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FSCS bill exposes regulatory inefficiency

Two weeks ago, towards the end of my column, I referred to the legal challenge taking place against the Financial Services Compensation Scheme’s decision to classify Keydata Investment Services as an investment intermediary.

I argued that despite the high risk of losing, Aifa should have backed the challenge on principle. As we saw last week, the High Court ruled in favour of the FSCS’s levy. Mr Justice Beatson said the FSCS was correct to have classified Keydata as an investment intermediary rather than a discretionary manager.

He added Keydata was not an investment manager because it had no discretion over the management of client’s assets. Moreover, the judge also concluded that the FSCS was right not to have consulted more fully on this issue, given that it had already held talks on the matter with Aifa and Apcims, the two main trade bodies covering this side of the industry.

There is no question that most advisers will feel bitterly angry by this judgment. I can only add my own disappointment – especially as it potentially paves the way for more multi-million-pound levies, not only in respect of this failure but also other firms that may be deemed to lie in the investment intermediary sub-class.

Money Marketing editor Paul McMillan is right to say there is no shame in fighting a battle like this, even when you already knew that it might be a lost cause Indeed, I think it is incredibly brave of the 200 IFAs and others who contributed to the fighting fund to oppose the FSCS in court, even in the knowledge that they stood little chance of victory. They should be saluted.

Paul is even more correct in his link between Pacific Continental, the failed stockbroker, and the FSA’s responsibility for another levy worth tens of millions of pounds on advisers who only chose to be regulated in the D2 investment sub-class because they felt “nothing ever happened to stockbrokers”, in former Aifa boss Chris Cummings’ own words.

As I wrote almost two years ago, the well known writer Tony Hetherington fought a long running battle over the activities of Pacific Continental Securities, also known as PacCon, in its various incarnations. Tony first began writing on this subject in 2004 when the company admitted that it was taking commission of up to 12.5 per cent to punt shares in extremely highrisk companies.

PacCon’s sales techniques were in the boiler room scam category – highly dodgy and worthless shares talked up by salespeople with almost no knowledge or experience in investment matters. Not surprisingly, they turned out to be duds. What was particularly striking about Hetherington’s work is that almost all his articles would end with an appeal to the FSA to intervene and take action against, offering to provide the regulator with details of that company’s activities.

Yet the FSA failed to call a halt to PacCon’s activities until June 2007 – although it claimed to have first launched its investigation into the company in September 2005, a year after Hetherington started writing about it.

In other words, what we are seeing is a massive bill for IFAs caused by regulatory inefficiency, coupled with a refusal by the FSCS to understand that when a firm walks like a duck, looks like a duck and quacks like a duck it really is a member of the Anatidae bird family and not something else entirely different.

It is in that context that Aifa should have been willing to stick its neck out. Sure, its bank balance is undeniably better off as a result of the trade body’s refusal to become involved in the legal battle.

As Chris Cummings said at the time, Aifa’s legal advice was that anyone considering such a challenge was on a hiding to nothing, so why bother wasting all that money?

I can think of several reasons, both emotional and practical. On the emotional side, this was a totemic issue for many IFAs, one where it really mattered that you show what side you are on.

Forget winning and losing, this was where Aifa needed to be seen to be counted. Yet it went Awol.

The second related reason was that it really matters that Aifa shows its members that while the industry must support proposals to improve the professional standing of advisers – for example in the RDR – it is equally prepared to fight to defend IFAs in other areas. The disillusionment and scattergun contempt some advisers have for their trade body is because they feel Aifa is weak on everything.

Finally, it was important to back the challenge – and there is an argument to say the legal challenge ought only to be the first step of any resistance – because reforming the FSCS’s current levy system is vitally important, yet nothing seems to be happening about it. As Paul McMillan points out, the promised FSA review of FSCS funding has run into the sand.

Years ago, Tory leader Iain Duncan Smith told party members not to “underestimate the determination of a quiet man”. Duncan Smith tried to persuade his people that despite sounding like someone with a permanent case of laryngitis, he was nevertheless capable of being tough. In Aifa’ case, on this issue, its own sound is more akin to a mouse squeaking.

Nic Cicutti can be contacted at


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. It’s my understanding that the decision to classify Keydata Investment Services as an investment intermediary was not that of the FSCS. Rather, it was that of the FSA and the FSCS, as confirmed elsewhere by one of its spokespersons, had no choice but to go along with that decision.

    As for AIFA’s lack of engagement with the Judicial Review, my judgement is that it felt there was no point entering into an unwinnable battle, irrespective of the moral rights and wrongs of the issue. Had it done so, it might well have antagonised the FSA which, as is plain for all to see, is already engaged in an increasingly hostile campaign of persecution against the IFA sector.

    Bearing in mind that the FSA holds all the cards in a rigged deck, sometimes it’s better just to keep your head down and your powder dry. What AIFA might have in mind as an alternative strategy, though, is anybody’s guess.

  2. I cannot believe you actually appear to be saying that IFAs have suffered an injustice nic.
    Surely you should stick to your guns and tell them just to take whatever is thrown at them.

  3. You were promised a review of the compensation machine, it never came. The system is clearly unfair, even the regulators admit as much.

    All of you, Nic included, must ensure that the “new and improved” regulatory regime is fair and reasonable in all respects, right down to the bone.

    What worries me is that your representative bodies failed last time, will they fail again?

  4. Nic, cant believe what I am reading, excellent article and agree 100%.

    I left AIFA if many others followed or follow then the court charges would have appeared cheap.

