FSCS structured products U-turn could hit IFAs with £40m bill

"The cap on" would exist in common law with 6years, 3 years and a 15 year longstop being the timeline from when professional negligence occurred. As we all know, the problem is that FSMA 2000 dropped any mention to a longstop from the rulebook and the FSA to date have refused to reimplement/insist the FOS respect the longstop. Hector's Sants statement to the TSC that they were willing to look again at the issue of a longstop was just hot air as nothing appears to have happened since.

With regard getting hit for a further FSCS levy, surely our levy pool has already been exceeded this year? Hence it will all be spread across the other sectors?

The original FSCS distinction between 'capital secure' and 'capital at risk' (SCARPS) plans was just too simplistic. FSCS soon backtracked and their 'decision' became a 'position' . FSCS has at last accepted the principle of Lehman-backed SCARPS having been missold but they are still looking at claims on a 'case by case' basis. Should this not be on a 'product by product' basis? The product brochures and the way in which these products were operated were either flawed for all investors or for none. On the evidence so far, we now have examples of FSCS paying out for some but declining others with exactly the same plan.

The outstanding loss for the remaining 2350 NDFA, DRL and ARC savers is about £45m. Whether or not savers make their claims will depend whether they are told about the FSCS u-turn. FSCS announced in September 2010 that Lehman SCARP savers needn't bother claiming. There has been no announcement since from FSCS.

Contrast this with the 1750 Lehman 'Capital Secure' savers who were proactively sent claim forms by FSCS in December 2009 and almost all of whom were compensated shortly afterwards.

FSCS has made a bit of a mess of this, and it is time to put this right.

On one of these threads about 3 or 4 weeks ago, it was proven that if an investment was sold via an AIFA member, a longstop does exist. I also seem to remember that Citywire tried to discuss this with the FSA who refused to discuss it

yet another example of the inadequacy of this system of consumer compensation, the sooner a product levy is set up, paid into a ring fenced account for such matters the better. Maybe we as IFAs when we charge clients should identify and isolate a charge for such events and keep that ring fenced, thus as in all aspects of life the consumer pays.

This whole business is becoming a joke. How is the counterparty risk ever going to be accurately assessed with the interlinking financial system we have today? A company which appears sound and has a good rating can end up in trouble because of the domino-effect from other failing companies/institutions or economies. When governments are on the verge of bankruptcy and the economic situation threatens the Euro, then what warnings can you realistically give to investors? The truth is that no investment is 100% safe and that any guarantee is only as good as the ability of the guarantor to live up to it and, most importantly, the ability to back up the guarantee can and does change - often with little or no notice.

Also, from a practical point of view, if the rating of a counterparty changes just how feasible is it to contact all of the investors to point this out - assuming that the adviser has been made aware of the change? If it is pointed out - what good is that if there is a lock-in or prohibitive penalties for coming out early? The problem is that all an adviser can do is take all REASONABLE steps to ensure the accuracy of the information/advice which they give. I haven't sold any of these products but I have a little sympathy for those who did - after all, how many advisers who thought these were safe would have changed that opinion on the basis of a downgrade from A+ to A- ?

If the incompetants at the FSA had published their thematic review of KIS products in 2007, none of this would probably have occured.

Shame on them!

The ratings system was (and is, in my opinion) another part of the back slapping boys brigade that seems to run our financial system.

The like of the FSA and, to an extent, the FSCS, are part of the problem too.

How is anybody - never mind an IFA - meant to second guess what a ratings agency decides? They have enormous resource and expertise and I am sure the FSA would be the first to jump all over IFAs if they tried to gainsay a ratings agency's assessment.

Why aren't S&P, Moodys et al being made to pay for some of this? How can Lehman's have been AAA one minute and A- the next?

Why aren't the rating agencies and the regulators that trust(ed) them being called to account and being made to stump up for this?

I know why. It is becuase they can take it from somewhere else. It is because they are unnacountable and they can dip their hands in the pockets of consumers and IFAs instead of their own.

Asset allocation - The FSAs thematic review of structured products (belatedly) has got it right. Effectively a structured product backed by one counterparty should be looked at as if it is simply a corporate bond and hence allocation to that one coroprate bond needs to be considered relative to the clients total portfolio. Would you reccomend more than 10 or 20% in one corportae bond for a client?

If the structured product is backed by more than one counterparty or collateral (gilts) is part of it, then perhaps percentages can change. OR if the structured product is deposit based rather than equity based too.

As to Neds comments about Keydata SIPs (which were not structured products in teh same sense). As with most FSA reviews, it is not what they say, it is when they say it (after the event) that gets up a lot of adviser's noses. Even worse, when they don't publish their findings as in the Keydata SIPPS situation where the majority of monies invested in Keydata SIPP I suspect occurred AFTER the investigation had started and had decliend or stopped BEFORE the report became public.

to: Phil Castle, I think you have made a good point; but of course the counterparty is only called on if the returns given by the structure don't appear.

