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The compensation merry go-round

By Justin Modray, published 19 February 2018.

One of the many expenses of running a financial advice business is fees paid to our regulator – the FCA. We keep a very tight lid on most costs, but this one is totally outside of our control and always a not insignificant sum.

Our annual FCA invoice comprises five items: a fee towards FCA running costs, fees towards running the Financial Ombudsman Service (FOS), Money Advice Service (MAS) and The Pensions Regulator (TPR), plus a contribution towards the Financial Services Compensation Scheme (FSCS).

The FOS, MAS and TPR fees are negligible. The FCA fee on our last invoice was 22% and the FSCS levy 75%. In other words, three quarters of the invoice – many thousands of pounds - goes towards funding the industry compensation scheme.

We fully support the FSCS concept, it’s vital investors are protected in the event of mis-selling and insolvencies etc.

But as an advice firm that has never had any issues with mis-selling and the like, we begrudge having to pay towards problems created by less scrupulous advisers, who probably made quite a lot of money in the process. In short, the scheme is effectively set up so that the remaining (mostly good) guys end up paying the bill for the actions of those advisers that sink under compensation claims.

This would be more palatable if widespread mis-selling was not allowed to persist for extended periods before coming to a head, but history suggests this happens time and again. The FCA has little incentive to pro-actively nip mis-selling in the bud, as it’s much easier to let these things happen then leave the industry funded scheme to compensate up the mess – as the likes of us have no choice but to pay our share of the compensation bill, despite having played no part in creating the problem.

Another compensation storm is brewing – final salary pension transfers, of which there have been a lot over the last year.

Ian and I took a decision very early on to avoid giving advice on final salary pension transfers, over fears there would be a mis-selling scandal further down the line. When these things happen, everyone tends to get caught in the crossfire regardless of advice quality. Since we’re focused on building a great, sustainable long-term business it seemed an obvious decision to us, despite the temptation of receiving many enquiries from potential clients asking if we could help transfer their final salary pension.

We still know we made the right decision, even though it meant turning away a lot of potential business. But it’s frustrating to know that some advisers who recommended these transfers might fold their businesses when mis-selling claims start coming in and move on to avoid paying compensation, shifting the burden on to the FSCS (hence us in some small way us). In fact its already starting to happen.

We’d like to see the FCA be far more pro-active at spotting and stamping out mis-selling scandals early on. And also restructure FSCS levies so that those advisers giving higher risk advice pay correspondingly higher levies.