Brokers have backed FCA plans to make Financial Services Compensation Scheme bills fairer and cheaper, although lenders are unhappy they are set to shoulder part of the bill for claims against failed intermediaries.
A recent FCA consultation on the future of FSCS funding suggested that brokers who conducted protection business should be transferred from the life and pensions group to the general insurance class. This would mean they no longer picked up part of the bill for claims made against firms that sold completely different products, such as self-invested personal pensions.
The bills from failed Sipp brokers can be large due to a high volume of claims made against the products. For example, mortgage brokers paid an extra £10.5m in FY2017/18 when just one firm, Fuel Investments, went bust.
Several firms, including the Association of Mortgage Intermediaries and TMA Mortgage Club, called the system unjust and campaigned for fairer levies for brokers.
The lobbying paid off. While the FCA’s first consultation on the issue in December 2016 lacked plans to protect mortgage brokers from life and pensions claims, following industry lobbying the proposal was included in the regulator’s second consultation.
Ami chief executive Robert Sinclair says: “The fact that the FCA has decided to re-consult with industry rather than proceed with one of the proposals set out in the last paper is encouraging. It has not only listened to our concerns but is openly engaging with industry to ensure that it implements the fairest solution.”
TMA Mortgage Club had launched its own campaign against the issue after 93 per cent of its members said the current levy was unfair to brokers not licensed to sell pensions products.
TMA director David Copland says: “Cynics would say the regulator had already made up its mind. My view is it is heartening to see that it appears to have taken on board a number of the suggestions that were being made.”
The changes mean brokers would contribute to any payment protection insurance claims against failed firms. But this is not likely to be a problem in practice. Because missold PPI has been an issue for so long, most firms that were likely to go bust from the misselling have already done so. All the current PPI claims are likely to be made against solvent firms, meaning the FSCS would not be involved.
Sinclair says: “The current situation is that there may be some small, residual firms that have to fold, but anybody left in this marketplace paying claims on PPI is there for the long haul. There is always a risk, but mortgage brokers will be in a much bigger pot with the rest of GI intermediation.”
The FCA also proposes that mortgage lenders pay a quarter of all FSCS claims against failed brokers. Lender trade bodies, understandably, are lukewarm about the idea, while brokers support it.
UK Finance mortgage spokesman Bernard Clarke says the trade body will not make a statement until it has responded to the consultation. But its response to the regulator’s first consultation said it did not want to pay any extra unless the broker community was systemically endangered by the level of FSCS bills.
That response, given under the former Council of Mortgage Lenders, says the trade body will support the contributions “only if it is vital to maintaining the distribution channel”.
The Building Societies Association is slightly more in favour of extra contributions but still has concerns. BSA head of savings policy Brian Morris says: “To the extent that there is affinity between product providers and intermediaries, we can see the case for product providers contributing to compensation liabilities arising from the activities of intermediaries.
“We raised concern, in responding to the FCA’s original proposals, that it was diluting the concept of affinity, and this concern does not appear to have been addressed fully in the FCA’s latest plans.”
However, intermediaries welcomed the FCA’s proposals.
Chadney Bulgin mortgage partner Jonathan Clark says: “Around 40 per cent of our advisers carry only mortgage permissions, so any reduction in the FSCS levy will be of major financial benefit to us. I doubt if any lender will react positively to a proposed levy on it but, when the bulk of mortgages are intermediated, lenders will need to shoulder some of the cost.”
Coreco director Andrew Montlake says: “This is a very sensible stance, as is the movement in the direction of provider contributions.
“It is really good to see the regulator engaging and consulting with those in the industry around this subject, something that directly affects the finances of brokers.”
SimplyBiz chairman Ken Davy not only backs the idea but thinks 25 per cent is too small a percentage for lenders’ contribution.
He says: “As anyone who has read my previous comments on this will know, I am supportive of the principle of product provider contributions and measures to reduce overall liabilities. But I strongly believe that the suggested contribution is far too low, given that providers have had years of risk-free distribution but also had the greatest opportunity to spot rogue advice firms and advisers.”
The regulator’s consultation on FSCS funding says some parts of the industry had called for lenders to contribute up to half of payments towards failed brokers. Sinclair says Ami had wanted lenders to pay a third of claims but the trade body was happy with the figure of 25 per cent.
He adds: “The suggestion for provider contributions of 25 per cent is not as much as we’d hoped for, but it’s a step in the right direction and the FCA should be applauded for it.”