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Those to blame should pay the FSCS price

It is that first-credit-card-statement-after-Christmas feeling – you know you spent more than you meant to but in the cold light of day, the magnitude of your generosity hits you.

Last week’s bills from the Financial Services Compen-sation Scheme had an even more salutary effect.

We need a proper process so that those who profited from these products pay when they are shown to be flawed and compensation is due.

So, what should that order be? I think it includes a wide range of firms and individuals. Some have suggested just the IFAs who sold (this includes the spurious non-advised sale) the products but I would go further. We need to consider the product development cycle through to the marketing of the products to IFAs and to clients. Where a network has put the product on a best buy panel, they too are culpable. The idea that they keep their “wedge” is not tenable.

This way, all who earned from the sale of these products would pay to make the compensation fall on those who erred and not just everyone by default. This should not be capped by commission earned but on the value of contracts sold. It would include the adviser, the firm and the provider plus any external consultants who designed the product. The latter seem to escape scott-free, yet often they are the driving force and the main recipient of the profits.

Back to non-advised. I realise I mentioned this in my last column but it is essential that this method of distribution is put to the sword. Or better still, make the banks write to all non-advised customers and ask them what happened. I suspect they will all say they received advice, so which of the banks has the you-know-what’s to try this idea out?

We are still left with the cost of delivering advice being too high. This is no more apparent than in group pensions. If a fixed cost is applied, the lower paid suffer more than the higher paid and if the charge is a percentage, the opposite applies.

The reality in consultancy charging is that it cannot and will not work as some IFAs set up small group schemes to enable post-RDR commission. Providers are privately considering withdrawing commission across the board. We need to have discussions with the FSA and the FOS if group advice is going to be workable in practice.

I have no problem with liability for my advice but I do need clear guidance and I do need a level playing field where those at fault are first in line to pay.
The FSCS is meant to be a last resort but instead it is currently better described as the default choice. An urgent debate is essential and the objective of that debate must be to change the status quo, which is bankrupt of fairness.

There is no doubt that time is of the essence and making people liable in the manner I suggested is not something that needs lengthy consult-ation. After all, the FSA sees merit in product regulation, so perhaps this is the oppor-tunity to make people see that poor design is at their peril and not everyone else’s.

Robert Reid is managing director of Syndaxi Chartered Financial Planners


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. I can’t understand how we keep getting into the same mess. Who, if anyone, is responsible for checking that the correct Professional Indemnity Insurance or Product Liability Insurance is in place and is adequate. Has anyone considered an industry wide PII policy to protect the industry from the mistakes of those who should be checking the effectiveness of PII or PLI?

  2. Virtually everyone agrees that the way in which the FSCS is funded needs reform. Furthermore, there needs to be an investigation into just how the FSCS goes about calculating these enormous additional levies, as some have speculated that they’re done on a blanket assumption of total loss for all investors with no offset to take into account any recovery of assets.

    The trouble though, as usual, is the FSA, which is merely stonewalling on the basis that it’s decided to give higher priority to other things and is therefore not prepared to embark on such a review. For those landed with this latest bill, and with more probably to come, a review of the way in which the FSCS is funded is arguably the highest priority. But the FSA thinks otherwise and has no regard for anyone else’s point of view, so nothing is going to be done unless or until the FSA feels like it. In all probability, the FSA will continue to come up with so many other issues which, in its opinion, warrant higher prioritisation, that a review of how the FSCS is funded may well never happen at all.

    And because the FSA is free to set its own agenda without reference to any other body, there’s nothing anyone can do about such a stance, no matter how many articles are written or action groups formed or how vigorously the likes of AIFA may lobby. We’re forced to pay to support the FSA, yet we have no say in how our money is spent, none at all. What kind of democracy is this? It isn’t ~ it’s totalitarianism.

  3. Like all contributors I will have to pass muster with the Editor – but I hope to be allowed to post a follow up to my earlier article which outlined my first thoughts on how to radically alter how consumer protection can be implemented.

    It will address the points made by Robert Reid and also also address the issues raised by Julian Stevens – specifically when the FSA and or Mark Hoban are seen as obstacles to reform – it is possible to simply bypass them – if the first priority is consumer protection..

    Previous article here:

  4. When SIB created the compensatio scheme in the 1980s, the theory was that calls on it would be rare. In fact, to start with, the liabilities were insured. What has happened since is that the range of failures in the industry has become so wide and constant that the scheme has become too much to bear. The real answer is higher standards for all. The RDR is only a start in one sector.

    Rob has highlighted some of the people who need to be reviewed, and urgently. Otherwise the industry could be decimated by the sins of the few.

  5. John Ellis, if this is the man I am thinking of he should know all about the theories of civil servants. They are just theories which often cause us problems in future by which time they are doing something else altogether, like enjoying their vast pension pot.

    Mike Fenwick warned of this in the 80s and those in power at the time said they would ‘keep the letter on record’ which was absolutely the wrong thing to do, not listening is still not the right thing to do.

    The number of people with opinions which are being published makes this paper look like a platform for professional complainers. Everyone is looking for a solution but they are looking in the wrong places!!

  6. Honestly, I’d have more sympathy with the writer if he were an authorised person. Given Syndaxi’s “just” an appointed rep, they are not legally accountable for much in this area – specifically, how much of the FSCS tab they pick up is a matter of contract between them and their principal.

