Advisers are unconvinced by FSA estimates that Financial Services Compensation Scheme levies will fall following the regulator’s decision to introduce its Arch cru consumer redress scheme on an opt-in basis.
The regulator published a policy statement on its Arch cru consumer redress scheme this week, which amended the proposed scheme first set out in April. Under the amended scheme, firms have to write to clients who were recommended Arch cru and clients have to opt in to have the advice reviewed, rather than advisers being required to review all Arch cru advice as originally proposed.
The FSA estimates between 15 and 30 per cent of clients who were advised to invest in Arch cru will opt in, reducing the redress paid out by the scheme from the proposed £110m to between £20 and £40m.
In its paper in April, the FSA said up to 30 per cent of firms that recommended clients to invest in Arch cru could default as a result of the scheme. Out of the £110m redress, up to £33m was expected to be paid by FSCS.
Based on its opt-in estimates, the FSA now predicts between £3m and £7m will fall on the FSCS as a result of the opt-in scheme. In total, the regulator estimates up to £37m in Arch cru claims will fall on the FSCS, including £30m for existing claims which were not factored into the FSA’s claim estimates.
Hudson Green & Associates principal Ian Hudson says: “It does not matter how strong a relationship an adviser has with clients, if the client has lost money they will seek redress unless they fully understood the product. The FSA opt-in estimates seem too low, which of course will have a worrying impact on FSCS levies.”
Capital Asset Management chief executive Alan Smith says: “The FSA is appearing to appease intermediaries, but given our heavily-driven compensation culture, if people are receiving a letter indicating they are in line for compensation most will opt in.”
Following the policy statement, law firm Regulatory Legal polled 362 Arch cru investors it is working with in connection with the £54m payment scheme agreed with Capita, BNY Mellon and HSBC last June. A total 87 per cent of respondents say they would opt in to have their advice reviewed and 71 per cent say they would ask for redress if the advice is deemed unsuitable. The FSA says 400 investors contacted the regulator to say they did not want their adviser to be forced to pay redress.
FSA head of investment intermediaries Linda Woodall told Money Marketing: “We have come up with a solution that recognises consumers may be owed money for unsuitable advice, but does not force them into having that money whether they like it or not.”
Firms must write to Arch cru investors by 29 April to offer a review. Consumers will have until 22 July to opt in.