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Financial Ltd faces ‘hundreds of millions’ in redress after FCA action

Adviser network Financial Ltd faces making massive payouts in redress after the FCA found “systemic weaknesses” in its systems and controls. 

Last week, the regulator banned networks Financial Ltd and subsidiary Investments Ltd from recruiting appointed representatives and individual advisers for four-and-a-half months.

The FCA says were it not for the firms’ financial positions, it would have imposed a £12.6m fine on Financial Ltd and a £621,583 fine on Investments Ltd. Financial Ltd has 299 ARs while Investments Ltd has four. Investments Ltd also has discretionary permissions.

The regulator found the firms did not take sufficient steps to assess prospective ARs’ business models and failed to adequately supervise advisers once they joined the network to minimise the risk of misselling.

The FCA has ordered the firms to conduct past business reviews in relation to pension-switching recommendations and the promotion and sale of unregulated collective investment schemes, which may result in redress being paid to consumers.

The regulator says between 20 August 2008 and 30 April 2013, Financial Ltd sold 322 Ucis funds to 252 customers. Of these customers, up to 80 per cent may have received unsuitable advice.

At its peak, Financial Ltd was responsible for 400 ARs and 500 individual advisers, who gave advice to over 60,000 customers – all of whom the FCA says were exposed to a “significant risk” of unsuitable advice.

Clarke Willmott solicitor Laura Hazell, who is acting for an investor in a Ucis claim against Financial Ltd, says: “There are specific procedures and requirements surrounding the sale of Ucis and unless complied with properly, the product risks being unsuitable.

“My client’s file suggests even where Financial Ltd identified the adviser had not complied with regulatory requirements, nothing was done. Based on a loss of approximately £50,000 per unsuitable Ucis, Financial Ltd could be looking at £10m in Ucis redress. The FCA also points out that overall 60,000 customers may have been exposed to a risk of loss. If even half those claim, [the firm] could face liabilities worth hundreds of millions of pounds.”

The FCA says Financial Ltd gave its ARs and advisers a high degree of flexibility and created an environment that allowed poor standards of business to continue for a significant period.

It says the failings were directly attributable to the firm’s culture which viewed the ARs and individual advisers as the end consumer rather than their clients.

The regulator found ARs were allowed to follow their own sales processes and use their own tools, including risk-profile questionnaires, without Financial Ltd assessing if they were fit for purpose.

The frequency of supervision was not driven by the actual risk an adviser posed to customers. For example, the results of pre-sale checking did not influence advisers’ risk rating.

The regulator found file checking was not consistent and the network’s grading system for post-sale file checks was ineffective because there was no clear definition of unsuitable advice.

FCA director of enforcement and financial crime Tracey McDermott says: “This is the first time the FCA has used its suspension or restriction powers to punish a firm for serious misconduct. The sanction serves as a reminder that the FCA takes systems and controls failings seriously and is able to respond with sanctions that target specific revenue streams.”

In 2010, Financial Ltd director Charles Palmer was fined £49,000 for management failings which resulted in poor compliance monitoring of pension switching advice.

Financial Ltd and Investments Ltd chief executive Brian Galvin says: “We respect the FCA’s findings and regret we fell short of expectations. We have co-operated fully and have introduced new controls and significant changes to processes and systems to address the FCA’s concerns.”

Financial Ltd refused to comment on the potential figure for redress.

Expert view

Networks must get the right advisers through the door

Malcolm-Kerr-700x450.png

The size of the potential fine for Financial Ltd, at £12.6m, demonstrates how seriously the FCA views this lapse of control. Any network model carries a degree of embedded risk but firms can put in place appropriate systems and controls to mitigate that risk.

However, it is the culture within an organisation that drives behaviour. And if a firm is letting the wrong people through the door, that culture will be affected negatively, which is difficult to change through systems and controls.

There is little point in the regulator imposing a fine on a firm that does not have the means to pay it but by publishing what the fine would have been the FCA is sending a strong message to the industry about how serious this is.

