The Association of Professional Financial Advisers (APFA) has responded to the Financial Services Compensation Scheme’s (FSCS) consultation on its proposed approach to calculating expected 36 month compensation costs.

Chris Hannant, director general at APFA, said: “While we agree with the idea of using past experience adjusted to take account of current trends and market experience, FSCS needs to think again about the way it defines ‘exceptional’ factors. According to their proposed approach FSCS would, in all likelihood, almost never adjust for exceptional factors, rendering this step in the process meaningless – which we do not believe is their intention.

“For example, we believe a breach of the class threshold should be treated as exceptional. There is only one occasion when the cross subsidy provisions were triggered, which was Keydata, yet FSCS has said it doesn’t view this as an exceptional event.

“The Keydata collapse would have significantly distorted levies under the proposed system, as £150m would have been collected every year since 2010/11. However, since compensation levels spiked at £277m that year, they haven’t been higher than £109m since. It is hard to see, therefore, exactly how FSCS could have justified asking for £150m in any year subsequent to 2010/11.

“Ultimately, this proposed approach risks firms paying more in fees to FSCS than necessary. There needs to be a re-think to ensure this does not happen, which means reconsidering the criteria it will use to determine exceptional factors.”