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The toll truth

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


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. Toll it like it is Nic. I don’t know anyone who knows me well who would ‘probably’ be surprised by my comment on your article last week, that may be because very few people in this industry know me personally. Fortunately, or unfortunately depending on your point of view this is unlikely to change because nowadays I don’t really want to meet any more of the unsavoury characters who ply their particular trade out there.

    Even though my opinion of some IFAs has been lowered by what I have seen and heard there are too many injustices in this regulatory regime, I see them often and this particular issue may be dismissed by some as a ‘just a few hundred quid’ but in my humble opinion there comes a point when this death by a thousand cuts becomes unbearable for anyone with sense of decency and fair play, you for example Nic.

    I have been dismayed to hear it is being suggested that it would be better for IFAs to take yet another blow on the chin rather than make a fuss. These people obvioulsy don’t have any problems with it because they are not being asked to find an unknown quanity of cash at a time when their business is down and their futures are uncertain.

    Does anybody at the FSCS have any idea how their decisions wil affect firms? Will any be wiped out by the demand for money to compensate people for the failures of others who never gave advice?

    Nic, do you believe that the ‘consumer’ is better off than he/she was back in 1995 when ‘regulation’ as we have come to know it was on the drawing board?

    Is it me or is this regulation lark getting worse by the day?

    As for refusing to pay the FSCS bill when due you might not be surprised that the FSA will argue that you don’t have a leg to stand on and promptly put you out of business. I’m not so sure that this meets their obligations under Article 6.

  2. Quote:

    “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.”

    May I suggest a third, and for me the only “immediate” option, and it emanates from the statement issued by the FSCS.

    Appearances were that the levy was to be allocated to “investment intermediation” – but as is often the case appearances can be misleading.

    My understanding, which I believe to be correct, is that no final decision has in fact been reached, and that it will not be reached until mid-March, and that the FSCS will accept, in fact have asked, all those who wish to make representations, to do so.

    So if “The key issue, therefore, is that of what to do about it.” Then it seems obvious to me that the only “immediate” option is for all IFA firms to record their views to the FSCS on the matter, before that final decision is made.

    The FSCS have expressed their initial, but not final views, based, as I understand it, on their legal opinion, and that is that Keydata did not engage in “investment management”.

    And yet, as I posted elsewhere in MM, Keydata chose (Yes, Keydata chose – not anyone else) to limit the scope of the investments to which any funds would be allocated – that to me is the very essence of “investment management”.

    FSCS, appear to concentrate exclusively on what then followed, the secondary steps, and seem to have ignored the very first step in the process, namely the exercise of “investment decision making”, which in my book cannot be described as other than “investment management” – exercised solely and exclusively by Keydata.

    Ask yourself why what appeared to be a done deal changed?

    Why are the FSCS asking if anyone wants to make representations?

    Is it because the FSCS have begun to realise that they may have been pre-emptive in their initial judgement – that is my guess.

    The FSCS are there – willing to accept representations – will they hear yours or a deafening silence?

    Absent a clear and overwhelming response, I think I can near guarantee that any mass refusal to pay, or indeed any legal challenge is doomed to failure – and it will be so because nobody spoke out when they were invited to do so by the FSCS, and had the chance to do so.

  3. The duality of the world in which advisers operate never ceases to astonish.

    The FSCS has settled on its course due to a technical distinction as to whether Keydata was a provider or an ‘adviser’.

    When the FSA and the FOS look at compliance with the rules they look beyond the technical aspects and focus on issues such as ‘natural justice’ and the spirit or principle of the matter.

    Is it any wonder that advisers suffer from paranoia and, like Kenneth Williams, believe that “they’ve all got it infamy”?

    What a carry on.

  4. Michael Fallas 4th March 2010 at 4:13 pm

    The real issue is the FSA (not the FSCS) with the keydata situation just another failure on their part.

    Sadly it seems we are powerless to sue the FSA and a Judicial Review seems unlikely to make any real difference so “we pay” a regulator to protect the consumer, who also acts as judge, hury and sentencing authority and can fine us unlimited amounts of money of we make a mistake yet when they make a mistake we also pick up their bill as well.

