FOS compensation hike. Hand me the black cap, will you

Panacea comment for Financial Advisers & Paraplanners

20 Mar 2019

FOS compensation hike. Hand me the black cap, will you.

We highlighted in November the need for firms to respond to an FCA consultation on a proposed FOS compensation limit hike of 200k taking the maximum  pay-out to £350k.

It was announced with very little time to respond.The consultation opened 16 Oct and closed 21 Dec so slightly over two months.

Just one hundred firms, including Panacea responded.

Rory Percival commented in our LinkedIn discussion that “100 is a fairly typical response rate, more than many consultations, and hardly the fault of the FCA. Don’t get me wrong; I have serious reservations about the result but to suggest the process is unfair is in itself unfair”.

The FCA said that “proposed changes to the ombudsman service’s award limit will ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a firm”.

At Panacea, we believe that this will see the end of smaller IFA firms due to impossible capital adequacy requirements caused by higher excesses to deal with £350k claims and a PI market that just will not want to play.

It will be the end of anyone looking to start a new firm because of capital adequacy constraint.

It will mean that PI premiums will get so high that only the largest firms could afford it.

And, you guessed it, more firms falling into FSCS default with fewer firms being left to pay the increasing calls for cash.

Truly, this is the industry, sorry profession, that will destroy itself.

Why have they done this, or is it an April Fool a bit early?

FCA chief executive Andrew Bailey reckons that: “Consumers and small businesses struggle with the cost and time needed to take firms to court, so it is essential they can receive fair compensation from the FOS when things go wrong.

And then, that now sickeningly often used regu-speak:

“We have listened carefully to the feedback we have received and believe our approach is right”.

Really? What feedback and from who?

The consultation period was very short. The implementation date just weeks later.

My view at the time of the consultation announcement, possibly quite wrong, was that the outcome was already decided and the consultation was to make sure that the process appeared to be correctly followed.

100 respondents is pretty poor and in itself an indication of the adviser community’s lack of trust and openness in a flawed system. Historically, I cannot think of any consultation that that has seen an outcome that was contra to what either the Treasury, consumer groups or the regulator wanted.

We were right regarding the outcome, this was not a consultation at all.

Rory Percival reckoned, again in our LinkedIn discussion, that “just because the FCA didn’t agree with responses, it doesn’t mean it didn’t consider the issues appropriately or that its approach was unfair”.

This sounds a lot like Lord Meltchett’s Court Martial of Blackadder.

Blackadder’s court martial was, shall we say, less than fair. Lord Melchett was the judge and Darling the prosecution. Meltchett opens the case by saying, “The case before us is that of the Crown versus Captain Edmund Blackadder, alias the Flanders Pigeon Murderer. Oh, and hand me the black cap, will you – I’ll be needing that.” 

Now that’s consultation?

I rest my case.

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Feel brave enough FCA?

Regulatory update for Financial Advisers & Paraplanners

24 Jan 2019

Feel brave enough FCA?

Being responsible is what the financial industry should be about.

Sadly we have now reached a stage that the responsibility now falls on all as the few who mess it up never have the resources to put things right, previously referred to as ‘the polluter pays’.

There is an urgent need to find a better way to fund the ever-increasing costs of regulation and redress as well as delivering confidence and developing consumer protection. At its core, is funding the seemingly endless liabilities for consumer entitlement to compensation whether or not from ‘inappropriate (bad) or unsuitable advice’ and/or failure of product.

If not found, the only way to even think about evaluating the worth, let alone seeking access to advice, will become so expensive only the very rich will be able to seek it out and the entry of new firms impossible.

That in turn creates big problems for almost all provider firms, almost all, who rely totally on intermediated distribution.

A leading provider CEO observed only this week that: The truth is that we currently have a mixed economy in terms of compensation for mis-selling, product flaws, etc. Individual firms have primary liability for their actions and the wider FS industry carries the costs of systemic regulation and systemic failures (FSCS). Whilst everyone grumbles about this it is pretty sensible. Firms have real incentive to ensure that their activities are meeting standards, but the overall system has a backstop to maintain public confidence”. 

He is quite right, but how regulation and consumer protection is funded is what I see as the problem and not the responsibility focus where the ‘who pays’ door has slammed shut.

Financial products are predominately ‘purchased’ as a result of adviser recommendation, this can now include sales attached to products such car purchase. This distribution of intangible products is often referred to as intermediated distribution. The latter outlets, although regulated, are rewarded by way of commissions.

