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Aifa warns on legal costs of FSCS judicial review

Aifa has warned members of the costs associated with Regulatory Legal’s challenge of the Financial Services Compensation Scheme’s £80m interim levy.

This week, Money Marketing revealed that Regulatory Legal had been given the go-ahead to launch its judicial review against the FSCS levy after the High Court ruled it had an arguable case. A High Court hearing is likely this autumn if the law firm can raise the necessary funds.

Regulatory Legal partner Gareth Fatchett (pictured) estimates that the firm will need to raise £200,000 to pay legal costs and possible FSCS costs should the judicial review fail.

In a note to members, published today, Aifa warns members over the costs of the review even if it is successful.  

It says: “The additional cost to the sector, next year, in FSCS’ management time, will also have to be considered.  I do not recall any of the coverage so far mentioning this financial downside: which could be serious to those who are asked to pay the FSCS’ legal bill. 

“It is worth considering the scenario that the judicial review is successful.  It is customary that bodies such as the FSCS immediately appeal the verdict and continue to pursue their case through the legal system.  This is both time consuming and increasingly costly.  Thus, those who support the challenge should be prepared both for the time the legal process could take (several years) and the mounting liabilities they could incur.”  

Aifa says it is in discussions with FSA, FSCS and other interested parties about how the scheme works and how it is funded, with a consultation paper due out in November. 

In the meantime, it is lobbying the FSA to undertake a review of its actions regarding Keydata and is due to meet them shortly to review the situation. 

It says: “This has been an obvious regulatory failure.  The FSCS carries out its functions according to its rules.  The rules are set by FSA – hence our focus on FSA.  We believe that members are right to feel angry at, and let down by, the FSCS and FSA.  Fundamental change is needed to both and that is the action we are pursuing urgently.” 

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Comments

There are 28 comments at the moment, we would love to hear your opinion too.

  1. There may well be costs involved but there comes a time in every situation when you have to say enough is enough and try to do some thing about it rather than just sitting back and hoping somebody else will solve the problem.It is time the FSA FSCS etc were made to realise that we have had enough of all these unwarranted costs.Come on the IFA community lets get behind this and work for a better future whilst we still have the chance.

  2. Rhodri Gronow 2nd July 2010 at 2:16 pm

    I cant see what all the fuss is about – the Financial Services Industry (apart from a few fee based IFA’s) will be Crucified in December 2012.

    I’m past caring, because I will have left the Industry before that happens!

  3. I`ll wager the farm that AIFA`s discussions will drag on with the FSA until a court case starts so that they can then say it is Sub Judice and they can no longer comment. Pussycats!

  4. Well said Peter. I would rather pay £500 that is fairly and justifiably due, than £100 that cannot be justified legally or morally. Remember, this could be the thin end of the wedge. I’m sure there would be no doubts or delays from the IFA community in supporting the action against the FSCS if these notional figures I’ve mentioned were the other way around!

  5. As in every case here are reasonable costs and unreasonable costs. In this case the cost of the action when shared amongst us is very reasonable compared with the punitive penalty imposed by our regulators collectively on the financial services commuinity, who by and large are not to blame or have any direct responsibility in the matter. I agree with Peter – it is about time we stood together and highlighted the inadequacies of our flawed regulatory system for the benefit of all not forgetting the poor consumer who eventually pays anyway. It is a pity that bodies such as AIFA do not take the opportunity to speak out for those they are meant to represent instead of following a ‘political’ agenda.

  6. George Chappell 2nd July 2010 at 2:26 pm

    The other option is to roll over and the next time The FSA say jump we all ask ‘how high sir’ AIFA are using scare tactics now because they were not up to the task in the first place.

  7. Simon Webster 2nd July 2010 at 2:34 pm

    The FSA is out of control and has lost the plot completely. Elsewhere I read today that a firm had to spend £200k plus to review its systems at the FSA’s insistence. Jobs were lost as a result.

    The FSA must be forced to account for its actions. It is now a matter of the survival of the IFA sector.

  8. Has Gareth Fatchett pledged his own money or is he providing his services to the industry for free?

    Before paying him, readers may wish to read paragraph 82 of the Tribunal’s decision in Kuun.

    Equally, before forking out, readers should look at previous such fundraising activities and their effects. The Needler case resulted in a significant increase in the compensation payable in mortgage endowments and other misselling cases even though that case actually concerned a pension transfer. All the other regulatory guidance and Ombudsman policy had to be adjusted in line with the decision. It cost the industry many millions of pounds.

    R v SIB ex p IFAA, an earlier example involved establishing definitively that the pension review and similar exercises were legal and actually made it easier to launch the FSAVC review by providing some guidance on how to do it.

    Very few judicial review attempts ever work and the record against FOS is awful except for the Garrison case which probably cost the firm or its PII insurer more than it helped and one where a claims management firm succeeded.

