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Nic Cicutti: Calm before the compensation storm

How good are IFAs at lobbying on their own behalf? Probably not as good as fund managers, or so it would seem.

About two months ago, I wrote a column to the effect that the impetus for reform of the FSCS seemed to have been lost in the wake of a massively reduced “interim” levy from the scheme itself.

In March, the FSCS announced it would “merely” (my quotation marks) be asking for £60m, compared with the £326m that had been demanded last year.

But the key aspect of the 2011 compensation bill was that the vast majority of that levy was paid not by IFAs but by the investment fund management sub-class.

About £233m was handed over by asset managers, including companies such as Rathbone Brothers, which had to find £3.6m, Brewin Dolphin, which was levied for £6.1m, and Charles Stanley, whose business took a £2.6m hit. The squeals of anger from that sector of the industry were loud.

Back then, I wondered whether the long-awaited review of the FSCS, which has been meandering on a road to nowhere for almost three years, would be delayed further. Fund managers, having paid so heavily in 2011, might feel they were not liable for massive bills in the current year, reducing their ardour for reform.

Were they assisted in believing they might escape lightly this year? One cynic who wrote to me pointed out that “what people are missing is the way in which the FSCS has pushed CF Arch cru into the 2012-13 funding year to avoid breaching the £100m cap this year.

“It got close this year. For that reason – and that reason alone – the FSCS has stalled on paying out on CF Arch cru. It has had the claims since 2011 (early in the case of Alpha 2 Omega clients).

“If it had dealt with matters correctly, the interim levy would have had the full levy for CF Arch cru. If you read the detail of the FSCS press release, it does not specifically say how much for CF Arch cru.”

My fellow cynic has a point. If you look at the FSCS statement on the interim levy, it says: “Investment fund managers are not facing an interim levy in 2011-12.

“The costs of claims driving the interim levy will not trip the £100m annual limit on the compensation costs for intermediaries.

The total compensation costs of the annual levy and the interim levy are £82m, so they do not trigger the cross-subsidy.” How convenient.

Even so, there is a massive problem looming for fund managers, which no amount of delaying tactics and prolonged salami-slicing of compensation payments will overcome – MF Global.

The effective collapse of MF Global in October last year, after huge and highly risky bets on European government bonds went bad, is a potential nightmare for UK fund managers and the FSCS.

The Financial Times reported at the start of May that £650m of non-segregated funds have been collected and a further £470m of segregated assets traced to a number of financial institutions but there is a question mark over what proportion of that money can be repaid to clients. Reports from the US suggest up to £1bn of clients’ money has gone missing and much of that has not been recovered.

Even a conservative compensation scenario suggests the FSCS may find itself paying out on claims totalling what could be hundreds of millions of pounds

If so, financial advisers in the investment intermediaries sub-class will also be hit, although this sub-class is already nearly up to its limit, as will those in the life and pensions sub-class. But fund managers, who hoped they had got away lightly in the current FSCS funding year, will now also be in line to be blown over by a compensation tsunami heading their way in 2013.

It is vital, in the semi- calm before the next wave of FSCS levies falls on all sides of the industry, for IFAs to renew their lobbying of MPs over the way the compensation scheme should be restructured.

The issue of whether to join forces with fund managers in the lobbying approach is a tactical one. Can a compromise be reached that ensures both sides are happy neither pays a disproportionate amount towards future levies? I am not sure that is entirely possible.

If so, the IFA Centre’s call for MPs to support an amendment to the Financial Services Bill, giving the new Financial Conduct Authority more flexibility as to how levies are imposed on regulated firms under the FSCS is a good start.

The IFA Centre, Gill Cardy’s new trade body, is calling for the bill amending the 2000 act to ensure the FCA has “regard to the extent to which some authorised persons may have derived business, or otherwise derived benefit, from a firm that is declared in default, the extent to which various authorised persons have contributed, by act of commission or omission, to the losses incurred and the desirability of avoiding levies that are significantly anti-competitive in their effect.”

Regardless of whether you are members of the IFA Centre, it may now be time to join forces in its lobbying efforts.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 31st May 2012 at 1:55 pm

    The bill amending the FSMA 2000 needs to go very much further than merely requiring the FCA to “have regard” for the basis on which, via the FSCS, it dumps on the IFA sector the costs of one motorway pile-up after another that it (or the FSA) should have averted, had it been doing its job properly.