    This what a Judicial Review is about

    ” judicial reviews are a challenge to the way in which a decision has been made, rather than the rights and wrongs of the conclusion reached.

    It is not really concerned with the conclusions of that process and whether those were ‘right’, as long as the right procedures have been followed. The court will not substitute what it thinks is the ‘correct’ decision.”

    How do we get justice one has to ask?

  5. Am I the only one who wonders why IFAs should be billed for things a former IMRO firm did? IMRO stands for Investment Management Regulatory Organisation, not Independent Financial Adviser. Looks like it all went pear shaped at N2.

    As far as I can recall the compensation schemes for these quite different sectors were completeley separate, but I may be wrong, and does it matter to these people who pay no price for being wrong?

    If you could write a script for a West End farce this one would be incomprehensible.

    David Kenmir was former IMRO, perhaps this is yet another ‘Kenmir effect’?

  6. In my above post I assert that Keydata should be dealt with by the FSCS as an “Investment Manager”.

    I do not depart from that assertion, but what are the wider implications if the bases upon which the FSCS have reached their alternative conclusion are correct?

    You need to read the FSCS statement to follow how I think their legal opinion led to their conclusions namely that Keydata were not involved in “investment management” but were involved in “investment intermediation”.

    Inter alia, the bases they use include acting as an agent on behalf of others, they include who it was that was managing the monies that were invested, they also include who made the choices over the actual management of the investments.

    I hope that gives you a taste – for me it really boils down to hands on or hands off control on a day to day basis.

    I repeat I do not depart from my original assertion – for all of those secondary events there had to be an initial event, and that initial event were the decisions taken by Keydata over how investments once received were to be managed, and that is “investment management” – end of story as far as I am concerned.

    But, let’s have a think. Have the FSCS uncovered something that has far wider implications?

    Remember, (and again the FSCS address this issue in their statement), it does not matter how the FSA may have granted authorisation, what matters to the FSCS under Fees 6.5.2R and Fees 6.5.3R is the “activity” that is being undertaken, whether permission has been granted for that “activity” or not.

    So say we look for an “activity” which mirrors what the FSCS say amounts to “investment intermediation”, but look for it not as it applies to Keydata, but across the “investment management” industry.

    I will give you just one example, there are many others.

    Think of those Fund Managers who allocate funds to Hedge Funds.

    Does that “activity” not offer a direct mirror image of what the FSCS say constitutes “investment intermediation”?

    The granting of the control of the day to day “investment management” to others as an intermediary between the original investor and the Hedge Funds.

    Remember, please, I still stick with my original assertion, but the FSCS may be revealing that there are many “investment managers” who dependent on their “activity” (not their FSA permissions or authorisations) are also engaging in “investment intermediation”

    If the FSCS maintain their initial thinking it has major implications, not least to how levies, as in the case of Keydata, are eventually levied, but it may go even wider.

    One hopes that if the FSCS stick to their original (and for me, incorrect) conclusions, they will ensure that the levy is apportioned across all those engaged in “investment intermediation” – a net far wider than perhaps is currently realised as a consequence of how the FSCS have now so interestingly defined that “activity.”

  7. Excellent contribution Mike.
    It is amazing that the FSCS can decide what category a firm falls into. One would have thought the FSA made that decision when it issued its authorisation, and the FSCS should simply follow suit. However if the FSCS decsion now implies that Keydata type activity constitiutes ‘intermediation’ then every hedge fund manager will be asked to cotribute to the levy which may result in a smaller payment by IFAs. Unless of course the FSCS has already factored in Hedge fund managers as those liable to pay!

  8. What is all the fuss about?

    Did you not see it coming?

    Are IFA’s blind to the conduct and direction of regulation?

    Have you not greeted the departure of many good firms of IFA’s, on the basis that their was more room nay opportunity at the swill bin, for the clever one’s that remained?

    For anyone to suggest that regulation has been anything other than a total and absolute failure should be an IFA for they are delusive.

