PIMFA urges government to reform FSCS
1 December 2020
Financial advice trade body PIMFA has urged the Government and Financial Conduct Authority (FCA) to reform the Financial Services Compensation Scheme (FSCS) to protect consumers and firms.
PIMFA says that every individual that has sought compensation through the FSCS has already suffered a poor outcome and argues that policy should instead be designed to minimise the need for the compensation scheme and protect consumers before the harm occurs.
In its latest policy paper, ‘A rising tide lifts all boats? A roadmap towards better consumer outcomes and lower levies’, PIFMA warns that without a review of the fundamental drivers behind the FSCS, the total compensation bill will continue to rise for all advisers and wealth managers.
According to its findings, the FCA’s current regulatory approach incentivises some firms to fold their company to deliberately transfer risk to the FSCS, often selling assets first, and warned that this act of phoenixing continues to “penalise prudent firms whilst in effect providing a no risk default environment.”
PIMFA has called upon the Treasury to review the drivers of FSCS levy costs and review what allows firms to transfer risk onto the FSCS to cause market distortions including phoenixing.
It has also urged the FCA to review its supervisory approach against risk assessment of firms adding costs to FSCS as well as review intelligence provision and provide an annual assessment of whether the FCA has acted upon it.
Lastly, it would like the FCA to consider a risk-based element to the levy and review how to boost recovery from the original firm or product.
Liz Field, chief executive, PIMFA, said: “PIMFA and our member firms are fully committed to ensuring that consumers are protected via the FSCS. However, the current environment allows some firms that simply should not be in business to transfer their responsibilities to compensate their clients onto the rest of the industry through the practice of phoenixing. Lifeboating is also a key challenge.”
Field said that aside from the direct harm to consumers, this trend tarnishes the financial advice and wealth management sector as a whole and creates a financial burden upon well-run firms which could impact upon firms’ ability to invest in the development of their own businesses.
Field added: “We are aware this is a complex issue and as a result, there is no single cure that will provide a solution. But we urge the Government and the FCA to work with us in order to ensure that the FSCS and the regulatory structures can more effectively protect against harm, ensure the advice gap doesn’t further widen and provide confidence to both consumers and the firms which fund it.”
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