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Nic Cicutti: Industry is standing by as FSCS costs rocket

Nic Cicutti

In the early hours of 13 March 1964, a young New York woman was returning home from her work as a bar manager. Kitty Genovese had parked her car about 30 yards outside her front door, when a robber attacked and stabbed her in the back with a hunting knife.

Kitty screamed for help and a neighbour who heard the commotion shouted: “Let that girl alone!” The attacker was observed by several neighbours to flee in his car, but returned about 10 minutes later.

Seeing his victim still alone on the ground, he stabbed Kitty several times more, sexually assaulted her and stole about $50 from her purse. As neighbours finally came out to help, an ambulance was called but it was too late: Kitty died on her way to the hospital.

Kitty Genovese’s death has since become a by-word for a phenomenon known as “bystander apathy”. According to initial newspaper reports, up to 38 people heard or saw elements of the assault on her, yet they did little or nothing to help until it was too late.

My mind turned to Kitty Genovese’s story last week, after reading SimplyBiz Group chairman Ken Davy’s latest paper on how to reform the Financial Services Compensation Scheme to ensure it is fairer to advisers, who have been forced to contribute heavily to successive levies in recent years.

The paper is Ken’s contribution to the FCA’s FSCS review team, which is looking into funding for the scheme in the aftermath of the Financial Advice Market Review, which called for reforms of the current system.

The vast majority of advisers, Ken believes, are just as much victims of the minority of their colleagues, whose errors they have to pay for. The annual levy on advisers has risen from £114m to £182m in the past five years, Ken points out, with an underlying average of £140m.

The question is what to do about it. Ken has long argued – since the days of the former Life Insurance Association, of which he was president – that the scheme should be paid for out of a product levy.

He believes such a levy would offer consumers peace of mind at a cost of a few pence per £100 of funds under investment, while massively relieving the financial stress facing advisers.

That said, Ken also appears to step back from a product levy just a smidgeon, acknowledging that it is not immediately on the cards. His submission to the FCA states while a product levy “would be the fairest option, however, it appears to have been ruled out at an early stage of the review. We see no logical reason for this stance.”

Instead, he says he would like to see providers shouldering a far bigger share of the compensation burden – because, he argues, many of them know what is going on and should be able to stop it.

His report says: “Product providers have, or ought to have, significantly greater market intelligence, both individually and collectively, than any other market participant apart from the regulator.

“Providers also have access to a wide range of additional market information and research, so are well placed to identify potential ‘problem firms’ at an early stage, therefore preventing losses escalating.”

Given Ken’s infinitesimal but nonetheless significant concession on the issue of a product levy, perhaps I should acknowledge my own change of views on the subject.

Many years ago, I argued “the current system is a crude but potentially useful mechanism for ensuring better long-term compliance with the FSA’s conduct of business rules. It also serves as a, again crude, semi-Darwinian method of ensuring that only the most financially stable intermediary firms remain open for business.”

Back then, I assumed the number of cases requiring compensation would fall as, in the wake of the RDR, we moved to a new era of better-qualified and more competent advisers. The reality has been nothing of the sort. What I had not taken into account is there will always be a minority prepared to cause massive damage on their peers.

Ken is also right in pointing out that providers often know what is going on, yet – like those who witnessed the attack on Kitty Genovese and did nothing – choose to turn a blind eye to poor practices in the industry: as long as they get their wedge in the short term, they are not too concerned about the consequences years down the line.

Intriguingly, Ken omits advisers themselves from the list of those who often know what is going on. Yet my discussions with advisers in the aftermath of Arch cru and Keydata suggests many knew what their peers were up to, they chose to keep their heads down and say nothing.

In addition to restructuring the levy itself, bringing compensation costs down would involve a far swifter and tougher regulatory intervention against those who abuse the system. It also means holding them personally liable if they try to dump liabilities into shell companies to evade paying compensation to their clients.

All this requires a far more vigorous “holistic” approach to reforming the compensation system itself. By failing to acknowledge it, Ken’s paper suffers from its own version of “bystander apathy”.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. “Yet my discussions with advisers in the aftermath of Arch cru and Keydata suggests many knew what their peers were up to, they chose to keep their heads down and say nothing.”

    Rot.

    For Nic’s rather distastefully chosen Kitty Genovese analogy to work, there would be a crowd of people surrounding her yelling the house down, and several of them rushing into the police station repeatedly trying to tell them that someone is being murdered, only for the police to issue them with a pre-printed statement saying “thanks for your report, Action Murder takes reports of murder very seriously”.

