The Financial Services Compensation Scheme (FSCS) has increased its levy for financial firms by 20%, amid a rise in DB pension transfer claims, bringing the total levy for 2018/19 to £407m.
According to the FSCS, a rise in defined benefit (DB) transfer claims is a key driver for growing costs, with the scheme having recently set aside £10m to pay for claims against a number of independent financial advisers.
One of those is Active Wealth, which advised British Steel workers, amongst others, to transfer their defined benefit pension schemes into Self-Invested Personal Pensions before going into liquidation earlier this year. Consequently, the FSCS has increased the levy on life and pensions advisers by £52m to a total of £75m.
Conversely, the investment intermediation sector will see a decrease to its indicative levy announced earlier this year of £4m, mainly because of recoveries offsetting compensation payments, the FSCS said.
Mark Neale, FSCS chief executive, comments on the decision: “Risks rise as people make increasingly complex choices about the investment of their pension pots, even where investors take the sensible step of taking independent professional advice.
“Many claims reflect bad advice to transfer pension savings from occupational schemes into Self-Invested Personal Pensions, usually with a view to invest in illiquid and risky unregulated products,” he adds.
The FSCS’s decision coincides with the Financial Conduct Authority (FCA) publishing a consultation paper which foresees that financial product providers should bear 25% of the contributions to the FSCS scheme, highlighting their role as indirect beneficiaries of the FSCS lifeboat provision.
The new rules, which are set to come into effect as of April, next year, have split the industry. While product providers are sceptical, the initiative was welcomed by the Personal Investment Management & Financial Advice Association (PIMFA): “This rule represents a significant reduction in business costs, reducing the size of the overall pot to which our member firms have to contribute,” PIMFA says.
With regard to the impact of the increased FSCS levy, PIMFA adds: “With such a sharp increase in the FSCS levy – up by £71m more than it forecast in its Plan and Budget in January – we feel that the FCA needs to demonstrate that it actively seeks to mitigate through its supervisory processes claims on the FSCS.”
