AIFA: FSCS should isolate ‘second activity' intermediaries

AIFA will propose a split in the FSCS sub-class for investment intermediaries, in a bid to separate out firms where intermediation is only a "secondary activity" and not their main business.

The idea will form part of the body's consultation paper on reviewing the funding of the FSCS, which it will publish this month.

AIFA says firms which conduct several types of business tend to be higher risk than firms which purely give financial advice.

Where intermediation is only a "secondary" activity the firm should be put into a separate compensation class, AIFA director Robert Sinclair argued at the All Party Parliamentary Committee on Insurance and Financial Services last night.

AIFA has been calling for a public review of the Scheme's funding after advisers were hit with a record £93m interim levy. This was due mainly to the collapse of Keydata, which AIFA and many advisers argue was not an intermediary.

Keydata carried out various types of investment business but the FSCS ruled it was failures in its intermediation activities which caused consumers to lose money. As a result it levied the FSCS D2 sub-class - investment intermediaries - for the costs.

The FSA plans to change the way the FSCS levies the industry, but AIFA policy director Andrew Strange told Committee MPs the regulator's current timetable is "too slow".

He wants to fast-track the process to have a new regime in place by summer 2012, when advisers will be levied for the 2012/13 year.

A front-runner alternative to the current FSCS funding system is a "pre-funded" Scheme.

Levy payers would contibute about £100m over the next five years to a main pot ahead of firms' failures to be drawn on by consumers if needed.

But Andrew Strange, policy director at AIFA, says pre-funding is not a "panacea".

He told MPs: "It is difficult to see how the Scheme could be sufficiently pre-funded.

"Also the transition period would cripple firms which have just paid the interim levy."

Chairman of the All Party Committee, Conservative MP Jonathan Evans, queried why the FSCS' recent £4m advertising campaign, paid for by levypayers, fails to explain to consumers the Scheme is industry funded.