Pretty much all life, pension, protection and investment product providers do not sell or distribute what they design and build and have not for decades. Instead they rely on third parties. That party is the adviser community, tied, restricted or whole of market. That distribution method became predominantly fee based on 31st December 2012, excluding protection products and mortgage related advice.

Many argued that this date spelt the end of mass market access to financial advice and the beginning of a more professional era where if you could not pay, or were not deemed financially worthy, customer segmentation by advisers ensured advice was not coming your way any time soon, or at all.

Segmentation does not mean that IFA firms are always financially well-resourced to compensate for when things go wrong. This simple fact is the cause of the big problem the FSCS, PI insurers and firms left who pick up the cost of the clear up face.

Poorly, yet still compliantly capital adequate firms often collapse after a big call of money from the FSCS or even a single successful complaint and unaffordable compensation payments.

The regulatory year 2018/19 with just over 3 months to go, has seen the FOS refer 273 cases from around 74 companies to the FSCS. For these firms, Sipp’s accounted for 39% of FOS casework, PPI 28% and portfolio management 9%. This in turn will see more complaints against those firms hit the FSCS as the FOS will wash their hands of them as they will be placed in default.

Smaller IFA firms often do not use limited liability protection options, instead using their personal assets to satisfy capital adequacy. For many established firms operationally functional PI to ride out a bad advice claim award is difficult to achieve because of a very restricted pool of insurers and a continuing slew of claims for unregulated products being distributed by regulated entities.

Limited liability protection actually increases the risk of firms failing. And phoenixing can follow.

As PI cover is arranged a year at a time, any claim or notification of a claim in the current policy year, with a diminishing pool of reinsurers and huge premiums, could be curtains at renewal in the next year, no PI = no business.

Although there are always exceptions in commercial life, very, very few businesses set out to disadvantage clients for their own gain. It seems in today’s world of financial services that the collapse of firms can often be brought about because of a failure to get compliant PI, a big (even small) FOS redress order, or a flood of unexpected FSCS calls for cash from the misdemeanours of others. This in turn sees reducing adviser numbers that in turn presents fewer firms to pay ever increasing liabilities of others as they fail.

Many advisers have reported fraudulent claims in our regular FOS surveys. All this is really not helped by the culture of compensation that has encourgaged no win no fee lawyers (CMC.s) to boost consumer opportunity perception, as noted above. All financial products and advice presents an opportunity for a ‘refund’ many years later if what was suitable at the time of the advice is not seen that way, say, 15 years later due to changed client circumstances, changes in their aims and aspirations that applied at the time of advice.

Why? A lack of longstop does not assist, something that applies in just about every commercial walk of life. After six complete years from the date of the transaction there is no redress for bad service, goods or advice as commercial law does not permit it. In the world of financial services, it is forever, although I note that the FOS is now exercising the six years plus three rule a bit more.

In the summer of 2018, Panacea ran a FOS survey whereby 83% of respondents felt that FOS complaints process places them in an automatic position of guilty until proven innocent. The outcome should be determined by the evidence available and/ or the balance of probability. Often, that is not seen by firms as being the case. No file, because the case was more than say seven years in the past, does not help. Equally so if a file is retained, data protection could come back to bite as record keeping beyond seven years could be seen as a breach.

It is all well and good suggesting that the polluter pays from a compensation point of view, but the reality is they cannot because the pollution has proved so toxic, they just died along with everything else in that murky pond. In other words, the death of the polluter means they can never pay.

Some thoughts therefore follow for the FCA and HM Treasury to consider on how the industry should pay for regulation and at the same time protect the consumer from bad actors and product failures.

Every regulated firm, there are some 50,000, of whatever type (from car finance, to pet insurance, to funeral plans, pensions providers, life insurers etc) should pay a simple percentage of turnover to the FCA each year as a new type of ‘all inclusive’ regulatory fee to cover ALL the cost of delivering regulation, FCA, FOS but not the FSCS as this idea would see their need removed, building, quickly, a financial services fund to pay for when things go wrong (similar to the Pension Protection Fund?).

The complete opposite of the polluter pays.

This clearly defined cash ocean is locked, and if need be in the beginning underwritten by the Treasury, rather like the FSCS is today.

It should not see HM Treasury doing a cash grab on surplus funds as it has done with fines. Build up surplus, rather like the three-year Lloyds of London accounting period, and use that surplus to reduce the cost of regulation along with fee and fine offsets.

