The FSA’s decision to launch its first-ever consumer redress scheme to force IFAs to pay up to £110m to Arch cru investors raises a number of concerns.
The regulator has come under significant political pressure to find a solution to ensure investors receive appropriate compensation. However, the quickest and easiest way of obtaining compensation is not necessarily the fairest means of apportioning costs and blame.
As well as the dramatic affect the consumer redress scheme will have on firms which advised on Arch cru, with up to 30 per cent at risk of default, the move could have a hugely destabilising effect on the wider IFA sector.
The significant hit PI insurers may take as a result of the redress scheme is likely to lead to higher premiums in a hardening market and perhaps more insurers quitting the sector.
Some IFA firms are reporting big increases in premiums as policies come up for renewal. Underwriters are said to be very nervous about the heavy-handed way the FSA and FSCS are handling both Arch cru and Keydata.
A significant number of Arch cru firms will not have the appropriate PI cover due to policy exclusions. The FSA suggests firms may be able to find other sources of capital but the worry is most will fail capital adequacy requirements and be forced to stop trading.
Given these circumstances, it would seem sensible for the regulator to offer some short-term flexibility on capital requirements. However, no such proposal was forthcoming in a consultation paper which showed little concern for the livelihoods of those running and working for these firms.
The FSA predicts that £33m could pass to the FSCS. When this is added to the £40m compensation costs already allocated to Arch cru, it is highly likely that intermediaries will pay more in total than the £54m compensation package funded by the fund range’s authorised corporate director Capita and two depositories.
Policymakers need to ask themselves if it is fair for advisers who never went anywhere near Arch cru to end up paying more in total compensation costs then the fund range’s ACD.
They may also want to question whether putting numerous firms out of business and destabilising the entire IFA sector is the best way of getting investors the compensation they deserve. Certainly, if it was up to investors to decide where the blame lies a very different picture would emerge.