PIMFA, the trade association for the wealth management and financial advice industry, is calling on the government and Financial Conduct Authority (FCA) to urgently reform the supervision of financial advice and consumer compensation through the Financial Services Compensation Scheme (FSCS).

The FSCS plays a vital role in UK retail financial services ensuring consumers can confidently save and invest.

PIMFA argues that every individual that has sought compensation through the FSCS has already suffered a poor outcome.

FSCS ups levy costs by £92m

The trade association has consistently argued that policy should be designed to minimise the need for the compensation scheme and protect consumers before the harm occurs – rather than allowing harm to occur and relying on the FSCS as a safety net.

In its latest policy paper, ‘A rising tide lifts all boats?: A roadmap towards better consumer outcomes and lower levies’, PIMFA argues that without a wholesale review of the fundamental drivers of calls on the FSCS, the total compensation bill will continue to rise for all advisers and wealth managers regardless of any review of the levy’s construction.

PIMFA has identified three-interconnected issues that ultimately lead to consumer harm.

Firstly the inadequacy of supervision and regulation carried out by the regulator, secondly market distortion and finally the structure of the FSCS.

The existence of a levy which continues to incentivise poor outcomes for savers and the profession, is something which “clearly needs review” according to PIMFA.

PIMFA has set out a roadmap towards providing better consumer protection whilst also lowering levies which calls for several actions to be taken.

These include HM Treasury to review the drivers of FSCS levy costs and review the regulatory perimeter against this and for the FCA to review its supervisory approach against risk assessment of firms adding cost to FSCS and report against this.

Liz Field, chief executive of PIMFA, said: “PIMFA and our members firms are fully committed to ensuring that consumers are protected via the FSCS”.

“However, the current environment allows some firms that simply should not be in business, to transfer their responsibilities to compensate their clients onto the rest of the industry through the practice of phoenixing.

“Lifeboating is also a key challenge.

“Aside from the direct harm this causes consumers, this tarnishes the financial advice and wealth management sector as a whole and creates an additional financial burden on well-run prudent firms.

“Firms need to continue to invest in their innovation and this is impacted by the exponential rise in FSCS fees.

“We are aware that this is a complex issue and, as a result, there is no single cure that will provide a solution.

“But we urge the government and the FCA to work with us in order to ensure that the FSCS and the regulatory structures can more effectively protect against harm, ensure the advice gap doesn’t further widen, and provide confidence to both consumers and the firms which fund it.”