This pool of cash would be to specifically deal with the cost of FCA regulation and FOS arbitration when investigating consumer detriment for regulated products and advice only. Claims should be arbitrated at minimal, even no cost to either side by the FOS with the outcome being determined by the FOS with a low-cost form of independent appeal for each party.

The FOS should operate by assessing claims on the six years plus three rule, the basis of evidence available and/or the balance of probability and not by way of retrospection or beyond that time limit.

In the case of ‘guilt’ there should be an element of affordable, turnover redress payable by the firm and the rest paid for by the accumulated fund. This should mean that firms do not go out of business because of a claim or a claim against others.

There should be a very strict bad behaviour outcome with very bad being an immediate red card then say a ‘two strikes and you are out’ standard, or, where redress amounts are above a certain level and you are out ruled out of further activities, possibly even first time.

Regulated advisers should only engage in regulated products. Unregulated products should be exactly that and excluded from the support.

There would be no need for individual PI as the FCA should/ could, rather like huge corporates, self-insure by way of the fund created and the FCA could have in place a reinsurance pool made up of many insurers, PI or otherwise to remove any doubts of being selected against.

Tear up the current protocols, the status quo needs something a bit different.

Let’s do a little simple maths:

  • In 2017 £22.1 billion of revenue was earned by retail intermediary firms in 2017 from insurance, investment and mortgage mediation activities, compared to £20 billion in 2016. Source FCA
  • Over £300 million was paid by firms in Professional Indemnity Insurance (PII) premiums in 2017, Source FCA
  • The FSCS paid in claims to the year ended March 2017 £375,262,000 (£130,362,000 was recovered) source FSCS Financial review page 47
  • The biggest single cost to the FSCS in that year was £306,246 in interest source FSCS Financial review page 47
  • There are some 50,000 firms across many business areas that are registered with and regulated by the FCA

So, if every firm regulated by the FCA paid just 0.20% of their turnover each year, based on the above numbers some £442m would initially be raised. There would be no need for PI cost and a sum could be set aside to reinsure easily covered within that 0.2% cost.

That could be a starting point for a brave new world.

This thinking is not about presenting firms with a low-cost way to be reckless in their advice, it is not about bringing advice to the masses in its purest sense. But it is a starting point.

As the leading provider CEO further noted: Your suggested approach will only affect advisory firm behaviour materially if it leads to greater socialisation of all of the risks across the sector, and so reduces risk of ruin for advice firms.

The description of my thoughts as “socialisation” is very astute.

He did add a caveat that “this in turn runs the risk of too many firms taking higher risks because they don’t have to bear the brunt of their actions to the extent that they do today”.

But I beg to differ. Money is being made in the ‘industry of compensation’ that would be better used by ploughing it back to the pot, confidence would be restored, bad business put out of action very quickly and all that money saved on a firm level basis put to providing lower cost, easier access to advice, better regulated products and services created with foresight to ultimately benefit the consumer rather than hindsight to compensate them.

I hope that this very brief summary could be the basis of a new way to deal with compensation.

Just a thought.

A fourth way to fund regulation?

Regulatory update for Financial Advisers & Paraplanners

22 Jan 2019

A fourth way to fund regulation?

First of all Panacea followers, this is our 1,000th Bento. Given this landmark status, I felt that it should contain something special, and with that in mind, I would like to make a heartfelt suggestion or two about how the regulation and protections in the financial services industry could be re-engineered, for in regulatory parlance, better regulated firm and consumer outcomes.

This is quite long, but it needs to be to articulate conceptual thinking that can be taken forward and developed.

In a scene from ‘Wall Street: Money Never Sleeps’, the great Gordon Gekko defines financial services moral hazard as “when they take your money and then are not responsible for what they do with it”.

But being responsible is what the financial industry should be about, we have reached a stage that the responsibility should fall on all as the few who mess it up never have the resource to put things right.

There is an urgent need to find a better way to fund the cost of delivering confidence and developing consumer protection. At its core, the funding the seemingly endless liabilities for consumer compensation regarding ‘inappropriate (bad) or unsuitable advice’ and/or failure of product.

If not found, the only way to even think about evaluating the worth, let alone seeking access to advice, will become so expensive only the very rich will be able to seek it out and the entry of new firms impossible.

That in turn creates further problems to those provider firms who rely almost totally on intermediated distribution.

A leading provider CEO observed only this week that: The truth is that we currently have a mixed economy in terms of compensation for mis-selling, product flaws, etc. Individual firms have primary liability for their actions and the wider FS industry carries the costs of systemic regulation and systemic failures (FSCS). Whilst everyone grumbles about this it is pretty sensible. Firms have real incentive to ensure that their activities are meeting standards, but the overall system has a backstop to maintain public confidence”. 

