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Alan Lakey: FSCS long stop adds to confusion


The emotive longstop issue will not go away any time soon. Why should it?

They were caught sneakily removing the longstop defence without prior consultation or advance warning.

Their argument for its removal revolves around their legal adviser’s belief that it was Parliament’s intention to do this, despite the fact that the longstop never was discussed within any Parliamentary debate.

Of course there are some who wish it would. Some advisers believe it to be inconsequential to their business and therefore they have little interest in the potentially ruinous impact on other advisers. The FCA and the Treasury would like it to go away because they have been embarrassed by the whole episode.

The logic that exists within financial services legislation received a further poke in the snout this week when I discovered that the various compensation bodies have terms of reference so far apart as to imagine Cyril Smith firmly implanted between them.

The FOS derives its rules from the FCA and the rules fail to incorporate a longstop defence within the jurisdiction wordings.

The FSCS derives its rules from the FCA and it does accept a 15 year longstop defence inasmuch as it is bound by the Limitation Act 1980.

This also means that, unlike the FOS, the FSCS will not be bound by the traffic light letters sent out on endowments. If it is shown that a complainant was aware of a potential shortfall in some way other than a red traffic light letter it will use the three and six-year rules within the Limitation Act to deny the complaint.

Joined up thinking here? Let us not beat around the bush, this area is a mess and one that is of the regulator’s own making.

Surely it is not too much to expect that the regulator – particularly one which, theoretically, can attract talented individuals with daunting salaries and other fringe benefits – has the capability to provide a consistency of treatment when it comes to consumer protection.

Consider the following scenario. Bert Bloggs has two endowment policies; both were arranged in the early 1990s but by different firms of advisers.

Now, some 20 years later, he decides to claim some compensation as both traffic-light projections have gone from green to red. One of the firms is defunct having closed down some years back so that complaint is directed to the FSCS, the other firm still exists so the complaint ends up with the FOS.

The FOS refuses to accept the 15 year longstop defence as its FCA derived rules do not allow such a defence. 

Conversely the FSCS rejects the claim because the sale was over 15 years earlier and its FCA derived rules does allow such a defence.

So, for embattled advisers the situation is clear. At retirement, place all of your assets either in a trust or into your spouses name (as long as she was not a partner). 

This enables the claim to be dealt with by the FSCS and not the FOS. As a consequence the longstop defence is applicable and the adviser does not risk losing his savings and/or property.

Of course, this is sneaky and contrived and against the spirit of things…but isn’t that exactly what the FSA did in 2000 when it removed a perfectly valid legal defence from the industry?

Alan Lakey is partner at Highclere Financial Services


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. This is a good article and the Bert Bloggs case study is spot on. But its not so much the FSA-derived rules themselves, but the primary legislation. FSMA allows an ombudsman to determine complaints on the basis of what he believes to be fair and reasonable, whilst stating that FSCS can only pay out where there is a civil liability i.e. where the investor would have cause for action, and within the timeframes set by the Limitation Act.

    I would suggest that the long-stop is only part of the issue. FOSs jurisdiction needs amending in respect of financial advisers in SMEs such that FOS exists to determine causes of action under s.150. This would not only bring the Limitation Act into play, but would require FOS to tke less random approach to its decisions and open more decisions up for judicial review (‘error of law on the face of the record’).

    In terms of adviser self-help, absurd though it is, one option for a retired/retiring adviser who was directly authorised would be to engineer a default: whilst FSCS might try and recoup, it would be less likely to pay out in the first place.

    Another more obvious answer is to simply avoid a network situation involving a personal guarantee. For DA firms, obviously one needs to ensure one trades with limited liability (e.g. Ltd, LLP). And there are tricks that can be played here in jumping between LtdCos every few years so as to crete your own break-point in liability.

  2. incompetent regulators 29th August 2013 at 10:34 am

    This is all about giving low calibre people a job at the FOS, period.

