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Regulation roundup 2011: FSA struggles as RDR approaches

The FSA has had to contend with a year of investment scandals as it tries to lay the foundations for the RDR.

During 2011, the RDR has moved beyond a debate about the higher qualification requirements to look at the practical concerns about RDR implementation.

A turning point in the debate came in July when the Treasury select committee called for the RDR to be delayed by a year to give advisers extra time to meet the QCF level four requirement.

In what was widely seen as a misjudged move, the FSA published an embargoed response which dismissed the select committee’s call for a delay ahead of the formal publication of the TSC’s recommendations.

Richard Hobbs

Lansons public affairs and regulatory consulting director Richard Hobbs (pictured) says: “The FSA handled it rather clumsily. Therefore, at some future date, the committee will return to the RDR and ask the Financial Conduct Authority, as it will be by then, some very hard questions about whether or not the RDR met its objectives. That is the trouble with handling Parliamentary select committees clumsily. They remember.”

The FSA wrote to trade bodies in March to clarify confusion about the payment of trail and legacy commission after December 31, 2012 and then reiterated its stance in a guidance consultation in November, saying trail commission could continue but legacy commission resulting from changes to existing products after the RDR would be banned.

BDO Financial Services risk and regulatory practice director Alex Ellerton says the legacy consultation has provided more clarity but there is still uncertainty over rules for the platform market.

The Money Advice Service was set up in April with a budget of £43.7m for 2011/12 funded by a statutory industry levy.

It came in for widespread criticism after a TV ad in June which claimed the MAS offers free, independent and unbiased advice and was “a breath of fresh air”. The Advertising Standards Authority investigated adviser complaints but in September rejected them.

The MAS has recently entered into consultation with staff after a review of the organisation and has announced a move into “advice-type” activity.

Essential IFA managing director Peter Herd says: “The MAS debacle has been one of the negatives of the year, particularly with it being marketed as a free service. Now, the MAS seems to be saying the service in its current format is not working.”

The fallout continued from Keydata’s collapse.

In January, the industry was hit with a £326m interim levy by the Financial Services Compensation Scheme mainly to cover the cost of compensating Keydata investors. Advisers paid £93m, while fund companies paid £233m.

Philip J Milton & Company saw its interim levy rise from £6,009 in 2010 to £51,459 this year. Managing director Philip Milton says the FSCS was too quick to levy the industry on Keydata, without first properly assessing where the liabilities were.

He says: “The FSCS jumped the gun and it has created a lot of ill feeling. It is all messy and it should not have happened like that.”
Keydata products were backed by bonds issued by Luxemburg-based companies SLS and Lifemark. Lifemark provisional administrator KPMG Luxemburg has been working throughout the year to resolve liquidity issues and prevent Lifemark from going into administration.

Separately, Keydata founder Stewart Ford won a judicial review against the FSA after challenging the use of legally privileged information in its Keydata investigation. Ford also arranged a $150m loan facility to take Lifemark out of administration, which was later withdrawn.

Keydata was not the only complex investment beginning to unravel. The FSA agreed a £54m compensation scheme for Arch cru investors with Capita Financial Mangers, BNY Mellon Trust & Depositary and HSBC Bank in June. The FSA estimated investors would receive 70 per cent of the value of the funds when the fund range was suspended, when combined with distributions already made and remaining assets.

The issue gained momentum as MPs heard from constituents who had been affected. A Parliamentary debate in October established cross-party support for an inquiry into what went wrong at Arch cru but this was dismissed by Treasury financial secretary Mark Hoban, although Prime Minister David Cameron said in November he would look “very carefully” at opening such an inquiry.

The year saw a growing trend for the FSA to intervene where it sees evidence of risky products. Unregulated collective investment schemes, some structured products, life settlements and packaged products have all been earmarked by the FSA this year as products which are unlikely to be suitable for most retail investors.

At the time of writing, the regulator has levied a total of £63.2m in fines this year, compared with a total of £89.1m in 2010. The 2010 total was skewed by the record £33.3m fine against JP Morgan for client money failures and the £17.5m fine issued against Goldman Sachs over weaknesses in controls.
The two biggest fines this year have also been against banks – the biggest being the recent £10.5m fine against HSBC for inappropriate advice by care fees arm Nursing Homes Fees Agency. The second-highest fine was against Barclays in January, when the bank was fined £7.7m over failings in the way it sold Aviva’s global balanced income fund and global cautious income fund.

Herd says: “The FSA is fining big organisations large sums but what is disappointing is it is not backing it up with fines and banning orders for individuals. It is very quick to do it with IFAs, mortgage brokers and smaller firms but not very keen on doing it for larger organisations. There is a question mark why there seems to be such a difference between the regulatory action against small firms and large firms.”

Hobbs adds: “We have seen this growing reliance on the credible deterrence policy without any evidence yet that it is working. The fines get bigger and more frequent and there is no sign of them abating.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Yes, uncertainty by the lorry load.

  2. “There is a question mark why there seems to be such a difference between the regulatory action against small firms and large firms.”

    No there is not, how many senior staff at the FSA leave to join IFA firms and how many leave to join banks? They are corrupt, simple!!!!

