UK financial advisers will see their contribution to the Financial Services Compensation Scheme (FSCS) swell when the budget for 2019/20 comes into effect in April.
IFAs will be required to contribute £175m ($230m, €200m) to the FSCS, a £45m increase from the 2018/19 financial year.
The compensation scheme attributed the steep increase in contributions to an ever-increasing number of compensation claims against financial advisers regarding pension transfers into self-invested personal pensions (Sipps).
This created a “£78m deficit in the Life and Pension Intermediation class” in 2018/19, it reported.
Continuing rise in Sipp claims
FSCS chief executive Mark Neale, who will step next year, said that it is “the first year in which the recent funding review changes, with the new funding classes and provider contribution will take effect, along with an increased limit for some classes”.
“One of the priorities in the year ahead will be to work with the regulators and with the industry to bring about improvements in the quality of customer information. This will help us to increase the speed in which we make payments to our customers.
“We recognise, however, that empathy and responsiveness are just as important as speed, as we are seeing a continuing rise in complex pensions claims against advisers and against Sipp providers.”
Many paying for the wrongs of the few
Unsurprisingly, the move has received backlash from the advisory sector.
Ian Cornwall, director of regulation at the Personal Investment Management & Financial Advice Association (Pimfa), questioned what the regulators are doing about the rising numbers of claims, as the industry faces another rise in levies.
“Yet again we have an ongoing and ever increasingly high levy. We question the effectiveness of FCA’s supervisory approach and whether a proper analysis is being undertaken as to the reasons why claims are arising, in order to mitigate future claims.
“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.
“The FSCS levy is a major cost burden on all firms, large and small, and is considered by firms to be a cost of regulation – the current level of levies is unacceptable and not sustainable. Urgent work needs to be done to prevent failure of firms that leads to calls on the FSCS.”
Tackle the root cause
Steven Cameron, pensions director at Aegon said: “The FSCS expects to see further increases in claims connected with advice on unregulated, high risk investments within Sipps. This means the adviser profession, the vast majority of whom have never made such recommendations, are paying for the unsuitable advice of the very few, which doesn’t seem fair.
“Furthermore, the FSCS plays a key role on boosting consumer confidence, something which benefits both advisers and providers. For these reasons, Aegon lobbied for, and now welcomes, providers paying a 25% share of intermediary levies.
“Of course, it would be in everyone’s interest if failures or unsuitable advice never happened, so we’re pleased to see the FSCS will continue to work with the FCA and others to identify emerging areas of concern to tackle the root cause, preventing future compensation claims, which should lead to lower levies.”
