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MM Leader: Fundamental reform of FSCS must be a priority

Following a Freedom of Information request by Money Marketing, the FSA has released the list, including an array of wrap platforms, geared traded endowment providers and structured product providers.

Of immediate concern is the inclusion of Integrity Financial Solutions, the geared traded endowment provider whose liquidator recently warned could face potential claims of £80m in a worst-case scenario.

Although potential FSCS payouts would be far lower, due to the individual cap on claims of £50,000, this firm could be one of a number of new disasters to hit the sector.

The list also includes some investment firms, pension companies and offshore firms, adding to the sense of confusion and lack of transparency around the current claim process.

At last week’s Building Societies Association conference, the BSA again highlighted the “moral hazard” of the FSCS’s levy which penalises lenders which rely mainly on retail funding.

FSA chairman Lord Turner has promised a review of FSCS funding which is expected to take place later this year.

The list of possible reforms includes a Tobin tax on transactions, a product levy and a debate on whether the share of responsibility between adviser and provider is fair.

The FSA could learn a great deal from taking a look at the world of medicine where the drug company takes on a bigger share of the responsibility for product failings compared with the doctor. Currently the intermediary carries far too much of the responsibility should a product fail and rectifying this misalignment should be a priority for the review.

When a manufacturer has failed through the design of the product or by failing to update the product or react to market developments, then the blame should not fall on the intermediary.

Similarly, when a regulator has failed to properly authorise or adequately supervise a firm, as was the case with Keydata, intermediaries should have to pay such a high price.

We have yet to hear from anyone in the industry who believes the system is fair. Whoever takes power in the aftermath of the general election, and whatever the future holds for financial services regulation, fundamental reform of the FSCS must be a priority.



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. IFA Defence Union 13th May 2010 at 10:43 am

    Yes, this is an urgent matter. We cannot wait for a protracted ‘consultation’ we need the ‘issues of fairness’ to be addressed immediately.

    The situation is untenable.

  2. This scenario is the stuff of nightmares. Aline in the sand must be drawn to separate out REAL IFAs and quasi product floggers.

    IFAs are intermediaries. When they cross the line into product manufacture they cease to be both independent and adviser.

    It does not take a genius to draw up a clear definition of the genre.

    Perhaps MM could make the list of “cross dressers” available to its readers.

  3. A compensation scheme, such as we have, was intended to instil trust in financial services. Hands up those who think it has succeeded?

    If it had, would we now seek fundamental reform?

    Fundamental? Truly fundamental?

    I suspect the most “fundamental” question of all will remain wholly unasked – namely, should there be a compensation scheme at all?

    It is not an “unasked” question when it refers to our “too big to fail” institutions. Indeed, it is probably the first question on the agenda.

    Under the name of “moral hazard”, it is well recognised that if there is a perception that no risk is one too far, no risk too great – because the taxpayer will bail such institutions out, then … well, say no more, the evidence is all around us.

    Are we witness to similar perceptions and risks by offering a compensation scheme whereby the true understanding of “risk” is diminished? I suspect so.

    How do you imagine your clients might act before “investing” if there was a 100% risk that all the investment could be lost – with no compensation scheme in place to recoup any losses?

    How also do you imagine it might alter the nature of the advice you gave?

    The same as now, or differently?

    Should we question whether it may ironically be the very existence of a compensation scheme which generates the need for one?

    We do ask that very question when it applies to “our too big to fail” institutions.

    Should we start any “fundamental reform” by asking what effect, and unintended cosequences a compensation scheme may have?

    I believe so, but I suspect it will not even occur to the FSA to do so.

  4. A compensation scheme is there for the benefit of the ordinary saver who puts faith and trust in IFAs, high street banks, retail financial institutions and FSA regulation. These people dont’ necessarily have the knoweldge or experience to know a bad investment or a mis-sell when it is offered to them. The FSCS has low limits and is there for ordinary people.
    It is not the compensation scheme that causes the problem – it is the behaviour of financial institutions which in some cases cannot be trusted.
    Yes the FSCS is in a mess. It was bailed out by Government a couple of years ago (a loan to the tune of 9bn), the finance industry is still squabbling about how to fund the scheme, and the very people who were promised protection by the scheme are kept waiting for compensation. About two-thirds of the thousands of UK Lehman victims from 2008 nare still waiting for FSCS compensation nearly two years after Lehman collapsed, yet their product providers (NDFA, ARC, DRL) and Lehman itself were regulated by the FSA in the UK, and promised FSCS cover in their brochures.
    The FSCS clearly is not working – it needs to be fixed, or replaced, but compensation schemes should not be taken away.

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