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FSCS £80m levy offends every sense of natural justice

The Financial Services Compensation Scheme went even further in its attempts to offend natural justice this week with confirmation that intermediaries will pay the full burden of claims relating to Lehman-backed structured product providers.

The FSCS also confirmed it was to ignore the rightful outrage that greeted its original decision to place the full burden of complaints against Keydata onto the investment intermediation sub-class, albeit at a slightly lower level than originally estimated.

Putting this sum of money into perspective, the £80m interim levy is over half the £148m the FSCS expects the entire financial services industry to pay in levies for the 2010/2011 financial year.

Details in the small print reveal fund management groups will not even pay for any overflows into their subclass. The intermediation sub-class will pay £110m for the year, well over the £100m threshold that triggers over-flows into the fund management sub-class. But as £12m of this money was “management expenses” nothing will pass over to the fund managers. They really know how to rub it in.

The Keydata marketing brochure sat on my desk portrays the firm as a product provider which interacted with IFAs. That was the way its was perceived by the industry and the way the FSA let them market themselves.

The FSCS’s argument centres around the activities of Keydata. The firm did not handle client money directly or have discretion over bond purchases after receiving funds. Investment management was outsourced to investment vehicles Lifemark and SLS Capital and so in the FSCS’s eyes Keydata’s activities were that of an intermediary.

The logical conclusion of this argument is that responsibility for a huge number of firms we would consider to be at the riskier end of the market, and well outside the usual definition of an intermediary, would fall on advisers.

The FSCS’s decision regarding NDFA, Arc Capital & Income and Defined Returns Limited is equally worrying.

We had previously assumed the reason why the FSCS had yet to decide where the burden of claims should fall regarding failed Lehman-backed structured product providers was because the scheme was grappling with arguments over adviser/provider liability. I wrongly assumed the FSCS was juggling the extent to which these claims were the result of poor manufacturing and marketing literature or bad advice in instances where both the provider and adviser firm had gone bust. How wrong I was.

If such a situation did exist you could imagine intense debate about the role of misleading marketing literature and provider responsibility along the distribution chain versus the responsibilities of the regulated adviser. Dare I say that in some cases partial responsibility may have fallen on advisers- the FSA’s own investigations have found faults with both the advice given by IFAs and the marketing literature of the structured product providers.

But no, according to discussions between MM and the FSCS press office, the FSCS has just lumped all the structured product providers into the intermediation category.

Now at least Keydata had advising on investments as one of its permissions on the FSA register. A quick browse on register shows that NDFA and DRL did not have this permission, although ACI did.

With advisers paying for all the misselling claims that will result from these failed providers, the people behind them will presumably be allowed to carry on in the industry and move on to their next venture.

For example, ACI was put into administration in October 2009 following compliance errors in relation to its marketing material for Lehman-backed products.  In November last year its administrator sold the firm to Merchant Capital with ACI director John Gracey transferring to Merchant Capital along with other colleagues. Meanwhile advisers are left to clear up any mess left.

Sesame held a 28.5 per cent stake in NDFA and DRL. Of course Sesame will be in line for a steep levy bill anyway but should the shareholders of these failed firms not be forced to take on more responsibility for their behaviour?

And a quick point about the fund management industry’s lack of reaction to this debacle. The frantic lobbying which has taken place behind the scenes in recent weeks has also involved the Investment Management Association holding firm against pressure for its members to share some of the costs of the £80m levy. You might say that IMA chief executive Dick Sanders is only doing his job in defending his member’s interests. Perhaps some of his members should remember that a large percentage of their profits come through the same IFAs that are being hit with this unfair levy.

The FSCS’s justification for handing out the £80m levy to advisers ends by pointing out that there are many other firms which may not be regarded as intermediaries but who contribute to the intermediation sub-class.

I’m not sure if this passage was intended to reassure advisers that other firms are also suffering the burden of the levy. In fact it actually does the opposite, raising new concerns about what other types of risky firm advisers bear the ultimate responsibility for.

The FSCS needs to publish a list of all the firms it classes as investment intermediaries, if only so advisers know who they will have to bail out next.


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

  1. For god’s sake, why doesn’t the whole industry en-masse tell these idiots to get stuffed and see what pearls of “wisdom” they come up with then.

  2. How much longer before we are held responsible for
    1.the diasppearance of Sheargar
    2.Lord Lucan going missing
    3.Global warming
    4.The current bad weather.
    Last one left turn the lights out please
    It’s all gone mad!!!

  3. It is time the FSA & FSCS are abolished and the responsibility for regulation passed to the Treasury with costs carried by the taxpayer. This quango is a farce; it can’t manage risk and is expensive. Time for it to go.

