Suitability Review

What the FCA found when it did a Suitability Review of the IFA Sector

By The Enforcd TeamThe Enforcd Team

The independent financial advice (IFA) sector was given a clean bill of health by the FCA in May 2017. A suitability review of 1,142 individual pieces of advice given by 656 firms against the rules in the Conduct of Business sourcebook showed that in 93.1% of cases, advice provided was suitable.

You have to plough through appendix 1 to find that 481 of the 656 firms in the sample had a single file reviewed. The file was chosen at random, from advice given in 2015. Enforcd is pretty sure if an IFA told the FCA that its own quality assurance consisted of one file it would get short shrift.

What, if any, assurance can consumers draw from this? Simply that in 2015, 481 firms of IFAs gave a single good piece of advice. The advice in 2013 could have been terrible.

In January 2017, the Financial Services Compensation Scheme (FSCS) issued a press release, announcing three supplementary levies for 2016/17, totalling £114mn. Its Chief Executive explained:

“We will ask life and pensions intermediaries to pay their share of an additional £36m to fund compensation for the high numbers of SIPP-related claims we are continuing to receive, but also need to trigger a cross subsidy for the first time. These claims relate to advice to switch pension funds into high risk investments. We previously flagged the potential for high costs here…. And we currently expect a deficit of £15m on our home finance intermediation account due largely to the failure of one particular firm that gave bad advice to engage in risky property investments alongside mortgage advice.”

The FCA says everything is fine. The FSCS says it needs more money because of bad advice related to self-invested pension plans, and pension transfers. In 2017 alone, the FSCS declared 90 firms in default. Many of these were IFAs whose professional indemnity insurance claims limit was exhausted, and who couldn’t fund the Financial Ombudsman Service’s awards.

There’s an example, which won’t make it on to the FCA’s roll of enforcement notices (for the very good reason that it was not FCA regulated). Group First, a UK real estate developer, operates Store First Midlands Ltd. Store First owns and lets storage units. Rather than securing a commercial loan or mortgage, Store First sold its storage rooms to individuals, as investments. Prices started at £3,750 for the smallest room, rising to £30,000 for the largest. Sales literature gave an annual rental income of between £300 and £2,400 after charges. According to a DVD sent out to investors, a return of 8% was guaranteed for the first two years, followed by “guaranteed projected income rises of 10 per cent in years three and four, and 12 per cent in years five and six.” More people should have spotted that something can either be projected, or guaranteed. It can’t be both.

Store First, was linked by the Insolvency Service, via a First Group company director called Mike Talbot, to Transeuro Worldwide Holdings Ltd, registered in Gibraltar.

Transuero funded two cold callers (introducers) named Jackson Francis Ltd and Sanderson Clarke Ltd. These persuaded 500 people to place their assets in two pension schemes: Capita Oak and Henley Retirement Benefit. The scheme appeared to have been presented as follows: you transfer your pension, it will be invested in Store First units (with the guarantee and the projected double digit returns), and we’ll give you a non-repayable loan, which means you can have some of your pension money now. That was the pension liberation part. Something HMRC takes a very dim view of.

Store First Midlands Ltd was owned by Toby Whittaker, formerly of Dylan Harvey Residential Group, which acted as sales agent for a number of residential apartment schemes in Manchester and elsewhere in the North West. It received payments for off-plan reservations from buy to let property investors, and collapsed owing them £7mn in April 2009. The flats were never built.

On the 22nd of May 2017, the Serious Fraud Office launched an investigation into the activities of Capita Oak and connected parties, following the loss of £120mn.

One IFA who opted for voluntary liquidation was Anthony William Morrin (of AWM Financial Solutions Ltd). Enforcd searched the Ombudsman Decisions website, and found four complaints against him, related to SIPPs whose assets were invested in Store First Ltd storage units. The good news is that if the FSCS declares it in default, claims for losses arising from poor advice against an insolvent IFA are covered, up to £50,000.

What’s the upshot of all this for anyone performing due diligence on products, before offering them to investors? Be wary of high returns. Be wary of nonsense phrases like projected guarantees. Be wary of company officers involved in insolvency. If you perform quality assurance for an IFA network, test more than one file a year. And if you want to do just one, ensure your random sampling is immaculately documented, and really random.