The Personal Investment Management & Financial Advice Association (Pimfa) has urged the Financial Conduct Authority and HM Treasury to work more closely with the Financial Services Compensation Scheme (FSCS).
The industry body’s call to action stems from a recent survey it conducted among financial advice business owners and wealth management chief executives, which revealed widespread discontent with the UK lifeboat scheme.
More specifically, 64% of those polled do not trust the FSCS to deliver fair outcomes for both consumers and firms.
The survey’s results showed that some of the sentiment has been driven by the increases in FSCS levies; which 45% of respondents have experienced, and some claim have soared by over 100% in the past five years.
More than four in five (82%) said that FSCS levies now account for at least 20% of their total outgoings, excluding payroll and accommodation costs.
But there are other costs are affecting advisers and wealth managers alike.
Over a quarter revealed that their professional indemnity (PI) insurance premiums have increased by more than 100% in the last five years, and 56% revealed their PI cover had restrictions often related to historic defined benefit (DB) pension transfer advice.
This means that some firms are left without cover for the advice provided before the policy actually began.
As a result, just 17% felt confident they would be able to secure PI insurance terms within the next 12 months.
Pimfa believes that the lack of trust in the UK lifeboat scheme is “most likely linked to rising costs; […] distortions in the market that encouraged poor firm behaviour; and a perceived willingness on the part of the FSCS to settle claims when there was little basis to do so”.
Liz Field, chief executive of Pimfa, said that the widespread discontent shows the need rethink policy.
“The FSCS plays an absolutely vital role in protecting consumer savings and we recognise that the trust it engenders for consumers has a benefit to our firms.
“But the results presented in this survey point to a wider disconnect between a profession, which seeks to deliver the best possible outcome for consumers, and a regulatory system that most firms see as providing inadequate support at best, or failing both consumers and firms alike at worst.
“Every single person that has had to use the FSCS has suffered a bad outcome that it would have been much better to avoid.
“Government, regulators and industry must work together to ensure that, ultimately, policy is designed in such a way that in the future consumers only have to rely on the compensation scheme in extreme and unpredictable circumstances.
“Poor firm behaviour and harmful products must be identified quickly, enforcement action taken swiftly, and all parties commit to ensuring that claims upon the FSCS begin to fall rather than continue to rise,” she added.
Caroline Rainbird, chief executive of FSCS, admitted that rising costs are, indeed, a problem for advisory firms.
“While there is no simple solution to what is a complex problem, we take a three-pronged approach to minimise the elements of the levy that FSCS can control.
“The first is our efforts to continually innovate so that our management costs are as low as possible, which is shown by our like-for-like claims handling costs falling by 8% in 2019/20.
“We make recoveries wherever possible and if cost–effective, and have recovered £375m ($482.6m, €411.6m) over the past five years.
“Finally, under the ‘Prevent’ workstream in our five-year strategy, we collaborate with our regulatory and industry stakeholders to help prevent future failures and drive better outcomes for consumers, with a view in the longer term which in turn leads to lowering future compensation costs and therefore reduced levy bills for advisers.
“We know that consumers have a high level of trust in FSCS and we want this to be mirrored by the advisory community. We are completely aligned with Pimfa in their view that every consumer who has to use our service has suffered a negative experience that they would subsequently like to have avoided.
“It is crucial to tackle the root causes of the problem, not just the symptoms, as this will lead to a sustained reduction in the levy and more relevantly for all concerned – including the industry – an increase in good outcomes for consumers. We will continue to meet regularly with all parts of the industry, including Pimfa, to help achieve these two important elements.”