He is quite right, but how regulation and consumer protection are funded is what I see as the problem and not the responsibility focus where the ‘who pays’ door has slammed shut.

The problem:

Currently regulation and the compensation culture based on consumer expectations, fraud, advice failure and entitlements has presented the financial services industry as a harvesting opportunity for limitless cash calls from lawyers and consumers, who some may argue, should take some responsibility for their own actions and not always expect the financial services industry to compensate for circumstances that were quite possibly of their own making or not the intent of the advice channel at the time of giving the advice.

Financial products are predominately ‘purchased’ as a result of adviser recommendation, this can now include sales attached to products such car purchase. This distribution of intangible products is often referred to as intermediated distribution. The latter outlets, although regulated, are rewarded by way of commissions.

Pretty much all life, pension, protection and investment product providers do not sell or distribute what they design and build and have not for decades. Instead they rely on third parties. That party is the adviser community, tied, restricted or whole of market. That distribution method became predominantly fee based on 31st December 2012, excluding protection products and mortgage related advice.

Many argued that this date spelt the end of mass market access to financial advice and the beginning of a more professional era where if you could not pay, or were not deemed financially worthy, customer segmentation by advisers ensured advice was not coming your way any time soon, or at all.

However, it seems that when the adviser advice, rather than what was previously known as a sales process, all goes wrong, a derivation of Billy Bennet’s thirties music hall ditty seems to apply. Something along the lines of “it’s the rich what has the pleasure and the poor that gets the blame”.

In this case read IFA for ‘the poor’ as the blame always falls at the advice door.

And in some cases that blame may be correctly placed but irrespective of that, IFA firms are not always financially well-resourced to compensate. This simple fact is the cause of the big problem the FSCS, PI insurers and firms left who pick up the cost of the clear up face.

Poorly, yet still compliantly capital adequate firms often collapse after a big call of money from the FSCS or even a single successful complaint and unaffordable compensation payments.

The regulatory year 2018/19 with just over 3 months to go, has seen the FOS refer 273 cases from around 74 companies to the FSCS. For these firms, Sipps accounted for 39% of FOS casework, PPI 28% and portfolio management 9%. This in turn will see more complaints against those firms hit the FSCS as the FOS will wash their hands of them as they will be placed in default.

Smaller IFA firms often do not use limited liability protection options, instead using their personal assets to satisfy capital adequacy. For many established firms adequate capital adequacy and affordable, operationally functional PI to ride out a bad advice claim award is difficult to get because of a very restricted pool of insurers and a continuing slew of claims for unregulated products being distributed by regulated entities.

Limited liability protection actually increases the risk of firms failing.

As PI cover is arranged a year at a time, any claim or notification of a claim in the current policy year, with a diminishing pool of reinsurers and huge premiums, could be curtains at renewal in the next year, no PI = no business.

Although there are always exceptions in commercial life, very, very few businesses set out to disadvantage clients for their own gain. It seems in today’s world of financial services that the collapse of firms can often be brought about because of a failure to get compliant PI, a big (even small) FOS redress order, or a flood of unexpected FSCS calls for cash from the misdemeanours of others. This in turn sees reducing adviser numbers that in turn presents fewer firms to pay ever increasing liabilities of others as they fail.

All this is really not helped by a consumer perception, as noted above, that all financial products and advice present an opportunity for a ‘refund’ many years later if what was suitable at the time of the advice is not seen that way, say, 15 years later due to changed client circumstances, changes in their aims and aspirations that applied at the time of advice.

Why? Very simply because there is no longstop, something that applies in just about every commercial walk of life. After six complete years from the date of the transaction there is no redress for bad service, goods or advice as commercial law does not permit it. In the world of financial services, it is forever, although I note that the FOS is now exercising the six years plus three rule a bit more.

In the summer of 2018, Panacea ran a FOS survey whereby 83% of respondents felt that FOS complaints process places them in an automatic position of guilty until proven innocent. The outcome should be determined by the evidence available and/ or the balance of probability. Often, that is not seen by firms as being the case. No file, because the case was more than say seven years in the past, does not help. Equally so if a file is retained, data protection could come back to bite as record keeping beyond seven years could be seen as a breach.

It is all well and good suggesting that the polluter pays from a compensation point of view, but the reality is they cannot because the pollution has proved so toxic, they just died along with everything else in that murky pond. In other words, the death of the polluter means they can never pay.