That is another layer of "protection" - whatever it is worth - for the plan holder.

You could equally argue that placing £150k into a bank is getting on for the same as putting £85k in cash and £65k in a corporate bond with the same.

I don't think, however, that it is that helpful trying to stretch analogies across different financial instruments as it can lead to a misunderstanding of the risks undertaken.

FSA also investigated structured products in 2004 following the 'precipice bond' scandal in the early 2000's (FSCS compensated around 1800 investors with £20m in NDF/Abbey bonds at that time). This was a full four years before the Lehman-backed products were even marketed. FSA investigated again in 2009 following the Lehman crash (leading to the closure of NDF, DRL and ARC and fines for some IFAs) and announced early 2011 they were going to investigate structured products again. How is FSA going to prevent a repeat performance?

Chris I disagree (whilst I would not put 85 with the same bank as the corporate bond as it is all eggs in one basket and were I a tied adviser, then it is not an issue, which i where I think sometimes we forget the rules are different for tied to independant). The issue being £85k bank deposit covered by FSCS, corporate bond or (most) structured products woudl have no FSCS protection if the counterparty failed as it is an "investment" risk, which is not covered by the FSCS.

How do we then classify deposit based structured products that use the same £85k FSCS protection scheme as bank deposits. Should an investment be spread to reduce counterparty risk or are they fine upto £85 k each ?

@ Rich

Tied adviser £1million RBS, £1 million deposit based Structured product backed by RBS OK, with counterparty risk, very naughty

IFA - 85k RBS deposit and anything structured product RBS, risky as excess is over FSCS limit. Doesn't mean it is wrong, but needs serious discussion with client. Having more than the FSCS limit on anything is not in itself wrong, but it is (in teh light of mutliple defaults) an issue for both consideration and discussion now, which it probably was not for most advisers before 2007....

I agree with Stephanie on the A+ rating I think this was a guess against future performance of the product rather than facts at that time. I still do not see how FSCS can compensate some and not others with exactly the same product. I think they are going to have a lot of appeals to deal with

@ East anglia - Despite the fact I don't particularly want to have to contribute to an extra FSCS levy, I think expediency needs to be considered. The cost of looking at each case individually cannot be cheap (probably as much if not more than the commission paid on many of these products to the origianal adviser/seller), if the majority would be paid out provided the client quotes the issue of the rating or UK v US bank, then paying out the minority who fail to quote this as an issue, when it is not necessary may be cheaper by paying out ALL, than arguing about the minutie....

Phil- I think this is a good point especially as they are employing Deloitte as a posting point which will not be cheap. I think it is unfair on a lot of people including the levy payers and for investors who now have to have the command of the english language to make shure they can put their case across correctly.

Each of the plans are different but if any person in a plan is compensated then everyone else should be. It is rather like being pregnant, you are or you are not and these plans were either missold or they were not, it is not a matter of degree.

Maybe the FCSC should reconcider their possition

@BobR - Thanks for commenting on what I said. I do however disagree with your last point.

Using this example - I have clients with plans I have reccomended, my clients have not complained, I do not believe I have given flawed advice, but some advisers have had laims upheld on similar products against them. That does not make my advcie flawed automatically. If my client complains, I expect to be allowed to decide for myself (in conjunction with my PI insurer) whether it is more economic to pay even if I do not accept liability or rehject the complaint and wait and see whetehr the client accapets my rejection and if not, what the FOS say. The FSCS situation is completely different, the provider has defaulted and the economics of deciding to pay out on all cases (right or wrong) need to be balanced impartially, the trouble is, the F-pack is not impartial....

Phil, I realise it is a complcated business and I may have miss understood your point but taking your example if your advice was based on flawed information from the plan provider who would your insurance blame you or the plan provider.

This is the possition we are in, my previous plan was through an IFA but on this occassion NDFA bypassed them and came to me direct and I guess along with some IFAs I trusted what they said as an FSA regulated company in their literature.

@Phil Castle. In BobR's defence :-) I think complaints against product providers such as NDF, DRL and ARC are very different to complaints against advisers. Whereas each IFA/advice case is likely to be unique, the cases referred to in this article are about the integrity of 5 specific plans, their marketing materials and the way in which they were developed, marketed and operated. I don't believe this varied by customer, it will have been standard per product. The product was either flawed or it was not.

To: missold, but according to the FSCS and our judicial system, Keydata were intermediaries, not a product provider.

