The latest report from the Financial Conduct Authority (FCA) has included a number of new proposals that has created a huge amount of discussion in the industry. Their proposals for how the fund for last resort for customers, the Financial Services Compensation Scheme (the FSCS) will be funded has proposed that 25% of the levy will be paid by providers of investments schemes, whereas previously this has been entirely funded by advisors.
The reasons for this are that the FSCS has recently started to accept claims against providers, such as Lifetime SIPP, and payouts are expected to significantly increase, with the total levy now standing at £407 million. This is a massive £71 million increase on its projection at the start of the year. With the possibility of more providers being declared in default and unable to meet its liabilities, the FCA felt that providers should start to contribute to the lifeboat scheme for customers.
Unsurprisingly, this has been met with positive reactions from advisors but a huge amount of negativity from providers. The funding of the FSCS is often a cause of consternation as it is, with advisors, and now providers, paying ever-increasing fees to support payouts for firms who are now unable to meet their liabilities. Essentially, the good sellers are paying for the mistakes made by the bad sellers, while the bad sellers themselves are able to wiggle out of their liabilities.
One such example of this recently highlighted is that £10 million has been set aside to deal with claims relating to one firm alone, Active Wealth, who provided advice recently relating to British Steel Pension members, with a huge number of their instructions ultimately proving to be against their clients best interests.
Not all providers are against the idea however. Investment Quorum Chief Executive Lee Robertson stated that “The deeper pockets are with the providers, and of the providers want a thriving advice sector, they have to think about stumping up.” However further complexity is added to this by the fact a number of High Court cases against providers currently going through the legal process could see the liability greatly expand for SIPP providers. If more SIPP providers enter administration, and therefore the responsibility for customer compensation switches to the FSCS, this could snowball into increased levies and providers being expected to meet more of this cost.
With the increased public knowledge around possible claims relating to mis-sold SIPPs, and the possibility of the claim floodgates being opened, SIPP providers could face a turbulent few years, particularly if their book features a large amount of non-standard, illiquid assets, which may have previously proved highly profitable but could now lead to a number of claims against them. If the FSCS is forced to increase its pay outs and levies year on year, the strain that would potentially be felt by providers, who may have always avoided non-standard assets and are effectively paying for their competitors’ mistakes, could potentially see a number of providers leave the industry.