  4. Fraser Brydon - IFA 31st March 2010 at 3:23 pm

    Angry and extremely frustrated are just two adjectives, i have many more, unprintable, I would like to address at the FSCS. A mockery of justice, fairness and due process.

    This all stinks, there is more to this than is being published i bet. What other time bombs are in the filling cabinet? Treating people fairly – i think not.

  5. Although I agree with lots of the comments above and think that the FSA and FSCS are punishing us more than fund managers and stockbrokers at present. The problem is our own industry has not covered itself in glory in the past and we all know the types of firms that have acted responsibly to make a quick buck or have moved on to become property gurus which is totally unregulated.

    If the FSA and FSCS is going to do anything good about regulating our industry then it needs to encompass the whole of the industry including those accountants solicitors and other people that give advice through the back door just because it’s not linked to a product.

    How many accountants are out there giving advice around buy to let property portfolio has as a way of clients saving for their retirement. How many clients going to lose all of their wealth because they have overstretched themselves in this one asset class. Suspect will be picking up the bill for that one as well as IFA’s as we seem to be an easy target.

    It’s about time that the FSA and FSCS realise sometimes clients do not necessarily tell the truth and that the endless compensation culture that we got into needs to be greatly restricted unless a client can prove malpractice.

  6. Just received our invoice for £400. As we are not the BofE and therefore cannot print money it will be reflected in increased charges to our clients, it is they who ultimately pay. Perhaps ‘transparency’ should include a breakdown of the sums they ultimately pay for failure on the part of the Regulator who is ‘protecting’ their interests. Perhaps a client letter should go out saying that as they were a client at 31/12/2008 and I have had some unexpected extra costs (even though I would have seen them if I was doing my job properly), I would like, say, £5 each for starters?….

  7. I wil say it for you chaps…. FSA, FSCS and FOS, depart this country in short sharp jerky Movments, and take your banking mates with you. Investment houses and Insurance companies who get the majority of their inbedded value from the work the IFA has done for the last 40 years, how about helping us out by saying no to these dishonest regulators.

  8. I have decided that, having read all the propoganda from the FSA,FSCS and the OFT. They are all by their sell by date. Three organisations all covering the same situations one way or the other. Just keeps the jobs for the boys going. Mind you it will not last much longer, because they will have bankrupted us all, driven everyone out leaving the banks to really con the public. Mind you none of the members of the 3 organisationsd mentioned will give a toss because they will all get nice gold plated jopbs with the banks. It must be time someone woke up and saw what is going on.

  9. I had my invoice drop on my desk today for an amount of over approaching £10k!!! Every one of us at my firm has worked exceptionally hard this month to satisfy the demands of the tax year end to find our profit wiped out by an invoice from FSA.
    They really know how to demotivate the people they regulate.
    With constant accusations of miss-selling, a total disregard for our costs they need to be seriously challenged.
    Why is is we have no human rights? We can not challenge any of this, it is an injustice and grossly unfair but who cares. We practice TCF but those asking us to do this treat us in totally the opposite way.
    The fund management industry are a disgrace too. They only care about getting business from us and when it comes to stabbing us in the back they are very quick to do so.
    They design floored products, hide behind small print and allow the IFA sector to pick up the bill.
    I have been in this industry for over 30 years and it stinks a hell of a lot more than it did pre regulation.
    We are accused of fleecing the public and have to sit by and get fleeced by our regulator.
    It is a disgrace and I have no time for the regulator any more. Parsites the lot of them.

  10. We have to wake up and realise what I have said on previous occasions this is nothing to do with natural justice. This government (FSA) has got a political agenda to see the demise of small IFAs on an economies of scale regulation basis. They want big institutions to regulate and pay fines/income to the FSA when they have been found to be wanting on a retrospective inspection.This puts the UK Financial Services Market then in line with Europe. As a Tory I am not sure or not if George Osborne agrees with the absence of natural justice applying to the rights of IFAs.

  11. Some of us are challenging the FSA – email for details. He has been organising a class action and will next week be taking advice.
    Any IFA who doesnt join in loses the right to moan about this nonsense.
    Have you written to your MPs about this – at the end of the day they decide this sort of issue.
    Why not write to Mark Hobden Shadow FS to the T – he might be having an influence soon.
    Comments here are good but we need to take action as well.

  12. Well anonymous, if you got a bill for £400, pay it. I am a low turnover, low risk IFA and my bill is £934.

  13. Robert Donaldson 31st March 2010 at 4:17 pm

    The investment industry fails to take any responsbility for its shortcomings. They probably like us fail to see why they should pay for the likes of Keydata (again the good guys paying for the bad).

    Surely it is time to have a product levy based on the risk associated with a product and the amount of issuance. Hence all individuals investing in the product would be insuring one another.

