Nic Cicutti: FCA needs to face up to its failures on tackling poor advice

Nic Cicutti

Who should pay compensation to investors and savers when a firm goes into default and is unable to meet the cost of redress?

We all know this role is currently met by the Financial Services Compensation Scheme – and that, for many years, advisers have complained at the scale of the levies they are forced to pay when a firm goes bust.

Rightly, many advisers are angered at the fact current FSCS funding arrangements mean they are forced to stump up large sums of money to meet the cost of poor advice from a minority of their number.

Hardly surprising, therefore, that a substantial number of advisers, backed by trade associations and professional bodies, have long campaigned for a product levy to meet the costs of any compensation to investors at failed firms.

The issue has surfaced again as part of the FSCS funding review, with many advisers hoping desperately such a measure might be considered as part of any proposal to reduce the burden they face every year.

Sadly for them, this wish appears destined to be unrealised. Last week, Money Marketing reported the FCA met with Personal Finance Society chief executive Keith Richards and told him a product levy will not be considered within the context of the current review because its introduction requires primary legislation.

The FCA should have been a lot harder: it should have told Richards – and any other organisation raising the issue – that hell would freeze over before the product levy idea would be looked at.

That said, the FCA also needs to face up to its own failures to ensure investors are protected long before issues like this arise.

Both of these elements are reflected in a story which also appeared in Money Marketing last week: the FCA has refused an application from a firm of advisers to, in effect, resurrect itself as a phoenix and buy the assets of a firm previously run by the same directors, while ditching £1m of likely compensation claims at the same time.

Independent Family Advisers Limited wanted the FCA’s agreement to take over the business assets, staff and clients of Strabens Hall. The FCA has previously said the company faced “inevitable insolvency” over a likely claim of £1.05m to eight customers who complained to the Financial Ombudsman Service about advice they received to invest in the Connaught Income Fund 1. Strabens Hall have pointed out this referred to the period between September 2013 and February 2015, and the company is trading normally.

The one assurance apparently given by IFAL was it would fund Strabens Hall to pursue a legal dispute with its professional indemnity insurer. IFAL hopes this might lead to a settlement in favour of the eight FOS complainants.

Any adviser who has followed the story of Connaught Income Fund 1 will be aware this was an unregulated collective investment scheme. More than £100m poured into this fund, which invested in bridging loans made by a separate firm, Tiuta. The investors were told the fund itself was “low risk” – and believed their advisers.

It subsequently turned out the fund was anything but “low risk”.

Tiuta’s chief executive George Patellis handed an incriminating dossier to the regulator in March 2011, after stepping down a few days earlier in order, so he said, to spend more time with his family back in the US.

If this kind of story were to happen again, and I have no doubt it will, the question must be asked: why should investors who believe what they are told by their advisers in respect of a so-called “low risk” fund, be forced to pay a product levy for this fund?

Even more important, why should other investors who had nothing to do with a fund like this be required to pay a product levy because a small group of advisers decided the attractions of a fat slice of commission from the fund manager were too good to miss?

All a product levy achieves is to make it more likely the same minority will be prepared to take more chances with clients’ money, safe in the knowledge it will not be them who has to pay redress – or any other adviser, for that matter.

Having said that, it is also true that regulators should not be shirking their responsibilities either. One of the striking things about the Connaught/Tiuta fiasco is how much the regulator already knew about what was going wrong with the fund in question, long before it took action.

A staggeringly good article by the Compliance Complete service of Thomson Reuters, established that George Patellis handed the FSA, as was then, a fat file in March 2011 before heading off to join his family for his well-earned rest. His evidence laid bare what had been happening at Tiuta.

Yet the only thing the FSA did was to issue a warning that the Connaught Fund was not as “low risk” as people assumed. Tens of millions continued to flow into Connaught for months after that so-called warning.

If it is right that a product levy is no answer to poor advice, it is also the case that regulators must face up openly and honestly to their failures. If they let investors down, as they did here, heads should roll.

Nic Cicutti can be contacted at