    Advisers have repeatedly warned the FCA and the police about scams. Nothing is ever done, until long after the scam collapses and the money is gone. They’re not interested and even if they were they’re not capable. Which is why cold calling should be banned, because then at least there would be a crime that they could easily detect and prosecute.

    It doesn’t help that the popular telling of the Kitty Genovese story is nonsense. From the New York Times: “While there was no question that the attack occurred, and that some neighbors ignored cries for help, the portrayal of 38 witnesses as fully aware and unresponsive was erroneous. The article grossly exaggerated the number of witnesses and what they had perceived. None saw the attack in its entirety. Only a few had glimpsed parts of it, or recognized the cries for help. Many thought they had heard lovers or drunks quarreling. There were two attacks, not three. And afterward, two people did call the police. A 70-year-old woman ventured out and cradled the dying victim in her arms until they arrived. Ms. Genovese died on the way to a hospital.”

  2. To suggest the analogy is distasteful is an understatement. This issue needs to be discussed and debated with reasoned argument, as indeed do most contentious issues. The analogy introduces an emotional element which is completely out of place.

  3. Neil F Liversidge 27th October 2016 at 4:30 pm

    We’re not standing idly by Nic, but the FCA and police are. The FSCS bill is escalating because crime is not recognised as such by the regulator or police. I’m talking about fraud – securities fraud to be precise – perpetrated through the vehicle of SIPPs,UCIS et al. The FCA hides behind confidentiality (Its equivalent of ‘National Security’) while the police divert enquiries to (In)Action Fraud. There’s never been a better time to be a fraudster. The ‘authorities’ answer is not to detect and prosecute but to levy and compensate. They’ve dumped it into the ‘too hard’ box. They just go for the easy option of box-ticking and telling us how we should write recommendation letters. I do wonder though just how much my fellow advisers have to be put upon before anything resembling a revolt kicks off. A fees strike would maybe concentrate the regulators minds, but we all know it won’t happen, and so do they.

  4. No really a good analogy. Bystanders in order to do something have to be in a position to do it or be able to get someone else too and quickly. Many advisers know that whistleblowing or raising concerns directly with the FCA is a waste of time and we are certainly not in a position to do anything.
    Incidentally Nic, when looking a Ken’s paper and FSCS funding in general, have you considered the proposed changes in the definition of regulated advice and how that impacts on funding? I would suggest not but it actually lends further argument to a product levy so that funding is fairer, transparent and consistent with the new world of robo advice and guidance.

  5. Nicholas Pleasure 27th October 2016 at 6:06 pm

    Neil, a fees strike would be great but who would do it? This isn’t like a normal strike where the employer has to abide by employment rules and treat the strikers fairly. The FCA could and does do exactly what it likes. A fees strike wont happen because advisers have no way of holding the FCA to account. And it knows it.

  6. @ Sascha: So you’ve proved you can read Wikipedia. Bravo. That’s why I said “initial reports”. Nothing distasteful about the analogy, BTW. Ken talks about providers paying FSCS bills because they have “market intelligence”, but advisers somehow don’t possess that same intelligence about their peers? I don’t believe that for a second.

    As for YOUR analogy, taking it to its logical conclusion, if you see a murder being committed you wouldn’t bother to report it because a) police are lazy sh*ts and b) the judicial system is bent.

    @ Neil Liversidge: I’ve previously argued in favour of advisers collectively refusing to pay FSCS levies. I have a funny feeling that if they did, it wouldn’t half concentrate minds over at FCA Towers….

  7. I have been reading the ‘comments’ over the years and by and large (with some notable exceptions) find common ground with most views.
    As a small aside (no doubt to be shot down in short order) I wondered what the ‘regulatory’ cost actually was. Referring to my neatly compiled GABRIEL returns (I know they do not specifically ask for this information, but it is included in my management accounts), the combined FCA and FSCS bill equated to 3.5% of our turnover and our PII came to 1.7% of turnover, a total of 5.2%. Although this is not a small amount of money, it is only about 5% of turnover – as a cost for operating in a highly restricted and regulated industry (assuming it is regulated – but there is another conversation [don’t get me going]) this does not seem unreasonable.
    Next point: I am a small IFA, as (we have been told) are most of us. I meet my colleagues at various industry events and sometimes down the pub – how am I to know which of them is crooked? It it is not my job to find the crooks. Clearly, if I come across something ‘fishy’ I would report it, but no one I meet boasts about how they ripped off the granny they met last week.
    So where do we go from here: we cannot be the policeman, but we have to pay. I agree with virtually all IFAs; the system is rigged – but at ~5% pa I will put up with it. Now 10% might get me to take some serious action, but 15% would get me on the streets (fancy some new Nikes – just joking!).

