As 2021 gets underway, after a year spent adapting to uncertain times, the recent vaccine breakthroughs at last allow us to look beyond the pandemic to the long-term opportunities and prospects for our industry and how we use these to deliver better outcomes for our firms and their clients.
In line with this, at the top of Pimfa’s priority list remains reform of the Financial Services Compensation Scheme (FSCS), alongside the attendant difficulties with the availability and cost of professional indemnity insurance (PII) and the future direction of regulatory supervision.
‘Increased fees are unsustainable’
We continue to work closely with government and the regulator to find an effective way forward as the increased fees are unsustainable. Tim Fassam, our director of government relations and policy, gave evidence to the House of Commons’ Work and Pension Select Committee inquiry in September highlighting our concerns about consumer detriment.
It is our belief that the ‘polluter should pay’ and this is ultimately an issue that can only be solved with holistic change. This stance has been reflected in language used by the regulator.
Individual firm failures erode trust in all regulated firms and undermine consumer confidence. Equally, the costs associated with these supervisory failures – eg FSCS and PII premiums – materially impact on cost structures, damaging competitiveness and innovation.
These increased costs also negatively impact consumers by widening the advice gap. Today, fewer than 10% of UK consumers access financial and investment advice, with many who don’t pointing to the cost of advice as a reason as many believe they have to be extremely wealthy to use our profession.
Solutions to bring the levy back under control
In our latest policy paper, we argue 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.
As a first step towards bringing the FSCS levy back under control, we propose that the fines imposed on firms by the FCA for regulatory failures contribute to funding the FSCS rather than being paid to the Exchequer (apart from the monies that go to charity). This would limit levy increases to a more manageable level or, potentially, reverse increases altogether. This gives some breathing space for analysis to be conducted and reform to take effect.
We are also calling for the FCA and FSCS to increase efforts to recover funds from firms or schemes that have failed and ensure they take action in all cases that could reduce a potential levy payment for firms in the same class. And fundamentally, where out and out fraud is behind firm failures, this should not fall on the scheme but be pursued as a crime.
Brexit is an opportunity to review ‘detrimental’ Mifid II rules
Covid-19 also provided a lesson on Environmental, Social and Governance (ESG) investing in 2020. ESG-centric fund values did not fall off a cliff as people rushed to traditional stocks. In fact, data indicates that investors increasingly care about the obvious benefits of holdings that have good ESG scores, including lower operational and reputational risk, a focus on systemic inequality, as well as better staff relations and sturdy supply chains. It is now proven that investors can invest in sustainability and gain a return, even in the worst of times.
With this change in consumer’s values comes a significant opportunity. In September we launched our PIMFA ESG Academy, in partnership with Morningstar, to provide greater knowledge and understanding of ESG, simplify the latest information and language and deliver the latest regulatory guidance on ESG in a supportive, online learning environment led by experts in the field. With almost 350 students enrolled so far and two more cohorts set for 2021, encouraging this trend will be a priority.
And finally, Brexit itself. 2021 began with the end of the transition period, creating the environment in which to reconsider the practical application of regulation, review the architecture of the Handbook and change the rules to reflect the specifics of the UK market.
We therefore have an opportunity to ask for the review of Mifid II rules that have caused detrimental and unintended consequences and aim to achieve a future regulatory rulebook that is cost-effective, does not impose disproportionate cost burdens on industry and consumers and, above all, works for UK customers.
Liz Field is the chief executive at Pimfa