    AIFA did not support the Needler case and rightly isn’t supporting this.

  9. Gareth Fatchett 2nd July 2010 at 2:57 pm

    I would like to point out some factual inaccuracies in the AIFA statement.

    1. The FSCS lodged a 30 or so page bundle in response to our application on the 21st May 2010. It is wholly misleading to suggest that permissions are routine.

    2. The Grounds took our team and counsel a significant amount of time to put together. The observations of the High Court Judge make it obvious that we have merit.If it was purely procedural then why would a High Court Judge be needed ?

    3. If we win, we could be appealed. If we lose, we could appeal. Both these options are available to either side. Clearly, if we were to win then the FSCS may seek to appeal. We have no control over this.

    4. It appears that AIFA take the view that by making the FSCS justify themselves will only run up costs. That is ridiculous. We need the FSCS to justify themselves and work hard in doing so.

    5. The AIFA lawyers clearly do not understand procedure in judicial review. The negativity at first instance was wrong and no doubt they would be very happy to shout “I told you so”. Let us not forget IFA firms pay AIFA to protect their interests. Not to find ways to say “no” to anything and everything they personally find challenging or difficult.

    6. The choice for firms is very stark. We take the view that the AIFA position of “negotiating” with the FSA or the FSCS over the interim levy is a waste of time. The decision was made and AIFA were completely ignored from what we can see. Why does anyone think there will be an about turn now ?

    7. We enlisted the support of 212 firms initially to fund the initial application. They committed £235.00 or £352.50 toward the initial application. We paid counsels fees, our own costs and committed to pay the adverse costs from the firm. I think that shows commitment from our partnership which cannot be questioned.

    8. The next stage is the hearing. We feel that the monies to run the a full claim is not beyond the industry.

    9. The problem is that AIFA do not like confrontation and would prefer to “negotiate” everything. They may do sterling work on many topics, but on this their passive approach has not worked.

    Conclusion

    We are not going to run a claim without support. We are going to ask firms to help out and for a couple of hundred pounds I am surprised to find resistance. As all IFA firms require capital adequacy way in excess of this, the “cannot afford it” excuse does not really wash.

    In summation IFA firms have two choices.

    1. Negotiate and discuss in committee rooms or;
    2. Ask the judiciary to decide objectively in full open view of everyone.

    (1) is free and you will not be asked to participate

    (2) is a couple of hundred pounds and you can fully participate.

    Gareth Fatchett
    Regulatory Legal LLP
    gareth.fatchett@regulatorylegal.co.uk

    01384 426400

  10. Alan Parkinson 2nd July 2010 at 3:00 pm

    It sounds to me that AIFA are taking sides on this issue and are trying to dissuade members from supporting the review by highlighting the potential downside. Why is there not a name attitbuted to this press release?

  11. Michael Fallas 2nd July 2010 at 3:19 pm

    Agree with Peter

    Whilst it is good to hear AIFA is in discusions with the regulator etc about the issue I suspect many small IFA’s may not survive until a conclusion is made.

    The whole system is flawed and until that changes I am sad to say this will get a lot worse.

    The issue here is really with the FSA but as they are I believe protected by statute we are pretty powerless to do anything unless our Government changes the situation and for me the only way to make changes is to hassle the Government and local MP’s and I mean really make your voices known as I have done to my MP who is the “Attorney General”.

    Time to go to straight the organ grinder, as they say.

  12. Gareth Fatchett 2nd July 2010 at 3:29 pm

    Adam,

    We took R v Financial Ombudsman Service ex parte to the High Court and won it. I recall at the time the “naysayers” said it would not work.

    It is inevitable that cases will come and go and some will win and some will lose. That is the nature of the beast.

    However, to actively suggest inaction makes IFA’s look impotent.

    Gareth

  13. Simon Mansell 2nd July 2010 at 5:33 pm

    If AIFA does not join this fight they are finished in any case!

    I think the IFA is past caring and is willing to stand up and fight, unlike AIFA. I also would like to point out just how extreme most IFAs are now feeling towards the morally bankrupted regulator and all the quango jobsworths we find at Canary Wharf. What is for sure is that if AIFA does not join this fight it is finished in the eyes of the IFA any case. If I told you what I really thought about this regulatory shower I’d not get this published.

  14. Anthony Tobin 2nd July 2010 at 6:50 pm

    Do you know, I am fed up with listening to you IFA’s bleating on about how much the Keydata fiasco is costing you. Has any one of you stopped to think about the investors, like me, that gave you our pension savings, after believing all your hype about ‘how good an investment Keydata was, and have now lost everything? Just for once stop worrying about your own profits and consider the losses of those that depend upon you!

  15. Gareth

    As you know, you actually lost on liability in Garrison which I presume is the case to which you are referring. You did, though, reduce the compensation. I counted that as a judicial review win in my earlier posting. Actually, the judge only awarded the applicants 50% of their costs.

