The total bill for the compensation scheme will move beyond £1.0 billion, for the first time ever this year
Financial services groups have reacted with dismay to news that the levy they pay to support the UK’s Financial Services Compensation Scheme (FSCS) that insures client money against fraud or failure, will rise by more than 6 fold for certain groups in the coming year.
The Association of Mortgage Intermediaries (AMI) which represents mortgage brokers has said that members face a bill in 2021 of £23.0 million compared to a charge of just £3.0 million in 2020.
Overall, FCA regulated firms can expect to see the bill for the FSCS rise by 48% taking the total cost for the scheme beyond £1.0 billion for the first time.
The FSCS believes that the nine-figure sum will be required to cover claims resulting from an increased number of failing FCA firms.
A supplementary levy of £78.0 million will be charged to FCA regulated firms in February and more than half of that figure will be expected to be paid in that month. The largest 1000 firms will also be asked to pay 50% of their total levy commitments for the year, in March 2021.
In the forward to this years FSCS plan and budget report, the fund’s Chairman, Marshall Bailey, suggested that in future that contributions to the scheme could be increased for firms that market and sell unsuitable high-risk products to mass-market consumers.
He also suggested that rule changes are necessary and that this may lead to a more clearly defined, restricted set of protected product choices for mass retail customers.
Those comments were primarily motivated by a series of failures and claims on the fund from the clients of firms operating in a regulatory grey area of so-called mini-bonds.
Whilst the FSCS does not set regulatory policy in the UK where retail investments and trading are concerned, the fund does work in consultation with the FCA and other stakeholders.
Mr Bailey called for regulators and the UK Treasury to work together with the fund to resolve these and other issues. Such as the rise in claims related to financial fraud which according to Action Fraud data doubled in the first half of 2020.
Margin Trading, FX brokers, and their clients have of course benefited from FSCS in years gone by. Most notably after the failure of several UK regulated firms in the wake of the removal of the Swiss Franc’s Euro peg in January 2015.
Many of the current claims on the compensation scheme are from areas of the financial services industry that are totally unrelated to margin trading business.
However, there must be a concern that any moves to tighten regulation around the type of products that can be offered to retail customers could include further restrictions on the provision of CFDs and Margin FX trading, at a time when there has been a dramatic uptick in trading among private clients.
The UK FCA has already shown that it is prepared to put certain products off-limits to UK retail investors by banning the marketing and promotion of those products. As we recently noted some commentators believe that tighter regulations for margin trading products are inevitable.
If that is to be the case let’s hope that the industry can make a more convincing case for itself than it did when ESMA and the FCA moved to restrict the levels of leverage that could be offered to retail clients three years ago.