View more on these topics

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



Advisers challenge FCA rejection of FSCS product levy

Advisers have been left disappointed after product-based levy has been ruled out as a potential funding model for the Financial Services Compensation Scheme. The FCA held its first roundtable meeting about the FSCS funding model last week after the Financial Advice Market Review kickstarted a review into the scheme. The review is expected to consider […]


FSCS chief: PI cover is not fit for purpose

Financial Services Compensation Scheme chief executive Mark Neale has hit out at advisers’ professional indemnity insurance as being unfit for purpose and called on PI insurers to reveal how they decide what premiums to charge. Speaking at our flagship Money Marketing Interactive adviser conference in London last week, Neale criticised the way the current PI […]

FCA logo glass 2 620x430

FCA rejects approval for Connaught advice firm facing £1m in claims

The FCA has refused an authorisation application from the directors behind a firm facing over £1m in claims over advice to invest in the collapsed Connaught Income funds. The regulator says Strabens Hall is facing “inevitable insolvency” due to anticipated liabilities of £1.05m to eight of its customers who complained to the Financial Ombudsman Service […]


News and expert analysis straight to your inbox

Sign up


There are 17 comments at the moment, we would love to hear your opinion too.

  1. Christopher Lean 14th June 2016 at 9:05 am

    You say…..”why should other investors who had nothing to do with a fund like this be required to pay a product levy…?” . But, in effect, the additional cost of PI cover for IFAs and ever-increasing FSCS levy is increasing the costs to investors that take advice from IFAs now.

  2. Steven Pearman 14th June 2016 at 9:06 am

    It would have been a good idea to research the proposals for the product levy before putting out your weekly devils advocate scribblings Nic.

  3. Julian Stevens 14th June 2016 at 9:16 am

    The principle of the regulated adviser community as a whole being required to pay into a central pool to cover investor losses incurred as a result of the sins of a small number of its own is hard to argue with. The problem is the regulated adviser community having to pay for the sins of unregulated advisers (who pay no levies at all) as well, just because a handful of regulated advisers may have sold a product that’s subsequently gone down the pan. THAT is what needs to be addressed.

    Also, does the FCA have the powers to compel providers of unregulated products to include in their pricing a consumer protection levy which, one presumes, they would then be obliged to forward to the FSCS? If not, then I don’t see how it can work.

  4. The first sentence is one that I think needs some dissection:
    “Who should pay compensation to investors and savers when a firm goes into default and is unable to meet the cost of redress?”

    Obviously at present it is the FSCS. But isn’t there an element of horses and stable doors about this?

    Regulated firms go to a great deal of trouble filing their Regulatory Returns. All financial and trading information – bar haircuts – is included. What does the Regulator do with this information? Why can’t they spot a flaky firm from this information? I wonder if they supplement this information with a simple search on a decent credit web site? Indeed I have such a programme and dip into it from time to time (mainly for research purposes). When I have searched the odd Financial Advice firm there is the occasional shock at seeing a well-known entity with red warnings and abysmal credit ratings.

    Yes, I realise that a well-resourced firm could hit an unforeseen which may drag it down, but in this case where is the PI Insurer? These guys are also regulated and shouldn’t the regulator ensure that the policies they issue are fit for purpose.

    So – in all this a logical conclusion seems to be that at root it is a failure of regulation. Or is my interpretation awry?

  5. Although disagree with your views on the product levy – its the best of a series of poor options – the comments about the inaction of the regulators is exactly right.

    I have reported many scams, dodgy trustees, unregulated websites, adverts – you name it. What happens; Nothing.

    The current regulators remind me of the early days of the child support agency all those years ago. Set up with the best of intentions to track errant parents who do not support their children financially. However it quickly became quango what realised it was easier to harass the existing parents, the so called low hanging fruit, who were paying and squeeze more money out of the them. This allowed them to report to their masters in Parliament what a great job they were doing meanwhile the errant parents were never touched.

    The same is true today of scams and pension liberation. Whilst the good IFA practices & providers are battered with higher and higher FSCS bills for doing the job well, the guilty are not only left alone – they are indirectly given a helping hand by the regulations who have such complex systems that it allows the law breakers to survive in the grey areas. Pension freedoms are a perfect case in point.

    Like I said Nic, I agree the product levy is not perfect but the current system is even worse. The argument the clients should not be paying it via a product is flawed because they are paying it as it increases our fees – whom clients pay anyway. The vicious cycle has already started as witnessed by the public priced out of the advice market and the growing advice gap. Little or no new talent coming in, consolidators swallowing up IFA and hiking their minimum fees and FUM to 1% across the board – disconnecting the public even more.

    The problem like the FSCS is nobody is looking long term at the advice market and its future.

    My fear is that we are already too late ……

  6. On average solicitors pay 10% of their turnover in PI insurance costs. Even if I add FSCS costs into the equation my firm pays less than half that. So I suspect that FSCS costs will need to go a lot higher before the powers that be really start to listen, let alone take action.

    In reality we have two choices: suck it up or get out.

