Cosmo Gibson
Conduct Policy Division
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
20th July 2012
Dear Sirs
CP12/9 Consumer redress scheme in respect of unsuitable advice to invest in Arch cru funds
We are pleased to submit our response to the above Consultation Paper.
We believe that a robust regulatory environment is important in terms of consumer protection but a fair balance needs to be struck between ensuring consumers are properly compensated for the mis-selling of the Arch cru funds and the undoubted damage that will be done to firms who did not recommend these funds but will be expected pay a significant part of the cost of compensation.
Primarily we did not recommend these funds because we did not see them as low risk and indeed their opaqueness goes against the transparent nature of the investment funds we choose to recommend to our clients. We therefore find ourselves in almost total agreement with the findings in this Consultation Paper with one very important exception.
We intend therefore to restrict our response to just one question that is posed in the Consultation Paper:
Q9 Do you have any comments, or evidence or analysis to add, to our cost benefit analysis?
We are fearful that the Consumer Redress Scheme is goings to substantially damage the intermediary sector and in particular those IFA firms who themselves were not responsible for the mis-selling of the Arch cru funds. It is apparent from the content of Annex 1 that the FSA itself is unable to provide any reassurance to those of us who have no direct compensation to pay, that the scheme will not substantially fall upon the FSCS.
The Cost Benefit Analysis explains that at least 30% of the suggested £110m cost will fall on FSCS and we believe that is a substantial understatement of the true position In our view the impact upon the FSCS is going to be much more dramatic than that. Firms will fall into the following categories
* They will have sufficient financial resources to pay any monies due under the Consumer Redress Scheme and the FSCS will be unaffected.
* For some firms such compensation will be covered under their Professional Indemnity Insurance policy (PII) and the firms will have sufficient resources to cover any excess payments. The FSCS will be unaffected.
* However such firms may then not be able to renew their PII in the future and may fail in which case the FSCS will have to pick up any future claims arising. We have just seen that the recent failing of Honister Capital Ltd who were unable to renew their PII has resulted in FOS agreeing that claims submitted in respect of one of the firms in that group having client claims should be passed to the FSCS.
* Some firms compensation will be covered under their PII but the payment of multiple excess payments under the policy will cause the firm to fail and some liabilities will fall on the FSCS.
* Some firms will not be covered under their PII and their capital adequacy requirements and position will be such that multiple claims will cause them to fail and their liabilities will fall on the FSCS.
* As already identified in the Consultation Paper firms may already have failed and the cost of the Consumer Redress Scheme for those firms will fall on the FSCS
* Many small and medium sized firms will not have access to further capital and will fail with liabilities falling upon the FSCS
Unless and until the precise position of those firms who have mis-sold Arch cru funds is identified, the Consumer Redress Scheme is faulty and inequitable because it is not “firms who have mis-sold” who will be required to pay redress but firms who have not mis-sold who will have to do so.
It will not be the ” polluter who pays” for this scheme.
Firms are already suffering under successive FSCS levies and the consequences of the Consumer Redress Scheme will be to further damage, in some cases irreparably, those intermediary firms who have not mis-sold.
We do not believe that the Cost Benefit Analysis represents a true picture of the unintended consequences of this scheme.
The inability of the FSA to precisely identify the true cost of the scheme that will fall upon the FSCS means it is impossible for IFA firms to predict the future cost of their FSCS levies. This inability to predict means that firms are unable to determine with any precision how much cash they need to set aside to cover such future expenditure.
Even for a modest firm of our size we believe that levy costs will run into tens of thousands of pounds. Money that cannot then be invested to provide our customers with a better client experience.
I have repeated below some of the very imprecise language of the Cost Benefit Analysis and this is clear evidence that the consequences on the “non-polluter” are unknown. It simply cannot be right that the proposed scheme can become binding unless and until the regulator can clearly state the precise impact on non-Arch cru selling firms.
Point 8 How was the £54m of Capita Payment Scheme arrived at? How can any compensation be calculated without all parties knowing the basis of that calculation?
“we estimate that up to £33m of the £110m will be paid by the FSCS taking into account that some firms may fail under the proposed redress scheme” This makes it sound as if it is the FSCS money. It is not it is money that will be taken from the accounts of IFAs who had nothing to do with the selling of Arch cru.
Point 9 here you do at least state that it will be paid by “other firms via the FSCS in cases where firms fail”
Point 10 we agree that consumer confidence is indeed enhanced by a robust system of making firms that have mis-sold pay redress. Little comfort though is to be gained from the financial damage this imposes on those firms who did not mis-sell.
Market Impacts Point 17 little comfort is also to be gained by the analysis of known sellers indicating that “around 30% of those firms may potentially breach their regulatory capital requirements”
In our view the domino effect of firm failure which adds further burden to other IFAs, in the form of further FSCS levies, is massively understated in the Cost Benefit Analysis. We strongly urge you to consider the unintended consequences of the outcome of the Consumer Redress Scheme which will be to drive IFA firms out of business even though they are not the ones who have mis-sold this product.
At Point 18 you claim that “The FSA requires firms to have sufficient professional indemnity insurance” Has the Cost Benefit Analysis been based on a survey of Arch cru selling firms to establish if they are covered by PII? This would be a relatively simple exercise to carry out and may well inform you of a PII position that might actually mean more than 30% of firms failing.
Your suggestion that “some firms may have the ability to raise further capital over and above what they currently hold” is un-quantified and provides neither quantitative or qualitative data to support the Cost Benefit Analysis.
Point 19 you admit that you are unable to estimate the extent of claims other than Arch cru which will fall upon the FSCS in respect of failed firms who fail because of the Customer Redress Scheme. This is very worrying indeed
Summary
We agree that redress is needed where a consumer has suffered financial disadvantage where they were mis-sold Arch cru funds. We believe that the Cost Benefit Analysis seriously and dangerously underestimates the damage that will be wreaked on non- Arch cru selling firms.
We strongly urge you to think again about how the redress scheme is to be implemented before it irreparably damages firms not responsible for the mis-selling.
Yours sincerely
Nick Bamford APFS AIFP
Chartered Financial Planner
Executive Director