  8. There is certainly an element of truth concerning providers being in the know. As far as whistle blowing is concerned it would help if the ‘forces for good’ would take the blindest bit of notice. Neil is right on this score.

    The antipathy to a product levy is to my mind pure bureaucratic Kant. General Insurance has IPT – now at a whopping 10% (from the original 5%). So it’s OK for the Government to swipe these funds with no benefit whatsoever to the customer. But a modest product levy (2%??) which would be of great benefit to consumers and the good practitioners is forbidden. Furthermore the colossal fines levied in the industry also could be used instead of being purloined by an ever more avaricious Government. (Remember that this money was originally supposed to go to support the armed forces).

    Humbug – the bureaucrats are the Olympic champions. Pity that the press sometimes joins in.

    PS The Key Data farrago wasn’t quite as clear cut as Nic seems to have pointed out.

  9. The real “victims” of the whole FSCS debacle is not IFA’s or IFA firms it is the clients of the aforementioned

    From a personal standing as galling and distasteful as all these levies are, (coupled with the millions the FCA rake in, in fees) a business expense, and passed on to my clients…. the true and real victims !

    I / we need to be asking the right questions of our regulator, FOS and of the FSCS scheme.

    For this reason and this reason alone, the FSCS and its levies is a massive problem, and riddled with injustice, to those who are the innocent party.

  10. Apart from the fact that the raison d’être of the FSCS is to compensate investors for losses incurred as a result of bad advice, which has nothing to do with product providers/ manufacturers, a product levy simply wouldn’t work. The primary reason for this is that it would need to be tiered according to the perceived risk of each particular product. Who would decide on the relevant risk bracket for each particular product? The FCA? Gawd help us ~ what does the FCA know about product risk grading? It’ll authorise just any old rubbish provided the application paperwork has been properly completed, being careful to emphasise that authorisation should not be interpreted as constituting any sort of approval. Determination of risk and suitability are matters on which responsibility rests firmly with the adviser. What might be entirely suitable for one investor might be equally unsuitable for another.

    And how could a product levy be applied to unregulated products? Firm flogs lots of unregulated junk, junk goes down the pan, firm’s PII doesn’t cover advice on unregulated junk, firm cannot meet its liabilities, liabilities then fall on the FSCS. Funded by what?

    Solution ~ FCA needs to start doing its job properly by identifying, homing in on and putting a stop to dangerously unsuitable advice. Redesign the GABRIEL Returns so that they demand the right information and automatically flag up anything potentially dodgy. So simple, So straightforward. Why doesn’t the FCA just GTF on and do it?

  11. Julian

    Why would it have to be tiered? Just a levy on quantum. You pay £100 the levy is £2. You pay £10,000 the levy is £200. (Assuming as much as a 2% levy)
    At least what we offer isn’t compulsory. Motor insurance is and if you have a premium of £500 the levy is £50 and that just disappears into the Treasury maw.

  12. @Nic: Well if we want to hide behind semantics I can point out that I just said “the popular telling is nonsense” not “Nic’s version is nonsense”. But we all know what you meant. At no point did you mention that the “initial reports” weren’t true, and if you had it wouldn’t have worked as an analogy.

    Also, the initial reports of Genovese’s death were accurate. The “38 bystanders” version was made up afterwards by a science fiction writer.

    It’s distasteful because you used a made-up story about a genuine victim of rape and murder (regardless of the degree to which you thought you’d evaded responsibility for repeating it) to make a point about the comparatively trivial issue of compensation scheme finance. I am aware that MM pays you to be provocative towards IFAs but surely there’s a way to do that which doesn’t involve repeating made-up stories about dead women.

    If the police took the same attitude towards murder that they did towards fraud then of course I wouldn’t report it. It would be pointless and all I’d achieve is to risk legal action and stick my own head in the frame. However, thankfully, they don’t. In general the police do take action in regard to murder, and successfully prosecute. Because compared to fraud it is very easy to get convictions, plus murder is for obvious reasons more of a priority.

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