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The FSA must close a ‘liquidation loophole’ which many advisers use to shuffle the cost of complaints onto the industry-at-large via the FSCS, according to a claims management firm.
Paul Nedas, chief executive of Financial Advice Liability, says he knows of a number of firms which have entered voluntary administration rather than pay large excesses on their professional indemnity (PI) insurance when claims are made against them.
He is now calling on the industry to support the inclusion of firms’ PI insurer and coverage on the FSA register.
The regulator must also do more to monitor complaints procedures to ensure that PI providers have confirmed receipt of notification regarding potential claims, he says.
“Otherwise the potential exists for yet more claims to be submitted to the FSCS and further increases in the levy,” Nedas says.
It is IFAs’ responsibility to notify their PI insurers of complaints in the year they are made. However, if an adviser fails to report the claim, PI insurers can refuse to cover it, leaving consumers with little chance of compensation outside of the FSCS.
IFAs who are subject to a long list of complaints often hide the problem from their PI insurers, in the hope that consumers will not pursue the claims, avoiding hefty excesses, Nedas says.
“Where a toxic product like Keydata or Arch is involved, or where the IFA has just not been very good and has lots of complaints against them, there is a tendency to hope the claims will just go away,” says Nedas.
FSCS levy payers are forced to cover the cost when investors in failed firms instead seek compensation from the scheme, to which insolvent firms are not required to contribute.
Last month, IFAs vented their anger at being forced to pay interim FSCS levy bills thousands of pounds higher than last year, primarily caused by compensation payouts linked to the failure of Keydata.
But Nedas says advisers must investigate why they are paying out so much more money.
“Of all the IFAs I speak to, no one says that how the FSCS works is wrong, but they do complain that they pay too much for it. IFAs who choose liquidation do not pay the FSCS levy, so it is the good guys who subsidise the bad.”
In one case which Nedas has worked on, an IFA under FSA investigation for mis-selling geared traded endowment policies (GTEPs) continued to sell the products despite no longer having PI for that type of business. The IFA then went into liquidation and Nedas is now helping his clients claim compensation from the FSCS.
“What is the FSA doing to monitor the complaints procedures, to ensure that IFAs’ PI insurers have confirmed receipt of notification regarding potential claims?” he added.
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Ambulance Chasers
It's the over-bearing protection of the consumer that the FSA and the government need to address. If they don't there will be more claim management companies than IFA firms. In this financial climate firms will go bust and that's what the FSCS is for. It's when the 'adviser' going under is actually a multi-million pound product provider with dodgy practices, that we don't want to be contributing to their failings.
Posted by: MarkG
Liability - continuing business
I'm no lawyer but I can't think that the FSCSs interpretation of Mike's clients situation is correct. i.e. was there a buyout (continuing business witha transfer of liabilities) or was there a purchase of the assets (first business ceases with liquidation). Can anyone confirm that either way, one firm will have the liability
Posted by: David
Who is Paul Nedas?
Ambulance chaser extraordinaire. Ask yourself who he is and what his qualifications are? An 'Entrepreneur' by his own description and evidently trying to make money out of an area he has no real experience. He's after you!!
Posted by: Tosh
Even worse......
How surprising - firms trying to play the system to avoid paying out when liable for their or their advisors advice leaving the customer massively out of pocket and the FSA doing nothing. Why jump through all these hoops? I know of one firm who when presented with a clearly legitimate complaint by a number of customers simply says 'go away - if you'd like to spend vast amounts of more money then take us to court. If you dont fancy that then tough because we are just going to ignore you regardless of your complaint'. Seems easier than the liquidation route to me......! It obviously only works when the FSA refuses to step in and investigate, but that seems to be what happens so gives the firm a free hand to ignore any complaint against them.
Posted by: Jonathan
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I know of one IFA firm that bought out another, and continues to receive all of the renewal income from the firm they bought. However, the liabilities were left with the old firm, and now that a client has complained the new firm says "not us". The old firm when contacted says they went into liquidation on the buyout so won't do anything and recommended FSCS. The client and I went to FSCS who can't act because either/both firms are still on the FSA register. So you can have a firm taking renewals with no liability whatsoever, and a firm that receives a substantial payment for its business walking away from its liabilities. It stinks for the poor unprotected client left in a gap with no comeback whilst the IFA's concerned get rich.
Posted by: Mike