Now to go off piste, bear with me…

In 1970, I started working in the Lloyds marine re-insurance market. My ‘learning’s’ area of expertise was around reinsurance and claims, very specifically the ‘Torrey Canyon disaster’ of March 1967, the claims were still being worked on three years later.

As any insurer will tell you, you need to spread the risk base you hold, advisers take note. To do that you need to reinsure to protect yourself as a ‘name’ and your business. This is common place with life assurance products.

For those who do may not know, back in the ‘60s and 70’s Lloyds syndicates (the collective of insurers) operated in what was at the time the biggest open space room in the world opposite the current Lime Street current location.

Their individual ‘office space’ was referred to as a ‘booth’ paying homage to the coffee shop heritage that started Edward Lloyds concept in 1686. Each booth contained specialist syndicate underwriters who took a view on a risk, like Torrey Canyon, and signed up to insure it. No computers, just a piece of paper and in many cases a quill. The back office was another world of paper, comptometers, typists, and clerks but it all worked.

The super tanker SS Torrey Canyon hit rocks off the coast of Cornwall.

What was different about Torrey Canyon was the scale. The ship, one of the new generation of tankers, had been lengthened with the insertion of a new, larger mid-section. She was carrying, on a single voyage charter, nearly 120,000 tons of crude oil from Kuwait to Milford Haven in South Wales. Being deeply laden, she had to catch the late evening tide for berthing. To save half an hour and avoid a wait of five days, the Italian master took a route to the east instead of the west of the Scillies.

Those Italian captains eh, where has that happened since?

When the tanker struck the Pollard Rock, thousands of gallons of crude oil, a filthy chocolate-coloured mess, started spilling from her ruptured tanks. Detergent was sprayed continuously to disperse the slick, but it was like trying to hold back a tide that Canute would never even think possible.

Eventually the RAF and Royal Navy bombed it, using it as target practice. The idea was to burn the wreck and oil, still on the surface, as a final solution.

But beaches were left knee-deep in sludge and thousands of sea birds were killed in what remains the UK’s worst environmental accident and the minimal quantifiable cost, in other word insurance claim, was £14.24m, in today’s terms that would be some £249m. The losses were incurred on the hull, the cargo and the consequential losses a disaster can cause.

This massive claim threatened to put some Lloyds syndicates out of business as Lloyds always paid claims. If an individual Lloyds syndicate member, (a ‘name’),’ could not pay, their personal worth along with all those others who invested in the risk carrying syndicates were expected to pay. If you could not, your business was at severe, terminally and very legally seizable risk as were your personal assets and wealth, and all in cash.

Unlike IFAs their risk continued, a bit like PI today, for a specified policy period and a specified amount.

Matters were made worse because of a quirk in the risk assumption management and its spread.

Most syndicates would reinsure (spread) the risk on big bits of kit, like a tanker. A spread of risk with others who were not directly involved in insuring the vessel. But the complexity and size of the risk and the claim meant that reinsuring saw the risk spread back to the original insurer syndicates with the reinsurers reinsuring their risk.

Reminds me a bit of the 07/08 financial crisis, securitisation of mortgage debt bundles but not knowing what was in the bundle you brought. Reinsurance could be many layers deep.

As a disaster comparison in 2010 following the explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico, insurers, Lloyd’s paid out over $600m.

So how does this connect with the problem?

Some thoughts for the FCA and HM Treasury.

Every regulated firm, there are some 50,000, of whatever type (from car finance, to pet insurance, to funeral plans, pensions providers, life insurers etc) should pay a simple percentage of turnover to the FCA each year as a new type of ‘all inclusive’ regulatory fee to cover ALL the cost of delivering regulation, FCA, FOS but not the FSCS as this idea would see their need removed, building, quickly, a financial services fund to pay for when things go wrong (similar to the Pension Protection Fund?).

The complete opposite of the polluter pays and in complete harmony with the Lloyds ethos of spreading the risk.

This clearly defined cash ocean is locked, and if need be in the beginning underwritten by the Treasury, rather like the FSCS is today.

It should not see HM Treasury doing a cash grab on surplus funds as it has done with fines. Build up surplus, rather like the three-year Lloyds accounting period before profits are realised and use that surplus to reduce the cost of regulation with fee and fine offsets.

This pool of cash would be to specifically deal with investigating consumer detriment for regulated products and advice only. Claims could only be arbitrated at minimal cost to either side by the FOS with the outcome being determined by the FOS with a low-cost form of independent appeal for each party.

