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03 April 2017

The Personal Finance Society (PFS) has called for a joint solution to the flaws in the Financial Services Compensation Scheme (FSCS) and professional indemnity insurance (PII) market as part of its submission to an FCA consultation.

In its response to the regulator’s consultation, Reviewing the funding of the Financial Services Compensation Scheme (FSCS), the professional body welcomes the FCA’s proposed review of the PII market later this year, but suggests it should be more closely integrated with the current review into FSCS funding.

The PFS is concerned that proposals to reform the FSCS, due to be published by the FCA in Autumn 2017, will fail to take into account the outcomes of the later PII review.

PFS chief executive Keith Richards said the disconnected approach was likely to lead to a sub-optimal outcome: “Given the link between PII and the FSCS, and the dynamics of how insurance works in relation to the legacy liability of regulated advice, we need to find an integrated and sustainable solution that responds to the flaws in both markets.”

“Any success the FSCS review achieves in terms of reducing the unpredictability of levies, and better aligning costs to the risk profiles of adviser and related firms, could be undermined if it results in less competition and higher premiums in the PII market.”

“Higher risk rated advice firms may even find it impossible to secure PII as a consequence, potentially forcing them into administration and thereby adding more liability into the FSCS.”

The PFS has previously proposed the idea of a single solution, creating a central fund with the financial capacity to protect both firms and consumers from advice firm failures.

A single contribution to a non-commercial ‘pooled risk’ fund, with an excess applying similar to PII, is likely to be lower and more efficient than the current dual cost system.

Mr Richards said the idea of a single contribution was an example of the type of “out of the box” thinking that needed to be considered as part of the broadest possible review of PII and the FSCS.

“It is pleasing that the FCA has acknowledged the need to more clearly link product risk to FSCS charges but it is disappointing that it has effectively ruled out the possibility of introducing a product levy.”

“We have once in a generation opportunity to improve two markets in desperate need of reform and I’d urge the regulator to take an integrated approach and consider and investigate all options.”

“Ultimately, we must implement a solution that builds sustainability into the FSCS system, while promoting competition in the PII market.”

“Only then will cost pressures on firms be eased and smoothed, in turn making professional financial advice more affordable and accessible to consumers.”