I recently spoke at length to an IFA following FSCS’ levy for 2015-16 of £100m on life and pensions intermediaries to meet the rising cost of SIPP claims. What particularly angered him – and anger is the right word – is that he was not authorised to advise on long-term insurance products, like pensions. But he was still having to contribute to clearing up after failed firms which had given bad advice about pension saving.
Other comment was more restrained, but reflected the same frustration that businesses with low risk business models were, as they saw it, bailing out much riskier firms. The “blameless” were picking up the bill for the blameworthy.
I understand this frustration and it concerns me.
There is widespread support across the industry for the role which FSCS plays in protecting consumers. And let’s not forget that there are real victims, largely modest investors who were advised to transfer their retirements savings from safe occupational schemes into SIPPS and then into highly risky assets. But I appreciate that industry support for FSCS is put at risk if there is a perception that our funding arrangements are unfair.
Many firms do have that perception. My objective is, always, to work with the Prudential Regulation Authority and Financial Conduct Authority, which set the funding rules, to maximise industry support for FSCS funding. That means, above all, securing wide acceptance that, however unwelcome the costs of compensation, those costs are at least fairly distributed across the industry.
Now, this is by no means straightforward. This is, after all, a zero sum game. Any changes to FSCS funding will simply re-distribute costs, not reduce them. There will be losers as well as gainers from any change. That is a hard fact.
Is it nevertheless possible to distribute these costs in a way which most firms would accept is fairer?
In principle, I think the answer may lie in ensuring that the FSCS levy takes account of risk so that firms share of the levy reflects the risks they pose to the compensation scheme. This seems equitable and economically rational – ensuring that higher risk business models bear the costs of those risks. And it would create salutary incentives to manage risk.
The principle is easily stated, less easily achieved.
One way – often advocated – is to fragment the existing funding classes more closely to reflect the different business models in use. But we have previously concluded that FSCS’ funding – and security for consumers – is better secured by pooling costs across wider, deeper pools. Narrow, shallow pools are much more vulnerable to big failures. That was one of the shortcomings of a previous model that prompted a review of our funding and a new system in 2008.
A more promising approach may be to retain the current classes, but adjust the underlying levy base to reflect risk. At the moment, the levy base simply reflects firms’ shares of the relevant business: for example, shares of protected deposits in the case of banks, building societies and credit unions.
This is the approach which the European Union Deposit Guarantee Scheme Directive now mandates for deposits. The European Banking Authority (EBA) is consulting on how to put such an approach into practice.
To my mind, applying this approach more widely to the FSCS levy depends on two things if firms are to accept it as fair. First, we would need to find measures of risk which are objective and transparent. Second, those measures will have genuinely to correlate with the risk of firms failing, with claims against them which then fall to FSCS.
This is where firms themselves – and their trade bodies - can play an important part. If you think the principle of risk-based levies is right, please help the regulators and FSCS to identify fair ways of capturing risk in the allocation of levies. We can all, I‘m sure, think of possible ways forward. I certainly can. However, FSCS and the regulators won’t escape levypayers’ anger unless there is a broader industry consensus. So please help to create that consensus. You can help us to shape a better funding system if you get involved.
This is, moreover, the right time to do it because FSCS’ funding review, led the by the regulators, is about to get under way.
So if you think the current arrangements are unfair, please tell us what would be fairer. It is right that we have a debate about the impact of FSCS funding on the industry while continuing to provide vital protection to consumers.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).