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Independent view

Any financial adviser worth his salt will always start any financial planning exercise with a detailed budget so that the client’s overall objectives can be set. This then forms the framework for the financial planning exercise.

This procedure is no different when planning for any business entity, including the IFA firm itself.

One always has to expect the unexpected and factor in a safety margin. No one can be entirely accurate with estimates of performance against budget when planning in advance and inevitably there will always be pleasant surprises among the unanticipated shocks. Hopefully, there will be more of the former but, as we know, the latter will occur from time to time.

Of all the various unwelcome costs, it is those arising from the Investor’s Compensation Scheme that rank as the most irritating, particularly when they result from the actions of miscreants who then resurface back in the financial services business. Last year seemed to be a particularly bad year for the number of occasions when phoenix companies featured in the headlines.

Although the legacy of the pension review continued to bring about claims for compensation, other claims surfaced as reality struck home for the marketeers who thought they could reap a quick profit by selling structured products by the shed load without fully taking into account the potential downside.

There are too many instances of individuals setting up a new business venture and subsequently placing the original operation quietly into administration. This is the precursor to claims arising with the ICS and it is you and me who are subsidising the new operations.

Of particular concern as well are the large number of interim authorised firms, formerly regulated by the General Insurance Standards Council, a good number of which may not qualify for full authorisation, if history is anything to go by. How many of these individuals will pass on their liabilities to add to the liabilities?The net result continues to be that the rest of us have to pay up for their inadequate risk controls. It is rather like using the Get Out Of Jail card in Monopoly.

The FSA’s key risk assessment for 2005 highlights yet again the issue of structured products and that firms have not undertaken sufficient due diligence. It also recognises that there are, sadly, further rogues among us who may take advantage of depolarisation to leave everyone else to sweep up after them. More than enough of this activity took place in 1988 when polarisation arrived on the scene and many businesses reorganised themselves in a manner that was not advantageous to clients. At that time we did not have as much of a compensation culture, nor were savers adequately protected.

Looking further ahead, there is no mention of the Ucits III legislation which has the potential for creating problems in years to come. There is no doubt that this legislation will allow for product innovation and produce new investment possibilities for those clients wishing to diversify their portfolios. At the same time, in the wrong hands, the possibilities could lead to (a) fund management groups taking too much risk and (b) advisers not being sufficiently diligent or fully understanding what they are promoting to clients. Are sufficient checks going to be put in place to prevent these problems arising?Far too much is being paid out in compensation and we are at increasing risk through the naivety of some and the dishonesty of others. It is high time that the nettle was grasped, ensuring that individuals do not wriggle out of their liabilities and leave others to pick up the tab.

Nicholas Conyers is a director of Pearson Jones

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