Not a day goes by where we don’t hear of the injustice the Financial Services Compensation Scheme has heaped on advisers.
The good are paying for the bad, and in a greater magnitude than previously. That much is not in dispute. What is, however, is how to fix it.
The FCA had a pretty good look at this a few years back and took several options off the table. One was a so-called longstop on complaints to the Financial Ombudsman Service, where a time bar would be placed, say, 15 years after the advice event, following which a client would no longer be allowed to lodge a complaint.
The idea was that fewer firms would fail due to the redress paid out for historical issues, leaving less liability to fall on the FSCS (which deals only in defaulted firms, remember, while the FOS deals in live ones).
Personally, I think it was wise to take a longstop off the table; it’s a minor issue when you consider how few complaints from that long ago actually reach the FOS, the tiny proportion that are successful, and the fact that current rules would ban the majority of complaints just six years after a client could reasonably become aware of the unsuitable advice anyway. (And, of course, the bulk of advice firms don’t actually pay a penny towards the FOS’s upkeep, when it comes to case fees at least.)
However, it is definitely still worth focusing our attention on the FSCS. Along with the longstop, a so-called product levy – where consumers would contribute to the cost of compensation through a slight premium on purchases – was taken off the table too. As we’re still scrabbling for a solution to the FSCS’s woes, is now the time to resurrect this solution?
I get the appeal of risk-rating the product levy; you could force customers who wanted to take more risk into some form of caveat emptor, whereby they would pay a couple of extra basis points for the privilege. If the bar was set high enough, advisers recommending esoteric investments would be priced into dealing only with a narrower pool of clients. It would certainly spread the funding pool wider, while taking the weight off IFAs’ shoulders.
But I still have reservations over what it says about advisers as a profession when consumers are asked to pay for the cost of their own compensation. Not only has the client been sold a pup, they’ve had to pay extra for it too.
It doesn’t matter if – as the likes of the Personal Finance Society campaign for – such a levy would be seven basis points or fewer. When it comes to rebuilding trust in the advice profession, it’s the principle that matters: consumers shouldn’t have to pay for the mistakes of rogue advisers.
Honest advisers shouldn’t have to pay either, but a product levy isn’t the answer.
Justin Cash is editor of Money Marketing. Follow him on Twitter@Justin_Cash_1