Industry regulators could still be failing consumers through a potential loophole in the complaints system as IFAonline has discovered a consumer who lost £1m through bad advice is unable to get full compensation.
The client in question is said to have been given poor advice 10 years ago by an IFA who was at the time managing director of his own firm, but then discovered earlier this year he had been badly advised about action taken on his investments and losses were calculated at £1m.
This firm was then de-authorised by the FSA and the adviser later joined a national firm six months later, taking his client bank with him.
However, when the client complained, he was informed his former IFA was no longer responsible because it was his old firm which gave the advice and the firm had been de-authorised and he could not complain to the new firm either because it was not them who delivered the original advice.
This is just one of several situations in which there is still appears to be a regulatory loophole in financial services which can have a detrimental affect on consumers, as the Financial Ombudsman Service (FOS) points out even though the new firm bought the IFA’s client bank, the consumer will not be able to claim against them because most firms do not take on any liabilities when they purchase the client bank.
That said, the FOS says it might be possible for the client to bring a complaint against his former IFA because although the firm is de-authorised the FOS will adjudicate if the firm was authorised at the time the advice was given.
Adam Samuel, compliance consultant, points out the client could start court proceedings to force the IFA to pay the FOS award, but even if the client is successful the maximum amount FOS will award is usually £100,000.
That amount would be even less if the old IFA firm has been wound up and does not have any assets to be able to pay the award as the client would have to go to the Financial Services Compensation Scheme (FSCS) and the maximum compensation amount could then be £48,000.
The FOS does have the power to recommend the award is higher so Samuel suggests if the client goes to court and explains the FOS’s recommendation he will probably get the £900,000 extra.
However, Samuel says the chances of FOS recommending a higher award are very small – there are thought to be an average of only two cases a year where this happens.Similarly, Samuel says this is expensive because a solicitor will probably want money upfront and there is a risk the client will have to pay the IFA’s costs if he loses the case.
Further complications to the process arise if the firm was an incorporated company, as the client cannot sue the individual adviser but must sue the company - even though it would be better for the client if they could go after the client individually - as Samuel points out if the firm was incorporated it is highly unlikely any assets now remain and the only leverage the client would have is to threaten the reputation of the IFA.
At the same time, it is possible the FOS could declare the adviser is not fit and proper and he would therefore not be allowed to continue work, albeit this does not help the client in retrieving his lost money.
This case brings into focus the problem of so-called 'phoenix firms' generally, as while this case is not technically related to a phoenix firm, the adviser is still operating elsewhere having closed their own firm and sold the client bank, without bringing his liabilities upon himself.
Clive Briault said last week the FSA is “is taking a decisive approach” to phoenix firms but industry sources acknowledge cases such as this may adversely affect customers’ views of small IFA firms.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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