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 firstname.lastname@example.org