Advice giant St James's Place (SJP) lobbied the Financial Conduct Authority (FCA) to double the 25% provider contributions to the Financial Services Compensation Scheme (FSCS) levy, New Model Adviser® can reveal.
The FCA confirmed earlier this month that product providers would be required to contribute 25% of the funding towards the FSCS, a move intended to more fairly distribute the burden of paying into the lifeboat fund and alleviate pressure on advisers.
But a letter from SJP to the FCA ahead of the publication of its final rules on FSCS funding, obtained by New Model Adviser®, called for a 50% contribution from providers.
The letter, penned by SJP divisional director of public policy Andrew Cullen-Jones, said: 'Product providers have resisted proposals for additional contributions to the levy arguing that they have no control over the advice provided by intermediary firms and should receive a regulatory "dividend" for having their products regulated.
'They do, however, derive significant benefit from the distribution of their products through intermediaries. Under the existing mechanism, the average contribution from product providers have been just £8 million and £0 per annum for life & pensions and investment business respectively.'
Cullen-Jones highlights that advisers, on the other hand, also have no control over advice given by other firms, but contrary to providers, derive no benefit from them, only competition.
He adds: 'The fact that the levies falling on advisory firms have been £44m and £81m in comparison highlights the current imbalance and why the present approach to funding is clearly both unfair and disproportionate. For this reason, the only way forward is to share the costs 50:50.'
SJP's advice arm paid £18.9 million into the FSCS in 2017.
The letter goes on to explain that product providers have a 'duty of care' to ensure their products are appropriately marketed, under MiFID and IDD.
SJP offers the example of an 'unscrupulous' adviser recommending Sipps containing unregulated investments, potentially influenced by unregulated introducers, highlighting that those benefitting are the underlying investment and Sipp providers.
Cullen-Jones adds: 'In these examples, it is hard to see why intermediary firms working in similar classes of business, which were competing with the failed firm but have no involvement at all in the case, should pay the cost while the product providers involved in the business contribute nothing.'
He argues the FCA should pursue a levy applied to unregulated firms or products, or lobby another body to apply one, and suggets a tax on unregulated investments which could be used to support the FSCS for regulated firms.
Reducing FSCS claims
Much of the commentary on the FSCS funding review has suggested it is unlikely to succeed without tighter regulation underpinning the market, and SJP agreed.
The letter highlights that a significant proportion of current FSCS costs are derived from the provision of unregulated investments, either held directly or through Sipp wrappers.
Cullen-Jones writes: 'This is clearly an issue that transcends the entire value chain - from the manufacturers of the unregulated investments, to the Sipp providers that accept the investments on their balance sheets as well as to the provision of advice.'
He calls for further supervisory work from the regulator which places additional controls or restrictions on unregulated investments and requires further due diligence from Sipp providers.
Compensation limits and PI
The FCA's final rules confirmed an increase to the limit for FSCS payouts to consumers from £50,000 to £85,000.
However, SJP argued that the net result would be an increased FSCS levy on firms which would ultimately be passed on to consumers through increased advice or product charges.
The response explained: 'Currently, our clients are paying an average of c£30 each per year to the FSCS, to support those consumers who have suffered loss.
'While those losses are potentially significant for those involved, there must come a point where clients of reputable companies stop facing an increased bill to support those consumers who, unfortunately, were provided a service by a less reputable firm.'
The FCA also confirmed that it was tightening rules on professional indemnity insurance (PII), to stop insurers being able to limit their liabilities for an advice firm going into default by preventing the lifeboat fund from making a claim on the policy.
SJP endorsed this, adding: 'It is unacceptable that some firms pay PII premiums for extensive cover (including claims in the event of insolvency) whilst also having to pay heightened FSCS levies to cover the cost of those firms who don't. Requiring this cover is entirely consistent with the "polluter pays" principle.'