The FOS should operate by assessing claims on the six years plus three rule, the basis of evidence available and/or the balance of probability and not by way of retrospection.

In the case of ‘guilt’ there should be an element of affordable excess and redress payable by the firm, again set as a percentage of turnover. This should mean that firms do not go out of business because of a claim or a claim against others.

There should be a very strict bad behaviour ‘two strikes and you are out’ standard or where redress amounts are above a certain level and you are out ruled out of further activities, possibly even first time.

Regulated advisers should only engage in regulated products.

There would be no need for individual PI as the FCA should/ could, rather like huge corporates, self-insure by way of the fund created and in the event of a ‘Torrey Canyon’ the FCA could have in place a reinsurance pool made up of many insurers, PI or otherwise to remove any doubts of being selected against.

Tear up the current protocols, the status quo needs something a bit different.

Let’s do a little maths:

  • In 2017 £22.1 billion of revenue was earned by retail intermediary firms in 2017 from insurance, investment and mortgage mediation activities, compared to £20 billion in 2016. Source FCA
  • Over £300 million was paid by firms in Professional Indemnity Insurance (PII) premiums in 2017, Source FCA
  • The FSCS paid in claims to the year ended March 2017 £375,262,000 (£130,362,000 was recovered) source FSCS Financial review page 47
  • The biggest single cost to the FSCS in that year was £306,246 in interest source FSCS Financial review page 47
  • There are some 50,000 firms across many business areas that are registered with and regulated by the FCA

So, if every firm regulated by the FCA paid 0.20% of their turnover each year, based on the above numbers some £442m would initially be raised. There would be no need for PI cost and a sum could be set aside to reinsure easily covered within that 0.2% cost.

This thinking is not about presenting firms with a low-cost way to be reckless in their advice, it is not about bringing advice to the masses in its purest sense. But it is a starting point?

As the leading provider CEO further noted: Your suggested approach will only affect advisory firm behaviour materially if it leads to greater socialisation of all of the risks across the sector, and so reduces risk of ruin for advice firms.

The description of my thoughts as “socialisation” is very astute.

He did add a caveat that “this in turn runs the risk of too many firms taking higher risks because they don’t have to bear the brunt of their actions to the extent that they do today”.

But I beg to differ. Money is being made in the ‘industry of compensation’ that would be better used by ploughing it back to the pot, confidence would be restored, bad business put out of action very quickly and all that money saved on a firm level basis put to providing lower cost, easier access to advice, better regulated products and services created with foresight to ultimately benefit the consumer rather than hindsight to compensate them.

I hope that this very brief summary could be the basis of a new way to deal with compensation.

Just a thought.

Go to immediately jail, do not pass go

Panacea comment for Financial Advisers & Paraplanners

7 Jan 2019

Go to immediately jail, do not pass go

On day two of 2019 yet another IFA has been jailed for fraud. Neil Bartlett, 53, of Delamere Road, Ainsdale, used £4.5m of his victims’ money to fund some of the usual, favoured by all fraudsters, indulgencies of foreign travel, top hotels, prostitutes, exotic cars, boats and gambling.

In this case, again, like so many others, it involved investing other people’s money, pensions and often life savings into what they thought was a safe investment account with interest.

By safe, that means it is being paid to the advisory firm to disperse according to the advice plan. But in a not uncommon twist, Bartlett had created a sole trader account with the same name as the company he worked for and paid himself the money.

It is clear that in just about every case of fraud it involves client money being paid to a client account for onward distribution. Ninety-nine times out of one hundred all goes as intended but it is the one time that results in what we see again and again in client money fraud.

Readers may wish to Google search (other search engines are available- in BBC speak) fraud IFA 2018 where the scale of this fiscal disembowelling can be viewed. It is in millions and guess how it is dealt with?

This type of fraud is called, in legal vernacular a ’Serious large-scale confidence fraud’. A common factor is the targeting of known to be vulnerable victims. Also, they will often be multiple frauds, i.e. many victims are deceived in the same way.

As an example, this accusation could be levelled at the victims of the British Steel pension fund debacle.

These offences are usually charged under the Fraud Act where the maximum sentence permitted by law is 10 years imprisonment.

For this adviser’s type of fraud, sentences of up to 7 years are common if the fraud is in excess of £500,000.

For the now ex IFA, the sentence will see early release for being a good ‘boy’.

I am not sure if the FSCS ever try to recover from the now ex IFAs or indeed if asset confiscation is possible to offset some of the redress, but one thing is for sure, no matter what regulation is put in place, what checks are made, the opportunity is still there for this practice to continue.