    Is this not a fairer way, a bit like the climate levy on your gas and electricity bill where the uses pay for the damage that might be done..

    Advisors should understand where they come from, they are simply a money making machine

  14. mm! well i’m (fortunately) not an IFA or in any way connected with the FSA or its derivatives- I’m just some poor sod who was duped into putting £22k into the NDFA Feb08 ‘guaranteed’ income fund -since which time I have not recieved a penny of ‘guaranteed’ income and find myself enmeshed in the pigs swirl which is the failed Lehman mess and an FSCS ‘compensation’ scheme which can’t decide if I am eligible to even be considered worthy of being sent a claim form. There are thousands of cautious ‘investors’ like me who have relied upon the best advice of IFA’s as to where to put our money- presumably you’ve all been paid out your commission. Meanwhile since Feb 08 I am without my capital and no descision from the FSCS as to whether we will get it back -the whole thing is a scandal -and so much for Brown and Darling stating that NO English Investor has lost out as a result of the banks going under – you lot need to take a long hard look at your ‘industry’ and remember that it relies upon blokes like me to actually believe you know what your doing!

  15. I don’t know about anyone else in this industry, but this is the last straw for me. The FSA & FSCS can stick their levy where the sun don’t shine, I’m off to Spain!!

  16. Is it tax deductible? Is that why it plops on your doormat before the year so you rush to pay?

    Does anybody remember where Keydata started off, was it a CD of fund performance charts? When it bought thet foreign outfit what did the regulator say back then? Why did IFAs flog their dodgy products? Why are al IFAs being asked to cough up instead of those who actually sold them?

    A former FSA director said IFAs are their worst enemies, was he right?

    As far as a list of intermediaries who will be billed for this is concerned an FOI request to the FSA should provide the names if they consent because it is the FSA who does the billing.

  17. I have had enough, that is it I am off to my local branch of Unite to put forward our case as to the years of abuse we have had to suffer from unqualified financial journalists, thieving b****d politicians, plus the never ending accusations from ALL the thousands of FSA leach employees that we are a bunch of client abusers and commission craved so and sos, that every day we go to the office simply to rip off members of the public.Plus I am now an underqualified imbaseal, correction imbecile. I call on you all to do the same and join Unite. Comrades we can only make our point if withdraw our labour and not sell any policies, mortgages or investments of say two seperate two week periods (When)? Come on join me in the revolution and lets march on Canary Wharf and take over their jobs, salaries, final salary pension scheme, perks and expensises. Vive Les IFA

  18. In reply to rippedoff I have never even heard of never mind advised on contracts offered by Pacific Continental Securities (UK) Ltd or Square Mile Securities Ltd. I have also not effected any Structured Products(Lehman Brothers) or made recommendations to effect any plans with Keydata Investment Services Ltd. But I am expected to pay for other advisers who have effected these contracts and caused financial loss to an investor. Every year I carry out a Business Risk Assessment and list a range of products that I am not prepared to invest any of my client’s money. This is because I agree with GHC Capital Markets who state on page 11 of their Understanding of Investment Risk and Portflio Construction that structured products are often marketed as means of reducing risk; however the reality is in most cases that the product will still be subject to a number of risks including market risk, credit risk and liquidity risk. So I greatly sympathise with you but please don’t look at all of us in the same light.

  19. What would be the effect of every regulated firm of advisers en masse refusing to pay the levy? Would FSA de-authorise every firm?

  20. Anybody who expects Sesame to be honourable is likely to be disappointed.

    Whilst we were DBS / sesame members we used a recommeded direct offer letter that was later found to have incorrect wording.

    Sesame said it was the advisers responcibility and ran the other way. Sesame honourable, please dont kid yourselves, they are in it for profit and thats the bottom line.

  21. We are obliged to pay the FSA and compensation schemes by law but have no rights whatsoever in what they do or how they operate. We are probably the only industry who cannot sue those we pay for incompetence or injustice as the FSA is protected by Statute.

    A Judicial Review will only establish if correct procedures were followed, it does NOT decide if any decision is right or wrong.

    IFA’s must have their wallets open to anything the FSA, FSCS etc require us to pay. If we fail to do so the FSA stops us trading even if we may have a legitimate case of justice.

    You can sue the Government or even HMRC but you cannot sue the FSA.

    IFA’s HAVE NO RIGHT TO JUSTICE LET ALONE A HUMAN RIGHT TO JUSTICE. unlike any other industry I can think of.

    Even MP’s do not understand the FSA or live in fear of it.

    We need to find ways to prosecute those at the FSA etc who failed to do their job properly which “we all paid them for” and the sooner the better.

    The only other way I can see of making a stand is to STOP PAYING THEM but of course they will stop us trading and we would need the banks to stop paying as well which given the £billions of tax payers money they have gobbled up we have little chance.

