Questions have been raised as to whether the regulator should have spotted warning signs at the key firms involved earlier.
Recent weeks have seen depressingly familiar headlines being bandied about, as the British Steel saga continues to play out.
Hearing the phrase “pensions misselling scandal” being regularly used shows that, despite the progress made on professionalism post-RDR, the media is still very quick to jump on any bad news.
While there is no doubt there has been some poor advice provided in this area, and that British Steel members may have suffered losses as a result, most of the mainstream media did not balance their reporting by referring to the good work the advice community has undertaken to help.
Sadly, the general public could be given the impression the rogue advisers in this case are the rule rather than the exception. If this type of coverage results in fewer people engaging with their finances and retirement planning then that is a bad result all round.
The facts on Active Wealth
Another aspect of the same story has been around one of the key firms involved, Active Wealth (UK) Limited, with the trade press questioning whether it should have ever been authorised by the FCA and/or if the FCA should have spotted warning signs earlier, which could have prevented some of the losses involved.
This coincided with the FCA launching its latest Mission Document, on 11 December, on its approach to authorisation.
The key facts surrounding Active Wealth (UK) Limited and its “predecessor” firm Active Investment Services Limited neatly demonstrate the dilemmas in play here:
- AIS was authorised between 15 June 2009 and 15 April 2016, and declared in default by the Financial Services Compensation Scheme on 20 November 2016.
- AW was first authorised on 1 December 2014.
- The first two pension transfer Financial Ombudsman Service decisions upheld against AIS were on 10 January and 17 March 2014.
- The liquidator appointed to AIS agreed to sell AIS’ client bank to AW at some point between November 2015 and November 2016.
It can be seen from the above that, at the time AW sought authorisation from the FCA, there had been two FOS complaints upheld against AIS, but, on the face of it, no other indication of serious issues at that firm. Subsequent complaints against AIS were not upheld until after authorisation of AW. So, at the time of authorisation, there may not have been a great deal of information available to the FCA indicating a problem.
The compliance officer with CF10 at AIS was the new sole director and shareholder of AW. But in and of itself is that enough for the FCA to either dedicate a significant amount of resource to making further enquiries of AW or refuse its application for authorisation? Almost certainly not, particularly when dealing with a small firm and the FCA’s limited resources.
The approach to authorisation
The FCA’s Mission Document makes it clear its authorisation process is designed to ensure a firm meets minimum standards but is not designed to make sure no authorised firm ever fails (which itself would make the barrier to entry too high and stifle both competition and innovation).
It is also the case that, if a new firm can demonstrate on application that it meets the minimum standards and gets authorised, it is then more difficult for the FCA to remove the authorisation at a later date (when new facts emerge) than it would be to refuse a new application at the same date – even though by that stage much of the damage has already been done.
Sharp operators will therefore always submit an authorisation application early when they know there may be problems coming down the track, but that are not yet in the public domain.
So could the FCA have known anything about AW earlier? And what more could they do in the future? Looking at its Mission Document, it is difficult to point to anything indicating it did not consistently follow its own approach when authorising AW. As indicated above, AW sought authorisation before the problems at AIS really became apparent.
All of the information that could potentially have raised a red flag at the application stage was there – mainly the sole director’s association with AIS. But at that stage, if the only evidence was two upheld FOS complaints against AIS, that is unlikely to be enough to raise serious concerns.
The lessons learned
Perhaps a bigger warning sign should be when one firm or approved individual buys the assets of a firm in liquidation/default. This could arguably already be covered by existing notification requirements (on the buyer and the seller) but the FCA could easily issue guidance or make a specific rule requiring a firm to notify it when buying assets from a liquidator of an existing authorised firm (in particular when the buyer has an association with the failed firm).
The FCA could then look in more detail at that particular transaction, the intentions of the buying firm and the surrounding circumstances.
Even if this is done initially by means of a standard list of questions, it could provide an early warning of problems to come. This is not the first time this sequence of events has been seen and, in many cases, there may be no concerns. But the present system is clearly failing, and if such a small step could make a material difference and actually prevent losses before they happen, this should at least be considered by the FCA.
Alan Hughes is partner at Foot Anstey LLP