The Financial Services Compensation Scheme is the villain of the piece in the latest biannual statement of business and financial results from the wealth management firm of St James' Place.
SJP, which is represented by 4,324 qualified advisors, has weathered a very hard half-year but with gross inflows for the six months ending 30 June standing at £7.3 billion, only 2% lower than the first half of 2019.
A significant increase in the levy
However, SJP has noted: "In the short term our profit has been impacted by a more challenging new business environment together with a planned increase in our investment expenditure and the unplanned and frustrating rising costs associated with the FSCS levy. The underlying cash result for the six months at £114.4 million (six months to 30 June 2019: £125.1 million) was therefore lower than the same period last year.
"Our contribution to the FSCS levy increased substantially, and disappointingly, during the period to £27.8 million, up from £16.1 million for the six months to 30 June 2019 and £22.3 million for the year to 31 December 2019. This reflected a significantly increased rate of levy, over and above the 15% increase we expected at the beginning of the year and our growing proportion of the FSCS funding sectors in which we operate.
"The underlying cash result...was £114.4 million (six months to 30 June 2019: £125.1 million)."
By contrast, regulatory fees were £4.5 million - up £200,000 on the previous first quarter's figure of £4.3 million.
The report goes on: "Over the last few years the levy has been at an elevated level, which was further exacerbated by the FSCS increasing the levy by more than 20% for the current funding year and the continued relative growth of the group in the FSCS funding sectors in which we operate."
Why the FSCS needs more money
The burden on the FSCS is growing. Many wealth managers manage HNWs' self-invested pension plans or SIPPs for them in the same way that a discretionary fund manager or DFM manages his HNW clients' fund, but all is not well in the SIPP world. An eminent pension fraud litigator told Compliance Matters today: "In one pension fraud that I have been working on, the money from HNW pensions came into the scheme partly through banks, but mainly through SIPPs. In 2013 the Financial Conduct Authority put out a paper reminding SIPP providers to perform 'due diligence' on the investments that their clients were taking on. If you're doing multiple referrals on the same investment, you should do due diligence. This is very onerous and pension providers do not feel that they are getting proper guidance from the FCA.
"When you encounter a SIPP, it's invariably been set up in the years between 2009 and, say, 2015. SIPPs are going into decline. One by one they are being liquidated and then you see the FSCS stepping in. One cause of this is that when they go to the PI insurers in an attempt to stay afloat, the PI [professional indemnity] insurers say 'we never thought you were siging off advice; if you want that in, you'll have to pay another premium of £100,000.'
"I am sure that the levy will be continually increasing. Some people wonder why we bother with such an expensive compensation scheme at all, especially the prudent firms with a spotless regulatory record that nonetheless have to pay for the mistakes of the rest.
"All that said, however, the FSCS probably gives the financial sector more in market integrity than it takes away in fees."
In January PIMFA, the UK's largest wealth management trade body, furnished Compliance Matters with some facts and figures about the FSCS as it affected wealth managers. At that time, 30% of the UK's medium-sized wealth managers were paying into a higher band of £501,000 to £1 million; the previous year (2019) PIMFA only had one member-firm paying into this band. By January also, 100% of large full-service wealth managers were paying in the range of £1 million to £4 million, whereas before it was only 57%. Double the amount of stockbrokers were paying above £1 million. As a proportion of the regulatory bill, the biggest increase had been with the large full-service wealth managers. The FSCS bill had increased by 52% for IFAs from the previous year and all medium wealth managers had more than doubled their fees in the previous year. Most IFAs' PI insurance premia were considerably larger than FSCS levy. The FSCS as a proportion of turnover at firms hovered between 1% and 10%.