However, I do not think in any sense that this is a typical network. My own experience suggests the networks are increasingly diligent and cautious about the people they recruit to ensure they are fit and proper. Networks want to recruit the right people who will drive the right culture and the right outcomes.

Malcolm Kerr is a senior adviser at EY financial services

Adviser views

King

Justin King, chartered financial planner, MFP Wealth Management

If these poor practices were going on between 2008 and 2013, why did the FCA not take action sooner? This makes me question what the regulator does with all the data it collects from firms.

Nedas

Alan Nedas, principal, Alan Nedas Associates

The lack of checks the firm had on recruiting advisers is frankly ridiculous. There must be a common standard that every adviser is working to. But it is welcome to see the FCA is not afraid to use its suspension powers where necessary. 

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Comments

There are 25 comments at the moment, we would love to hear your opinion too.

  1. Clive Matthews 31st July 2014 at 3:42 pm

    So Financial Ltd gets fined £12.6m and then has to pay £100m+ in compensation to it’s clients, which it can’t afford to pay, so it goes bankrupt!
    So who picks up the bill? – the rest of the IFA community, via another huge levy imposed upon it by the FSCS.
    And all because the FSA/FCA has fallen down, yet again, on its ability to identify these wrongdoings and stop them, before clients get ripped off and the rest of us have to pay.
    As Justin King says, what on earth were the FSA/FCA doing between 2008 and 2013, and what is the point of all the plethora of information they gather from us every year, if it doesn’t prevent these abuses from happening?
    I am staggered by the utter incompetence of this regulatory system!

  2. Trevor Harrington 31st July 2014 at 3:50 pm

    I can assure you that any IFA with a reasonable amount of personal experience, could have picked up any of these people’s records of day to day transacted business and blown the whistle immediately.
    I mean back in 2008 …. not six years later.

    The fact is that the FCA, FSA, PIA …. do not have the expertise to recognise bad practice or poor advice, and no amount of “pass the parcel” creative paperwork exercises in stupidity and ignorance is ever going to change that.

    Why do they not have that experience or expertise within the ranks of the regulator ? ….. Because they do not … they will not … they utterly refuse to countenance recruiting from the vast array of retired and semi retired, highly successful and experienced IFAs.

    They will not even take our advice … silly isn’t it?

  3. Bring it on !! 31st July 2014 at 4:13 pm

    Hundreds of millions in redress ! Surely redress is only due if the client as lost out, so if a UCIS or pension switch was performed and the client has made money but perhaps incurred some addition costs I would have though redress would cover the costs and maybe unwinding unsuitable advice, but I cant think every bit of advice has resulted in this level of loss to clients. Even if compensation is required to bring returns up to 8% (used by FOS) or to match a former pension scheme that was switched, it surely cant come to hundreds of millions can it ?

  4. This sounds awful and surely the individual ARs are liable for the redress if the network goes under? The network may well be the authorised person but the adviser still has a duty of care when giving advice and cannot typically avoid that personal liability unless they trade through a limited entity but even then the AR agreement would no doubt have included a personal guarantee.

  5. Incompetent Regulators 31st July 2014 at 4:31 pm

    I don’t believe any of this rubbish coming out of the regulator. The Leviathan is picking off one by one against those who speak out against them.

  6. Dick Sprinkler 31st July 2014 at 4:32 pm

    @ Trevor Harrington

    Ah yes but Trevor that would mean there would be 3000 odd job cuts at Budgie Towers and we cant have that can we !!!

    All far too simple Trevor I am afraid – what ever next you’ll be suggesting that we don’t need the FCA in a minute !

  7. “Investments Ltd also has discretionary permissions.”

    And at least two of its ARs advertise that they provide DFM.

    However, it would appear that according to SUP 12.2.7 and the Appointed Representative Regulations, ARs cannot be exempt for this… which presumably is why you don’t see DFM networks…

    Perhaps I’ve missed something

  8. To Bring it on !!

    The FCA pointed out that overall 60,000 customers may have been exposed to a risk of loss. If even half those have actually incurred loss, and go on to make a claim, Financial could potentially face liabilities worth hundreds of millions of pounds.

