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Categories:Other,Regulation

When the FSCS levy breaks

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A few weeks ago, at an industry drinks do, I was accosted by a slightly drunk and belligerent occasional acquaintance. Having received one or two emails from him before, I am aware he is not my greatest fan.

He was determined to prove that most of what we scribes write is rubbish, for which trees are cut down. His thesis was that journalists are responsible for a significant part of global warming.

I made my excuses and disappeared, although not before replying that - as far as I could recall - for every tree cut down to make paper, five new ones are planted.

I was left replaying that brief conversation after reading the comments by Investment Management Association chairman Douglas Ferrans at the IMA chairman’s dinner, in which he warned that failure to reform the Financial Services Compensation Scheme could end up damaging the UK’s competitiveness as a base for international fund management businesses.

Ferrans’ remarks pointed out the scale of failures were on a level not seen since the Barlow Clowes’ debacle in 1988, when the Government was forced to offer a £150m lifeboat to compensate victims.

If there is one subject where reporting has led to many trees being cut down, it is probably that of the FSCS and its interim levy in the wake of the collapse of Keydata and a number of other financial firms.

Still, Ferrans’ anger and that of IMA members is understandable. Fund managers have paid £233m out of the £326m interim FSCS levy raised mainly to cover the cost of compensating Keydata investors. Advisers have been forced to stump up the remaining £93m.

In the past three years, failures of investment firms have cost the financial services industry almost £500m in compensation, Ferrans told his audience.

“There is a need for these events to be the subject of an independent review and for lessons to be learned,” he said.

As ever, the majority of the industry is being forced to pay for the irresponsible actions of a minority. After all, if you were Brewin Dolphin and had to shell out £6.1m, £2.6m in the case of Charles Stanley, or £3.6m in the case of Rathbone Brothers, you would be rather livid too.

Despite these figures, of the striking things about this whole issue is the way such an enormous bill has largely been swallowed by the industry - even those sectors that believe they should never have paid it in the first place.

Part of the reason, I suspect, is that many believe the collapse of these companies in swift succession with such massive liabilities was a unique and never to be repeated event.

That is what I have been told by one person I spoke to a few months ago when discussing the inordinate delays in the FSCS review. If you accept this scenario, it simply means the FSCS received stress-testing to an incredible level, from which it emerged resilient, with its systems still in place.

More significantly, after a lot of grumbling, each constituency within the FSCS also did its duty and paid up, albeit with bad grace. Therefore, there is no rush to do anything too swiftly, as there won’t be another demand on the industry to fund a similar compensation call.

I’m not convinced by this argument. Systemic collapses of the type we have seen recently, while impossible to predict in their scale or timing, are a by-product of poor regulation and an inadequate compensation funding mechanism.

Failing to address these two key issues makes it probable that if and when it happens again, the industry will not swallow the bill with anything like the degree of composure that many key players have showed in the past two or three years.

I do not believe even Aifa would relish repeating its mantra to infuriated members that quiet diplomacy is the way forward. I would foresee a mass refusal to pay, not just by IFAs but some of the bigger players, including IMA members, and the collapse of the FSCS as a compensation fund of last resort.

Lest any IFA be cheering at the prospect of such an outcome, it should be understood that one corollary of an FSCS review, whenever it happens, will be a demand for much tougher regulation of the industry, primarily in the form of swifter and harsher intervention of the FSA if it believes a firm is stepping out of line.

Still, if it saves advisers from having to fork out tens of millions of pounds unnecessarily, what’s not to like?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Readers' comments (9)

  • Cigarettes packets have to have warnings on them about health.

    Whey shouldn't 'complex' financial products have to have a prominent statement (rather than hidden away in the 'risks' section of literature) about 'investing in this product could seriously harm your wealth'.

    I would also like to see the FSA target its funds much better - the costs of the recent Money Advice Service advertisement would surely have been better spent highlighting the issues of 'land banks etc'.

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  • I'm not sure I share Nic's optimism that there aren't going to be any more special FSCS levies in the wake of further failures as a result of the FSA failing to identify and act with sufficient swiftness to head off another provider going to the wall, resulting in thousands of investors losing their money.

    For example, we still haven't had an explanation, let alone an apology, from the FSA as to why it apparently failed to act on information in its possession as long ago as 2007 that trouble was brewing with KeyData/LifeMark. And when those institutions did fail, the FSA decreed KeyData to be an intermediary, responsibility for which was dumped onto the intermediary sector. But, as has been pointed out before, if KeyData was an intermediary (which virtualy nobody but the FSA seems to think), then all it would have been doing was acting as a conduit for client monies en route to LifeMark, in which case those monies would by law have had to be held in a client money account entirely separate from the finances of the company itself. Therefore, the failure of KeyData should have had no impact on monies held in its client account. The party that failed was LifeMark, the provider.

    The FSA's ruling seems just to have been a manipulation of the facts to stick the intermediary sector for the FSCS special levy of £93m.

    And anyway, which institution will be the first to refuse to pay the next special levy and risk being shut down as a result? Unless a mass revolt is coordinated, it simply won't happen.

    The FSA, meanwhile, remains resolutely deaf to calls to reconsider its position on such matters so, before much longer, the levy burden on firms of all sizes will become so onerous that it'll be all but impossible to make a decent living in this industry, at least as a small practitioner without a client bank willing to pay upwards of £150/hr for our services. And that's progress?

    Still, never mind, the Stairway to Heaven for those at the top of the regulatory tree remains assured.

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  • We should ask why after more than two decades of increasingly expensive prescriptive and intrusive regulation the consumer appears to be no better off.

    Ther weakest link in regulation is supervision, when will those responsible do something about it?

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  • I may have been misunderstood by Julian. I am not personally optimistic that the massive levies we've seen in the past two years are unrepeatable. I was quoting someone with insight into FSA and FSCS thinking.

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  • The problem with poor regulation is that it is never addressed retrospectively. As an example
    poor regulation in the eighties has left victims of
    failed home income plans stewing in their own juice and dying owing vast sums to building societies

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  • £800,000 salary for this mess !! I'll have some of that please.

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  • Perhaps we could return to "A fool and his money are soon parted" rather than the current "A fool and his money are soon compensated by those who made no contribution to his or her downfall." Last week I was helping yet another successful Brit to emigrate beyond the EU. If I was younger I'd join them.

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  • The trouble with 'fairness' is that it inevitably involves being generous with other peoples' money.

    Removing 'caveat emptor' from UK financial services makes the regulator look good but produces a regime in which trade is stifled by bureaucracy and fees (taxation).

    Like the Roman Empire, eventually all this PC claptrap will come to an end.

    Where the people fear government there is tyranny, where government fears the people there is liberty. Thomas Jefferson.

    The FSA should be told where to put the levies (taxes) for Keydata as it was their negligence that allowed the conditions which caused the losses.

    I think it's time for the revolution...

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  • The next time we have massive compensation levies due to bad or inadequate regulation, the regulator should pay, otherwise we are paying twice, once for a useless regulator twice for the compensation caused by said regulator.
    Nic where does" bad grace" come into play when paying a bill you had no part in raising?

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