I’ll lose it when lazy drivers cut across junctions, when people stop suddenly in front of me on the pavement, or when someone takes longer than 60 seconds to use a self-service checkout in the supermarket. But other than these major societal indiscretions, it takes a lot to get my blood boiling.
Something that will always prompt my transformation into the Incredible Hulk is news of the gigantic regulatory train wreck that is the Financial Services Compensation Scheme.
Historically I’ve been a vocal critic of the FSCS. I should say however, it’s not their fault. The FSCS is, after all, simply an administrator of a broken system. The fault with the maddening scale of the FSCS levy rests elsewhere.
Personally, I blame the genius who formed a regulatory environment which places the cost of compensating the clients of failed firms squarely on the shoulders of the clients of the good firms. Because let’s be clear about this; whilst the FSCS levy comes out of my bank account and your bank account, it’s our clients footing this bill indirectly through higher fees.
This same genius, probably a civil servant at the Treasury, is no doubt also responsible for a system where regulated firms pay for professional indemnity insurance, FSCS levies and the cost of meeting capital adequacy requirements. And of course when things go wrong, that PI insurance cover often evaporates and the capital adequacy is quickly spent by the firms going bust.
I suspect the same Government employee is also responsible for the system which fails to incentivise the regulator to do anything about the consistently large cost of consumer compensation. There is no motivation to take action to clean this up when you’re spending other people’s money on both regulation and compensation.
The FSCS budget for 2018/19 presents a £519 million levy for the year ahead. More than half a billion pounds is being spent compensating the customers of failed regulated firms. This is broadly equivalent to the budget for the Financial Conduct Authority. On what planet does anyone believe it is acceptable to spend the same on compensation costs as we spend on regulation?
Compensation costs of this magnitude are indicative of failed retail financial services regulation. They are a black mark on the performance of the FCA each year and send a very clear message that consumers are not safe when it comes to dealing with regulated financial services providers and advisers.
Except of course consumers are safe. Because when things go wrong, the good guys are forced to step in and pick up the tab. All moral hazard is mitigated in this crazy system. As an investor you can be greedy, foolish, or both, and there’s a high degree of probability you still won’t lose out financially.
This needs to change. We need a regulatory system where a) the regulator intervenes earlier and takes more decisive action to prevent consumer loss, and b) consumers dabbling in stupid things don’t by default have the safety net of the FSCS.
There are several solutions to this mess; solutions that to date the FCA and Treasury seem unwilling or unable to consider.
We could introduce a product-based FSCS levy, weighted towards higher risk products. My rough calculation suggests that each of our clients pays around £50 a year towards FSCS costs. Why not make that cost explicit as a standalone fee when taking advice or buying a regulated product?
The FCA could introduce greater scrutiny for higher risk advice areas, including the introduction of peer review before advice with the greatest potential consumer detriment is implemented. Instead of paying £30,000 a year to the FSCS, I would rather allocate a day or two a month to the review of files from other firms.
We could get the professional bodies involved to a greater extent in the regulation of conduct of approved persons. With the Statement of Professional Standing system already in place, there is little to stop a regulated body from refusing to issue one of these licences to advise to anyone involved in prior advice leading to an FSCS payout.
Despite how simple this broken system could be to fix, it’s unlikely anything will change when there is no real consequence as things stand to address its failures.
Martin Bamford FPFS
Chartered Financial Planner
Managing Director, Informed Choice Ltd