And not without good reason: advisers have had to shell out millions in recent years to meet compensation claims arising from the failures of businesses they had little or nothing to do with.
In the most extreme example, investment advisers were the first to be asked to stump up to meet claims brought about by the collapse of Keydata, even though many considered the company to be a product provider, not distributor.
Regardless, successful claims against Keydata were so numerous that advisers were always going to have to pay something towards compensating its customers. This was because of the funding model under which the FSCS operated.
Not anymore.
From yesterday, the FSCS is to be funded in a different way. I go into a little more detail below, but the crux is this: advisory business may have to pay more often when claims against a failed business are unexpectedly high, but their net contributions, certainly compared to the interim levies of recent memory, should be lower.
I’m going to attempt to explain the changes…
First, the past: the FSCS used to split regulated firms into five ‘classes’ (such as deposits, investment, life and pensions), each of which was divided into two streams, provider and intermediation.
When a firm collapsed, triggering consumer claims for compensation, it would be the remaining firms in the relevant stream that would have to pay for them, up to a pre-determined annual threshold. Once the threshold was breached, the burden would pass to firms in the other stream within that class.
To use Keydata (again) as an extremely unpopular example, firms in the investment (that’s the class) intermediation (sub-class) stream had to pay to meet claims up to a £100m threshold.
Once claims breached it (which happened often), they were passed onto the investment providers (who weren’t happy, but perhaps should have been grateful that the initial burden fell, unfairly in most people’s eyes, on intermediaries). There, easy.
Now, the present: the FSA, which is soon to split into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), has done away with the sub-class system.
Instead, there are three classes under the PRA and five under the FCA.
The PRA classes, which include banks, building societies and life and pension providers, will look after themselves, but the FCA classes, which include all advisers and investment providers, will effectively be able to lean on another’s shoulders, lowering the overall burden on one particular FCA class.
To put it simply, under the new system there are no circumstances by which an adviser would have to contribute to compensation claims triggered by the collapse of a pension provider (a scenario possible under the previous model).
Conversely, all intermediary firms and providers would be required to chip in should a large advisory business fail, if the collapse triggered large compensation costs.
You may have noticed that the only providers that could now impact on advisers in the event of a failure are investment providers.
Should one collapse, it is possible that investment advisers would have to contribute to its compensation costs (as before). But, now, that burden would be shared by all intermediaries regulated by the FCA, including pension and general insurance advisers, who would be asked to contribute to a ‘retail pool’.
Not ideal, certainly, but a better option than before.