@ missold - sorry I wasn't having a go at BobR (he'd definately know if I was), I was trying to make the same point you did and agree ENTIRELY with what you have just said.

A flaw in the FSCS system is that as advisers we cannot rebate our fees to a client which we may have charged on something which has gone wrong (through no fault of ours or our clients) without it appearing we are accepting liability and potentially opening ourselves up to the FSCS telling the client to come to us for the complete sum (which would the invalidate the advisers PI).

The FOS, FSCS system is flawed as it is confrontational and does not allow for mediated solutions aimed at reaching agreement rather than forced unappaelable decisions.

@ ChrisF - yes those firms are treated as intermediaries because they were acting as agents to buy Lehman bonds, but in every other respect they were acting just like product providers. Those 'intermediaries' made claims about the bonds that turned out to be misleading according to the FSA's review in 2009. I am not surprised that IFAs are irritated by being in the same FSCS sub-class, but that is a different argument about the FSCS funding model.

@Phil - glad we are in agreement. Some advisory firms have settled using ex-gratia payments and compromise agreements to avoid the issue you mention, but usually this is not just about the fees involved, it is about the complete sum lost by the investor. I don't know how often FSCS tries to recover sums from individual IFAs involved in these sales. I think I read somewhere that they only do this where is it economically viable. They are certainly having a go at recovering money from N&P re Keydata.

What puzzles me more than the arguments about the rights and wrongs of FSCS funding is how they seem to have acquired the power to be complaint investigator, adjudicator and enforcer without a complaint being made by a client about mis selling or unsuitable advice.

When did they acquire this power?

Anybody know by what authority they can do this.?

It certainly is not part of FSMA as far as I can see.

Having just scanned through the latest "Ombudsman News" to find articles about the quality of sun-beds, missing adaptors for video cameras and teh failure of a mail order clothes shop to hand out free MP4 players it's blindingly obvious to me that most if not all of the problems that FOS faces are to do with its ludicrously wide scope.

Reference Counterparty.

How can anyone evaluate the counterparty risk if the identity of the counterparty is concealed? Further until after the Lehmans collapse the word counterparty did not feature in the context of NDFA,DRL & Arc at all- and come to that there was no mention of it in the FSA CAR Handbook which was produced to inform investors. Presumably the experts in FSA hadn't thought of it, or did not know there was such a thing.

The point of the section of the Prospectus Regualtions related to consumers/ investors was to set a legal requirement that Issuers and their Insurers were clearly identified, naturally by name & location. This was done so that investors could make due enquiry, and research the identity and location of companies with whom investment was being considered.

Lehmans thought that the rules impacted on them, hence they asked NDFA to keep their involvement quiet. NDFA did so and thus there was no mention of Lehmans in the Plan brochures. Therefore a reasonable commentator might well take the view that the intention was to evade those regulations, by the failure to make full and fair disclosure. Who would have invested in a US bank, in the midst of the toxic debt exposure? Very few I suspect, either the extremely brave or the foolhardy. Even more so when, had they known what should have been made clear, they might have looked at the Internet, for example, and seen the obvious red flags being run up by the financial industry media.

The saying is 'Ignorance is bliss'- I don't think so.

White Stick - The word counterparty has never appeared in the context of structured products on the FSA website, nor on the FSA moneymade clear website, not on it's new incarnation "The money advice service" http://www.moneyadviceservice.org.uk/tables/ try searching on their website using the word, you'll have to go to the comparison tab as there is no search facility anywhere else on the website which I can find. No wonder consumers look blankly when anyone uses the word "counterparty" if they then go and try and look it up using any of their jargon busters!

Thanks to Phil Castle for this interesting note. Is it not intriguing that in these premises FSCS places so much weight on the term?

As a further thought, any idea when the reference to counterparty was first featured in any of the FSA advice or gudance notes?

Am I alone in thinking that the FSA want to make IFAs the counterparty to the counterparty?

Surely everyone knows that a structured product must have a counterparty - these things don't work (or not) by magic.

How many of the, then, 90 year old virtually blind old ladies have you consulted? My mother in law's mistake was to trust NDFA & believe the unequivocal statement that 'Your capital is secure unless the FTSE100 or EuroStoxx50 fall by more than 50% over the life of the Plan' ( 5 years). That statement was untrue.

If your comment has any value, perhaps you might ask the FSA why the term does not appear in its factsheet issued at that time setting out the risks related to SCARPS.

Shurely everyone knows the laws of astrophysics the world runs by it. The fact is we are not all experts in certain fields and on these occassions we have to accept the words of the professionals.

I wa referring to advisors rather than underlying clients and I'm not here to defend the FSA.

Compliance Officer. Thank you for the clarification. Its a pity that FSCS does not understand the distinction that you have specified.