Many consumers may not be aware that ‘good’ financial advisers always get penalised by the faults and claims of ‘bad’ financial advisers.
Many rogue financial advisers give poor advice, take huge fees and when compliants mount up, they close, head off into the sunset with their ill-gained profits and leave the rest of the industry to foot the compensation bill.
Do not get us wrong here, human error means that all financial advisers will have a complaint made against them at some point. That said, we would not expect a good financial adviser to have a complaint more than once every 5-10 years, hence the need to protect them and their clients with professional indemnity insurance.
Some rogue advisers may be offering such poor or income motivated advice that leads to poor consumer outcomes and consumer detriment to the tune of 20, 30, 50 or even 100 claims per year. If an adviser’s insurance excess is £5,000 or £10,000 per claim, this could amount to £500,000 to £1,000,000 in uninsured liabilities in just one year (plus the actual claims/compensation to be paid) forcing them into insolvency and claims with the FSCS.
Between 2016 and 2022, the FSCS paid out £760m in claims for failed financial advisers with 95% of that compansation paid in respect of just 75 firms. That’s an average of just under £9.6m for each of those 75 failed rogue financial adviser firms. That is the scale of some rogue adviser operations.
In the last week alone, the Financial Conduct Authority (FAC) has:
Polluter Pays
Concerns have been around for decades that rogue advisers mis-sell, make £millions, strip out those profits and then close down their firms and are unable to meet their claims liabilities. The FCA is finally taking action with a ‘polluter pays’ structure to alleviate the pressure on the FSCS and those good advisers, like us, paying huge levies and PI insurance premiums.
The changes will affect over 5,000 financial adviser firms.
The FCA will require this to be reported back to them, we suspect every 6 months, and if firms do not have enough capital to meet ‘polluter pays’ rules, then the FCA will impose that any firm not holding enough capital to cover potential liabilities will be placed under automatic ‘asset retention rules’ to prevent the firm from disposing of its assets and its owner/directors stripping out funds before the firm fails due to liabilities.
Comment
As you may expect, we welcome the move in the hope that ‘polluters’ will pay and rogue business owners will not be allowed to walk away with the ‘spoils’ and then ‘dump’ their liabilities on the rest of the industry.
That said, we suggest care needs to be taken as many smaller firms with even just a history of two or three claims in last couple of years where perhaps now their insurance policy excesses for certain types of advice may be £10,000 or £20,000 per claim. Trying to find say £60,000 of additional capital to set aside quickly may be a struggle initially with firms choosing to close or even increase their fees when the FCA is already applying pressure for firms to reduce their fees under ‘Consumer Duties’ by proving value for money.