FCA is studying the fairness of FSCS levies and how they should be funded with the aim of ensuring that the framework remains appropriate and proportionate to benefit all market participants.
Examining the root causes of the high levies on the FSCS, the FCA said it will also review its prudential regime for non-MiFID investment firms, such as financial advisers, as part of its consumer investment strategy. “in the coming months”.
This revision will take into account the prudential regime, which includes advisory activities, and will combine requirements relating to the financial resources of companies with specific requirements for holding professional liability insurance. A Professional advisor source said it was a sign that increased capital requirements for smaller consulting firms were on the horizon.
The FCA will look for ways to improve elements of the prudential regime, the watchdog said, and whether any changes could reduce the likelihood of companies going bankrupt and leaving responsibilities for the FSCS behind.
Several alternatives to the current funding model, including risk-based levies, were considered in the discussion paper, which the FCA says is often requested by the industry.
The risk-based model proposes that companies pay a premium on FSCS direct debits if they were involved in regulated activities or products considered to be of higher risk. This would reward companies that choose not to undertake a higher risk activity by allowing them to pay a lower share of the annual levy for their funding category. In contrast, companies that choose high-risk activities would be forced to reconsider the value of engaging in such activities, as the increased premium would be passed on to the customer.
Despite its potential benefits, the regulator again decided not to consider this model further for the following reasons:
• Firms might be discouraged from distributing higher risk investments, when their purchase might be in the best interests of the consumer (for example, when they are appropriately included as part of a diversified portfolio).
• Reporting requirements could cause some businesses to misreport if reporting this data results in increased levies and it could be difficult to identify businesses that are not reporting correctly.
• A risk-based levy financing model could stifle innovation and competition and constitute a barrier to entry for new companies offering innovative products.
• The risk-based funding model should be constantly refined, as industry opinion on the level of risk of different activities changes.
• As there is often a long mismatch between the activities carried out by the companies and the liabilities indemnified by the FSCS, there may be a mismatch between the risk of the activities currently undertaken and the activities which incur costs of the FSCS.
This discussion paper was motivated by the ever-increasing remuneration costs in recent years, which are borne by the FSCS through levies on financial services companies. The FSCS is expected to take £ 717m from the industry for the 2021/22 fiscal year, with £ 900m as a provisional estimate for 2022/23. The FSCS recently revealed that the life distribution and investment intermediation funding category in the annual levy, which is primarily paid by financial advisers, has peaked at £ 240million for the third year in a row .
“The FCA is committed to stabilizing and reducing the amount of the compensation tax over time,” the regulator said. “We do this by taking action to help improve the conduct of businesses to prevent harm from happening in the first place, and by seeking to improve the financial resilience of businesses so that they are better able to do so. face their own repair obligations and bring good things for consumers.
“Ultimately, it will be through improved corporate governance, conduct and financial resilience that compensation obligations are significantly reduced over time.”
PIMFA challenged the FCA review, finding it lacking in ambition.
“It is disappointing that some of the FCA’s proposals today boil down to a checklist of existing, and in some cases ill-defined, initiatives which in most cases have not contributed to the significant increases we have. found in FSCS claims, ”said Liz Field, CEO of the trade association.
“If the industry is to put up with a higher levy for a few more years in the hope that things will eventually improve, as this review suggests, we think there should have been more ambition around alternative sources of funding to bring down the current total cost. “
The discussion will end on March 4, 2022, with comments being posted in a statement in 2022 outlining any additional steps the watchdog intends to take.