  3. I am not sure the article is factually correct. Indeed I wonder if the FOS set the rules which the FCA follow…..
    Lord Hunt a respected financial services lawyer looked at the issue of the long stop in 2008 in his independent review of FOS and he concluded that its complete removal would be unfair to consumers on the basis that it is harder to determine the point at which a complaint can be identified. We tend to forget this and look at it from our selfish viewpoint. Importantly though, he did sympathise with IFAs and insisted that FOS change their handbook to recognise that over time recollections vary and company practice, documentation and policy changes thereby making it harder to determine the validity of a complaint. Lord Hunt recommended that these new considerations apply to all cases after SIX years. Logically then, after 15 years facts and fiction should be indistinguishable and many complaints after 15 years should fail. And is that really the case and the issue of the long stop a non issue?
    I note the FSA has Lord Hunt’s recommendations to justify its stance on not removing the long stop although I do not recall them saying that greater emphasis should be placed on the effects of the passing of time!
    One question to be asked is whether Lord Hunt’s recommendations in respect of the long stop were accepted in full and added to the FOS Handbook and are they being applied now? If they are, I would expect more cases to fail.

  4. The only way for IFAs to get politicians to listen to them would be for every IFA to sign an online pledge that they will NOT vote conservative at the next election.

    Anyone know how to set one up?

  5. incompetent regulators 29th August 2013 at 5:11 pm

    @anon 11.30am

    You obviously still believe that maybe conservatives are trustworthy.

    Alongside many others I threw my vote into UKIP having given them plenty of chances.

  6. “Lord Hunt a respected financial services lawyer looked at the issue of the long stop in 2008 in his independent review of FOS and he concluded that its complete removal would be unfair to consumers on the basis that it is harder to determine the point at which a complaint can be identified”
    Why is Hunt allowed to overlook the statute of limitations, which was put in place to protect ALL citizens, without an act of Parliament?
    As a lawyer, would he subject himself to the same rule? NO ergo, why should he be respected?

  7. Anonymous at 5:43 – please get your facts right. The statute of limitations has been legally overridden and it is for us to argue our case on our own merits without comparing ourselves with lawyers or other people. Lord Hunt deemed that the statute of limitations was unfair for a significant body of people i.e. consumers and provided certain amendments were made to FOS handbook to protect IFAs then it was fair to remove the statute of limitations. Argue your case focussing on this profession, not others. Such comparisons would be inadmissible when the FCA reviews the long stop.

  8. As anon posters have said, why only advisers?

    A scientist, LAWYER, Judge, Dr or architect may have made a professional mistake which isn’t identified for much longer than an investment. Why do they not have to defend themselves against stale complaints.

    I am 48 now. If I retire at 67, then if someone comes for me at age 82+, what should I do? defend my home from theft via a stale claim or just make it clear that at age 82+ I might no it give a flying f about spending the rest of my (short) life in free accommodation rather than the home someone is trying to steal from me by an abuse of power brought about by the FSMA 2000.

  9. Sam Caunt

    You miss the point.

    FCA/FSA derives its ‘rules’ from FSMA which in turn gives FOS (via FCA/FSA/FSMA) its power to ignore statute equally FSCS derives its ‘rules’ from the same act and body which gives it the power NOT to ignore statute. In other words the FSA/FCA/FSMA bind both.

    By the way, the ‘6 year rule’ (sometimes known as the 6 and 3 rule by them) you refer to that the FOS observe under the DISP rules is actually part of you guessed it Limitation Act as amended by the Latent Damages Act.

  10. @ Sam
    Do consumers not use lawyers?
    Is Lord Hunt willing to accept the same terms?
    What protection, written into FOS handbook, is protecting IFAs’ FOS disregard that particular caveat.

  11. The longstop hasn’t been removed Alan, it is being ignored despite the FSA (David Kenmir) telling me that it could not override statute.

  12. @ Sam
    much of what the FCA deems appropriate would be inadmissible in a court of law.
    As Evan Owen has mentioned, the longstop has not been removed, it exists in law and is being ignored by the FCA, who claim to be unable to override statute.

  13. The FSA never consulted on the longstop’s removal it simply stated that in its Counsel’s opinion it was Parliament’s intention to remove the longstop.

    As Parliament never debated the issue there is clearly some form of divination available to the Counsellor that us mere mortals can only wonder at.

    When sight of this legal opinion was sought the FSA hid behind the Information Commissioner who ruled that as the legal opinion was still ‘live’ then it could not be divulged.

    Once the longstop is returned we will have recourse to this legal opinion which seems to be the back of a fag packet job.

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