    The only option available is to take all the kicks and more, for IFA’s have no rights, Who cares if they withdraw service, infact the demise of the IFA has been the bold objective of the FSA, in its pursuit of the european model, where the product provider, banks and large supermarkets rule distribution.

    Why is the FSA so against the payment of commission, I suggest that is because it damages the IFA market and fee’s if not already, can at the wave of a hand be subject to Vat.

    Some IFA firms will survive, but to guess how many, must be left to others

  9. Mike Fenwick makes some excellent and indeed useful points.

    Taking his investment mangement/intermediary hypothesis further, would not by definition all multifund and FOF providers fall under the same umbrella.

    In fact all insurance companies who use externally managed funds for life and pension products fit the bill too. This is especially true if we take the FSCS assertion that they are acting as “agent for the customer, sfaeguarding and administering of assets, arranging safeguarding and administering of assets, and agreeing to carry on those regulated activities”.
    At the very least this should add a significant number of deep pocketed contributors to this appalling levy.

    As the FSCS erroneously assumes that it is the activities, permitted or otherwise, and not the permissions which designates membership of an investment sub class, then we have some pretyy large intermediaries in this country, of which I was blissfully unaware.

  10. Having stressed the need for representations to be made before any final decision in my first post – for the record I have today submitted a detailed report to the FSCS addressing the issues which I believe are central to their eventual decision.

  11. Nic You state that “the only other option is a poll tax style mass refusal to pay”This shows that you really have no understanding of the way the fsa regulates brokers.They would simply close us down en masse. That is the power they have. We have no recourse to any decision they may make.Can you imagine how helpless that makes one feel?
    We are at the mercy of the beast full stop.

  12. I wish I could be a fly on the wall(s).

    Why do people say that? Could a fly understand it all any more than the regulators can?

    And they pay no price for being wrong…

  13. @ anonymous: well yes, in theory they could, especially if not everyone were to take part in such a non-payment campaign. But if EVERY IFA firm were to refuse to pay, I very much doubt the FSA would close down the entire sector. The real problem is actually the one that I addressed in my column: that not every IFA has the stomach for a fight. If Aifa is right and the bills are likely to be much smaller than some of the original estimates, ast least for some IFAs, then any willingness to refuse payment will dissipate, leaving only a minority who would be picked off at will. Which is why, again, Aifa may actually have gauged the mood right on this issue. For every angry post on here there are probably 100 advisers out there who are shrugging their shoulders and getting out their chequebooks, no matter how unwillingly…and I note that neither Evan Owen nor Alan Lakey, who have both commented on my post above, are leading the charge towards a levy boycott either.

  14. This whole situation shows that the FSA in its current form is not fit for purpose.

    In every recession structured product providers have defaulted and collapsed. When NDF had already gone down you have to really have your eyes shut not to think there is a good chance Keydata will go the same way.

    Keydata was obviously a product provider not an adviser – when did they advise a member of the public – they took orders and supplied product.

  15. Nic … to explain my position. Mike Fenwick corrected your main article – there were not two immediate options as you suggested – read his post.

    Mike, has prepared a report which has gone to the acting CEO of the FSCS and to their senior counsel, it reflects his correct analysis that the only “option” to adopt at this stage is neither judicial review nor a levy boycott, but to make representations to the FSCS.

    For my part, with Mike’s approval I have sent a copy of his report to Hector Sants at the FSA not least because the regulatory mismatch that is involved in this matter is not the first and won’t be the last. We know there is to be a review of the FSCS, and it is important not only that the specific Keydata issues are resolved correctly now, but that both the FSCS and FSA are given a clear insight into why the issues surrounding Keydata and others point to serious underlying errors, which require both understanding and correction for the future.

  16. This whole situation shows that the FSA in its current form is not fit for purpose.

    In every recession structured product providers have defaulted and collapsed. When NDF had already gone down you have to really have your eyes shut not to think there is a good chance Keydata will go the same way.

    Keydata was obviously a product provider not an adviser – when did they advise a member of the public – they took orders and supplied product.

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