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Bills, bills, bills: 10 FSCS tales from the last 12 months

As advisers contemplate a £24 million supplementary levy, we round up some of the biggest Financial Services Compensation Scheme stories from the last 12 months.

In July last year we reported that the Financial Services Compensation Scheme (FSCS) had paid out £105 million for claims connected to Sipps in the period 2016/17.

According to its annual report at the time, 3,565 consumers had made claims about advice they received to transfer out of occupational schemes in favour of investments in 'risky assets' held within Sipps.

FSCS chief executive Mark Neale (pictured above) said that the period 2016/17 had shown 'that our workload can be volatile and unpredictable.'

In July last year we reported that the Financial Services Compensation Scheme (FSCS) had paid out £105 million for claims connected to Sipps in the period 2016/17.

According to its annual report at the time, 3,565 consumers had made claims about advice they received to transfer out of occupational schemes in favour of investments in 'risky assets' held within Sipps.

FSCS chief executive Mark Neale (pictured above) said that the period 2016/17 had shown 'that our workload can be volatile and unpredictable.'

Also in July the hefty FSCS levy prompted the then chief executive of St James’s Place (SJP) David Bellamy (pictured), to bemoan small IFA firms' inability to keep up with regulation.  

Speaking at a presentation to City analysts Bellamy said SJP’s contribution to the year’s FSCS levy was £20 million, ‘the third consecutive year of near maximum contribution - frustrating for all of us.’

He said: ‘Firms, and they are mainly IFAs, that don’t keep up with the rules and regulations, often don’t have the resources to carry out the appropriate due diligence on the investments they promote, which in turn means that invariably some fail, costing their clients significant distress and ultimately money, and causing the FSCS levy to pay out substantial sums in compensation, which falls on companies like us to make up.’

In August Old Mutual Wealth (OMW) became the next advice giant to bemoan FSCS contributions in its financial results

OMW said its network Intrinsic continued to be loss-making partly as a result of its FSCS contributions.

In its financial statement of results for the six months to the end of June 2017, Old Mutual Wealth said the network made a loss of £13 million in the first half of the year.

This was up 44% from £9 million for the same period in 2016.

'Half of this increase in the loss is due to increased contributions to the Financial Services Compensation Scheme and half is due to costs associated with the growth of the business,’ it said.

September saw the FSCS declare collapsed discretionary fund manager (DFM) in default. We had previously revealed in March 2017 that the business was closing down.

Financial statements filed at Companies House covering the year to 30 June 2016 said that Strand Capital had £86 million of funds under management, with partnerships with 10 IFAs. 3,000 clients were potentially affected.

‘The joint special administrators are working closely with the FSCS to proactively seek to pay compensation to claimants, without clients having to submit a claim form. The compensation is subject to a limit of £50,000,’ the administrators report said.

 

In early October the Financial Conduct Authority (FCA) agreed to a recommendation for FSCS funding reform and said it would put out a policy statement in the autumn of 2017.

The proposals included:

  • changing professional indemnity insurance to make it more comprehensive;
  • considering whether the FCA could ‘more clearly link product risk to levies and whether product providers should contribute to claims involving intermediaries’;
  • a possible risk-based levy, which would result in firms that recommend high-risk products paying more towards the scheme. 

October saw the second part of the FSCS funding reform unfold.

We reported that advisers could be set to save signficant amounts of money on their regulatory bills if the FCA's proposed reforms to the FSCS were finalised and accepted.

In a paper issued by the regulator that month, the FCA said it wanted providers to pay 25% of the lifeboat fund's compensation costs. Furthermore, it proposed merging pension and investment funding classes.

‘The data above suggests that merging the life and pensions intermediation and investment intermediation classes will spread the cost of failure across more firms, reducing the annual average levy for firms, reducing volatility for the class and increasing sustainability,' the FCA said.

‘Had the new proposals had been in place in recent years some intermediary firms would necessarily have experienced higher levies than under the current rules. However, it is unlikely the retail pool would have been triggered, reducing the cost burden on a greater number of firms.’

 

In the paper proposing FSCS funding reform, the FCA also suggested that advice firms could take out a 'surety bond' to ensure more customer claims were paid for by insurers rather than the FSCS itself.

The FCA said it wanted to get industry views on whether ‘requiring certain Personal Investment Firms (PIFs) to pay capital into a trust account or purchase a surety bond might ensure that more consumer claims are paid for by firms or their insurers, subsequently reducing the cost of the FSCS to other firms.'

According to the regulator, FSCS claims data showed surety bonds of £100,000 could have reduced the compensation bill for advice firm failures by 8% over six years.

In December New Model Adviser® drew attention to the remarkable story of how a relativity tiny IFA firm had managed to rack up FSCS bills of £6.7 million when it collapsed.

Nine years after it was founded, Solihull-based Cherish Wealth Management collapsed in 2016, leaving a massive regulatory bill.

Naturally the lifeboat was there to help out, but the figures were remarkable for such a small firm. The FSCS paid out £6.7 million from 229 claims, which included 188 Sipp claims.

At the time it was also processing a further 357 claims, including 300 Sipp claims.

We asked how it was possible for one small firm to be responsible for 5% of advisers’ life and pensions FSCS bill? It raised questions about the way the FCA is monitoring and regulating the advice sector.

New Model Adviser® mapped out the connections Cherish had to various investment schemes.

You can read our full findings here.

 

At the beginning of 2018 the FSCS then announced a supplementary levy of £24 million for the period 2017/18. 

The levy was a result of the 'continuing growth' of Sipp claims, the lifeboat said.

In its update for the year, FSCS chief executive Mark Neale (pictured above), said the continued number of Sipp claims have meant a supplementary levy is required for financial services firms.

‘The supplementary levy arises from continuing growth in the volume of Sipp-related claims falling on life and pension advisers,' he said.

'Our forecast in April was that these costs would amount to around £146 million, but, because of the uncertainty attached to this forecast, we elected to raise a levy of only £100 million – the maximum for this sector. We now calculate that, on current volumes and average costs, we shall need to raise only around an additional £24 million in 2017/18.'

It was bad press aplenty for the lifeboat again earlier this month as it admitted to mistakes over its compensation payments for Arch Cru investors.

Following the suspension of the Arch Cru funds by Capita Financial Managers in 2009, the FSCS began paying out compensation for the funds which were wound up.

Initially this compensation was on an interim basis but from 2012 consumers were paid under the Financial Conduct Authority’s (FCA) consumer redress scheme.

A customer enquiry about how the compensation was calculated under this scheme made last year led the FSCS to find a number of errors in how redress was being worked out.

In a statement, the FSCS chief executive Mark Neale admitted that mistakes had been made over the redress scheme. Some people had been underpaid, while others had been overpaid to the tune of £700,000 in total.

‘I should also acknowledge errors made by FSCS in handling Arch Cru claims,’ FSCS chief executive Mark Neale said.

In mid-January we reported that IFAs would foot the bill for the collapse of a Welsh investment management company which was accused by the regulator of holding 'clear conflicts of interest.'

A total of 12 complaints had been made against Cardiff-based Cumulus Investment Management, all of which related to advice given to clients to transfer their pensions into an Eastern European property fund.

You can read the full story here.

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