Advisers say the Financial Services Compensation Scheme’s proposal to calculate levies over three years is being distorted by Keydata and fails to tackle “untenable” adviser costs.
From April 2014, the FSCS will raise levies based on either the compensation costs expected in the 12 months following the date of the levy; or one third of the compensation costs expected in the 36 months following the levy, whichever is higher.
In a paper setting out its approach last week, the FSCS has worked-up models of how levies would be calculated under the new three-year model. These suggest investment advisers would have been hit with the maximum levy of £150m for 2013/14, instead of the £78m actually levied on them under the current model.
The FSA first put forward plans to project potential compensation costs over three years rather than one last July, as part of its review of the way the FSCS is funded.
The review has already seen the annual claims limit for investment advisers rise from £100m to £150m, and the creation of a “retail pool” which would be triggered if one class breaches its annual claims limit.
The FSCS plans to use a five step process to determine levies based on compensation costs forecast for the next three years: assess the average costs in each class over the last three years; adjust for exceptional costs that are not expected to reoccur; add costs of expected defaults in the next three years; factor in new claims trends; and account for any surplus or deficit for each class.
The FSCS has not stripped out the cost of Keydata claims in its models showing average FSCS costs paid by each class over the last three years, saying although the cost of compensating Keydata investors was high, they are not “beyond the usual level of costs” met by the investment intermediation class.
But Apfa has challenged this view, arguing compensation levies under the three year model should be adjusted to exclude Keydata costs.
Director general Chris Hannant says: “We would argue a breach of the class threshold, which has only happened once in the FSCS’s history, is exceptional, and the effect it has on the numbers could be significant.
“By taking its proposed approach, the FSCS is distorting the calculations and risks making levies more volatile and leaving firms out of pocket. We urge the FSCS to look again at its approach, and reconsider the criteria it will use to determine exceptional factors.”
In 2011 the industry was hit with a £326m FSCS interim levy, with Keydata accounting for £258.8m in claims. Of the total interim levy advisers had to pay £93m while fund managers paid £233m.
Atkinson Bolton Consulting director Simon Gibson says: “I would argue the Keydata costs are exceptional. Just because a major collapse has happened once, this does not necessarily mean it will happen in the immediate future.
“I am all for consumer compensation, but the key is it has to be appropriate. With increasing regulation, there is the potential for the level of FSCS claims, and therefore the costs on advisers, to get worse rather than better.”
Pilot Financial Planning director Ian Thomas says: “The fundamental issue is not three-year versus one-year, but the way firms are categorised. Investment providers and stockbrokers continue to be thrown in the same class as smaller financial advisers, which just makes FSCS costs untenable.
“You almost feel powerless when you see these kind of proposals, because it is hard to see how I can change what is happening.”
Macroeconomic forecasting consultancy Capital Economics has issued a positive outlook for the UK, highlighting the potential for a period of “strong catch-up growth”. In its quarterly review of the UK economy, the group says the country could be on the brink of a strong comeback after the challenges of the coming year or two are […]
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Financial Conduct Authority chief executive Martin Wheatley will today promise the new regulator is a “very different animal” to the FSA. In a speech at the Association of British Insurers’ biennial conference, Wheatley will admit he understands why the industry doubted the regulator would genuinely change. He will say: “One of the questions I was […]
What a dog’s dinner! Advisers cannot keep absorbing these ever increasing regulatory fees. Would not a product levy be fairer?
Even the FSA paper that came out noted that there might be reasons to change it but said that doing that was for Parliament to do, and so in the interim it would plough on regardless. Or something like that.
Its a poor scheme with poor principles behind it and whats worse is that it wont really work in a REAL crisis. Forget KeyData, what if Equitable Life happened next week??
We need a complete overhaul of the mechanisms AND the principles, ie perhaps people shoudl be allowed to buy products and take advice WITHOUT compensation if they wish and if it gets them a cheaper product, AND we should have product levies including an ADVICE levy, for those that do wish to include compensation.
Some interesting suggestions Paul. Are you suggesting Keydata was not a crisis? And what about the fact that the banks are now paying for the fact that the scheme did rescue millions of savers.
A major contributory factor to the size of the FSCS levies is the FSA’s continuing policy of dumping onto the IFA sector the costs of mopping up in the wake of its own failures. The two most obvious examples, of course, are ArchCru and KeyData, the latter not even an intermediary by any objective measure. Resolutely oblivious to all cries of dissent, the FSA just decided unilaterally to classify it as such and there’s been nothing that anyone’s been able to challenge it, least of all being able to refer the matter to any sort of independent arbitrator.