  7. Most of this debate is about who should bear the losses arising from failed firms. Addressing standards reduces the losses. So you get back to the original concept of FSCS as a long stop (like the old Policyholders Protection Act). Raising standards is perhaps painful for the industry but the only way to enhance its reputation.

    There is a major injustice in allowing some who are indifferent to their public responsibilities to cause liabilities for the many who are trying to do a good job for their clients.

  8. All seems to be getting a bit complicated.

    Those that may benefit should pay, this would mean including a charge in the annual charges of existing product to part fund the scheme, 0.05% or less per year.

    Capital protected product which is not life office ring fenced should carry much higher charges, ie counterpaty risk to firms such as banks which lets face ot could not have funded their compensation fund if the tax payer had not stepped in, let alone cover counterparty risk on structured product.

    There is no way that a person buying a product today should be paying the claims of people of the past and covering their own potential liability.

    Also new advisers today should not be paying higher FSCS costs than advisers who established their businesses on top commissions incl endowments etc, then churned to a Wrap and now start pretending they are angels and would never attract a claim.

    It should be a percentage collected from all product in the AMC.

    Advisers should be covering their advice errors only, keeping the cost of product with product and the cost of advice in the advice arena.

  9. I want to follow up on the posts from John Ellis, because they include reference to where, when and how much of the current controversy arises.


    Meeting place: Royal Exchange – opposite the Bank of England.

    Date: 1987

    Present: Professor James Gower, 3 of his staff, and me.

    Purpose of meeting: To put on record:

    – for Professor Gower, the author of the Gower Report which was a blueprint for the upcoming Financial Services Act,

    – and for the then Conservative Government

    – and for those employed to establish the SIB etc

    … that the Gower Report, and the subsequent Government White Paper both contained (at least)one crucial error,.

    Imho …in many ways it was that error which has inexorably produced the complaints which are raised so vocally over the FSCS some 20+ years later.

    Am I in any way justified in stating that conclusion – or in hoping that another article from me (as mentioned above) might lead to a positive debate on alternatives?

    Well, let’s go back to what I said in this very paper shortly after that meeting took place.

    I recorded that one error in this very paper shortly thereafter … I said “If you re-read the Government’s White Paper you will find a crucial mistake. The Government described the Policyholders Protection Act 1975 as offering its 90% provision only to private policyholders. This is incorrect. The 90% provision extends to all policyholders if it is long term business.”

    I also said … in that same article, back in 1987.

    ” Failure to obtain the necessary authorisation is not solely based on an objective assessment of what is right or wrong, nor indeed of what is deemed criminal. The criteria which may dictate whether you are guilty of a potential criminal act may not be the commission of such an act. The over-riding criteria may be your ability to adhere to a set of subjectively assessed rules and, even more significantly, your ability to absorb the running costs involved in enforcing such rules. Ignore honesty! It may be the rules and costs which prove to be your prison.”

    “It is also a recipe for disaster. Simple arithmetic is all that is required to produce “criminals out of the hat”.

    “Take any drop in the number of intermediaries to be regulated, add any increased regulation costs and multiply by a call on the compensation fund and they equal an immediate cost increase. Any such costs are uncontrollable and there is no compensating price increase. An inability on the part of an intermediary to absorb totally all such costs becomes a potential criminal offence. You do not have to commit an offence, it can just happen to you.”

    I hope my next article, and the now widely held and clear understanding that the status quo is not acceptable, will point to at least one of the alternatives – available back in 1987 and still available to this day.

  10. There needs to be an urgent review of the funding of the FSCS in light of RDR.

    When our industry becomes fee based more and more people will go online to buy direct and yet it will still be those who provide independent advice that have to pay a levy should a Keydata situation arise again.

    Ours must be the only industry where the distributors and not the manufacturers bear the cost of a product failing.

  11. It is also worth bearing in mind that the body which never pays a penny towards the costs of its own failures is the regulator itself ~ it’s always somebody else, somebody else’s money, so just pay up or pack up. And those £21m of bonuses will be paid out, come hell or high water, even if the FSA has to go £14m into the red to do so. Never mind that any regulated firm would be shut down if it did the same ~ we’re the FSA and we can do what we like.

  12. .and just exactly how do we legislate against fraud?? No-one has told me any different other than that the majority of the fault with Keydata was the siphoning off of millons of pounds into offshore companies and enterprises all in contravention of legislation.

    The secondatry debacle with Lifemark is itself surely one of cashflow – people not dying quickly enough! Articles today show revenues are now coming in, venture capitalists are heavily backing N&P as they appreciate the vlaue still to be realised. So a mix of alledged fraud and poor performance lie at the heart of Keydata’s problems – neither of which will be dealt with by any kind of levy or PI premiums.

  13. Yes Julian, there is the regulatory failure but the fundamental problem is the legislation.

  14. I be “just and appointed rep” but it doesnt mean that I should not side with IFAs who did not sell KeyData being lumbered with the bill. The system does not work. When the Icelandic Banks failed we had FSCS trying to compensate SIPP investments which I contended was ultra vires, FSCS never came back to me on that so I must assume I was correct. Where the regulator was asleep on their watch surely central government is also due to pay their share?

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