1st September 2010

Huge FSCS supplementary call on IFA practices

IFA letter of the week

Dear Mr Darling, Lord Myners and Mr Byrne,

I write to you as those ultimately responsible for the Financial Regulatory structure of the FSA and FSCS. I had wished to include Gordon Brown but it is noted that the ability to email him has been withdrawn (something to do with a security issue?).

I write particularly with regard to the news that we as small firms are about to be hit with a huge supplementary call from the FSCS of an average of £10,800 per firm. Until recently my business was only me, but as I TRY to move slightly in the direction of retirement I have a colleague who is also an adviser. Whether it will EVER be possible to retire is of course a very thorny question due to the determination of the FSA / FOS in making us responsible for advice given well beyond the statutory time bar period of 15 years, and that in itself longer than many professional are exposed to. This is not aided by having been a sole trader for 20 + years which means that until I die, I face the prospect of getting a bill for advice given 20 years or more ago, probably using the wonderful wisdom of hindsight rule reputed to the norm for the FOS.

Putting this supplementary call into context:

1. For a firm our size we actually only have to prove to the FSA that we have capital adequacy of £10,000 - so this call even breaches that level
2. We pay something like £4,500 p.a. to the FSA including the basic FSCS levy
3. We pay another £4,000 p.a. or more in PI premiums, and face very sizable excess in the event of a complaint against us - currently down to a mere whiff i.e. £5,000, but a few years ago £10,000 or more.

Many small firms need to pay even their FSA fees on monthly direct debit (we don't). So how on earth are they going to deal with a £10,800 bill, to be delivered in March with a demand for payment within 30 days??

It is reckoned this will push more firms out of business, so then the number of firms left to pay into the bottomless pit gets smaller, and we face ever growing and hugely disproportionate bills. There are major expectations that the numbers of IFAs will shrink massively after implementation of RDR at the end of 2012. We worry as to how many firms might be tempted to "sell" over zealously before commission is banned, proposing to then shut their Ltd Cos at the end of 2012, and "dump" their liabilities on the FSCS, adding further to the huge burden on those left. We worry that the FSA stands idly by, and will maybe do a "retrospective" review of such practices - doing their usual of regulating with the "tail of the dog" rather than the head - and in so doing leaving us to pick up the financial tab, for their lack of "up front" regulation.

This brings me to WHY we are being hit with this MASSIVE bill from the FSCS. We are told that some £43m of the £70m (and remember this is just THIS supplementary call) is due to the failings of KeyData and £27m in respect of stockbrokers Pacific Continental and Square Mile.

1. Why are we, small investment firms picked out to fund ALL this? KeyData were a "product provider" heavily into the structured product market which I am pleased to say we have never exposed our clients to - how diligent were the FSA in seeing a problem coming?
2. With regard to the stockbrokers, how can the FSA stand by and allow firms of this magnitude to get into such a mess - I thought the FSA's job was to monitor the risk to investors of all firms and regulate accordingly.

One could maybe ask if it doesn't really matter to the FSA - with their massive pay packages, bonuses, pension schemes - maybe if a part of THEIR pay (and a material percentage just like we are being made to suffer) was deducted for regulatory failings they might regulate a bit more from the front.

I don't know what you can do between you, but as senior members of H.M. Government as MPs surely SOMETHING has to be attempted.

As it is, the progress of the railroaded RDR is quite clearly going to remove many of our clients from access to independent advice as we are forced to remove any evidence of larger investors helping in any way to pay for the small ones, and in working on fees alone raise the bar of hourly rates to a level which will preclude many needy investors benefitting from our services. It appears the only place many people will go, including the vulnerable and elderly, will be their local building society / bank branch, who will be only too delighted to "flog" them "this months" offer. We currently take on many clients (all of whom come by personal or professional recommendation) who come to us having had absolutely shocking treatment at the hands of banks / building societies - is it the will of Government to in future allow such people to be used as soft targets for the bank selling tactics? These are not empty words - I can put you in touch with clients who were so affected, and they will tell you how hard we had to fight on their behalf for them to be rid of the inappropriate rubbish they had been sold. We won on each occasion, often at no cost to the client as we are driven FIRST by principles - whether post RDR we can afford to help such people remains to be seen.

I would be happy to meet with you. I would be willing to bring other IFAs to such a meeting, hoping that you precipitate action before it is all too late.

I hope to hear from you VERY SOON.

Yours sincerely,

P.S. In the hope of added impetus I have copied in several of your colleagues, namely Peter Mandelson, Jack Straw and Alan Johnson

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