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.
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.”