Could FSCS levy reform boost the advice market?
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The levy that financial advisers pay for the Financial Services Compensation Scheme is unsustainable, the Financial Conduct Authority’s director of life insurance and financial advice has said, following estimates that the levy is set to rise by 48% this year.
Debbie Gupta, director of life insurance and financial advice at the FCA, has said the regulator shares the frustration of wealth managers and advisers over the FSCS.
Speaking at an event organised by the Personal Investment Management & Financial Advice Association on Wednesday, she said the FSCS estimate that its compensation levy for this year would be 48% higher than in 2020, at over £1bn, showed the current situation was “unsustainable” and adding that the FCA wants “to see this come down”.
Gupta said the challenge was how to bring down the cost of the levy, noting that suggestions from across the industry had been “inherently contradictory”, as there are tensions between “what was desirable versus what was achievable and what was practical and fair".
The growth in scams and those consumers that would be considered financially vulnerable were key concerns for the FCA in the coming year, Gupta added. These could also point to a greater need for affordable financial advice, which a high levy makes difficult to provide. Last year, a freedom of information request from FTAdviser revealed that 1,680 advice companies chose to be de-authorised since 2015, while the number of independent financial advisers fell in 2019 for the first time since the FCA’s Retail Distribution Review.
The financial advice market interacts with pensions as its accessibility and affordability are directly linked to savers’ outcomes in a freedom and choice environment. The FCA previously found that almost about a third of consumers had entered pension drawdown unadvised, with almost half of these holding mainly cash. In response, it introduced a requirement for pension providers to offer investment pathways, to enable savers who don’t take advice to better navigate their decumulation options.
Levy rises a result of ‘poor supervision’ and ‘poor adviser practice’
PIMFA sees the levy as a key issue in making the advice market work better. It produced an FSCS strategy paper last December which said that continued rises in the levy are a result of “poor supervisory oversight, legacy issues of failure, poor adviser practice and yes, the construction of the levy”. It lists activities and analysis that can be undertaken by the government, the FCA and the FSCS, highlighting a need for collaboration between industry, regulators and government.
“We will continue to the engage with both the FCA and the FSCS [on] the issues of the levy and supervision. The fact that they both acknowledge the levy is unsustainable and that improvements need to be made to supervision are both welcome,” said Liz Field, chief executive of PIMFA.
Field highlighted PIMFA’s 12 recommendations put forward earlier this year that she said would “help create a consumer investment market that is fit for the future and provides advice for all”.
The recommendations include reviewing the definition of advice and are built around the creation of a safe environment that encourages more consumers to save and invest, improving financial literacy and enabling more people to access advice, and ensuring the regulatory environment is one in which the advice industry is able to innovate and grow.
