PIMFA has called on the Government and the Financial Conduct Authority (FCA) to urgently reform the supervision of financial advice and consumer compensation through the Financial Services Compensation Scheme (FSCS).

PIMFA, the trade association for the wealth management and financial advice industry, said the FSCS plays a vital role in UK retail financial services but claimed “every individual that has sought compensation through the FSCS has already suffered a poor outcome”.

PIMFA argued that policy should be designed to minimise the need for the compensation scheme and protect consumers before the harm occurs, rather than allowing harm to occur and relying on the FSCS as a safety net.

In its latest policy paper, PIMFA said 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.

The paper focuses on the “inadequacy of supervision and regulation carried out by the regulator”, including a failure to protect customers from unregulated products and supervise firms adequately.

The trade association said that the existence of a levy which continues to incentivise poor outcomes for savers and the profession, is something which clearly needs review.

PIMFA set out a roadmap towards providing better consumer protection and lowering levy costs for firms.

As part of this roadmap, it has called on HM Treasury to review the drivers of FSCS levy costs and review what allows firms to transfer risk onto the FSCS to cause market distortions including phoenixing and identify ways of legally limiting firms ability to transfer risk onto FSCS in future.

The trade body also called on the FCA to review its supervisory approach against risk assessment of firms adding cost to FSCS and report against this, and to review levy construction and consider a risk-based element and how to boost recovery from the original firm or product.

Liz Field, chief executive of PIMFA, said: “PIMFA and our members firms are fully committed to ensuring that consumers are protected via the FSCS”.

“However, the current environment allows some firms that simply should not be in business, to transfer their responsibilities to compensate their clients onto the rest of the industry through the practice of phoenixing. Lifeboating is also a key challenge.

“Aside from the direct harm this causes consumers, this tarnishes the financial advice and wealth management sector as a whole and creates an additional financial burden on well-run prudent firms. Firms need to continue to invest in their innovation and this is impacted by the exponential rise in FSCS fees.

“We are aware that this is a complex issue and, as a result, there is no single cure that will provide a solution. But we urge the Government and the FCA to work with us in order to ensure that the FSCS and the regulatory structures can more effectively protect against harm, ensure the advice gap doesn’t further widen, and provide confidence to both consumers and the firms which fund it”.