The Association of Professional Financial Advisers (APFA) on Wednesday submitted a position paper to the FSCS aimed at creating a fairer and more sustainable levy system, which also protects consumer interests.
According to APFA, the combined FSCS levies for the financial advice sector in 2014 were £216m ($324.5m, €298.7m). Comparing this with retained profits of £171m from the UK’s financial advice sector during the year underscores “the huge and severe strain” placed on the finances of financial advice firms.
The unpredictability of the levy and the need to find funds at short notice puts severe pressure on firms, the report stated.
Product levy
The industry body is calling for a fundamental change to the system with the introduction of a product levy.
“A product levy is a fair and workable solution. I believe it is the most equitable way to fund a compensation system as it does not penalise innocent firms, allows financial stability and also drives better outcomes for consumers."
They have suggested that the FSCS set a small surcharge for different product categories with a levy attached to the income from the transaction and sale of a product, added to its price and paid for by the client.
Higher levies could be charged for higher risk products.
The money would be collected by firms and passed on to the FSCS, but would be neutral for the firm’s finances in the same way as insurance premium tax (IPT) and value added tax (VAT).
A better balance
APFA is also advocating the creation of a “whitelist” of product categories, for which FSCS compensation is available, as well as a cap on compensation levels.
The FSCS is a mechanism for collecting small amounts of money from many consumers to compensate a few, the paper states.
Questioning whether the organisation is stricking the right baance, APFA believes that FSCS compensation should only be available for advice on investments in products suitable for retail customers, or a “whitelist” of appropriate products.
We don’t believe there should be compensation for people taking extreme risks. They should be made aware of the lack of protection and only allowed to proceed under strict criteria, the report said.
This may even deter retail consumers from investing in products that are not appropriate for them. Consumers taking a more cautious approach should not be made to bail out those that choose higher risk investments,” it added.