  3. I agree, The corruption at the FSA sickens me, that’s why I’m leaving the industry.

  4. Calling 4000 odd people corrupt is an interesting comment to make from a legal perspective

  5. And still, whilst a manifestly two speed regulatory framework ~ one for the banks and another for IFA’s ~ continues, the calls from Adair Turner continue, for more power, more resources and, above all else, more money, always MORE MONEY. But, as we see, ever more money clearly isn’t the answer. The FSA needs to do its job better with the resources it already has. Why, for example, was it necessary for victims of Barclays’ mass mis-selling of those two Aviva funds, and fobbing off complaints en masse, to demonstrate outside Parliament for the FSA to get up off its backside and do its job of protecting consumers? Was this because the FSA didn’t have enough money? Or because it wasn’t being sufficiently intrusive or interventionist? I hardly think so. It simply wasn’t doing its job, preferring instead to turn a blind eye.

    In its report into the near-collapse of RBS, the FSA admitted to having mis-prioritised its objectives. Yet still it continues to steamroller forward with its RDR agenda and refuses to negotiate on anything. It’s a rigged deck and the FSA holds all the cards.

    Hector Sants has claimed that the FSA has no prejudicial agenda against the IFA community, yet the evidence continues to mount that this is exactly what the FSA has. Every time a provider collapses, somehow or other the FSCS finds a way to classify it as an intermediary, so the IFA sector ends up being forced to pick up the compensation bill. Why didn’t the FSA act on the findings of its 2007 visit to KeyData? Why is the IFA community now being landed with the bill for the consequences of the FSA’s negligence?

    IFA’s continue to be denied the protection in law of the 15 year longstop against stale complaints, so the FSA and FSCS can hound retired IFA’s to the grave and even hound their relatives after they’ve gone.

    The NAO supposedly oversees the FSA yet, in reality, all it does is check the accounts (I asked). It makes no attempt to rein in any aspect of the FSA’s wanton profligacy with other people’s money. So the FSA can raise however much it wants and spend it in any way it pleases. Every year, its budget and levies rise well above the rate of inflation.

    Look at the FSA’s Cost:Benefit Analysis on the implementation costs for its RDR ~ initially £600m (though the FSA has declined to share with anybody out here just how that figure was arrived at) and now, after several revisions, pushing past £1.7Bn, almost triple the original estimate. Given the costs to providers of being forced to change their systems to remove the payment of commission on top-ups to legacy products, the figure must now be well beyond £2Bn, and that’s with the cliff-edge implementation date of 1.1.13 still a year away. Has the FSA even deigned to countenance anything in the way of negotiation? Well, it’s received submissions asking for consideration to be given to some sort of alternative……….and said NO. Why will it not allow direct-to-client rebates of commission in excess of whatever amount has been agreed with the client? Oh no, that’d be too practical, to cost-effective, too flexible, words that simply don’t feature in the FSA’s vocabulary.

    The IFA sector has been forced to hand over large additional sums of money to fund the MAS (launched without any Cost:Benefit Analysis or consultation), yet the MAS has been quickly revealed to be another regulatory white elephant with at least twice as many staff as it actually needs. Nevertheless, that seems to be no barrier to CEO Tony Hobman being paid a salary of £250,000 p.a. with another £100,000 of ancillary benefits on top.

    When the FSA does deign to undertake consultation, none of the submissions it receives are ever published for all to see and debate. All it claims to have done is to have “taken them on board”. How can anyone reasonably believe such claims to be true? The evidence to support them simply isn’t there.

    The FSA has been asked formally, by way of a FOI Request, to disclose the legal advice it received with regard to its powers to sanction IFA firms passporting out and back to escape the requirements of the RDR, but has refused to do so, despite claiming on its website to be “an open and transparent regulator”. What is the FSA intent on hiding?

    The FSA has shown wanton disregard for the TSC, Hector Sants having said, basically, that it [the FSA], in conjunction with the Treasury, has carte blanche to pursue whatever agenda it likes, and that there’s nothing the TSC can do about it other than get the law changed. Of this, there can be little prospect, given that the government has already declared that the FCA, like the FSA before it, “will be accountable only to its own board” which, of course, means accountable to no one. Andrew Tyrie surely knows this, but he doesn’t wish to admit it, at least publicly. At their appearance before the committee back in March, Sheila Nicoll sat beside Hector Sants, smirking in open contempt for the entire proceedings (and was sharply but impotently rebuked by George Mudie for so doing).

    Hector Sants claimed before the TSC to be a strong supporter of accountability. Notable by its absence, though, was any mention of accountability on whose part. What he really meant was that he’s a strong supporter of everyone else being accountable to the FSA, not of the FSA itself being accountable. But it doesn’t matter anyway, because no matter what Hector Sants may say, the FSA is unaccountable and he knows it full well.

    Every utterance from Mark Hoban on the subject of regulation includes a reference to the FSA being a body “independent of government”, yet he never explains why, if that’s the case, the FSA’s web address is In reality, the FSA is an arm of government funded by the industry that it regulates. Everybody knows it. It’s the Great Lie of regulation.

    The FSA is a totally out-of-control, unaccountable and insatiable monster. Is it any wonder that so many IFA’s are looking to throw in the towel as soon as they can afford to? We’re already at the upper limit of the FSA’s estimate of 13%. How high will the figure have to go before Hector Sants admits the attrition rate has gone beyond an acceptable price to pay for the RDR?

    And so it goes. On and on, worse and worse.

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