IFAs finally had their day in the High Court last week to judicially review the FSCS’s decision to burden intermediaries with the full costs of paying Keydata claims.
The case was heard on the same week as the FSA announced it was to delay its review of FSCS funding due to the proposed regulatory overhaul.
The FSA promised a review of the FSCS earlier this year in full knowledge of the likely regulatory changes proposed by the Conservative Party.
It is regrettable that a desperately needed review of FSCS funding will now be delayed, meaning the current unfairness in the structure of the funding system is not addressed.
The judicial review was triggered by huge anger in the IFA community that the FSCS had classified Keydata as an intermediary and so the FSCS intermediary sub-class would shoulder the full burden of claims relating to the firm.
The FSCS claimed it was only following the rules as they were laid down, despite the fact Keydata marketed itself as a provider and was previously regulated by the Investment Management Regulatory Organisation.
Opponents of the judicial review suggested IFAs should wait until the funding review rather than chasing a futile case through the courts. Unfortunately, it now looks as if the judicial review is the only hope of imminent reform.
As it happens, if the majority of Lifemark claims are received within this financial year, fund providers may also have to shoulder some of the burden as it is likely intermediary claims would breach the £100m sub-class ceiling. But that does not mean reform is not overdue.
The current system of FSCS sub-classes has created arbitrary groups of businesses, for instance IFA firms, Lehman-backed structured product providers and high-risk stockbrokers, which have huge variations in risk.
Consumers must have the confidence that misselling claims will be paid out, up to a reasonable amount, in the event that a firm goes bust.
But a strong and stable compensation scheme must be based on fair and reasonable levies. The share of the claim bill currently being paid by IFAs is far too big in relation to their size and risk.
At present, good IFAs firms are forking out considerable sums to pay for the mistakes of others. A successful judicial review now looks like the only hope of reforming this unfair system anytime soon.