The level of change being asked of the industry by the FCA is a significant challenge.  Firms are still embedding SM&CR; operating new ways of post-covid working; applying Operational Resilience measures; providing enhanced data for authorisations; completing ongoing Covid-19 financial resilience surveys; considering the impact of the new Consumer Duty as well as completing the GI fair value work; reviewing the AR regime and considering both the future regulatory framework and how to protect our customers from scams.  This will be added to in the second half of 2022 by work on Diversity and Inclusivity.  All of these because the FCA thinks the industry needs a wake-up call.

The mortgage and protection advice sector however does not recognise any of the harms that the FCA and others are citing to justify all these changes.  Consumers in this sector have low inertia and the market is highly price and product competitive.  It has low levels of complaints other than administrative, low FOS complaint volumes, low FOS over-turn rates and only one property scam from 2005/06, settled through FSCS payments that is the majority of the sector costs.  We were not London Capital, Connaught, Woodford or Greensill.

AMI continues today to talk to our FCA contacts about firms and products that cause us concern.  The time taken to “act” remains extended to a degree that means that consumers risk damage and firms may have to compensate.  We are not convinced that the lessons of LC&F and Connaught, which the FCA has acknowledged and led to a mass clear out of senior staff, are yet learnt or embedded.  The FCA remains ponderous and out of touch with the markets it supervises.  There are individuals within the FCA who recognise the risks, but claim both process and resource constraints limit their ability to act.

AMI agrees that the FSCS funding model needs a radical overhaul.  It is not sustainable to levy large amounts for the retail pool at short notice upon firms who have no direct responsibility for or influence upon the areas in which the damage is caused.  What must be remembered is that two things need to have happened for a claim.  The firm must have conducted itself so badly it has failed financially – been liquidated.  This is an issue the PRA and FCA should be closer to than they have been historically.  The firm also has to have either had toxic products or given bad advice.  Again, these are supervisory matters.

As we review the scheme in 2022, as a minimum, Treasury must allow FCA to retain all financial penalties to reduce the amount good firms are being asked to pay.  The grab of fines by Treasury was to avoid Banks that had created the 2007/8 financial crisis “benefiting” from the penalties that were anticipated.  This did not materialise, but HM Treasury has continued to benefit from other industry misdemeanours.  AMI believes that we should return to the original “contract” so that the FSCS levy for the “innocent” is reduced by the fines on the “guilty”.  By making this change it would reduce the need for deeper structural change beyond a re-assessment of categories, limits and class inter-relationships.

The simplest solution to ensuring a more durable funding mechanism would be a new product levy paid for by all consumers.  This could follow the example set in the travel industry with ABTA and ATOL which is seen not as a tax on customers but as welcome insurance protection.  We believe that the cost to the consumer would be circa 0.001% of their loan, which could be blended into the interest rate of the product and collected by the product provider.  Similarly, a fractional percentage of invested assets could be levied annually to provide consumer protection.  This would also make it clear to consumers which products or services have “protection” and which do not.  This would eliminate the uncertainty currently facing firms who know that a levy may be announced later in the year resulting in additional, higher invoices to compensate customers who have experienced harm in other sectors, unrelated to their own.

Robert Sinclair, AMI Chief Executive
March 2022