  9. Julian Stevens 31st July 2014 at 5:10 pm

    Another triumph for the FSA’s RMA Returns, in terms of helping it to avert YET ANOTHER train wreck, the costs of which will be landed on the rest of us. Just what did John Griffiths-Jones mean when he described their purpose as “pragmatic”? I shouldn’t think he himself has the faintest idea. It was just a word that somebody suggested might help him look as if he knows WTF he’s talking about. Plainly he doesn’t.

  10. @Grey Area : the network cannot have DFM permissions – but I understand that this is precisely why they set up a separate company which is not actually a network, under which their associates can also provide DFM services …
    @Everyone else – just cos they can’t afford the fine (which has to be paid from their own resources) doesn’t mean they cannot afford to pay claims – or more precisely, no reason why their PI insurer cannot afford to pay any valid claims … and it may also be the case that the likely costs of review and excesses have been in the FCA’s mind in which case forcing them to pay the fine would indeed be counterproductive – so better to leave the money in the firm to pay for the review / excesses etc

  11. Julian Stevens 31st July 2014 at 5:32 pm

    How many PI insurers are likely to be able to stump up claims of this magnitude, assuming that they agree even to try? At the first sniff of looming claims on something like UCIS business, I imagine they will have withdrawn cover at the earliest possible opportunity.

  12. Trevor Harrington 31st July 2014 at 9:21 pm

    Good evening Gillian … and all,

    As usual, we are in danger of entirely missing the point.

    Of course we can discuss who pays for what, and why they should pay it, and Gill, you can even involve the PI insurers, but at the end of the day there will be no doubt who collectively will inevitably have to pay. Insurance underwriting is not a charitable function, they are motivated by profit, over and above their costs, as indeed are those of us IFAs who remain.

    The point is a very simple one, and I really think we should concentrate on that alone rather than a pointless and sterile debate over who pays.

    These guys are the bad guys. These are the guys who are ripping off the public, stealing their financial futures, and making otherwise perfectly arranged, and normal financial plans, into destitution and desolation. They may just as well have nipped in through an open window and thieved their clients their money.

    The undeniable fact is that that we have an incompetent Regulator, who seems to find it amusing, or perhaps the source of some justification for their own very existence, that they can triumphantly hold a company, with several hundred Advisers on board, as in “default” of their impenetrable rules and pointless regulations …. wait for it …. six bloody years after the event !!!!!

    We are all businessmen …. In control of some very successful businesses … this is not a case of who pays …. This is a case of who done wrong.

    Close the company !

    Sack the regulator !

    Not possible ? …. OK …. But let us at least try and get it right … six bloody years !!! … and that can only mean that the regulator MUST recruit those who know how to get it right …. not those who are in the middle of a life’s search for a Knighthood, or a huge public sector pension … they have to recruit IFAs … “like what I said thirty years ago” …. smart arse or what … not really … common sense actually.

    Warmest

    Trevor

  13. @ Gillian

    Am I right in thinking that (based on the fact that these so called claims will take an age to finalise) the PI insurer (come renewal time) will / may refuse to renew cover, exclude certain areas, or increase the premium so it becomes unaffordable, like they did in a case not so long ago (I forget the name of the company who had to go insolvent) ?

    So who would take them on, would the FCA still let them trade without PI to meet their obligations or in reality will they just have to fold and us pick up the tab ?

  14. @Gill
    As far as I can see SUP 12.2.7 and the Appointed Representative Regulations don’t refer to networks at all. An AR is an AR regardless of whether it exists within a network. My understanding is that a network is an FSA/FCA construct (firm with five or more ARs or based on number of advisers in those ARs), not a legislative one.

  15. Er, wait a minute.

    This solicitor appears to be working for one individual. How does she know how many of the UCIS have made a loss that she can come up with a figure of £10 million? She can’t possibly know.

