Joining the list of major headaches for the regulator in 2019 is SVS Securities. It has been placed in administration by its directors following information received by the FCA concerning the assets in which SVS invested its client’s money. An official FCA investigation is now underway with noises from the media suggesting this may turn into a scandal akin to that of Beaufort Securities.
The frequency of incidences like this is growing and it highlights the troubling issue of whether current regulation is fit for purpose when the costs of compensation under the Financial Services Compensation Schemeare spiralling upwards.
Over the past five years there have been massive claims on the FSCS every year. Is this indicative of FCA’s supervisory regime being effective? Has there been too much focus on supervisory methodology and not enough focus on supervisory outcomes?
In an attempt to ameliorate the costs to our members, Pimfa successfully lobbied for product providers to pick up a 25 per cent share of FSCS levies. But the costs continue to escalate as the demands on the FSCS grow ever greater, so for some this win has had little effect.
The costs of running the scheme are, broadly speaking, the same for the FSCS as for the FCA – in the region of £500m each, or 50 per cent each of the total regulatory cost burden. But some firms end up paying a greater percentage to the FSCS than to the FCA. This leads to the conclusion that good firms are paying for bad ones and this is where we believe that there is scope for improvement.
Nobody is suggesting a lifeboat fund such as the FSCS is anything but a good idea, especially in respect of our firms’ clients. However, when some firms end up paying as much as 64 per cent to FSCS as a proportion of the overall cost of regulation, it’s time to ask whether this is cost-effective for our sector and whether or not it is time for a rethink.
Indeed, Pimfa recently confirmed that, out of a total regulatory bill of £1m, one firm paid 90 per cent to the FSCS, suggesting a spread of around 60 per cent for a small IFA to 90 per cent for a medium-sized investment manager is realistic. When that £1m is a significant proportion of hard-earned profit, this is another indication that it’s time for a rethink. But, following the latest review of how the cake is split, we think that the main issue lies with prevention and supervision.
In January 2019, Pimfa strongly criticised the level of the FSCS’s indicative levy of £300m, as proposed in its plan and budget for 2019/20, asking whether a proper analysis is being undertaken on the reasons why claims are arising, in order to mitigate future claims. The FCA’s supervisory approach must be more proactive in quickly taking action to address the root causes of the claims that result in unsustainable FSCS levy increases and it must be quicker to work to prevent the failure of firms where that failure leads to calls on the FSCS.
The FCA should be as transparent as possible about its supervisory processes. In particular, greater transparency about FCA’s business model analysis may assist firms in their own risk assessment and in determining the allocation of their compliance resources. It would also enable feedback and possibly challenges to the FCA about its analysis.
There should also be greater transparency about the nature and extent of the supervisory work, particularly thematic reviews. Before the FCA starts a thematic review it should publish its supervisory programme – providing an opportunity for all firms to understand the FCA’s supervisory approach to the issue and enable them to consider whether or not they should conduct their own reviews.
The FCA should review, in conjunction with other stakeholders, its communication with firms – including the content of the website and its Regulation Roundup bulletin, to ensure firms are readily able to understand their regulatory obligations and FCA supervisory expectations.
Pimfa will continue to engage further with the FCA on this topic.
Liz Field is chief executive at Pimfa