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.