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Rights issue

If they are successful in their bid to overturn the Financial Services & Markets Act, the group of IFAs co-ordinated by Sway chief executive Jon Maguire could change the IFA landscape.

Maguire is setting up a lobbying organisation, Justice for IFAs, to argue that the powers given to the FSA in the FSMA breach European human rights legislation. It is a move that is bound to ignite a debate over whether the IFA sector should argue its corner with the regulator and Government in a spirit of co-operation or of resistance.

The challenge will aim at three main areas where the Act could be vulnerable. The first is the power that the Act gives the FSA to conduct criminal proceedings against IFAs. Maguire argues that any FSA inquiry could lead to criminal charges, which can mean IFAs&#39 licences being taken away if they refuse to co-operate. He believes that all inquiries should be carried out with the safeguards normally required for criminal proceedings.

Lawyers Pinsents partner Robin Ellison says: “The Government thought long and hard about this issue at the time that the Act was being drafted and think their defence is bullet-proof. But the European Court is very hot on the issue of due process of the law and is not happy with organisations that are prosecutor, investigator and regulator, especially for criminal proceedings. At first view, I would say this head of Maguire&#39s challenge has an evens chance of success.”

The second main challenge is against the Financial Ombudsman Service&#39s £360 charge per complaint, and he is telling IFAs that they can look forward to getting that money back if the case is successful. Maguire says: “If you get found guilty, then fine, you should pay the costs but you should be innocent until proven guilty. If we win, then IFAs will get their money back.”

LIA public affairs manager John Ellis says: “The ombudsman&#39s fees&#39 issue is an old chestnut. There is a flat fee to everybody and a per case fee so those who generate most complaints pay a higher proportion of the regulatory costs, which is fairer to those who do not create complaints.”

In a consultation starting this month, the FOS is expected to grant a concession agreeing that IFAs will get their first two complaints of each year dealt with without the up-front fee. But Maguire says that is not enough for IFAs facing multiple claims.

Ellison says: “I think a court would hold that the fee is not overly disproportionate although it seems high compared with a High Court writ which costs £400. The whole idea of an ombudsman is that it is cheap and cheerful, so why does it cost so much?”

The third point of Maguire&#39s assault is the vexed question of retrospective action. This could ultimately lead to a reopening of the pension and endowment reviews and a rethink on structured products. Maguire argues what has happened with the closure of so many final-salary schemes in the past few years means that compensation was overestimated, although trying to overturn what was expressed at the time as a full and final settlement of a claim will prove tough.

Maguire believes Aifa and the LIA have both failed to take on these issues. He says: “Irrespective of the people involved in Aifa and the LIA, who I know and like, it has to be said that they have presided over the demise of the IFA sector and therefore you have to ask what service have they provided to the IFA community that they represent.”

But Maguire says it is not his direct intention to set up a body that is a competitor to the other trade bodies. He says: “If people see what we are doing as competition, then that is for them. We do not see it as competition, we are simply focusing on this monumental issue that faces our sector.”

Ellis believes Maguire&#39s strategy risks tarnishing the intermediary sector&#39s already damaged image. Ellis says: “If something like this became public, then what would it do for our reputation as an industry? We would effectively be telling clients that we resent them bringing claims against us when they think we have acted wrongly. The industry has got to become more customer-focused and this would be sending exactly the wrong message.”

Maguire disputes that the strategy will do more harm to IFAs&#39 reputation than it will do good to their balance sheets, saying: “What reputation is left? Misselling has been rammed down the throats of the public by the press and the regulator. You do not see the regulators of the legal or accountancy professions encouraging people to claim against their firms.”

He is looking to raise £1m from IFAs as a fighting fund to pay lawyers. Ellis says: “I do not think it will get very far. Enforcement procedures are provided for in the legislation and, because Parliament decided that it wanted these rules, I doubt whether the European Union could be persuaded to overturn the Act.”

Aifa director general Paul Smee says: “Be under no illusions – this will cost a phenomenal amount of money. Before he starts asking people for money Jon should read part 4 of Schedule 1 to the Act, where the FSA is given immunity by a British statute.”

The issue appears to be as much about tactics and some IFAs have privately expressed anger at seeing themselves set up as the fall-guys between product providers and the regulator who, between them, had, for example, agreed the wording of marketing literature on structured products. Maguire is certainly proposing a more confrontational approach to dealing with the regulator than has been seen from Aifa and the LIA so far but Smee sees this legal challenge&#39s chances of success as insufficient to warrant the cost.

Smee says: “It is not so much a question of what this will do to the reputation of the IFA sector, more a question of whether such a case will be effective, and the timescale for such a claim is a very lengthy one. My view is if you look at what we have achieved on professional indemnity insurance and depolarisation we have achieved an awful lot.”


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