That aside, the whole infernal cost of regulation is rapidly becoming untenable because the regulator seems to be constitutionally incapable of finding a cost-effective way of doing ANYTHING. Example:-
1. Client claims (but appears to be under no obligation to prove) he didn’t properly understand the nature of an investment into which he put money.
2. Cost-effective solution: Consult (and listen to) the industry with a view to finding ways to streamline and clarify the ways in which products’ key features are communicated to clients.
3. FSA solution: More verbiage, more paper, more expense, in the misgotten belief that what clients need is more of everything.
Our latest featured recommendation is one of Canada's leading owner/operators of senior housing, particularly long-term care (LTC), explains Art Charney, editor of Big Yield Hunting.
Leisureworld (TSX:LW) (OP:LWSCF) should enjoy a significant tailwind as more and more of Canada's baby boomers retire.
Equally important, a substantial portion of the company's LTC revenue is derived from government funding, which means its core business is supported by a stable, recession-resistant income stream.
And, as the company's long-term growth story unfolds, investors are amply compensated by its CAD0.075 per month payout, which translates into an 8% yield at current share prices.
The small company primarily operates in Ontario and it's the second-largest LTC provider in the province.
The LTC business not only has significant barriers to entry, thanks to the Canadian government's stringent licensing requirements, but it also has exceptionally high occupancy rates, averaging 99% in the most recent quarter.
After hitting an all-time high earlier this year, the company's shares began a protracted sell-off in mid-August, because its second quarter results failed to meet analyst expectations.
But the selling was overdone, and shares have started rising again, while analyst sentiment has improved markedly, following more recent results. We believe the shares currently offer an attractive entry point. Buy Leisureworld below USD11.85.
High-yield plays north of the border look very attractive to Robert Gorman, Chief Portfolio Strategist for TD Waterhouse Canada, as he explains with plenty of examples in this exclusive interview with MoneyShow.com.
Sure. I think one of the big stories within the Canadian market is that dividend yields are abnormally high versus bond yields. Dividend growth stocks should do very nicely as a result.
One good illustration would be Power Corporation (Toronto: POW), which controls Investors Group and Great-West Life. The stock has really not moved in the past few years, but you’re being paid a 5% dividend yield, which is very handsome at this stage of the game. I think the stock will appreciate in coming years as well.
Another name would be Shaw Communications (SJR), the largest cable company, with a dividend yield of 4.4%. They have very wisely avoided direct movement into the wireless market, which is very competitive and subject to shrinking margins.
Some of the banks have really pulled back this year, and are really high quality. Royal Bank (RY) and Bank of Nova Scotia (BNS) also sport hefty dividends.
If we move out of the financials and the interest-rate sensitives into some of the more commodity-oriented stocks, Suncor (SU) is a very high-caliber name in the oil sands. It’s come off 25%—very inexpensive. If you’re looking for something with a higher stream of income from that same industry, look at Canadian Oil Sands (Toronto: COS).
On the materials side, my favorite play is in fertilizer companies, which are a great way to participate in the agriculture theme going forward. Potash Corporation of Saskatchewan (POT) and Agrium (AGU) are two of the best ways to go—very high-quality names in that sector. So those are a few key Canadian names.
Are all of these available to US investors on the US exchanges, or are some of them traded only on Canadian exchanges?
Not all will be on US Exchanges, though some are interlisted…Potash being an example, as would be the Royal Bank. If they’re not traded there, you can buy them on the TSX, which of course is a very liquid market as well.
They’re part of our client portfolios. I’m a client as well, so yes, I would own them as a consequence.
Let’s shift gears a bit. I wanna ask you a bit about your thoughts on the fixed-income side and where you see that headed.
Well, essentially, we are coming to the end of a 30-year bull market in bonds. We’ve just seen bond yields go from the teens down to about 2%, and I think that has pretty much run its course at this stage of the game.
You want to be defensive when it comes to bonds, and your best bet is probably to go into high-grade corporate issues, which have two advantages:
In the coming year, I expect bond returns to be fairly modest—1% to 3%, essentially coupon returns—and again, focus on those high-grade corporates. In the US, look to the tax-free municipals which have a much higher after-tax stream of income for investors.