Tim Sargisson: How high can the FSCS levies go?
Anybody who has read Charles Dickins’ Oliver Twist should be familiar with the passage in the book regarding the experimental philosopher, who had a great theory about a horse being able to live without eating.
The man demonstrated it so well that he got his on horse down to a straw a day in a bid to prove the animal could live on nothing at all. This he was primed to do, however the unfortunate animal died, just 24 hours before he was due to have had his first “comfortable bait of air” as Dickins put it.
This, if you like, is the FSCS levy in reverse and I was reminded of this passage when the latest FCA invoice landed. In other words, just how high can you push the levy before the firms paying it find it unaffordable and their own financial survival is called into question?
It is five years since I began writing for Professional Adviser and five years as CEO of Sandringham Financial Partners. Straight off the bat my blogs highlighted the iniquities of the FSCS levy. At the time Sandringham’s levy was about four times the FCA levy. Now it is six times, but of greater significance is the increase, where we have seen a 776% increase in the levy over these five years compared to what we paid in 2015/16.
This is a shocking state of affairs and the debate over the method of calculation and the burden it places upon well-run, low risk firms like Sandringham continues.
Last month Charles Randell, the FCA’s chairman, stated that the already “unacceptable” levy was likely to increase as a result of the coronavirus crisis and at the same time recognised the system needs to be redesigned so “polluting firms” in the financial sector paid the bill for high risk and unsuitable investments, not “well-run firms” via the compensation scheme.
Last year 260,000 customers were compensated by the FSCS at a total cost of £527m. An increase of £79m from the previous year, with £56m due to the failures of SIPP platforms alone. The FSCS has come to the aid of more than 4.5m people, paying out more than £26bn since 2001.
The fundamental flaw at the heart of the FSCS is one of moral hazard. Moral hazard occurs when an entity has little incentive to reduce exposure to risk because it does not bear the full costs of that risk.
Two examples illustrate what I mean. Firstly, defined benefit transfers. The risks and the danger of people being separated from their hard-earned pension by a collection of snake oil salesmen, culminating in the British Steel debacle were clear for all to see.
Little was done in the early days following George Osborne’s announcement to provide adequate protection for people and five years on we see the results. There is little incentive to move quickly, especially when the cost of the damage is being picked up by someone else.
My second example is allowing the likes of London Capital & Finance, MJS, Blackmore, Basset & Gold and other such schemes to run on until they collapsed, leaving tens of thousands of investors likely to lose their life savings. While it’s encouraging to report that the marketing of controversial minibonds to the public has been banned, the FSCS levy to be borne by advisers in the coming year has increased by £16m predominately as a result of an extra £44m set aside by the FSCS earlier this year to meet claims against LCF.
Unfortunately for all advisers this situation is unlikely to change any day soon both in terms of the amount and the way the levy is raised. In a recent video blog Ken Davy, chairman of SimplyBiz, made the point that it doesn’t matter how many policemen there are, if you’re going to murder your wife, you’re still going to murder your wife. In other words, there will always be crooks.
The hopes of any immediate changes as to how the scheme is funded seem dashed when the FCA confirmed they have no plans to revisit the funding model.
The sobering fact is the cost of protecting consumers in the regulated environment remains significant as do the flaws in the current scheme and as a profession we must continue to lobby for change.
While the cost falls on us, as businesspeople we must ensure these costs are reflected as with every other cost in the fees we charge our clients. This is to ensure we continue to survive and prosper. Because, ultimately, it’s always the client that picks up the cost and in this instance pays the tab for their own protection.
Published 21st July 2020