When I was a broker consultant in the early ‘80’s, some IFA firms, referred to then as brokers, had client accounts’ and operated something I recall as being broker bonds. A bit like a wrap or platform investment in a way but it was in house.

I cannot recall any frauds but there were regulatory concerns and also concern from my employer at the time that this holding of client money where the investment was in an inhouse designed and built vehicle could be subject to abuse.

So, role on and working lifetime and fraud opportunity continues in abundance. The cost to clients when the opportunity is exploited is massive, the cost to the compliant firms is huge too and of course unexpected when the FSCS come calling.

The time has come to put a stop to regulated firms holding client money when the intended destination is to a regulated providers funds, wraps, platforms. As an extra measure, despite all the good arguments put forward by IFAs, regulated firms should NOT be allowed to deal in unregulated activity or markets, this would relieve the burden on PI insurers, FCSC calls and IFA firms when a regulated advice firm advises upon unregulated products. Unregulated products are often just that for a reason.

The ability of consumers to execute instant electronic transfer of funds really renders holding client money an unnecessary and expensive temptation. To stop this would see PI and other regulatory costs reduce and go some way to restoring trust in an industry, sorry, profession, that has taken a battering and will continue to do so every time money ends up in the hands of someone or something it should not.

Just a thought.

In the business of crime there’s two people involved

Panacea comment for Financial Advisers and Paraplanners

13 Oct 2017

In the business of crime there’s two people involved

It was during this same month six years ago that I first read with some dismay, but an overall lack of surprise, that the then FSA had opted not to license or pre-approve financial services products, due to what it claimed were a “lack of resources”.

I’m sure I don’t have to remind anyone reading this that back in 2011 the consumer had already faced considerable detriment as a result of financial products such as PPI. And the regulator’s helpful response almost every time was to point out flaws in product design, marketing or understanding of the product – all with the benefit of hindsight.

Fast forward to 2017 and the same issues rumble on as a result of the regulator’s inaction to preapprove products before they are made available to consumers. Around this time last week, for example, the news broke that the FSCS had begun accepting claims for bad investment advice in relation to a failed property scheme Harlequin.

Anyone invested in Harlequin would have, at first, been deemed ineligible for FSCS compensation as the product would have been considered a direct investment. But the FSCS reviewed this position and found new evidence that the Harlequin products likely fall under the banner of unregulated collective investment schemes (UCIS), which qualifies them for FSCS protection. The FSCS is also already paying claims against firms for bad mortgage advise and pension switching, if the underlying investment was in a Harlequin resort.

If I’ve said this once I’ve said it a hundred times and I’ll keep doing so in the hope that one day the regulator will finally see the light: regulation should not be about being wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen again. To licence a product as fit for purpose, with that purpose clearly defined, as part of the regulatory process is the surely best way of achieving this? I’d even go one step further to say it’s the single most effective consumer benefit a regulator could put in place.

The situation with Harlequin, and most other examples for that matter, are always about the advice and not the product. The FCA has been careful to point out that any adviser recommending Harlequin was expected to have carried out thorough due diligence on any Harlequin investments “to fully satisfy themselves that it is a suitable investment”.

In no way aim I suggesting due diligence isn’t a crucial part of the advice process but let’s consider a slightly different approach for a moment. If products were regulated from the outset, and advisers regulated by the FCA were not allowed to engage, at all, with unregulated products – commission paying or not – problems and losses such as this would not happen. And crucially, the tab would not have to be picked up by the FSCS.

I’ve been suspicious for a long time now that the FCA’s decision back in 2011 was really nothing to do with resource and instead was all about responsibility and, ultimately, who the finger points at when things go wrong. Sadly, this latest development in the Harlequin case only confirms my suspicions yet again. It seems that without something to bash the regulator would perhaps feel it has no purpose, or as Keith Richards of the Rolling Stone’s, not PFS, once said of the policing system, “in the business of crime there’s two people involved, and that’s the criminal and the cops. It’s in both their interests to keep crime a business, otherwise they’re both out of a job.”

Some have suggested that the resource needed by the FCA to pre-approve products would have resulted in a huge increase in fees. But then there’s the alternative, logical, argument that perhaps if products were licenced there would be fewer failures to fund? Just a thought…

FSCS levy and some blue sky thinking

Regulation comment for Financial Advisers and Paraplanners

31 Oct 2016

FSCS levy and some blue sky thinking.

