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Topics: FSCS| contracts for difference
Advisers are expected to have to pay part of a FSCS compensation bill for the alleged mismanagement of high risk Contract for Difference (CfD) investments which could total £13m.
CfDs are highly-leveraged investments which open investors up to increased speculative gains but also large potential losses.
Investors claim Glasgow-based stockbroker Direct Sharedeal, which entered administration last May, failed to suitably assess their attitude to risk, and managed their investments outside of its stated mandate, causing some to lose up to 98% of their capital.
But Direct Sharedeal, which won the bulk of its business via referrals from IFAs, claims it was the advisers' responsibility, at least partly, to assess suitability.
Extracts of a report by the joint administrators of the firm, Finn Associates, seen by IFAonline, reveals the FSCS is due to meet the administrators next week. It is thought to be ready to declare Direct Sharedeal in default and begin paying investors compensation.
"The administrators are advised that these claims potentially could reach up to £13m" according to the report.
The FSCS splits compensation costs between the levy-paying sub-classes according to the activity from which the claim arose.
Claims where the FSCS rules Direct Sharedeal failed to suitably assess investors' attitude to risk are likely to fall within the investment intermediation sub class, with costs related to poor management of the investments hitting the fund management class.
As first reported by IFAonline last May, Direct Sharedeal has tried to avoid full responsibility for judging suitability, saying this was partly the role of the clients' financial advisers.
But Regulatory Legal, which is acting for investors who blame Direct Sharedeal for losses prior to its insolvency, argues the firm can not pass the buck to advisers.
"The regulated activity in managing the account is undertaken by Direct Sharedeal. It is therefore obligated under the FSMA 2000 regime," Gareth Fatchett, partner at the law firm, said.
A spokesperson for the FSCS said: "We are working with the administrators of the firm but it is not yet in default so we can not comment further at this time."
The FSA has been monitoring Direct Sharedeal's activities for some time. In February it fined the firm £101,500 after its appointed representative, First Colonial Investments LLP, used misleading sales pitches which failed to set out the inherent risks of buying penny shares.
According to the joint administrators' report, following publication of the FSA's findings a number of investors sued Direct Sharedeal. The claims were passed to the firm's professional indemnity insurers which charged a £20,000 excess on each claim, leading to Direct Sharedeal's insolvency.
Advisers have already been told they will have to contribute £33m towards the total expected cost of running the FSCS in 2012/13, and that they will also pay an additional interim levy of at least £40m before April.
The FSCS this month revealed the total industry levy will be £221m in 2012/13, up from £217m in the current financial year.
Investment intermediaries will contribute £33m, down from £34m in 2011/12.
However, following up on previous warnings, it said investment intemediaries are likely to be hit with an interim levy of at least £40m by the end of March to plug a deficit caused by compensation payouts related to Keydata, Wills & Co and other high profile failures.
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Why do we bother to obtain further qualifiacations and act in a prudent manner when clearly these folks did not and yet we end up footing the bill for reckless investments. I do not think that hiding behind a discretonary fund manger or stockboker is viable. The IFA should ascertain the risk taken by the fund manager, befor investment Roger Holloway
Posted by: roger holloway
SURPRISE SURPRISE
Actually, I don't think I'd like to carry on baling other people out. I think it would be cheaper if you just took my knighthood away.
Posted by: Keith Jayne
Read the rules
Have these people have no idea of the rules, it is not the entity that provides the advice, it is the entity that transacts the product who is responsible. Unless of course it was done on EO, then it is down to the client to take the hit. If share Direct were DFM's I believe the view of the regulator is that referrals to a DFM is viewed as a non advised sale by an IFA. This is backed up by HMRC who will be charging IFA's VAT on income derived from DFM's post RDR. So which ever way this goes the IFA's are not responsible, so why do we have to pay.
Posted by: Dr D
QE
Talk about the BOE using QE to sort out the nations debt, Looks like the FSA, FSCS just looks to IFA's Just so they are aware I am now officially skint !!!! enough is enough I dont have the availability to print money. Especially as I have never advised or sold these investments.
Posted by: DH
All done were off
If we all bail out and leave these clowns to go bust where will the FSCS get the money from to pay for the Kobheads mistakes
Posted by: Had enough
Greed
...got share direct and those that used them into this situation. Whatever happened to taking responsibility for your actions? We are at the point where investors cant lose either way because if their investments go down in value all they need do is complain and the weak FSCS just accept it and request the money from IFA's via levy hikes. This must stop as we will soon all be out of business through no fault of our own just the fault of those that the regulator fails to regulate!
Posted by: Fivepoles
Sophisticated
CfDs are a sophisticated investment vehicle and as such most likely to be recommended for Sophisticated HNW investors, by highly qualified HNW advisors. These investors are generally wealthy because they are clever, know how to make money and don't give it away without due thought. I can't believe the risks weren't fully set out and understood. Why do regulators always seem to assume investors have the mind of a 5 year old? What happened to Caveat Emptor?
Posted by: Clarky
FSA negligence
Once again IFA's are paying for regulatory failure.
Posted by: Nigel Tinsdale
FSA negligence
Once again IFA's are paying for regulatory failure.
Posted by: Nigel Tinsdale
Regulatory Incompetence
I would just add the thought - surely regulation is failing if the FOS and FSCS compensation payouts keep escalating!
Posted by: Ex-IFA
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Staggering
I think I might as well just send the FSA/FSCS a book of signed blank cheques and then when some other idiot outfit that the FSA have been monitering goes to the wall they can just help themselves :(
Posted by: Andy B