The year has not started well for the adviser sector with nearly a dozen firms already declared as failed by the Financial Services Compensation Scheme.
I know this infuriates the vast majority of decent, highly qualified and hard working Financial Planners.
Month after month they have to look on as a procession of often dismal firms collapse, usually after being hit by a string of complaints from clients, leaving their ‘dirty washing’ for the FSCS to sort out.
This week on Financial Planning Today we covered the seemingly inexorable rise in advice firm failures as yet another pension adviser firm went under, both failing and going into liquidation at more or less the same time.
They are not alone. Nearly a dozen advice firms have been declared as failed by the FSCS in just the first month of the year. The compensation bill will run into millions, if not tens of millions. Other advisers will pay.
It’s worth looking at the common factors in these failures and there are several. Many of the firms actually failed several years ago, either going into administration, closing down or just losing their regulatory permissions. The cases often take years to reach the FSCS. Many were involved in pensions transfers and quite a few were involved in BSPS transfers.
I won’t go over the factors in detail but pension transfers were not the sole reason for the failures. Many gave equally poor investment or general pensions advice. Some firms have hundreds of complaints against them.
We do not have any reliable figures about how many complaints, often submitted to the Financial Ombudsman Scheme in the first instance, were made by Claims Management Companies but it’s fair to assume that quite a few were. This is a developing and worrying trend for many advice firms but it’s not the whole picture.
The fact is that many of these firms were just poorly run and gave bad advice. They failed long before the FOS and CMCs got involved.
To my mind this is becoming something of a vicious circle and a rethink may be necessary on who can provide advice. If you can set up an advice firm as a limited company and then walk away when it collapses and let the FSCS sort out the cost of compensating your clients, something is inherently wrong.
Many bona fide Financial Planners and industry bodies have called for a move towards a ‘polluter pays’ model which more fairly apportions costs to those advisers who cause the most problems.
This is fine in theory but making this work in practice would be extremely difficult.
One solution might be a combination of much tougher penalties on those who wilfully walk away from failed firms in tandem with tougher barriers to entry for new advisers who are not up to the job. Keeping out the rogues and the inept must be part of the way forward to cutting down on compensation claims.
The FSCS also has a part to play. One positive action it has taken recently is to step up efforts to pursue those behind these companies for compensation. It has recovered a few millions, which is welcome, although this is in reality a drop in the ocean. The FCA is also looking at reform of the whole compensation system and not before time.
What we mustn’t do is destroy the good work the FSCS does. I’m on record as saying that the FSCS for all its problems and costs, does more to build trust in the financial services sector than just about anything else. It is a shining light in an often murky sector.
The FSCS, for all its faults, is worth keeping but more must be done to stop firms from failing in the first place and preventing the people behind these firms from getting into financial services. Earlier intervention from the regulator would help prevent problems piling up on the basis that prevention is better than cure.
It seems astonishing that many fairly new firms are able to transact hugely complex advice areas with seemingly little experience. Advice firms should earn their stripes, not be given the equivalent of a loaded gun before they can shoot arrows.
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Kevin O’Donnell is editor of Financial Planning Today and has worked as a journalist and editor for over three decades.