  16. Mr Fatchett has emailed me this afternoon suggesting that my reference in an earlier posting to a particular paragraph of the Kuun tribunal decision could distort the meaning of the Tribunal decision and what it said about him.I would not wish that.

    So, readers can read the whole of the Tribunal’s decision on http://www.tribunals.gov.uk/financeandtax/Documents/decisions/FSMTribunal/Kuun_and_MFPGroupPlc0020.pdf in its proper and full context.

  17. I should like to offer the anonymous investor a rational explanation of what is going on and why IFAs are so angry. Many of us will empathise with your understandable anger caused by your investment loss but it is unreasonable to blame all IFAs. I

    Unfortunately it is symptomatic of this blame culture to seek compensation for loss from anyone or group no matter whether they are guilty of the actual transgression or not.

    To put it plainly, small IFA firms with impeachable professional service records are currently saddled with an uncapped liability to pay compensation to the investment clients of other firms and could go to the wall as a result of the failure of others.

    KeyData was a product provider and it didn’t provide advice. Advisors do not see why we should compensate investment clients who seek to paddle their own canoes by buying directly from a product provider. In fairness, product providers should pay to compenate the clients of failed product providers. Some might argue, however, that imvestors who buy directly without taking professional advice should carry the risk under the legal principle of caveat emptor, or buyer beware.

    I have not recomended KeyData to any of my clients because they did not pass my scrutiny. I cannot speak for others but I do know that my immediate IFA colleagues have been like minded in this issue.

    Can I put it like this, if good quality small IFA firms are to survive then we cannot continue to accept the downside of unlimited personal risk with an upside reward potential cannot not possibly compensate for that risk.

    I will use metaphor to help me to further explain the issue. If small IFA firms are fishing boat owners and are required to compensate investors in other fishing boats when they sink, that is one thing but, as things stand, we are required to compensate investors in cross channel ferries, merchantmen and ocean liners when they sink.

    I understand your concerns and hope that you will begin to understand ours. We are fighting for our very existence and the public will be left with financial salespersons for the great majority if we are financially ruined through the failures of others. Those few professional advisors left will only work for the very well heeled you may be assured.

    If you would like to contact me personally for a proper discussion then you may Google me for contact details.

    David R Chubb

  18. Patrick Schan 3rd July 2010 at 7:27 am

    To the anonymous investor who is anti IFA. Do you realise that a huge chunk of money seems to have gone missing at keydata? Do you think the IFA is responsible for that? Would you like to blame us for recommending you keep some savings in deposit accounts as well, when you might have lost that if not for the tax payers (which includes us).
    I also agree that we do stick together on this issue, even if i does cost us now. At least we will be sending a very important message that may stand us all in good stead in the future.

  19. I should like to offer the anonymous investor a rational explanation of what is going on and why IFAs are so angry. Many of us will empathise with your understandable anger caused by your investment loss but it is unreasonable to blame all IFAs. I

    Unfortunately it is symptomatic of this blame culture to seek compensation for loss from anyone or group no matter whether they are guilty of the actual transgression or not.

    To put it plainly, small IFA firms with impeachable professional service records are currently saddled with an uncapped liability to pay compensation to the investment clients of other firms and could go to the wall as a result of the failure of others.

    KeyData was a product provider and it didn’t provide advice. Advisors do not see why we should compensate investment clients who seek to paddle their own canoes by buying directly from a product provider. In fairness, product providers should pay to compenate the clients of failed product providers. Some might argue, however, that imvestors who buy directly without taking professional advice should carry the risk under the legal principle of caveat emptor, or buyer beware.

    I have not recomended KeyData to any of my clients because they did not pass my scrutiny. I cannot speak for others but I do know that my immediate IFA colleagues have been like minded in this issue.

    Can I put it like this, if good quality small IFA firms are to survive then we cannot continue to accept the downside of unlimited personal risk with an upside reward potential cannot not possibly compensate for that risk.

    I will use metaphor to help me to further explain the issue. If small IFA firms are fishing boat owners and are required to compensate investors in other fishing boats when they sink, that is one thing but, as things stand, we are required to compensate investors in cross channel ferries, merchantmen and ocean liners when they sink.

    I understand your concerns and hope that you will begin to understand ours. We are fighting for our very existence and the public will be left with financial salespersons for the great majority if we are financially ruined through the failures of others. Those few professional advisors left will only work for the very well heeled you may be assured.

  20. But what money is the FSCS fighting the case with? Its our hard earned cash that we keep paying them.

    They have got a bottomless pit of money (and they can, as they see fit, get legislation in place to take some more from us) and fight it to the end.

  21. Trade bodies such as AIFA alweays end up cosying up to the regulators which is why I have never joined any of them. AIFA are way off beam here, instead of discuussions behind closed doors they should commit to join the legal case. That way the FSCS might just sit up and take notice.

