Tim Sargisson: A look back in anger
The Christmas break offers the perfect chance to respond to the FCA’s proposals on overhauling the FSCS – and respond the adviser community must, says Tim Sargisson, to ensure its combined voice is heard on this critical matter
Looking back on the various blogs and articles that I have penned in 2016, one topic has grabbed headlines throughout the year and that is the continuing iniquities inherent in the Financial Services Compensation Scheme (FSCS).
The scale of the threat posed by the FSCS is laid bare by the eye-watering sums involved, where the scheme paid out £271m in the year to the end of March and received more than 46,000 new claims. It’s the sharp rise in levies that has provoked the ire of the advice community and which poses the greatest threat, together with the fact that while the FSCS should be a last resort, the scheme has increasingly taken on the role of “first line of defence” when a firm fails, a fact that is not lost on the FCA.
This commentator provoked the anger of the adviser community by suggesting the amount of levies is a problem entirely of our own making and therefore advisers should suck it up and pay up. After all, £77m of this sum is in regard to bad advice about using pension freedoms to transfer money into a SIPP and holding it in what the FSCS calls “high-risk, non-standard asset classes, which have often become illiquid”. In other words, investing that money into ‘dodgy’ investments. My myopic view was largely anecdotal and drawn from my experiences from my time in provider land and running SIPP firms and the constant demand from adviser firms wanting to find a home for investing in ethical forestry, Cape Verde property, life settlements, carbon credits or other such rubbish.
What we have since learned this month from the FSCS is that there are four advice firms which accounted for 73% of SIPP claims. In other words this failure isn’t down to systemic flaws in the advice process as a whole, but more a failure of regulation, which many of you have been saying for a long time. As an example of a regulatory failure writ large, one of these firms – TailorMade Independent provided advice to over 1,661 customers who invested £112m in unregulated investments between 2010 and 2013. These included green oils, biofuels and overseas property with 923 invested in overseas property developments run by Harlequin. According to the FCA, the FSCS has already paid out £40 million in relation to 919 claims.
But it is not simply a failure of the regulator to proactively exercise its operational objective to protect consumers by administering a surgical strike to deal with these instances at a much earlier stage; the other failure is businesses’ botched approach to managing conflicts in their firms. From my James Hay days, I remember visiting TailorMade Independent, because they wanted to ‘partner’ with a ‘respected’ SIPP firm; to use their words. The meeting was brief and my advice for readers of this column is that if you arrive for a meeting and there is an Aston Martin in the MD’s parking bay, you might want to think carefully about who’s paying for that shiny lump of metal. If these investments make money for anyone, it is usually the high commissions for the introducers.
However, the specific conflict I’m referring to is the smaller SIPP firms employing a USP which was basically allowing their products to hold investments which larger firms wouldn’t touch. This provided a route to market for all manner of toxic stuff which we now see starting to unravel. Firms need to understand that failure to manage conflict leads to an increase in risk and part of that risk is the understandable reluctance on the part of investors to pay fees if their SIPP assets are worthless. I see one SIPP firm that provided a home to Harlequin is suing investors for non-payment of the fees. All I can say is good luck with that.
The good news as we wave a fond farewell to 2016 is the radical overhaul put forward by the FCA, where riskier firms will shoulder bigger contributions into the financial compensation fund. The “polluter pays” approach means that those companies that sell products or undertake activities that the regulator deems to be riskier than others pay higher levies. In addition firms whose “behaviour reduces risk” would be eligible for discounts on their levies.
The FCA has posed 31 questions in its consultation paper but there is only a handful that advisers need to focus on when drafting a response. The Christmas break provides the perfect opportunity to respond, and respond we must, to ensure the combined voice of the adviser community is heard in regard to such a critical matter.
On that note let me take this opportunity to wish you all a merry and relaxing Christmas and New Year break and a healthy, wealthy 2017.
Published on 20th December 2016
