A key part of the justification for Catalyst Investment Group being in the Financial Services Compensation Scheme investment adviser class has been called into question, with the episode again raising serious concerns about the fairness of the current funding model.
The FSCS and FCA are at odds over whether Catalyst dealt directly with investors – a major reason why the firm is classified as an investment intermediary.
In October the FCA censured Catalyst for misleading investors when promoting bonds issued by Luxembourg-based life settlement vehicle ARM Asset Backed Securities. The FSCS has declared Catalyst in default, triggering an interim levy of £29.5m on investment intermediaries for 2013/14, on top of an annual levy of £78m.
The FCA final notice states: “Catalyst did not give advice or sell the ARM bonds directly to retail customers and was not authorised to do so.”
When quizzed on the rationale for the firm being included in the adviser class, an FSCS spokeswoman said Catalyst “sold the ARM products directly to investors” and “appears to have played a key role in structuring the products, and remained closely involved in facilitating the distribution process”.
When pressed over the apparent contradiction, the FSCS and FCA made it clear that their reviews were different in scope.
They said in a joint statement: “The FSCS recognises some investors may have dealt directly with Catalyst and/or relied on the literature which Catalyst was responsible for without discussing with an IFA.”
The FSCS is carrying out a review of Catalyst claims, which it says will establish how many investors dealt directly with Catalyst.
An internal email on the classification by FSCS head of legal James Darbyshire, seen by Money Marketing, reads: “The issue to be determined is what regulatory activity was Catalyst carrying out; its permissions are ultimately not conclusive of this.”
Capital Asset Management chief executive Alan Smith says: “It is greatly concerning that at the very least there seems to be a major misunderstanding between the FCA and FSCS.
“This is further evidence the whole system needs to be reviewed, including the distinction between product manufacturers and distributors.”
IFA Centre managing director Gill Cardy says: “When the FSCS assessment of a firm’s activities bears no relationship to the actual activities for which the firm was authorised, there is something fundamentally wrong with this system.
“We all want to see investors compensated for any losses when financial services firms go out of business but once again advisers are being levied on the most spurious grounds for provider failings and it’s simply not acceptable.”
Personal Finance Society chief executive Keith Richards says it is becoming “increasingly reckless” to continue with an FSCS model which is “so clearly flawed”, and has called for alternative funding methods such as a product levy to be revisited.
Separately, the FCA this week removed the permission of fund management firm Catalyst Fund Management to offer advice, for having no qualified advisers.
The regulator says this is a separate firm to Catalyst Investment Group. The two firms are based at the same address and both list Timothy Roberts as a director. Roberts is also a director at ARM.