Financial services is full of anachronisms and anomalies but the way the Financial Services Compensation Scheme’s boundaries are drawn surely ranks near the top.
Frustration among brokers reached boiling point in recent months after it was announced the FSCS levy for the life and pensions sector had trebled from £33m to £100m in the current financial year – and this directly affects them due to the absurd way protection insurance is classified.
The FCA and the Financial Ombudsman Service deem this business ‘non-investment protection policies’ but, strangely, the compensation scheme places it in the life and pensions intermediation category.
What does this mean?
Essentially, it means brokers are picking up the tab for poor pensions and investment advice regardless of whether they hold the permissions to operate in these sectors. This can push up their levy to eye-watering levels.
As an example, London & Country says its FSCS bill is north of £250,000 for the current financial year, with 73 per cent of the levy relating to life and pensions.
No matter how you look at it, this is patently unfair.
The FCA is set to consult on the way the FSCS is funded at the start of next year – which will be long overdue, in our opinion.
The Association of Mortgage Intermediaries has proposed a product levy whereby consumers are charged a “very small” fee each time they take a product. This would then be used to fund the compensation scheme.
The idea has its merits and is something the FCA should seriously consider. At the very least, brokers should stop being punished for failures in other sectors.