  5. For what it is worth I have absolutely no regret at sending in my £200; whatever the outcome there is always an element of surprise for a boxer when the punchbag suddenly throws a left hook at him.

    As for AIFA what on earth is the point of subscribing to this organisation?

  6. Seems strange that every legal adviser consulted, including Aifa’s, was utterly certain of the outcome of this judicial review. Wonder why Regulatory Legal thought it worth a punt? Couldn’t be because they know that many IFA firms are fighting for their very survival right now and might be willing to grasp at £200-pound-a-pop straws could it? Surely not.

  7. Glad Nic has realised that this levy is unjust. I’m so glad I never touched these complicated products for clients. The FSA were told that their were problems with this arrangement years before it became apparent.

    I’ve come to realise that UK Financial Services is made up of crooks, mercenaries & some good guys. I try my utmost to filter out the crooks & work with people & companies that I trust & are not ripping my clients off.

    It’s about time the FSA sat down & dealt with the crooks & the rip off merchants, whoever they may be! That’s the job of the regulator, not adding ridiculous amounts of regulation & cost making an IFA’s life ever more difficult.

    It’s no good moaning about commission hungry IFAs neither when we’re all seeing our costs spiralling out of control thanks to the FSA. All of us will have to put our fees & charges up as a consequence of RDR etc.

    Good practice should be rewarded & bad practice dealt with severely.END OF!!

  8. Agree AIFA does not represent IFA’s and seems to have other objectives.

    As Evan Owen says the system is unfair, but it seems to me that our Government, the FSA and the Treasury all want to ensure the Banks have little in their way as they need to rebuild their capital reserves so we do not have to bail them out again.

    Consumer protection is also vital regardless of the cost and if they can encourage people to buy products that are easy to understand with or without advice then that is also I believe and key objective.

    IFA’s are well down the list of priorities or probably not even on it, but putting obstacles in the way like RDR help to justify they are doing something to protect the consumer and give them a better deal, even if it does not achieve that.

    Consumers will probably be the biggest losers but by them it will all be done and dusted and the big players will have even more control, power and market share.

  9. Spot on Nic but to be honest I couldn’t care less about AIFA. They are insignificant. I am, as you already touch upon, extremely angry that the FSA yet again has been found to be negligent. Any IFA afraid of expressing their views about the short comings of the FSA, are bybtheir actions allowing our regulatory body to run roughshod over us.

  10. We too have no regret in supporting this action. We face another levey shortly which will hurt many smaller firms and just adds cost that could be better put to use elsewhere. It is a shame that many IFAs just stick their head in the sand and at best just post anonymously!

  11. Thank you Mr Cicutti for writing a thoughtful, fair and well- balanced article.

    I, and no doubt many others, raised issues such as we are still discussing now with the FSA and AIFA over 10 years ago! I have the correspondence still. Although the FSA – no surprises here- preferred to speak rather than write AIFA did indeed write. Both parties admitted that the levy system was unfair on small IFA firms and that it was being reviewed. AIFA claimed that they were on top of their initiative, even though I raised it well before it seemed to enter their consciousness.

    I left AIFA years ago because I thought they were ineffective and seemingly uninterested. As for the FSA they have demonstrated, by their actions, inactions and disingenuous promises that they are inept, self- serving, unfit for purpose and, above all else, undeserving of trust.

    The supreme Chutzpah is that the FSA say that we are not trusted, hence the further proposed shed loads of expensive and back breaking controls to “re-assure” the public about us. Where is your evidence spokeswoman for the FSA? Libel laws still exist for unjustified and unproven damaging slurs do they not? Let us see your evidence FSA, if it exists. As for AIFA, hang your heads in shame an go away.

  12. Why does anyone pay fees to Aifa ?

    That’s like giving a mugger a tip.

  13. Im a member of AIFA and Im fed up argueing with them, Ive now asked the Director General on numerous occasions for the minutes of the meetings where crucial policy decisions have been taken by the “Council” which have had huge consequences for its membership, including myself and am still waiting, talk about the regulator being secretive and unaccountable.

  14. A good article by Nic Cicutti or “a tale … full of sound and fury, signifying nothing”?
    Written to an audience that fully understands the gross inequity of the current system it makes little real impact. The same regrettably can also be said for everyone who blogs in support of Mr Cucutti’s sentiments.
    There is no public place were we can engage the public, even we even thought they were interested. We are talking to ourselves. I doubt that the FSA hear the shouts, like the court case, let alone the constant whispers of the internet.
    The FSA, RDR and the advisor industry live on a different planet to the “ordinary man in the street”. I suspect they live on a different planet to the Advisory Industry. It shouldn’t be that way, because decent financial management is fundamental to the strength of the economy.
    The FSA should actually be leading the industry forward, not shooting it in the back at every opportunity. Everything can be improved, but it is difficult to obtain that improvement when there is only ever criticism, when rules change on a whim, and when the industry has no trust in or respect for its Regulator. We should be building and adapting on what we have, not tearing it down every 10 years. The public are bewildered, and therefore uninterested.
    The court case over Keydata was a necessary first step in saying enough is enough. We want a quality, thriving industry that benefits clients and advisers alike, but that will never happen when confidence is continually undermined by a central body absorbed in its own infallibility and untouchability.
    The better leaders lead from the front, not from miles behind the rear line. Let Parliament, for once, demonstrate that it can lead by ensuring the next regulatory regime is more in touch with reality, and that there is a process in place to keep it that way.

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