    Why does she also then think that 1 in every 2 cases resulted in duff advice and therefore 30,000 people have suffered a financial loss such that hundreds of millions in claims will be paid out. This is not logical. How many clients just have a term assurance or a mortgage? How many have a plain vanilla portfolio or Stakeholder pension? Banding these kinds of figures round is ridiculous.

    Then, suddenly, the headline of this articles give the impression that it’s fact that hundred’s of millions will be paid out.

  16. Apologies if this appears twice but having trouble posting.

    The figures quoted by this solicitor are quite frankly ridiculous. (perhaps it explains how solicitor’s bills get so big though if they can inflate figures at the drop of a hat).

    The percentage of UCIS is tiny compared to the overall business and the 80% figure mentioned is those that are ‘unclear’ not those that are unsuitable. Whereas the FCA may say they now want a more outcomes based advice service, the fact is that in checking such things they have a strict box ticking formula which is not in the least bit client focussed.

    As soon as the issue with UCIS was identified we the AR’s were all contacted and asked whether we had any on the books and again the vast majority like ourselves had never sold a single plan and knowing a number of other AR’s quite well I have yet to find anyone who has sold any.

    The AR’s I know are all hard working, conscientious client focussed people who do a damn fine job in looking after the clients interests despite the onerous regulatory regime that we have to work under.

  17. point 1. in these current times of ambulance chasing ” solicitors” and I use that word tentatively, 30,000 potential liability claims will generate a lot of revenue. Whether sold correctly or not people will be coerced into claiming. – The PII insurers know this.

    point 2.

    Honister group were closed down overnight by the regulator when they couldn’t get PII in place and after trying to self Insure , but did not have the capital adequacy in place. This was also due to the PII insurers opinion that there had been a lack of systems and controls in place which would leave them open to heavy claims in the future. – A disgraceful lack of ability at Board level. – Financial looks far far worse than Honister, and will not get PII – A certainty at renewal time. The industry has a lack of PII insurers at this time and many are looking to reduce their exposure due to a litigation and claims environment. Many IFA’s who are directly regulated are seeing huge premium increases or refusal to renew.

    Pioint 3 – Financial Advisers could be stuck anyway!, The FCA will not re-authorise an adviser when there is a mountain of redress to settle and he could be liable for some of it. Honister advisers found that out after a the event.

    Point 4 . Financia Ltdl has no money – they will have to close (or be closed), and the FCS levy will try and agree any claims, so we, yet again will pick up the costs. However if this is as big as it looks, then it could be a long battle as the effect on the industry from a finacial and consumer confidence point of view will be massive and the FCA will also know this….

    My advice – get out now!..

  18. This has got to be one of the most inaccurate and irresponsible articles from MM in a very long time.

    One solicitor, with one client who was sold a UCIS (not necessarily badly advised) is quoted as inferring that 60,000 clients have been badly advised (i.e. every single client of every single adviser between 2008 – 2013) and that 50% of those have (where does she get that figure from ?) will then claim and have suffered a loss, and then this drivel is given a leading headline by MM ?! I thought CMCs were ambulance chases but this takes the biscuit !

    Financial is a mid-sized network that has never, to my recollection and happy to be corrected, appeared in the FOS published list of firms complained about (i.e. 30+ complaints never mind 30,000). If poor advice was rife, as this solicitor is saying, since 2008 it would be showing up by now. Financial ought to start taking legal action against some of these commentators for defamation and/or libel.

    For heavens sake everyone, get some perspective, accuracy and a degree of common sense and, MM, try and provide some objective commentary and not just lurid headlines.

  19. I understand some advisers would be upset by the comments here on this public board and respect your loyalty and also the argument about one solicitor making the comment and MM using it as a headline.

    However you are right lets put it in perspective and remember how this came about. It wasn’t because of one solicitor or complaint, (that will be MM looking for a supporting story). It was the FCA!!!…

    Lets not forget £13.2 million fine that Financial should have had but have no money to pay it, and the FCA’s comments that a review of past sales was still ongoing. The Reason for the £13.2 million fine – one of the largest by the way was “lack of systems and controls” plus a complete disregard for any recruitment process and ongoing monitoring of advisers and their business. plus banned from recruiting for 4 ½ months- Lets not forget that shall we?