  7. Clifford Gribble 14th June 2016 at 10:12 am

    You seem to imply that all financial failures would be compensated for out of the levy. If compensation were only open on funds / products that paid / would be allowed to pay the levy then there would be clarity for all (advisers, clients and PI insurers) as to what is protected and what is not.

    The issue then arises of Regulated advisers recommending non levied funds. This could be addressed by advisers having to produce an indemnity from their PI insurer that the PI company would cover the situation, if a claim arose. No doubt the PI insurer would charge a premium for this service.

    Finally, unregulated advisers ‘recommending’ non levied funds – caveat emptore

  8. In the article please substitute adviser for client on the cost of product levy and you get the same out come!

  9. Julian Stevens 14th June 2016 at 1:01 pm

    Harry K ~ Relatively easily, were it reasonably on-the-ball, the FCA could spot a flaky firm or practices from the information supplied on its GABRIEL Returns. The trouble is that it makes no effort to do so. They’re just a pointless time and money wasting burden on the regulated community, for which John Griffith-Jones can find no better description than “pragmatic”. Just where, FFS, is the pragmatism in demanding the submission of information that the FCA never examines, much less acts upon if something looks as if it may warrant further investigation?

    Three obvious areas of business are SIPPs (or, more pertinently, the types of investments used within them), DB Transfers (processes, qualifications and suitability) and, of course, the ever thorny thicket of UCIS (adequately thorough DD and sufficiently robust PII cover). Although firms are, I understand, required to confirm that they do have PII cover in respect of all classes of business on which they advise, it’s easy just to say yes, whether or not that answer is true, because the FCA never demands proof. So what’s the point of asking the question?

    Anecdotally, many firms commonly fudge their GABRIEL Returns just to get the totals to cross-tally (or submit identical data year after year). They’re just a waste of time and money. And what’s APFA trying to do about them?

  10. Either way you cut up the cake Nic, its always the clients who pay for the ingredients !

    The only one who gets a away scott free is the fly who….. well lets just say ? relieves itself right in the middle of it !

  11. This is probably a stupid question – but why are unregulated advisers allowed to sell unregulated retail investment products? Surely all retail products and all retail advisers should all be regulated? If issuance of unregulated products and the provision of unregulated advice was a criminal offence?

  12. Julian Stevens 14th June 2016 at 4:16 pm

    Many times has it been suggested that all retail investment products, providers and sellers thereof should be regulated but the reality is that the FCA just doesn’t have the resources to do it. And even if it did, it would take them ’til the second coming of Christ before they managed to process all the applications for authorisation.

  13. Hello I am working on a special project which will stop the above happening in addtion we may have the answer to lowering PI costs, Levy fees, and regulation costs. Look me up on linkedin to find out more

  14. A few points.
    As I have pointed out before, a system of pre-funding the FSCS -whether by a product levy or otherwise – is not the panacea some seem to believe. It takes time to build up a fund sufficient to meet current claims on the FSCS. In the meantime does any supporter of pre-funding seriously believe consumers will be asked to wait however many years it may take to build up a fund sufficient to meet their claims? The consequence is that for a period a system would be needed to collect money from the industry to both meet the cost of current claims and to establish a fund sufficient to meet future claims. How big does this fund need to be?

    I think Nic makes some valid points about the justice of a product levy on all products. But a product levy does not have to treat all products the same. It could be a risk based levy depending on the nature of the product, just as the FSCS levy on firms coukld be risk based.

    The supporters of the product levy ignore the fact that sometimes it is not the product itself which is at fault but the advice which accompanied – for example, the totally risk and loss averse consumer who is put into a unti trust.

  15. When firms tell people their money is safe because there exists a fund of last resort they will take risks they would not consider without such a guarantee. The issue of unsuitable advice is another matter altogether and that is where the collective intellectual failure comes in. Mind the gap.

  16. Nic – can you think of any other industry where the good continually pay for the bad and where in areas where they don’t even hold permissions? It’s like ship builders being forced to pick up the tab for car manufacturers – this fails any objective ‘fair’ test and is in need of reform. In years gone by fines on the bad helped to offset, but now that too has been grabbed by government as a nice new income stream

  17. Julian Stevens 19th June 2016 at 6:57 pm

    David Severn’s comment echoes the point I’ve made elsewhere, namely that product levies will take so many years to build up sufficient reserves (within the FSCS) that they’ll make no appreciable impact on the problem. Plus, of course, the FCA has no powers to impose product levies on unregulated products so the effect of levies solely on regulated products will be so small that it may well make no difference at all. Or they’ll need to be so huge that they’ll deter investors from putting any money into products that are subject to them.

    The only thing that will make any (meaningful) difference at all is if sales of unregulated products by unregulated intermediaries are excluded altogether from the remit of the FSCS ~ as always used to be the case until, without any notice let alone consultation, this was changed. At whose behest has never been revealed, though we can make a fair guess it was the FSA.

    On top of that, the introduction of a product levy will require abandonment of the fundamental principle that consumers shall never be required to pay a penny towards the cost of their own protection, which the FCA will fight tooth and nail.

    A product levy will never happen. Even in the highly unlikely event that it does, it’ll make no difference. So why is anyone still banging on about it? Can’t they see it’s a completely hopeless idea?

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm