Challenge is important for future of IFA industry
Gareth Fatchett, Partner, Regulatory Legal LLP
When we issued proceedings to judicially review the decision of the FSCS to issue an interim levy against the investment intermediary sub-class in respect of the Keydata claims, we received little trade body support.
They all took the view we were wasting our time. We were told the best way to deal with the FSCS and the FSA would be by negotiation. I have never seen the FSA negotiate properly on policy with the trade bodies.
The complete failure to address the lack of a long-stop defence is a good example. Some of our clients include firms which ceased to be authorised by the PIA in 1995 and yet the Financial Ombudsman Service asserts jurisdiction over these firms when dealing with complaints.
The cost of a judicial review in such a case outweighs the likely redress payable and so these IFAs (or retired IFAs) rarely want to fund such a challenge to a FOS decision. If they had done so, all IFAs might have benefited.
Here is an opportunity for all IFAs to stand united and to share the costs of a challenge that is just as important to the future of the IFA industry.
The problems at Lifemark have the potential to drop another huge levy on advisers. If we had waited and only challenged any later levy, the FSCS would state the original Keydata levy decision was not challenged in time. An application for judicial review must be brought within three months of any such decision.
On a micro level, the allocating of the Keydata damages to IFA firms creates a precedent.
On a macro level, the FSCS is ripe for review and a more equitable system should be put in place. The case will review the way in which regulatory bodies deal with the representations of IFA firms. We asked Aifa to disclose what “negotiations” had gone on prior to the FSCS deciding to levy Keydata on IFA firms. It was really disappointing when they ignored this request.
The costs of contributing in support of the challenge are, for each firm, nominal. We need to be able to show that the industry is united behind this matter.
The effect of a victory or a loss with adverse judicial comment will really help IFA firms as we go into the period when the changes over the retail distribution review are finally settled.
The chance to influence the rules that underpin the new regulatory regime is here right now. It should not be missed.
We take the view that IFA firms need to stand up and be counted. Firms have a choice. Are they going to support a challenge permitted by the High Court or do they favour their representatives arguing their cases in FSA meeting rooms over tea and biscuits?
Our view is that our showdown would occur in public where anyone interested could attend. The FSCS and the FSA cannot avoid the court date. The only way they will avoid explaining and accounting for their stance is by this action lacking support.
Many of the commentators have asked about adverse costs. This is a very important question. If we can get enough funding from IFA firms we will run the judicial review. We will not ask firms for any more money.
Let us be clear on this point. If we can get north of £150,000, we will run the challenge and risk the adverse costs’ order. We will deal with any shortfall ourselves and so volunteer to pick up potentially tens of thousands of pounds of adverse costs. Hopefully, this answers some of those asking whether I am personally supporting the case.
If we cannot get sufficient funding, and quickly, we will have to withdraw. The economics of this matter give us no choice. If we have to pull out, then that would be a major victory for the FSCS. It would mean that, realistically, they are never going to be challenged. I really hope that the chance is not squandered.
Aifa is focusing its firepower on FSA’s failings
Chris Cummings, director general, Aifa
There are times when my blood boils over the unfairness created by the regulatory structure that firms labour under. I want to make sure the wrong is corrected and lessons are learnt so it does not happen again.
Just such a situation happened when I first heard the Financial Services Compensation Scheme was labelling Keydata an “intermediary”.
We had urgent meetings with the FSCS’s chief executive to find out what had led them to this decision and how we could protect members from the resulting costs.
Given that the FSCS does not have an external assessor (unlike the FSA and the Financial Ombudsman Service – something that must change), Aifa’s chairman formally asked the FSCS’s chairman to review the decision.
The problem lies in the difference in regulatory permissions and definitions that are used by the FSA and the FSCS. The fact these do not align zean a firm that every sensible person can see is not an advisory business has been placed into our fee block for compensation payments.
This is obviously wrong and is exactly the reason why Aifa immediately raised this matter at the most senior levels of the regulator and why there is now a full review of the FSCS’s funding and the underlying definitions that the scheme uses – to make sure parity is agreed. That will sort out the medium term and prevent future issues like this arising.
But the fact is that members are being asked to pay for the FSA’s failure and that is wrong.
We instructed a specialist public law advocate to offer us advice on whether we could bring a successful judicial review of the FSCS’s decision.
The advice we received was against proceeding, given the expected outcome. We checked that advice again recently, with the same result.
I respect the right of every person to make their own decisions about whether to go to law or not. For some, the principle is always worth the cost. Aifa sought the advice of one of the UK’s leading advocates, Aifa’s elected council decided to heed that advice and that is still our position.
The root cause of the matter is the firm that did not receive full regulatory scrutiny at authorisation, was poorly supervised and subsequently failed.
This has again tarnished the reputation of the sector, risks depriving some clients of their funds and cost firms with entirely different businesses a great deal of money.
The FSA has yet again been found wanting. That is why, in my judgement, the FSA must be held to account. That is where Aifa is focusing its firepower and why we want a full public statement from the FSA setting out why this failure happened, what they have learnt and what steps will be taken to ensure it does not happen again.
Only at that stage will good firms have confidence that the FSA does not use the FSCS as a blank cheque to pay for its mistakes.