    It is not a first time either, your past managing Director was fined personally £49,000 for not having controls in place years ago !

    Ignoring the headline you mention, and no doubt you are a quality adviser, there are clearly concerns from the regulator about the whole culture of Financial and there is likely to be a requirement to complete a past business review exercise, they have mentioned that they were concerned about lack of controls on pensions transfers if you read the FCA’s own statements (not the MM’s comments), but the regulator’s wording
    Speaking with experience — yes i have been part of this before with Honister, the Pii insurers will be running a mile and as with Honister are highly likely to stop offering renewal terms that are affordable if at all?

    £13.2 million – put that in perspective! 30,000 potential cases miss- sold? I doubt that very much. However as Financial have no real systems and controls over what their own AR firms are doing how do they no they were not? – that is the regulators point of view & reason for the fine!!….

    Honister Partners Ltd all over again? ….it follows the same pattern, even I was in denial when i was at Honister and being told to get away by others. I was quite vocal and listened to my fellow peers.

    I would have no reason to doubt you are doing the same ?….

  20. @ J J

    The non fine is based on a theoretical turnover figure – 15% I believe.

    However, that is not Financial’s turnover which is purely based on flat monthly fees.

    The FCA realised that and sensibly looked for some other sanction.

    What is unhelpful is hysterical ramblings from those who should know better! And by this I mean MM & the solicitor and one or two of the other more ridiculous comments, not yourself.

  21. @Jonathan Kirby
    As explained in the Final Notice, the revenue figure used to calculate the fine was appropriate because it was indicative of the potential harm caused by the breach. Turnover was not mentioned. To suggest that this should have been restricted to just the flat fee charged by Financial to its ARs makes no sense and would completely ignore what Financial were directly responsible for, i.e. all actions of their ARs.

    The fine itself is made up of five parts. ONE of those is “Seriousness of breach” and within that there is a 5-point scale of 0-20% of relevant revenue. Financial was assessed as Level 4 which equates to 15%.

    An extra 10% was added under the heading of “mitigating and aggravating factors”.

    The others weren’t relevant given no fine was actually imposed.

    And the ONLY reason Financial were not fined was that they were in no position to pay it.

    For the record I have no connection with Financial, MM or the FCA

  22. Surely one of the big lessons coming out of this – and it shouldn’t be a surprise, after previous events such as Honister and Park Row – is that being an appointed representative makes you a hostage to fortune.

    OK, directly-authorised firms still can’t duck the bullet when the FSCS levy comes out, but you can at least avoid being tarred by the same brush as the least competent/ethical adviser in your network.

  23. @ Trevor Harrington

    You seem to be suggesting that just because the systems & controls at Financial were flawed in the eyes of the FCA, who you rant about being incompetent themselves, that ALL their ARs are therefore automatically corrupt and/or incompetent. Surely, that is not what you are trying to say – is it ? That is certainly NOT what the FCA are saying.

    @ various others

    I reiterate, check the FOS data. The PBRs are not just starting, they are ending. The PI broker has spoken to the PI insurers and there is NO concern about renewal, please don’t make statements that are not supported by the information available.

    I’ve always steered clear of blogs up to now because I’ve viewed most contributions as ill conceived, lacking credibility, having a vested interest or poorly articulated (often all four), but mostly because I felt I rarely, if ever, had sufficient facts to be qualified to comment on the particular issue. This episode has only re-enforced that view, except here I do have sufficient facts to comment (but freely admit to a vested interest, unlike I suspect some recruiters who comment without declaring an interest).

