It’s 2019. There are a few things guaranteed to happen in and around the next 12 months: pledges to lose weight, rising rail fares and a bit of paperwork and/or office spring cleaning. Another sure bet, a little later in the year, is having to pay ever more towards the Financial Services Compensation Scheme (FSCS) – a predictable event that can bring out a groan from the vast majority of law-abiding and ethical financial advisers.
It is hardly surprising that fees are rising. Consumers used to be able to claim just £35,000 at the start of the financial crash in 2007, and the amount of protection will have almost doubled by April this year. However, after years of rising fees for advisers, is it the case that the so-called “good guys” are funding the unethical and unprofessional actions of others?
One adviser who has voiced his concerns is Martin Bamford, a chartered financial planner from Informed Choice in Surrey. Speaking to BBC Radio 4 Moneybox show in the summer, he revealed that his firm has paid over five times more to the FSCS in the past three years than towards financial services regulation.
He also tweeted: “[…] persistently high FSCS levies are indicative of failed regulation and the FCA should be ashamed of the level of claims paid each year.”
Advisers are admittedly overwhelmed with costs – the Financial Conduct Authority asks for firms to hold capital reserves, to take out professional indemnity insurance as well as contribute to the FSCS. But when an adviser goes bust, according to Bamford, they eat up their own capital reserves and the insurance doesn’t pay out – meaning that the FSCS has to step in to refund clients. As a result, FSCS charges go up and advisers feel under pressure to raise their client fees. It is arguably a vicious circle.
But not all advisers believe the FSCS levy is disproportionate. When the firm Gibson Lamb questioned on social media last year whether 81% of its FCA invoice should be going to “pay for the ‘bad guys’ who have gone bust”, chartered financial planner Alasdair Walker responded that the cost “protects our clients against rogues and cowboys”.
“As we have to pay it regardless, I’m much happier thinking about it that way,” Alasdair added.
The subject can cause debate. While some advisers claim that the FCA is failing to prevent unprofessional behaviour in the industry, Paul Corrigan responded on social media: “Alas, it is often difficult to identify the bad guys until they have been bad. Hence the need for a fund.”
But one fact is not up for debate – the levy imposed upon advisers is rising, and fast. In 2014, the final FSCS levy was just £276 million. In 2015/16, it had risen to £319 million. By 2017/18, the cost was a staggering £363 million. Last May, the FSCS levy for 2018/19 was set at £407 million – according to reports, this final figure was £70 million more than expected.
Mark Neale, chief executive of FSCS, explained at the time the rising cost for advisers in 2018 was mostly down to bad advice regarding pension transfers and clients taking risks with their retirement funds despite taking independent advice.
Sadly, it is unlikely costs will fall this year. The compensation limit will be raised to £85,000 in April – good news for clients, if not exactly a promising sign for advisers. At least the costs will be shared more evenly in future, as product providers will also have to fork out 25% of compensation costs that fall to the intermediation classes.
Advisers have little choice but to keep doing what the vast majority are already doing – that is, building the best relationships with clients that they possibly can. Technology can help with this. It enhances communication and education, promotes transparency of the firm, as well as allows advisers to ditch the time-consuming admin like onboarding and factfinding and spend more time with clients to build them a financial future. Technology is also one way of preventing mistakes and keeping client costs lower in a world of rising fees.
It may not be as clear cut as good guys and bad guys. But let’s hope the New Year is a time of reflection for those who are on the wrong path, otherwise, everyone has to pay for it.