It's not going away any time soon is it? With IFAs reporting a 76% hike in Professional Indemnity Insurance (PII) premiums the hardened regulatory levies are really biting and squeezing firm margins at a time of economic uncertainty given the on-going pandemic.
At Model Office-MO® we continue to press that regulatory levy stakeholders such as the Financial Services Compensation Scheme (FSCS) Financial Ombudsman (FOS) and PII need to take firm’s soft data i.e. their competence, conduct and culture into account when assessing firm’s risk and potential consumer harm.
Unfortunately and presently, there is a trend to look at the market risk rather than individual firm risk, this can be seen in the recent FSCS plan and budget 2021/22 statement which sees a forecast levy of £1.04BN which represents an increase of £339M from the previous year and there is a £78m supplementary levy (£44.5m invoiced this month).
This increase is down to the fact the FSCS anticipates an ongoing increase in complex pension advice claims and additional failures of self-invested personal pension (SIPP) operators. It also expects increased firm failures due to the economic impacts of the coronavirus pandemic, as do the FCA who estimated up to 4000 firms are at risk of failure given the data received from their financial resilience questionnaires.
As we wrote in March 2020, we also have had the FOS increased limit rise from £150,000 to £350,000 and reports of 300%+ increases in PII premiums post FCA DB pension transfer directives means the industry is now facing a real dilemma. Indeed due to this rise, the FCA says nearly 300 financial advice firms reported their PII cover for claims was non-compliant. So, we have a perfect storm, increasing regulatory levies, a pandemic and increasing potential for customer harm!
What can we do I hear you ask?
The FSCS talk about the fact they are attempting to reduce levies through data analysis and sharing with the regulators , the FCA’s consumer investment data review 2020 wants to ensure customers are educated on financial scams and their 2021/22 business plan wants to ensure all firms offer suitable advice, are resilient and are cyber-secure and the FOS, well….
In relation to these points, firms who use RegTech to audit and analyse their business governance, risk and compliance (GRC) competence and conduct can increase their profile in evidencing data and culture that showcases they are a good risk for PII insurer underwriters which can then have positive influence on renewal rates.
We do remain concerned that the apparent ‘homogenous’ approach to calculating levies and monitoring risk is severely penalising the majority of firms who are doing a good job in operating compliant businesses. At the end of the day, the regulator and FSCS have created a cause and effect conundrum; the higher the levies, the higher the costs to the end user, i.e. the client which completely defeats the FCA premise of consumer protection!
What is very apparent from our work in the RegTech sector is that technology can provide evidence based practice to identify good and bad GRC practice and ensure firms evidence they are ‘walking their talk’ on regulatory GRC competence and conduct requirements.
RegTech that monitors a firms GRC can then provide hard evidence that a firm is meeting all relevant regulatory requirements at business operations, systems and controls and people management level. This can in turn, provide valuable data to PII underwriters across their risk evaluation metrics that a firm risk (rather than a market risk) is the main factor for assessing the premium levels and any necessary premium risk loading.
RegTech can also integrate with InsureTech and thus provide a powerful GRC audit process for those PII underwriters who are adopting technology in their underwriting processes.
The FSCS can also use such RegTech data to better assess the soft and hard facts across business behaviours in the market and come to an informed (evidence-based) judgement on firm levies. Such GRC conduct and competence data should allow the FSCS to class firms more realistically and thus segment the market fairly into those firms performing well, those who need more support and the rogue firms causing the most damage.
There are other potential solutions some eloquently detailed by Personal Investment Management Association (PIMFA) in their excellent 2020 paper ‘A rising tide lifts all boats; a roadmap towards better consumer outcomes and lower levies’and in their 12 recommendations to bring government, regulators and wider industry to work together.
The current ‘homogenous’ approach taken, tends to place all firms within the same class and thus we have the issue where compensation is paid by all, not just those that cause the loss (if they are still active and have not attempted ‘pheonixing’).
By using RegTech GRC data, regulatory stakeholders will be able to better segment the market and thus then identify those firms causing detriment who should pay and if found insolvent then any wind up should include terms for payment of a levy from available assets.