The FCA ban on two advisers last week over unsuitable Sipp advice marked an interesting turning point, in that it was the first case of its kind where the £490,100 fine was paid to the Financial Services Compensation Scheme.
In final notices published last week, the FCA banned 1 Stop Financial Services partners Andrew Rees and Timothy Hughes from performing any significant influence function.
Savers were advised to pay into high risk investments such as diamonds and developments through collapsed overseas property firm Harlequin.
1 Stop has ceased trading and applied to cancel its FCA permissions. The FSCS is investigating claims that redress may be payable to 1 Stop customers.
Rees has been fined £215,000 while Hughes has been fined £275,100, with all money going to the FSCS. The FCA said future fines could go to the FSCS in certain circumstances.
The FCA says Rees and Hughes advised customers to switch into Sipps regardless of customers’ objectives, risk appetite or knowledge.
Between October 2010 and November 2012 the firm advised nearly 2,000 customers with £112m worth of savings.
Nearly half of all customers invested in overseas property developments with Harlequin. In March last year the Serious Fraud Office started investigating Harlequin Property and quizzed investors over money put into Harlequin’s resorts in the Caribbean and elsewhere. Harlequin Property, the trading name of Harlequin Management Services (South East), filed for administration in April.
Rees and Hughes were also directors of EGI, an unregulated firm that introduced customers to 1 Stop.
Rees and Hughes were paid from both advice feesfrom 1 Stop clients and commission payments to EGI from the underlying investment.
The FCA says both individuals failed to disclose, manage or mitigate this conflict of interest.
FCA director of enforcement and financial crime Tracey McDermott says: “By enabling customers to invest in unregulated and often high risk products without assessing suitability, these men exposed customers to the risk of losing their hard earned pension funds.
”This was then compounded by the partners’ failure to ensure that their customers fully understood these risks.”
Compliance firm Telos Solutions director Richard Farr says it is “common sense” to pay the fine to the FSCS but it is unlikely to be a trend.
He says: “A lot of firms in default do not have any money so this appears to be a specific set of circumstances where there are some assets.
”Most individuals do not end up paying fines because of hardship. Although this is the first time it has been done, I am not sure a precedent has been set.”
PriceWaterhouseCoopear financial services centre of excellence senior manager Andrew Strange says this new arrangement could help solve problems in FSCS funding.
He says: “By diverting fines in this way, the individual partnership that has done something wrong pays its way, instead of the rest of the industry paying through the FSCS. This is positive for advisers.
“It is also a significant fine on two individuals which underlines the focus the FCA is putting on individuals at firms. This applies as much to a small firm doing Sipp transfers as to a large retail bank.”
The FSCS declined to comment.
EXPERT VIEW Richard Hobbs
The Financial Services Act 2012 changed the rules so fines could go to the Treasury and not the FCA.
From the Treasury, millions of pounds worth of FCA fines are now divided up between armed service and public service charities.
But this case is different and represents the first time fine money has been sent to the FSCS.
It makes perfect sense to return money to affected consumers when there is poor advice that leads to compensation.
The main obstacle is how you get the money from a firm in default but this case shows it can sometimes come from the individuals involved.
Directors who do wrong can pay into the FSCS and the money goes to their clients. There is an economic and common sense rationale to it.
When fines are just pumped back into the FCA pot it is the banks and other big levy payers who benefit.
But putting fines into the FSCS will put it into a particular fee block that could reward honest advisers.
It is clearly a better way of using fine money, though it has taken the FCA a while to find a suitable case to use this power.
Richard Hobbs is an independent financial consultant