We have been doing a lot of bleating in recent months (for good reason I hasten to add) because the cost to our business of funding the Financial Services Compensation Scheme (FSCS) is getting out of control.
We forecast, based on actual payments to-date this year and estimates of what is to come, that our contribution will top £50,000 in 2012.
That is a lot of cash for a mid-size firm like ours.
We would much rather spend it on staff or systems and processes to improve our client service because that is what our available cash should be for.
Now don’t get me wrong, we absolutely support the need for a robust compensation scheme so that if things go wrong and the firm that caused the problem for the client is no longer around to pay compensation, the client is not disadvantaged.
But things have got massively out of control and the whole funding system for the FSCS is getting to a tipping point where it may break down.
To be fair to the regulator, the Financial Services Authority, it has called for a review and the outcome of that review should be known later this year. But at the moment we are living with a real problem.
Now some might argue that the problem is a problem of our own making. By ‘our making’ I mean the IFA community.
An example of this might well be the Arch cru debacle. This was a fund (or more correctly a series of funds) that have collapsed because of alleged fraud behind the scenes.
There is a reasonable argument that an IFA could not have predicted this and I don’t disagree. But having said that, a simple bit of due diligence, for example noting the nature of the underlying assets of the fund, would have confirmed that this fund was not suitable for ‘cautious’ or even ‘balanced’ investors (despite the glossy marketing material and sales pitch suggesting otherwise).
Certainly our own research notes at the time the fund was marketed tell us to avoid the fund altogether (we are not trying to be smart here, it just made no compelling sense to us to recommend this fund).
At the moment there is a lot of blame game going on.
IFAs blame the ACD (Capita) and others involved in the fund (HSBC and BNY Mellon) who together have created a compensation fund of some £64m.
They blame the FSA for not having regulated the Arch cru funds as well as not being transparent about the way they and the above firms arrived at the £64m compensation fund.
We are also joining in the blame game by blaming our fellow IFAs for the absence of or weak due diligence that they did or did not carry out.
We are also blaming the regulator for a potential consumer redress scheme of some £110m on which they are consulting, knowing that at least a third of the IFAs who would have to pay that redress already fall on the FSCS. So we will have to pay for it through a further levy!
If you are reading this and have reached the point where you think this is chaos then you will not get an argument from me. But back to my original question. How much due diligence can an IFA do?
My answer is that they can at least read the brochure and challenge the thinking behind the marketing message. After all that is why you presumably employ an IFA in the first place.
An element of an Arch cru fund might well have been suitable for some clients, perhaps those who took a more adventurous investment view, but it simply was not suitable for cautious investors and certainly should not have represented a significant part of any individual’s portfolio.
At least that was the result of the due diligence we carried out.
We stand or fall by the advice we provide. If we advise a client to invest in a risk asset then we expect them to understand that they can lose money. Even a cautious investor may have some of their money exposed to risk but it would be wrong for them to be in a fund which is much riskier than the marketing material states.
That is where IFA due diligence should work. With Arch cru it didn’t work. And now we have every right to bleat because we have to pay for it.
