Rough Justice

Today I received an invoice from the FSA for our interim (which I understand to be provisional) “share” of an £80m bill. This is in relation to the Financial Services Compensation Scheme (FSCS). Our clients probably don’t know that three companies, Pacific Continental Securities, Square Mile Securities and Keydata Investment Services all went bust, with their clients rightly claiming compensation. These organisations sold duff products, whilst being regulated by the FSA. Moreover, they marketed their products so that other IFAs also sold the same duff products.

One of my favourite financial journalists Nic Cicutti, who has a fairly acerbic pen and is not generally a huge fan of IFAs (for good reason) recently wrote for Money Marketing (24 Feb 2010) in relation to the shared fine due to the Keydata fiasco:

“…I naively thought it would not take the FSCS and the FSA between them a nano-second to see that it was nonsensical to make IFAs pay for this firm’s collapse. How wrong I was. Last week, it was announced that, in addition to Continental and Square Mile, which will cost IFAs a whopping £27m, Keydata’s contribution to the bill that IFAs face having to pay would be a whopping £43m. As one or two of you may have realised, I am not generally renowned for being a great fan of the IFA industry. However, this levy is an outrage. It offends every sense of natural justice, for a number of reasons….”

(full article here)

We didn’t (because the products were duff) and indeed I even thankfully got a couple of people out of Keydata products. That said, the FSA need to collect the money from someone… so they share the bill across the remaining IFA community – even though the vast majority never had any dealings with any of these companies.

I hate to bleat, but this just doesn’t seem like a fair system to me. As we move towards 2012 it is estimated that something between 10% and 25% of IFAs will elect to leave the industry due to changes being implemented (clear charges, higher qualifications, more buffer money in the bank). To my mind a shrinking industry suggests future “shared” fees are only likely to rise. As part of our own business plan to be 2012-ready, we clearly have to have a sustainable business model. Our costs rise every year – and this seems to be a problem that every IFA I speak to shares. Inevitably we have to cover this sort of cost like any other, which ends up being priced into our fees. The Catch-22 scenario ensues of wider industry bad advice leading to complaints which ultimately consumers at large end up paying for.

I’m not convinced that the system is anywhere close to being sustainable. I fear that it is severely broken if advisers that are “not guilty” are treated and charged as though they are. Ironically, you as clients have no protection from being advised by a firm with good practices when additional costs incurred by the wider industry.

Naturally with the credit crunch and the complete mess of a financial services industry, it will be interesting to see if the next Government addresses this issue. The cynic in me knows full well that raising taxes on investments merely means that investment products end up with higher costs, in the end we all pay. It’s almost as though we end up insuring ourselves from ourselves, which is simply mad. Sorry to bleat.