    The fact of the matter about this ridiculous article is that the person quoted clearly has a vested interest, in ‘stirring the pot’ presumably with the forlorn hope the controversy generated aids her client’s case. She appears to have deliberately or accidently misinterpreted some selected figures, then extrapolated exponentially, multiplied by a number she first thought of and then MM have swallowed the answer. Then everyone picks it up and repeats it as gospel – “Why, sometimes I’ve believed as many as six impossible things before breakfast”

  24. Abandon Ship!!!

    I suppose there are different ways of looking at all this info –
    1. Is Financial going to survive this? – If you are an AR of Financial, will you get out before or after its demise? Will you be tarred with the same brush so when you a. Try to get another AR ship or direct, will you be able to? and b. When your application goes into the FCA will it be flagged? If it is you will have a 6-12 month waiting period whilst THEY deem you suitable!! Can you guarantee none of this will happen?

    2. Financial have had so much bad press that when the ban is lifted if they are still running, who will join them. As far as I can see numbers are only going one way.

    3. What happens when this information gets into the public domain, how many of Financial’s AR’s are going to run to the ambulance chasers, missold pension is a big issue ATM… Also, once this breaks and it is a like a pressure cooker, how many of Financial’s AR’s clients are going to trust the whole set up?

    4. Have Financial Ltd not only arsed up their own AR’s – all of their AR’s whether they know it yet or not but the whole industry, what will happen to my costs – can I send a bill for my increased fee’s to a firm thats has gone bust? Maybe I will need to claim to the FSCS!!

    5. I feel that from reading comments on this article and others about Financial that there are some hardened and loyal Financial fans, I do applaud loyalty but where will their loyalty be when they sink –

    It reminds me of the stockmarket, when do you get out of a down move – at the top, middle or bottom? Where are Financial in their bear run and how long will it last? I fear this is not yesterdays newspaper material!!

    I have nothing to do with Financial. If you are a member of Financial now and have not made plans to leave – abandon ship it will only get worse, they cannot come back from this.

    If you work for Financial and you read this why are you still there? Get out now!!

    Whether you feel the FCA were right punishing them, this article right exploding the issues, we all need to baton down the hatches.

    Of course, I could be completely wrong!!

    Kind regards

    Diddly

  25. Financial AR doom and gloom – abandon ship!!

    I suppose there are different ways of looking at all this info –

    1. Is Financial going to survive this? – If you are an AR of Financial, will you get out before or after its demise? Will you be tarred with the same brush so when you – a. Try to get another AR ship, will you be able to? and b. When your application goes into the FCA will it be flagged? If it is you will have a 6-12 month waiting period whilst THEY deem you suitable!! Will this happen? Who knows – I wouldn’t want to be in your position!!

    2. Financial have had so much bad press that when the ban is lifted if they are still running, who will join them. As far as I can see numbers are only going one way.

    3. What happens when this information gets into the public domain, how many of Financial’s AR’s are going to run to the ambulance chasers, missold pension is a big issue ATM… Also, once this breaks and it is a like a pressure cooker, how many of Financial’s AR’s clients are going to trust the whole set up? Worry and concern will set in!!

    4. Have Financial Ltd not only arsed up their own AR’s – all of their AR’s whether they know it yet or not but the whole industry, what will happen to my costs – can I send a bill for my increased fee’s to a firm thats has gone bust? Maybe I will need to claim to the FSCS!!

    5. I feel that from reading comments on this article and others about Financial that there are some hardened and loyal Financial fans, I do applaud loyalty but where will Financial’s loyalty be when they pull you down with them?

    It reminds me of the stockmarket, when do you get out, at the top, middle or bottom? Where are Financial in their bear run? Where are you going to set your stop loss?

    I have nothing to do with Financial. If you are a member of Financial now and have not made plans to leave – abandon ship it will only get worse, they cannot come back from this.

    If you work for Financial and you read this why are you still there? Get out – fast

    If you are or were an AR with Financial then you want to be seeking legal advice before Financial start the claims against you – the clock is ticking.

    Of course I could be wrong. Financial will tell you otherwise but they already see the writing on the wall they aren’t stupid, they weren’t making money before – they certainly won’t be making money now!!

    Good luck and keep your heads down…

    Diddly

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