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 firstname.lastname@example.org