We hear that the new chief executive, Andrew Bailey, has confirmed the introduction of a product levy will be considered as part of the regulator’s upcoming consultation on the funding of the Financial Services Compensation Scheme.

The time is right for Mr. Bailey to also consider (alongside this very sensible idea that always seems to get ‘kicked’ into the long grass) the use, or in reality, the miss use of banking fines in this consultation?

FCA fines were to be used to offset the cost of regulation. But not any more.

Why, well here’s the thing as they say.

Over the last century or two the nations wealth and success was built on our vast below ground natural resources.

Coal, tin, oil, sand, cement, gravel extraction have all played their part but many fear that these resources have a limited life as dwindling stocks make it more expensive to recover.

Alongside all natural resources there is a tax raising opportunity but if stocks of natural resource reduce or become exhausted this will, in turn, see tax revenues reduce and that spells trouble for HM Treasury.

But the nation has turned to another ‘natural resource’ because of some very clever HM Treasury ‘fine-fracking’ on the part of the last government

This table contains the FCA’s own information about fines published during the calendar year ending 2016 and up to the 12th October.

The total amount of fines levied so far in 2016 is £22,127,442.

  • In 2015 £905,219,078 was levied
  • And in 2014 £1,471,431,800 was levied.

The FCA will deduct its costs from these huge amounts and the rest will go to HM Treasury. The FCA was obliged by statute to pay away £1.370bn of the 2014 fines to the Treasury, the equivalent of 70% of all alcohol and tobacco levies for 2014.

In April this year the FSCS announced a £337m levy for 2016/17.

The FSCS levy in 2015/16 totaled £319m.

So over the last 3 years some £2.4bn in fines has been levied that could have seen zero FSCS levy for a good number of years with the polluter paying. Just do the math!

Banking fines should be used to reduce the burden of regulatory cost, in particular that of the ‘oh so’ contentious FSCS levy that hits, in particular, small IFA businesses the hardest.

Any thoughts yourself?

Do let us know here via our quick survey, details will be shared with Mr. Bailey.

FSCS and the release of data, your data

Panacea comment for Financial Advisers and Paraplanners

24 Oct 2016

FSCS and the release of data, your data

Advisers may be concerned to know about the continued, contentious handling of personal data by the FSCS where claims are received.

In particular where the adviser has retired and the firm in question was NOT in default of the scheme some 20 years later.

With regulators looking at personal responsibility from company directors, in the words of Hector Sants, all advisers should be very afraid, and to the grave it would seem?

When a ‘consumer’ approaches the FSCS (looking to claim compensation) as the firm from whom advice was obtained is no longer trading and not in default (as the adviser has retired) the FSCS, if requested by the ‘consumer’, is releasing information as to the whereabouts of that now retired adviser, whether or not the adviser has consented to that release.

In correspondence seen, the FSCS is stating that it has the right to release such data when requested; quoting guidance it says it has from the Information Commissioners office (ICO).

This states, “ Where the FSCS has rejected a claim for solvency reasons (firm not in default) and the consumer wishes to pursue a claim, disclosure is permitted under the Data Protection Act 1998.

They go on to refer to the fact that they have received guidance from the ICO to that effect- providing this summary. 

Now here is the situation, and advisers should rightly be very concerned as this could happen to anyone and illustrates only too well the need for a longstop.

The date of the advice being claimed against (relating in this case to affordability surrounding a mortgage protection policy with CI) was in 1997, almost 20 years ago.

If the firm was in default and the FSCS did accept such a complaint, it would be dismissed as they do recognise the longstop.

The advisory firm- a partnership in this case, closed in a correct way in 1998 with full PIA regulatory approval and it is not in FSCS default.

The adviser made it clear that he did not wish his address to be given and he gave some specific, valid reasons in response to the FSCS’s asking.

These reasons were dismissed out of hand, without any explanation as to why other than to refer to ICO guidance.

The adviser told the FSCS that he would complain to the ICO. He felt it was unfair to release his details when the firm was not in default and that the complaint would have been dismissed under FIMBRA, PIA and FSA rules as well as the FSCS own rules by way of being out of time on so many levels, including the FSCS’s own application of a longstop.

As a result the FSCS then advised the ICO, to whom that complaint about data release was made, that the complaint was made to “delay the consumer in getting compensation”.

The FSCS, in saying it can release data so long after the date of the advice being given, reasons that “considerable weight has to be given to the legitimate interests of the customer”.

In this case the decision seems very unfair, surely the adviser has rights too?

Tell us what you think about the FSCS and especially their funding in this short survey, have they got it right? We think they have not.

Do you?