Remaining advisers must pay for others' insolvency
Published by FT's Financial Adviser 23 May 2012
At the end of April, the FSA launched CP12/9, a three-month consultation on establishing a consumer redress scheme, estimated at delivering more than £100m in compensation for investors who were mis-sold the CF Arch Cru investment and diversified funds.
This scheme is in addition to the £54m payment scheme involving Capita Financial Managers, BNY Mellon Trust & Depository (UK) and HSBC Bank that was announced last year.
The FSA’s redress scheme is being implemented under section 404 of the Financial Services and Markets Act 2000, as amended, that allows the FSA to make rules requiring firms to review their past business and pay redress where there has been a widespread or regular failure, the failure has, or may, cause consumers loss about which they could go to court and the FSA considers it desirable to make a consumer redress scheme, having regard to the alternatives. This is the first time this power has been exercised by the FSA.
The FSA claims that several thousand investors – estimated at between 15,000 and 20,000 individuals – were mis-sold these high-risk funds by advisers who sold them unsuitably as low or medium risk. The proposed scheme requires firms who sold the funds to contact their customers and, if appropriate, offer redress. The scheme is designed to put the investors back into the position they would have been in had they received suitable advice.
CP12/9 states that an IFA firm advising on Arch Cru funds could rely on statements of fact made by third parties, for example the authorised corporate director, investment manager or distributor, but not statements of opinion about the suitability of the investment or the likely returns. This is because the duty to determine suitability cannot be delegated and it is up to the IFA to determine the risks in the product.
Unfortunately for both the industry and the investors, many of the advisers have ceased trading and/or insolvent, leaving investors to claim on the Financial Services Compensation Scheme. Again, the rest of the sector will share the pain from the mis-selling of others.
Philip Ryley is a solicitor and Head of Financial Services & Markets at Michelmores LLP, based in Exeter and London.
Author: Philip Ryley
Last updated: 2012-07-16 14:45:49