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Firms’ abuse of the FSCS is another “cost of advice” issue, says LEBC

The consequences from firms making fast fraudulent profits then folding are increasingly being felt at the end-customer level, says LEBC director of public policy, Kay Ingram.

The issue should be treated as a separate “cost of advice” problem, she adds.

Commenting on the publication of the FCA’s call for input on its review of the RDR and Financial Advice Market Review yesterday, Ingram says: “There is more work to be done in this area.

“The Financial Services Compensation Scheme safety net is not to be abused by firms which set out to recklessly pursue short-term profits, but then fold and leave their liabilities with compliant firms.”

The issue also stunts much-needed public confidence in the industry, she says.

“Picking up the bill for fraudulent behaviour of other is a tax on advice and increases costs to consumers and needs to be addressed.”

Poll: Should the FSCS compensate for advice on unregulated investments?

Outgoing FSCS chief executive Mark Neale says advisers are already paying far less than what they could be, despite the new £69m levy announced for this year last November.

Neale confirmed in March that just over £300m has been recovered from failed financials services firms since 2014.

However, a further £16m was added to the levy earlier this week.

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Martin Martin 2nd May 2019 at 11:12 am

    Are any steps being taken (or even considered) to make it more difficult for firms to use the FSCS as a convenient exit? It appears that the FCA will not take pre-emptive action, even when it’s obvious that a firm is heading that way.

  2. It has to be the only punitive system where the innocent pay for the guilty. I am massively in favour of regulation but the Regulator is not ‘fit for purpose’as malpractice is rife!
    There are so many excellent IFA’s out there being penalised for the sins of others!

  3. Andrew Cartlidge 2nd May 2019 at 11:58 am

    I agree with both Kay Ingram’s comments and those of Peter Taylor, as he observes the FSCS to be a system where the ‘innocent pay for the guilty’. Part of the problem with the FSCS and regulation generally is that there is insufficient participation permitted at top level by the ‘regulated’ (who are merely highly ‘taxed’ subjects, not citizens in the current system)for either the FCA or the FSCS to be as effective as they should be at exposing the rotters at the very earliest stage.

  4. Trevor Harrington 2nd May 2019 at 12:27 pm

    For years (decades actually) I have advocated that the cost of the FSCS, and regulation, should be born by those who transgress.

    It is not difficult to do so as the Regulator already receives the data showing how many complaints are received by which individual firms.

    All it has to do is to divide the costs of regulation and the FSCS into those numbers and send out the bills as appropriate.

    The financial motivation is then clear and concise, not only for companies to reduce complaints, but also for the early elimination of those who are obviously transgressing.

    I have never had a proper answer why this simple solution has not been adopted, so I am left to assume that the Banks, and the large sales organisations would not like it, and have lobbied accordingly.

    • So only people who have had complaints have to pay?

      How do you split the cost beteeen those with complaints? 12 months, 36 months?

      What about a firm that has had a vexatious complaint but to keep the client happy, they pay a modest amount as a good will gesture.

      How about firms that have advised on high risk assets but have not yet had a complaint, and then recieve 3 and fold becuase they have no PI cover?

      This has to be one of the most unthought out solutions I have read.

      • Trevor Harrington 3rd May 2019 at 4:15 pm

        Of course only the people with complaints pay – is there something which you do not understand about “you do bad … and you pay”?

        Previous year’s records only to count.

        If a company has just one complaint, their bill in the following year would be microscopic, because it would be 1 part of x thousands received in that year.

        Thought it through a lot actually – unlike yourself obviously.

  5. I have been saying this since 2004, until every advised policy has an insurance premium built in this issue will never be resolved.

    This is very simple to understand, its cost effective and protects everyone. The cost of FSCS levies is passed on to the clients anyway and is seeing advisers charges increase substantially to cover these and PI.This would also mean the fraudsters client policies would be paying for their protection.

    These issues seems to go around and around. The same people seem to be paid great sums of money to actually do nothing. Unregulated investments, SIPP’s have been an issue and costing millions, yet nothing seems to happen.

    DB Transfers it would appear will be the next big payout, yet I am not so sure the reported problem is as big an issue as everyone thinks. If the FOS compensation was they had to purchase an annuity (a guaranteed income, which is what they had), less PCLS spent and income paid, I wonder, how many would actually pursue the claim?

    • Thomas Frodsham 2nd May 2019 at 5:54 pm

      Boom, nail on head. It should be compulsory to purchase an annuity, and if you have been reckless with your tax free cash or income, take some personal responsibility. There would be hardly any DB complaints if this was the case

    • Trevor Harrington 3rd May 2019 at 9:41 am

      Morning Martin,

      The product levy to which you refer, would be unfair on all those policy holders who are working with quality professional Advisers.

