It isn’t every day that someone like me visits Money Marketing’s website to discover that Evan Owen has been giving fulsome praise to one of my articles. Generally, Evan’s comments range from dismissive to hostile. Yet, for those who know him, his comment last week regarding my column on Keydata – is probably a great surprise.
It might have something to do with the fact that I described the FSCS decision to levy IFAs £43m in the wake of Keydata’s collapse, because the company was deemed to be in the investment inter-mediation sub-class, as an “outrage which offends every sense of natural justice”. Almost 30 comments in addition to Evan’s, not to mention a dozen private emails, suggests that my remark hit a raw nerve.
This levy is indeed a disgrace. For the FSCS to bill advisers for the demise of a company almost everyone considered to be a specialist product provider appears to confirm the paranoid suspicions of many IFAs who believe the regulatory agencies have it in for them.
As it happens, I disagree with this overall view. In general, the FSCS has performed a vital role in ensuring that the fallout from the occasional insolvencies and cases of misselling that have bedevilled even the IFA sector are cleared up quickly before they begin to poison the entire industry.
Think about it for a minute. Every year, scores of IFA businesses are declared to be in default. In many instances, clients are badly affected too. Sometimes, particularly in the case of some high-profile firms that go bust, the number of people with potential compensation claims runs into thousands.
Can you imagine what life would be like without an FSCS in such circumstances? Banner-waving protestors, angry letters in the Daily Telegraph, repeated questions about “thieving IFAs” in the Commons?
In that sense, the FSCS acts almost like a clean-up team after a CIA hit, making sure far fewer ripples disturb the surface of the financial services pond, at least as far as consumers are concerned. Peace of mind is therefore worth paying a few quid for, even if the cause of that payment is sometimes unfair in and of itself.
The question, however, is how much is that peace of mind worth? If Aifa is to be believed, earlier estimates of Keydata’s effect on IFAs have been exaggerated. It says the cost of compensating Keydata victims is likely to hit £440 for a “typical” adviser firm in the appropriate sub-class.
Aifa’s analysis suggests the cost for full investment firms will be around £1,100 because the average member is only exposed to investment on around 40 per cent of its business.
That may indeed be the case although, as with all such instances, there are likely to be widespread variations in the final bill for different firms, depending on the types of business they transact.
I would not be surprised if a large minority of IFA businesses incur a bill for thousands of pounds. That’s an eye-wateringly high price for peace of mind in your sector. Moreover, the fact remains that this levy – and others that have fallen recently on the D2 investment intermediation sub-class – is morally wrong.
The key issue, therefore, is that of what to do about it. It seems to me there are two immediate options for those who want to fight it – a legal challenge or a simple mass refusal to pay.
Last week, law firm Regulatory Legal announced plans for a judicial review against the FSCS’s decision to levy the investment intermediation sub-class for the three defaults. The firm is looking for IFAs to stump up between £200 and £300 plus VAT per firm in order to mount a legal challenge to the FSCS. However, Aifa says its own legal advice is that the levy can only be challenged on the grounds of evidence of a “mindset of reckless indifference” within FSA. Such a challenge would be unlikely to succeed, it believes.
If this is true, then the only remaining option is that of a poll tax-style mass refusal to pay. The question here is, do IFAs have the appetite for such a course of action? My gut instinct is that they don’t. Unfortunately indignation, even genuine anger, is not quite enough. You also need a sense of desperation, a feeling that this bill is the final straw and simply cannot be afforded. I don’t get a sense that’s where IFAs are at right now.
Aifa is right to demand that the FSCS publishes its own legal guidance on the levy, even if – in my opinion – the main reason for doing so is to bolster its own case against seeking a judicial review.
More important is to seek a public assurance from the FSCS that it will review the issue of which compensation sub-class companies such as Keydata are allocated into. It may feel like shutting the stable door after the horse has bolted but sometimes that is the only realistic course.
Nic Cicutti can be contacted at firstname.lastname@example.org