    The FSA failed miserably in allowing Keydata to promote a product that was essentially illegal in the same way that they allowed Arch Cru to make outrageous claims about their products.

    And IFAs are expected to pick up the tab.

    What kind of regualtion is that?

  22. Errata – I broke cardinal rules in my enthusiasm to disabuse anonymous investor of his, I somehow think his rather than her, notion of IFAs that I made a cods of it. I meant to say impeccable rather than impeachable and there were several other shameful typos/omissions.

    My cardinal rule is never to use an iPhone keyboard, not the easiest thing to use, in the small hours with predictive text switched on. Sorry anonymous investor, and it just goes to show that we, like you, are mere mortals trying to do our best – and not just for ourselves by the way.

  23. If I was an IFA and thankfully I am not; it is a fact that I wouldn’t be putting my name on a list of people who would be liable for any unknown costs. Even if I were to do so I would insist upon receiving a client care letter which spells out all the potential pitfalls so that I could make an informed decision.

    I would also expect to know what the merits of success were, what would happen if we won and of course what problems would arise if we lost.

    I have been through all this before; fortunately we always had a firm which bad the balls to stand up and be counted alone, they spent their own money because IFAs were unable to reach the bottom of their pockets and even if their arms were long enough all many of them found was fluff.

    The FSCS will spend all your money defending its position, even if it costs £2 million.

    Finally, I have to disagree with AIFA in that the way the decision was made by the FSCS was unrelated to the rules laid down by the FSA.

  24. Gareth,
    My issue with joining in initially was simply the lack of shared objective betwen you and the group – ie you stand to make more profit the less time you spend on this as you have a fixed fund. At the time you argued that the amounts were so small that to arrange rebates to people for any unspent money was too difficult. Fair enough.
    Q 1 – Now that a larger fund is involved, will you change this approach?
    Q 2 – If the money raised ISNT enough to cover the costs and time spent because it drags on, will participants have to cough up more money to pursue to completion or will your firm take on that risk?
    Q 3 – Finally, and prob most importantly, what is the risk to participants of having to meet any costs awarded ?
    Thanks

  25. To: Anonymous | 2 Jul 2010 6:50 pm 5th July 2010 at 12:09 pm

    I share your outrage but I’m that is all. You need to ask the regulator not the IFA for your compensation – we are not a consumerist cash cow to be milked ever time the regulator fails to do it job!

  26. to anonymous investor
    every ifa hates it when an investor is let down or loses out through no fault of their own.
    We are truly sorry for your loss but if you ordered your weekly shopping from tesco and something went wrong, with you losing out as a result, would you expect the shopkeeper, who does not know you from adam and who has never sold you anything, in the local corner shop to compensate you?
    This is what is happening here.
    Ifas who have never even dealt with keydata are expected to pick up the bill for this fiasco.
    We are as much victims as the investors except we have nowhere to go with our complaint, or to seek compensation for our loss. There is no choice for us except through very expensive judicial review.
    I hope you get back every penny you deserve but keydata was a provider and as such the providers should be picking up the tab. If they were authorised as anything other than a provider then the FSA should be picking up the tab.

  27. To the anon investor – I would repeat what teh above poster said “every ifa hates it when an investor is let down or loses out through no fault of their own. We are truly sorry for your loss”.
    I personally would like to see investors get back what they deserve (that may not be all their money, but it should be most up to the FSCS limit of £48k as there was regulatory failure in my opinion). Whether IFAs have to pay the levy or not is immaterial as to the fact I think consumers should get back what they desreve sooner rather than later and that the deserve better communication from PWC and the F-pack about what the likely outcomes will be.
    Our argument with the FSCS is immaterial to whetehr you get paid back what you deserve as all firms arguing now will already have paid what the FSCShas asked for from them to date, oth the standard levy and the interim one for the HMRC Keydata problems. No firm (in their right minds) will refuse to pay the FSCS levy if they lump anymore of Keydata’s losses in our levy pool as in doing so we put ourselves out of business, but we will continue (as you would I hope as a consumer) argue that the right people foot the final bill, whether that be providers, Keydata Directors, PWC or any otehr individual who has profited from the original failures or disproportiinatley from resolving them. Any FSA member of staff who was involved in Keydata prior to it’s failure might also like to do the right thing and refund their bonuses to meet part of the FSCS levy and in future any FSA bonuses in the supervisors sector should be wiped out automtically where significant failures are identified.

  28. Adam Samuel | 2 Jul 2010 2:56 pm - Strange comment 7th July 2010 at 10:35 pm

    Adam Samuel | 2 Jul 2010 2:56 pm

    What a daft comment from Adam Samuel! Having said that I have heard many such daft comments from Adam Samuel. I gues he works for nothing?

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