FSCS MAY BECOME NATIONAL INSURANCE SCHEME
Written by Charlie Palmer on 09/11/2020


IFAs may have to take out PII to cover against their failure as increasing costs burden well-behaved companies, the chief executive of the UK’s Financial Conduct Authority (FCA) said on 4 November 2020.

The FSCS is the preferred way for customers to receive payments if their IFA has failed, is fully funded by levies from the industry.  But, as costs for firms to contribute to the risk-sharing fund have increased, so too have complaints that the polluters are not paying their share.   This may need addressing, FCA chief Nikhil Rathi told parliament this week, with one option being a kind of Nationalised professional indemnity insurance - here is what he said

‘We have sympathy with the fact that the costs have been rising...it clearly puts a burden on the financial adviser community....One of the things we’d like to explore is whether we would require a higher level of professional indemnity insurance.  Clearly that also brings costs, but one would hope riskier firms would pay higher premiums’, 

Despite the challenges the FCA is seeing, the timeframe for changes is unlikely to happen any sooner than within the next two to three years, Rathi said.  That, he explained is partly due to corona virus.

The FCA’s chair, Charles Randell and said:  ‘This is a really difficult problem which I’ve been discussing with some of the representatives of financial advisers. I’m well aware of the strength of feeling that exists on this front, and it’s right that it does. The cost of bad actors is mutualised across good people remaining in the industry.’

FCA say that the problem is that it may discourage new businesses from entering the market, as an insurance solution would inevitably see newcomers being deemed as riskier and more likely to fail, thereby resulting in higher costs for them.


COMMENT:
Ever since the FSCS levy was first introduced, by the PIA in the 1990’s,  it has been controversial and unpopular.  The polluter leaves the industry, and the rest of us pay.   But the flip side that no IFA wants to discuss is that we all leave the industry at some point, and most do not take their liabilities into retirement, leaving them behind, closing companies down, stripping out goodwill and so on, thus effectively joining the ranks of the very same polluters they have spent a career complaining about.  Most IFAs last about five years in one place – a damning fact that is open for all to see by studying the FCA register.  They leave and set up new companies, sell or close old ones, and move on, leaving the rubbish behind.

Personally, I think we need an FSCS to pay for these problems, but it makes me wonder why, on top of that we also have mandatory PI insurance.  After all, PI is there to protect the firm, and most fail due to lack of PI.  So why not merge the two?  It seems, after 20 years, the FCA may be coming to the same view. charlie.palmer@ifac.eu

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