    We have been shafted well and truly and continue to be.


  22. I support the comments of Ian Jones, but feel sympathy for Mr Rippedoff. However:

    The big question is, regardless of the guarantees in the contract, was it adequetely explained, in writing, that the guarantee would fail in the event of the failure of Lehman Brothers.

    If it was, and if all the contract terms were adequately explained, and if no misleading ‘safe and secure’ comments were made by the adviser in question, in writing or otherwise, and if Mr Rippedoff acknowledges this, then he can have no complaint against the advice he was given.

    If not, then he should complain to the Adviser in question in the normal way.

    In common with 90% of IFAs, I have never recommended structured products, and based on client correspondenceI I have seen from IFAs who have recommended them, I suspect that the sale process would not meet the above requirements.

    Bullshit CAN baffle brains, but not for long.

    He certainly has just cause to complain at the treatment he has recieved from FSCS, and it is an indictment of the poor quality of the service they provide.

    As a side question, does Mr Rippedoff class NDF as an Adviser, or as the provider of the contract, or ‘product’?

    I bet I know the answer to that.

  23. To Ian Jones. I am one of the advisers who sold a keydata product. Although it was one single £7,000 ISA, into the (so called) secure income bond in 2005 believe me when I say I am gutted that I got it wrong. I don’t need anybody else to castigate me, I am doing that myself. The client is an elderly woman who was in desperate need, at that time, of a high income. I checked out the key features and everything looked reasonable. It mentions HSBC overseeing the trading of the insurance contracts and says KPMG constructed the financial models used to structure the product, as well as also stating that Mees Pierson intertrust – part of the Fortis Group, were custodians of the bond (I would like to hear what involement and responsibility these organisations really did have). Roddi Vaughan-Thomas (at that time the keydata head of communications) was quoted in ‘Money Marketing’ as saying the underlying protection policies were not viaticals (which I would not have touched). Keydata had also won the Professional Adviser Best structured Product award as well as a similar one from Future Value consultants. Obviously I knew the product was not guaranteed and stressed this to the client, both verbally and in the suitability letter. However I am still disappointed that (in my own mind) I made a wrong call.

    Once I heard of the problems keydata were having I contacted the client and spent many hours trying to sort things out for her and keeping her up to date. I did get compensation for her, so she has not actually lost anything, but I very much regret the worry caused to her for several months.

    Stupidly I thought these products were vetted by the FSA, as well. Hah! I have always been very careful, in the past, with product selection. I have never been inolved with endowment or pension misselling or split capital trusts and I hate the fact that that I, misguidedly, trusted this product.

    Obviously you will appreciate the commission I earned was negligible, so I didn’t recommend the product for that reason. I honestly felt it was the best thing I could find for my client. Some IFAs wouldn’t even have bothered with such a small piece of business. I just wanted to do a good job for an old dear I was fond of. I know there are a lot of IFAs out there that do care about their clients and I bet some of these also sold the Keydata plans with the best of intentions. But we should have realsied the road to hell is paved with those.

    If only I knew then what I know now.

    What a sad shambles this job has become over the last few years.

  24. Perhaps it is about time to take early retirement, move abroad, or change careers ! – and retain your sanity, reduce stress and keep your health ! . . . . if you are young enough, you can always come back in later once the industry has been torn apart by the various regulators and then rebuilt with comon sense – or if you are old enough to retire, then you may live long enough to enjoy it and not die a premature death because of stress, pressure and heart problems ! ! !

  25. I am an IFA and being asked to pay over £1000 to bail out two firms that I thought I had nothing to do with (Pacific & Keydata).
    It seems the FSCS think it reasonable to dump the liabilities of the non IFA sector on IFAs who are innocent and not related to the likes of Keydata et al. We are easy targets with no single voice to fight back against this outrage.
    The FSA/FSCS will just renamel all product manufacturers ‘investment intermediaries’ so they can pass buck onto innocent IFAs.

  26. IFAs signed away their entitlement to natural justice in 1998, those who wisely refused to do so left the industry with a bit of baggage but not what those currently authorised face in the future. Anybody who thinks this is the last of the bailouts for firms who were thought to be ‘manufacturers’ but were declared to be ‘intermedriaries’ should get ready for the rest of them because nobody is listening to reason, not the FSA nor the FSCS. Or are they?

    I sympathise with the ‘consumer’ (if he is indeed one) who invested in the dodgy products but how did he manage to collect so many and now sound like a ‘holier than thou’ wealth manager in his delivery.

  27. Natural Justice 2nd April 2010 at 12:08 am


    We had no choice but to sign away our rights to natural justice. To do so would have been to consign our advisers and our clients to an abyss.


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