FSCS £80m levy offends every sense of natural justice
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The Financial Services Compensation Scheme went even further in its attempts to offend natural justice this week with confirmation that intermediaries will pay the full burden of claims relating to Lehman-backed structured product providers.
The FSCS also confirmed it was to ignore the rightful outrage that greeted its original decision to place the full burden of complaints against Keydata onto the investment intermediation sub-class, albeit at a slightly lower level than originally estimated.
Putting this sum of money into perspective, the £80m interim levy is over half the £148m the FSCS expects the entire financial services industry to pay in levies for the 2010/2011 financial year.
Details in the small print reveal fund management groups will not even pay for any overflows into their subclass. The intermediation sub-class will pay £110m for the year, well over the £100m threshold that triggers over-flows into the fund management sub-class. But as £12m of this money was “management expenses” nothing will pass over to the fund managers. They really know how to rub it in.
The Keydata marketing brochure sat on my desk portrays the firm as a product provider which interacted with IFAs. That was the way its was perceived by the industry and the way the FSA let them market themselves.
The FSCS’s argument centres around the activities of Keydata. The firm did not handle client money directly or have discretion over bond purchases after receiving funds. Investment management was outsourced to investment vehicles Lifemark and SLS Capital and so in the FSCS’s eyes Keydata’s activities were that of an intermediary.
The logical conclusion of this argument is that responsibility for a huge number of firms we would consider to be at the riskier end of the market, and well outside the usual definition of an intermediary, would fall on advisers.
The FSCS’s decision regarding NDFA, Arc Capital & Income and Defined Returns Limited is equally worrying.
We had previously assumed the reason why the FSCS had yet to decide where the burden of claims should fall regarding failed Lehman-backed structured product providers was because the scheme was grappling with arguments over adviser/provider liability. I wrongly assumed the FSCS was juggling the extent to which these claims were the result of poor manufacturing and marketing literature or bad advice in instances where both the provider and adviser firm had gone bust. How wrong I was.
If such a situation did exist you could imagine intense debate about the role of misleading marketing literature and provider responsibility along the distribution chain versus the responsibilities of the regulated adviser. Dare I say that in some cases partial responsibility may have fallen on advisers- the FSA’s own investigations have found faults with both the advice given by IFAs and the marketing literature of the structured product providers.
But no, according to discussions between MM and the FSCS press office, the FSCS has just lumped all the structured product providers into the intermediation category.
Now at least Keydata had advising on investments as one of its permissions on the FSA register. A quick browse on register shows that NDFA and DRL did not have this permission, although ACI did.
With advisers paying for all the misselling claims that will result from these failed providers, the people behind them will presumably be allowed to carry on in the industry and move on to their next venture.
For example, ACI was put into administration in October 2009 following compliance errors in relation to its marketing material for Lehman-backed products. In November last year its administrator sold the firm to Merchant Capital with ACI director John Gracey transferring to Merchant Capital along with other colleagues. Meanwhile advisers are left to clear up any mess left.
Sesame held a 28.5 per cent stake in NDFA and DRL. Of course Sesame will be in line for a steep levy bill anyway but should the shareholders of these failed firms not be forced to take on more responsibility for their behaviour?
And a quick point about the fund management industry’s lack of reaction to this debacle. The frantic lobbying which has taken place behind the scenes in recent weeks has also involved the Investment Management Association holding firm against pressure for its members to share some of the costs of the £80m levy. You might say that IMA chief executive Dick Sanders is only doing his job in defending his member’s interests. Perhaps some of his members should remember that a large percentage of their profits come through the same IFAs that are being hit with this unfair levy.
The FSCS’s justification for handing out the £80m levy to advisers ends by pointing out that there are many other firms which may not be regarded as intermediaries but who contribute to the intermediation sub-class.
I’m not sure if this passage was intended to reassure advisers that other firms are also suffering the burden of the levy. In fact it actually does the opposite, raising new concerns about what other types of risky firm advisers bear the ultimate responsibility for.
The FSCS needs to publish a list of all the firms it classes as investment intermediaries, if only so advisers know who they will have to bail out next.
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Readers' comments (28)
Anonymous | 31 Mar 2010 3:17 pm
For god's sake, why doesn't the whole industry en-masse tell these idiots to get stuffed and see what pearls of "wisdom" they come up with then.
