Originally, large compensation costs arising from the failure of an intermediary business would have been mostly paid for by other intermediaries via a ‘retail pool’.
The pool – triggered once a funding class compensation threshold (currently £100m for investment advisory firms) is breached – would have been funded by intermediaries and investment providers only.
However, re-drafted proposals suggest all provider firms regulated by both the incoming Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) should have to contribute also.
The FSA said this is because all firms subject to FCA regulation will have a “mutual financial interest” in maintaining the confidence of consumers who use the markets in which they operate. It acknowledged this “undermined the exclusion of product providers from the FCA retail pool”.
The FSA first published a review of the funding arrangements of the FSCS in July last year. Its aim is to “establish a credible funding approach for the FSCS, one which balances the need for adequacy of funds with affordability for those contributing”.
Chris Hannant, policy director at the Association of Professional Financial Advisers, said it was important product providers retained some responsibility for their products.
However, there was some bad news for intermediaries: the FSA said it would take forward its proposal to increase the investment intermediation sub-class threshold from £100m to £150m.
Hannant said: “We are disappointed that the FSA hasn’t announced a more sensible threshold for investment intermediaries. The regulator must recognise that the RDR and the wider economic environment will affect adviser revenues. The lack of revision to the threshold for investment intermediaries is a missed opportunity to build a more stable and affordable funding model.”