    The whole damned thing needs to be pulled comprehensively apart and reassembled piece by piece subject to due scrutiny of the implications for everyone involved of every single line PLUS the issue of the FSA/FCA’s current lack of accountability and immunity from legal action on the part of those over whose legitimate rights and interests it has trampled roughshod.

    We are, after all, supposed to live in a democratic free country, are we not?

  2. Unfortunately there arent too many cushy roles in the IFA industry for ex ministers or senior FSA employees to move into.

    As a result Banks and Fund Management groups have a rather too cosy relationship with decision makers.

  3. Based on the rights,expectations and the rule of law we ‘enjoy’ as IFA’s under the jackboot of the FSA, our geographical location is somewhere outside the UK, probably in the vicinity of Mugabe’s compound in Harare.

  4. No one is asking the right questions about MF Global and the risks of the same thing happening again with another US or Canadian brokerage. Articles in the US suggest that US and Canadian brokerages have been playing regulatory arbitrage, opening UK accounts for their home clients because UK regulation was lax and allowed them to play the types of games with client money which blew up on MF Global and which were not allowed under their domestic regulation. Rather then meekly paying up and waiting potentially for the same thing to happen again, this type of regulatory arbitrage needs to be closed down urgently – who’s clamouring for that?

  5. Nic! Bless you for sticking up for IFAs (most of the time) but you have missed out one vital fact about this mess. NO ONE IS LISTENING TO US, WE HAVE NO COMMON VOICE AND NO POWER BEHIND THE EXISTING ORGANISATIONS THAT PURPORT TO REPRESENT IFAs

    I have on numerous occasions, too numerous now to count, written to my MP, the TSC, The FSA itself and received polite replies which say nothing and indicate the matter is under review.

    Until the regulatory organisation we have at present and will have in future is legally accountable for its own actions, nothing will improve our industry.

    The RDR is a failed social experiment already predicted to not only reduce the availablility of IFA services to the public due to costs, but the effect on input into retail investment markets will reduce capital in the markets by which business can expand, thus deepening the economic gloom

    Until people with common sense, clear vision and a clear understanding or our industry and its potential for boosting economic growth are in charge of it, the decline as a world beating financial centre will continue unabated, eventually we will, like the majority of UK chip shops, be owned by either the chinese or the arab or indidan businessmen who seem to have a better grasp of what needs to be done to trade for profit and boost the economy.

    This is a wonderful country, ruled by a political elite, interested only in the acquisition of personal wealth and position to the detriment of their duty to its citizens, we give many millions of pounds in foreign aid to countries that are either undeserving of our charity or whose leaders misappropriae it. We cannot even take care of our old and infirm citizens with dignity yet our leaders sqaunder our taxes and earnings on stupid social experiments like the RDR, refuse to listen to any sensible point of view and when it looks like it is going pear shaped, bail out and go to more lucrative employment, leaving in their wake a trail of broken businesses and broken dreams.

    If all the CEOs and MDs of the major providers and networks had got together in the RDR consultation period and made it clear that the current system of regulation, proposed changes and method of funding the FSCS was unacceptable and furthermore indicated that they were going to refuse to pay any more fees, levies or fines, THEN and only then would we see some changes.

    Up the revolution

  6. The FSCS is a socialist Utopian ideal.

    Good business compensates the public for the mistakes of bad businesses and failed regulators whilst politicians claim the glory. .

    It has Karl Marx’s fingerprints all over it.

  7. Alistair Paterson 1st June 2012 at 1:39 pm

    I have a much better idea. I suggest we start lobbying to have the FSCS closed down, completely. Let the buyer beware.

    I am totally sick and fed up paying for other peoples wrongdoing and mistakes. We have been trading since 1st May 1996 and have never received even a single complaint. I have paid over £35,000 in PI insurance premiums, something over £20,000 in FSCS levies, over £31,000 in regulatory fee’s, around £4,000 in reading material, study support and examination costs, and professional fees, countless hours of unpaid work on complaince (TCF, RDR) and all of this £90,000+ cost for a firm who hasn’t had even 1 complaint lodged against us.

    It really is getting beyond a joke now. These constant burdens are rapidly becoming the biggest threat to my business’s existence.

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