No shame in taking on the FSCS and losing
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As many experts predicted, the High Court this week dismissed the challenge to the FSCS’s decision to levy the costs of Keydata claims on investment intermediaries.
But I think it would be very unfair to dismiss the challenge from IFAs and Regulatory Legal as a waste of time.
Sometimes it is worth taking a stand against a blatant unfairness caused by the regulatory machine, even if the chances of success are remote.
The FSA promised a review of FSCS funding last year but this has been put on ice due to the upcoming regulatory shake-up. You would hope that fee block definitions and particularly the stress being put on advisers by the current rules will be a priority when the review eventually takes place. You would also hope that the JR challenge will be taken on board by policymakers as an important symbol of discontent with the current funding measures.
The Keydata levy has caused considerable anger in the adviser community due to the sense of unfairness caused by intermediaries being lumbered with the bill. This was exacerbated by the fact that claims caused by failed stockbrokers and Lehman-backed structured product providers also added to advisers’ bills.
High court judge Mr Justice Beatson agreed with the FSCS’ view that Keydata’s activities should be considered intermediation as Keydata purchased securities on behalf of the investor and exercised no discretion over bond purchases. Bonds were issued by two Luxembourg special purpose vehicles- SLS Capital and Lifemark. Lifemark was set up by Keydata founder Stewart Ford
The argument that Keydata should be classified as a provider as it effectively controlled the whole process- including manufacture, marketing, literature and being the architect of other companies involved- was dismissed by the FSCS. The fact Keydata was previously regulated by the Investment Management Regulatory Organisation did not sway the scheme.
Mr Justice Beatson was asked to consider whether the FSA acted unlawfully or was unreasonable in classifying Keydata as an investment intermediary and whether it breached any duty to consult on the matter. Both issues were dismissed.
In his ruling the judge made clear that for technical matters such as this, Parliament has given the FSA a high degree of discretion over its decisions and that only a completely indefensible action or statute breach would lead to judicial interference. A pretty strong warning to anyone considering a judicial review of the regulator in future.
After defeat in the High Court debate must turn to how the current unfairness in the system can be addressed.
The intermediation sub-class contains a vast range of firms including the likes of geared Tep providers, wraps platforms and structured product providers. The list also includes many mainstream asset management companies who perform certain activities which fall into the intermediation definition- although their share of any burden will be small relative to IFAs and much less than if the levy was shared between the intermediary and fund management sub-classes.
A case could be made for fund management groups and pension providers taking on greater responsibility for claims relating to the large range of firms defined as intermediaries, given their reliance on advisers to generate so much of their profits.
The Keydata saga also points to a huge supervisory failing by the regulator. Another example of this is the fall of stockbroker Pacific Continental, which led to tens of millions of pounds being paid out by intermediaries through the FSCS. Mail on Sunday journalist Tony Hetherington was raising concerns about the firm as early as 2004 yet it was allowed trade and continue to rip off customers until June 2007.
Questions must be raised as to whether one specific part of the industry should have to pay the price for issues which were caused primarily by failings at the regulator. Will the FSA’s move to intervene earlier in product development help stop a future Keydata from happening?
We must also examine again the thorny issue of ensuring that advisers leaving the industry, or IFA firms going bust, do not leave behind significant liabilities for the rest of the industry to pick up.
As part of its prudential rules reforms (a delayed consultation paper will appear later this year) the FSA has previously floated the idea of compulsory run-off PII cover to pay for any claims after a firm ceases trading. However, such cover is often difficult to obtain and would become even rarer and more expensive if and when the market hardens.
The introduction of a long-stop would make things more attractive to PI insurers but is not a solution on its own. Higher risk firms more likely to trigger claims would obviously find the most difficulty in getting cover.
The FSCS will shortly be announcing this year’s funding requirements, which is likely to include a significant Lifemark levy, and familiar bills will begin to land at IFA offices around the country.
Without significant reform these large bills look like becoming an annual event.
Paul McMillan is editor of Money Marketing - follow him on twitter here.
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Readers' comments (18)
Anonymous | 14 Jan 2011 1:46 pm
It was never a fair case but I agree one had to try. No matter what you do the FSA have far too much control and should not be protected from any wrongdoing under FSMA2000.
The whole system is flawed and unjust and sadly it looks like getting worse under the present Government and now Mr Sants has been elected to the European regulator it looks like even more of the same though they will be in for a bigger shock than us.
The total cost of protecting the consumer via regulation is now so massive it far exceeds the cost of consumer losses.
We cannot move forward unless the whole system of regulation is thoroughly reviewed with unbiased and imaginative eyes and ears.
To over regulate is to stagnate.
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mike underwhelmed | 14 Jan 2011 1:52 pm
the problem with the fscs is that its very existance is based on money coming in from existing members and new members to have the funds available to meet its payments. if the industry contracts then there may be a problem in the future meeting payouts as there would not be enough new money coming in. !! similar to a ponzi scheme really !!!
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Incompetent Regulators Awards Team | 14 Jan 2011 2:40 pm
There is a problem in taking on the regulator.
There are so many rules, they just pick the one that wins their case as many rules contradict themelves all the time. So picking a suitable way out is always available for the F-Pack.
Also win or lose, we all lose. Winning a case means the regulators legal bill is paid by us an losing the case speaks for itself.
It's already been said the system is flawed like the people who run it. Mark Garnier said there will be a new ACT to replace FSMA 2000. Lets hope so thats the only way UK plc can get out of this mess.
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Michael Fallas | 14 Jan 2011 2:42 pm
Quite why my comments above (anonymous 1.46pm) I have no idea as I did put my name in the system anyway in case anyone should not realise they are mine.
As Mr Underwhelmed has said I do believe many will leave the industry over the next few years, but not because of RDR but because of the whole issue of liabilities, increased costs, simplified products to be introduced which can be sold without advice, NEST etc. and partly RDR.
One can only assume more of these ever increasing costs will be funded via the banks and product providers as IFA numbers continue to decline which is something I think the FSA and the Government want
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Evan Owen | 14 Jan 2011 4:30 pm
It has become your prison.
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gelboy | 14 Jan 2011 5:54 pm
Anonymous." the cost of protecting the consumer far exceeds the consumer losses".Sir / Madam, I challenge you to quantify that statement.It just shows why there is so much regulation. One presumes you make similar unfoundeded statements to your clients without first bothering to verify it.
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Michael Fallas | 14 Jan 2011 7:00 pm
@Gelboy
The cost of the FSA, FSCS and FOS since 2003/4 was £3.012 Billion. The cost of compensation paid out to consumers by the FSCS over the same period including the Banking Crisis was £2.012 Billion.
Hence why the cost of protecting the consumer exceeds that paid out to consumers!!
Perhpas you can now justify your comments that this is not the case and perhpas you can include you real name or are you too frightened to do that ?
Prove me wrong by all means by justifying your own comments.
I look forward to being corrected.
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Anonymous | 14 Jan 2011 7:36 pm
If the financial industry thought a little bit more about the consumer instead of treating them third fiddle to the banks and shareholders maybe there would not be so much regulation.
They have brought this on themselves
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Michael Fallas | 14 Jan 2011 7:54 pm
@gelboy
The total FSA cost for 2003/4 to 2009/10 were £2,526 Million
The total running costs of the FSCS for 2003/4 to 2009/10 were £195.19 Million
The total running costs of the FOS for 2003/4 to 2009/10 were £401.50
Making a grand total of £3,122.69 Million
The total amount of compensation paid out by the FSCS from 2003/4 to 2009/10 was £2,012.60 Million.
This thus shows the costs of our regulatory system exceed that paid out in compensation to consumers by £1,110.59 Million, hence why I have claimed the costs of regulation exceeds the costs of compensation paid to consumers. Maybe I should have phrased it better but I think most people understood what I was getting at.
The above figures were obtained from the relevent accounts by the organisations listed.
By all means Gelboy I am happy to be proved wrong as I assume can back up your own comments disputing mine, so please correct me.
I am sure some consumers may have lost more than the amount paid out in compensation but as the limits of compensation has been set by those who know better, for good reason I believe my assumptions are not unreasonable based on this information.
I am not frightened to put my name to them either.
I look forward to being corrected and hopefully you will dislose who you are as well. I have.
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Michael Fallas | 14 Jan 2011 9:32 pm
@Evan Owen
I agree
hope to break out by the end of the year. What joy that will be.
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