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Peter | 31 Mar 2010 3:18 pm
How much longer before we are held responsible for
1.the diasppearance of Sheargar
2.Lord Lucan going missing
3.Global warming
4.The current bad weather.
Last one left turn the lights out please
It's all gone mad!!!
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John Leefe | 31 Mar 2010 3:19 pm
It is time the FSA & FSCS are abolished and the responsibility for regulation passed to the Treasury with costs carried by the taxpayer. This quango is a farce; it can't manage risk and is expensive. Time for it to go.
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Fraser Brydon - IFA | 31 Mar 2010 3:23 pm
Angry and extremely frustrated are just two adjectives, i have many more, unprintable, I would like to address at the FSCS. A mockery of justice, fairness and due process.
This all stinks, there is more to this than is being published i bet. What other time bombs are in the filling cabinet? Treating people fairly - i think not.
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Julian Stevens | 31 Mar 2010 3:35 pm
Take a look at this: http://www.berr.gov.uk/files/file45019.pdf
Illuminating.
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Peter Herd | 31 Mar 2010 3:42 pm
Although I agree with lots of the comments above and think that the FSA and FSCS are punishing us more than fund managers and stockbrokers at present. The problem is our own industry has not covered itself in glory in the past and we all know the types of firms that have acted responsibly to make a quick buck or have moved on to become property gurus which is totally unregulated.
If the FSA and FSCS is going to do anything good about regulating our industry then it needs to encompass the whole of the industry including those accountants solicitors and other people that give advice through the back door just because it's not linked to a product.
How many accountants are out there giving advice around buy to let property portfolio has as a way of clients saving for their retirement. How many clients going to lose all of their wealth because they have overstretched themselves in this one asset class. Suspect will be picking up the bill for that one as well as IFA's as we seem to be an easy target.
It's about time that the FSA and FSCS realise sometimes clients do not necessarily tell the truth and that the endless compensation culture that we got into needs to be greatly restricted unless a client can prove malpractice.
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Anonymous | 31 Mar 2010 3:43 pm
Just received our invoice for £400. As we are not the BofE and therefore cannot print money it will be reflected in increased charges to our clients, it is they who ultimately pay. Perhaps 'transparency' should include a breakdown of the sums they ultimately pay for failure on the part of the Regulator who is 'protecting' their interests. Perhaps a client letter should go out saying that as they were a client at 31/12/2008 and I have had some unexpected extra costs (even though I would have seen them if I was doing my job properly), I would like, say, £5 each for starters?....
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Rod | 31 Mar 2010 3:44 pm
I wil say it for you chaps.... FSA, FSCS and FOS, depart this country in short sharp jerky Movments, and take your banking mates with you. Investment houses and Insurance companies who get the majority of their inbedded value from the work the IFA has done for the last 40 years, how about helping us out by saying no to these dishonest regulators.
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Anonymous | 31 Mar 2010 3:45 pm
I have decided that, having read all the propoganda from the FSA,FSCS and the OFT. They are all by their sell by date. Three organisations all covering the same situations one way or the other. Just keeps the jobs for the boys going. Mind you it will not last much longer, because they will have bankrupted us all, driven everyone out leaving the banks to really con the public. Mind you none of the members of the 3 organisationsd mentioned will give a toss because they will all get nice gold plated jopbs with the banks. It must be time someone woke up and saw what is going on.
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Anonymous | 31 Mar 2010 3:47 pm
I had my invoice drop on my desk today for an amount of over approaching £10k!!! Every one of us at my firm has worked exceptionally hard this month to satisfy the demands of the tax year end to find our profit wiped out by an invoice from FSA.
They really know how to demotivate the people they regulate.
With constant accusations of miss-selling, a total disregard for our costs they need to be seriously challenged.
Why is is we have no human rights? We can not challenge any of this, it is an injustice and grossly unfair but who cares. We practice TCF but those asking us to do this treat us in totally the opposite way.
The fund management industry are a disgrace too. They only care about getting business from us and when it comes to stabbing us in the back they are very quick to do so.
They design floored products, hide behind small print and allow the IFA sector to pick up the bill.
I have been in this industry for over 30 years and it stinks a hell of a lot more than it did pre regulation.
We are accused of fleecing the public and have to sit by and get fleeced by our regulator.
It is a disgrace and I have no time for the regulator any more. Parsites the lot of them.
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