As an industry the Board and membership of the Association of Mortgage Intermediaries (AMI) have positively supported and subscribed to both the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) as important safety nets for consumers when things go wrong. Whilst FOS provides a remedy for those in dispute with a firm, the FSCS provides comfort to consumers that in the event of a firm failing they have protection for their deposits, investments, pensions, insurances and against poor advice or excess fees and charges. Such a scheme does much to ensure consumer confidence in transacting with all firms so ensuring a very competitive market. However it also comes with a price which is hidden from the consumer. Significant liability falls each year on good firms to pay for the bad.
The industry is currently engaged with the FCA in consultations on a potential new structure and approach to the funding of the scheme. These full scale reviews take place periodically, but those on the receiving end of FCA fee bills know how much the FSCS levy for mistakes in the pensions market is currently costing them. Most of the liability was caused by unscrupulous firms advising people with liberated pension funds to invest in unregulated Investments which have proved to have little or no value.
One of the changes which happened since the last restructure was the decision by the former Chancellor to remove a balancing item in the scheme where regulatory fines were used to reduce the liability created by FSCS compensation payments. Following the banking crisis he considered it wrong that banks should benefit from fines levied on their peers, so sequestered the funds for charitable benefit. If he had limited this to the fines on banks it would have been fair. By taking this from all authorised firms, the benefit of fee reductions to good firms from the fines on bad has been lost. The good firms have lost out in business to those who cheated and have to pay a second time for compensation with no fee reduction where the FCA has caught up with the bad firms.
We agreed with stripping the banks of the benefits within that sector, but not penalising small advice firms that have bought into FSCS, with the concept that offset from the bad would reduce their bill. If firms cannot have their money back, then we need a new contract that is based on a fairer system so that the toxic products have paid towards their solution.
A product levy charged up front on all products sold would be fairer and ensure that at least some contribution comes from all firms, including those that cause the problems. We are disappointed that this option has been dismissed, ultimately because it is deemed too complex. We disagree with the view that it is the same as a sales tax, however we understand that a change in legislation would be required to support this. Not only would a product levy be the most proportionate solution for the industry, the increased transparency to consumers would help go some way in avoiding take up of non-regulated products. While consumers are aware of the protections of regulation they do not directly see the cost. A product levy could be made obvious to the purchasing consumer, so that they are aware of both the cost of the FSCS and other regulatory protections, and clear when a product has that protection. The ATOL scheme run by the Civil Aviation Authority is a prime example of this, and nor is it a tax. In addition should we achieve better understanding of riskier products or advice areas, then this could be reflected in the size of a levy and improve consumer understanding of relative risk.
When looking at FSCS claims, the key factor that needs to be considered is how a firm has failed. If it is because a firm can no longer afford to continue trading, this can be a normal feature of the market unless there is volume suggesting a systemic cause, such as the level of regulatory fees. But where a firm fails and leaves a number of complaints, a legacy of poor advice and claims against it, the firm and its principals should not be allowed back into the sector. The FCA should recognise and be concerned about the difference in a firm that fails financially and one that fails and leaves liabilities, as the latter suggests a problem with the advice or product. Fraud, mis-representation and mis-selling are indeed the primary reasons for the FSCS claims being paid by our members, not financial failure. Risk-based levies will not address this issue on their own, as intelligent fraudsters will have wound down their businesses before complaints have time to arise.
We also consider that there needs to be another piece of work to deal with the appropriately named “rolling bad apples”. There needs to be a much clearer conduit of market intelligence flowing between the FSCS and FCA. We would support a small team at each end actively looking at the loss flows, the involvement of directors and advisers, and monitoring their current activity in markets. This team should display passion to identify and prevent poor behaviours and outcomes.
We support the idea that a premium could be added to higher risk products, which is essentially a product levy in limited form. The level of claims as a result of these products being mis-sold cannot continue as firms struggle to keep up with the rate at which the FSCS bills increase. An obvious example is where FOS and FSCS are still finding against advisers who open SIPP plans and try to abrogate responsibility for the investment choices made. The non-sequitur may be the “self-invested” title, but the activity has regulatory capture. All those products with higher FOS involvement must be seen as higher risk as the issues are clearly not well understood within firms or by consumers. We welcome further discussion and debate on this.
We are also very supportive of the idea that product providers should contribute to the costs of compensation in the intermediary classes. We do not understand any argument that providers are not responsible for the distribution of their own products. The FCA’s Responsibilities of Providers and Distributors (RPPD) paper set out guidance for firms around the fair treatment of customers. Although introduced in 2007, it articulated responsibilities already set out in the regulatory Principles, Rules and Guidance, financial services legislation and case law. It makes clear that when designing a product, a provider should identify the target market and give sufficient information to distributors. When providing this information they are advised to consider, for each distribution channel, what information distributors already have, their likely level of knowledge and understanding, and their information needs. A firm cannot contract out of, or delegate, its regulatory responsibilities. Providers therefore must also be held accountable for the distribution of their products.
The AMI, CML and IMLA Working Together guide, first published in 2010, used the RPPD as a starting point. An industry guide to lender and intermediary accountabilities and responsibilities in mortgage sales and servicing, its third iteration was agreed September 2016. Within the mortgage market many lenders rightly apply proper due diligence over those being allowed to sell their products and measure ongoing quality of intermediary performance. Some link their procuration fees to quality measures. We consider this to be a blueprint that other sectors should employ to reduce overall market risks. Advisory firms are routinely removed from panel if they do not use some lenders for long periods of time as the lender cannot be certain of competence or ownership.
We have also seen the European Banking Authority’s guidelines on product oversight and governance arrangements for retail banking come into effect in January 2017. The FCA Handbook remained unchanged as these requirements were already enshrined mainly through the RPPD. Throughout the last decade there has been no fundamental change in the expectations between providers and distributors. In our view, provider contributions mistakenly disappeared from the FSCS structure at the time the FSA split in 2013. Its reintroduction will only accurately reflect the existing regulatory landscape and will hopefully focus all minds more clearly on their respective responsibilities and accountability.
We strongly believe that the costs related to pensions intermediation needs to be separated from life intermediation. Pensions are more closely aligned to investment intermediation and life to General Insurance. Making such a change as now proposed makes significant sense.
The result must be a fairer and sustainable scheme which pulls the industry closer in reducing harm to consumers. It needs to apportion cost across the value chain to ensure all participants take full responsibility.