      Whilst it would initially be small amounts on each policy, the potential for it to grow exponentially would be unacceptable, uncontrollable, and there would be no in-built financial motivation for the miscreants and their activities to be curtailed. They could simply carry on writing new business and putting more and more into complaints claims.

      The FCA and their predecessors, have been clear and specific on the point of a product levy, and that is that they do not like it, for the above reasons and others, and will not sanction it.

  6. The FSCS in its current guise is “collective punishment”

    IE -: The punished group may often have no direct association with the other individuals or groups, or direct control over their actions.

    “No general penalty, pecuniary or otherwise, can be inflicted on the population on account of the acts of individuals for which it cannot be regarded as collectively responsible.”

    I think this sums up the FSCS quite nicely !

  7. Julian Stevens 2nd May 2019 at 2:05 pm

    Were the FCA to mandate relevant PII cover for ALL areas on which regulated intermediary firms advise/sell, vastly fewer would be able (legally) to sell toxic junk.

    As a result, there would be a correspondingly vast reduction in the number of firms (without it) folding as soon as the indefensible complaints start rolling in and dumping their liabilities on the rest of us by way of the FSCS. Why has the FCA still not acted to address this?

    • They do

      Requirement to hold professional indemnity insurance
      IPRU-INV 13.1.5 R 01/10/2018
      RP

      A firm must take out and maintain at all times professional indemnity insurance that is at least equal to the requirements in this section from:

      1)an insurance undertaking which is authorised to transact professional indemnity insurance in the EEA; or
      (2) persoan of equivalent status in:
      (a)a Zone A country;
      (b)the Channel Islands, Gibraltar, Bermuda or the Isle of Man.

      [Note: articles 10(4) and 10(5) of the IDD

      • Julian Stevens 8th May 2019 at 12:51 pm

        Okay, but clearly many firms have flouted this requirement, particularly with regard to UCIS and other dangerous off-piste investments, hence so many fold and phoenix almost as soon as the indefensible complaints start rolling in.

        Not only has the FCA failed to police such breaches but Andrew Bailey been quoted as having said ~ incredibly ~ that it’s not something about which the FCA is particularly concerned which pretty much sums up the FCA’s whole regulatory ethos: We’ll set our own priorities regardless of what anyone else may think or say (and we certainly don’t give a stuff about the Statutory Code of Practice For Regulators). If that results in a few train wrecks well, what the hell, others will pay to clean things up, we’ll make a few apologetic noises, then just carry on as usual. That’s about the measure of things, is it not?

  8. Whichever way you look at it, if there is going to be compensation then the innocent have to pay because the guilty can’t and won’t. The only question is which innocents?

    Is it the general taxpayer or is it the users of financial services. If the latter, which ones?

    At present the cost is effectively passed on to clients through fees. Perhaps the way to get attention would be to bill clients separately for FSCS levies.

    Notwithstanding the above it is still scandalous that some of the more obvious failures have been, and continue, to be allowed to happen. Clients and advisers should not have to pay for what are, in effect, regulatory failures.

    • Trevor Harrington 3rd May 2019 at 9:56 am

      The only way that I can see of making the guilty pay directly, rather than the “innocents” as you put it, is by charging the levy, and most if not all of the regulatory fees, to those who are generating the complaints, and in proportion to the number of complaints they receive in the preceding year.

      Only in this way can we be sure that the bad guys are paying for the bad guys, and … more to the point … they would be financially motivated to stop being bad guys.

      As I have said above, I have never had an explanation from the regulator why this cannot be done, despite pushing the point (quite high up the rankings of the various regulators of the day) over at least two decades.

      The cynic in me leads me to believe that the banks, and large product retailers, and the insurance companies, have too strong a lobby in the regulator to allow the concept proper discussion and consideration.
      Indeed, most of the senior managers at the regulator originate from those sectors, and after 30 years of regulation (yes I was around in 1988) they still steadfastly refuse to recruit from the ranks of the professional Independent Financial Adviser.

  9. Philip Castle 3rd May 2019 at 6:05 pm

    If it is a product levy on new business, then as we mainly service existing clients are “bill” like our annual PI insurance would be a pittance. Our FSCS fees are the bit which is high as that is based on turnover and not new business.
    The problem is regulatory failure of clear accidents waiting to happen and those which regulate advisers like Neil Liversidge and MANY others have reported BEFORE the crash.
    Lastly it is the FSCS payout on unregulated products doe whatever reason that needs to be met by taxation on ALL consuemrs (i.e. true taxation) rather than taxation of those buying regulated products through regulated advisers which is a tax on the prudent who use common sense.

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