Select Committee on Constitution Written Evidence

Memorandum [Name and Address supplied]

  I am a compliance manager at a firm of IFAs and thus experience at first hand the effects of the regulations and decision-making processes of both the FSA and the FOS. Our practice has always been to be at the forefront of the regulatory changes and my role was originally to assist in this function as the implementation of new regulatory requirements became too burdensome for a single individual. My company are not prepared to make a submission as a corporate body because they feel that either such a submission would be cast aside (altogether too familiar under the current regime) as a whinge or could place the company under the scrutiny of an antagonistic Regulator. As described below the Company could be legitimately (but outside the bounds of natural law) crushed by those rules (rules made by the regulator and interpreted in any fashion of their choosing) and the Directors effectively outlawed from financial services.

  I have submitted this as an individual rather than in my capacity on behalf of the Company. I am not a Director, nor am I a shareholder. I am mindful of the powers of the FSA and would ask that any evidence I give to your house allows protection for my employers from the FSA. I am most disheartened to be working in an industry, which engenders the fear of the regulator. This fear is not the fear of doing anything wrong, it is the fear of arbitrary punishment.

  My experience has been that the FSA is genuinely out of touch with the IFA market as exemplified by the problems generated by their handling of our Professional Indemnity Insurance queries. In June 2002 we were offered non-compliant terms by our underwriters. Previously these had been acceptable by the FSA/PIA but there were some signs this may no longer be acceptable by FSA and we sought their guidance. Four months later, after much pressing for a reply, the FSA designed to address the issue and we finally spoke to a human, who could make a decision. We were advised to take the PI cover offered. Unfortunately, because of the time delay the underwriters could no longer offer cover because their capacity was now full.

  The PI market had since collapsed, because underwriters cannot write risk for an industry, where the regulator changes the rules after the event and future liabilities cannot be predicted. As a result the company I work for has no PI cover and has been unable to obtain cover subsequently. We have now been advised that our premission to continue business may be removed because we do not have PI cover. If this happens, many employees will be out of a job, and all because the FSA wouldn't answer a question which only they were in a position to answer.

  We have been informed that the FSA cannot be sued for this. The company I work for cannot leave the FSA's regulatory control (and shut down) without the FSA's permission. There are no bodies we can take our grievances to.

  I am concerned about many aspects of the way retrospective legislation has been applied. The pensions review has been, to a large extent, expunged at a great cost to too many in the industry. Some deserved it and some did not. C'est la vie. The new witch trial appears to be the endowment review.

  In a court of law, if the plaintiff asks for reparation to put themselves back in the position they would have been in, if the accused had not been negligent etc., then the plaintiff is required to mitigate the loss as much as possible. Similarly if such a loss is demonstrated, then the loss would only be calculated based upon when the loss occurred. With the endowment review this procedure is ignored. The current surrender value (for with profits policies suffering market value adjusters this exacerbates the situation significantly) is used to determine the basis of the loss. The current surrender value is not the true value of the policy at the time of the determination of a loss (including penalties applied arbitrarily by the insurance company). This artificially reduced value is then applied to a calculation of the "loss" to the plaintiff and then a payment may be made to the plaintiff based on the costs they would have had to make using a repayment mortgage. Look carefully at the way the loss calculation is forced to be made. Ask if a respected judge would make the same determination. Also ask if the plaintiff should be allowed to participate in future profits should the markets recover—or should such profits be assigned to the advising company.

  I will give some examples of the fractal nature of the FOS determinations later in this missive but ask that there should be some check on the procedures determining future "hot-potatoes" whipped up by the media and how they should be (a) investigated, (b) determinations of any recompense derived and (c) an outside adjudicator (not the ombudsman system) for appeals by the accused to refer to.

  I have been asked to give specific examples of areas of concern relating to justice being circumvented by the regulator. Please remember I am an individual without the backing of my employer and the "whistle blowing" rules apply—I am anxious for my Company and my job and my family—not in that order.

  The company I joined was involved in the mortgage business in a big way and found in the late eighties and early nineties that endowments were a good buy for many purchasers. The Consumers Association agreed—see their best buys at the time. Now it appears that endowments were a bad thing. The Consumers Association now have a dedicated website promoting complaints (or fraud—dependent on how you view financial crime) about the sale of endowments. There were bad sales practices out there. What I cannot condone is the bad interpretations practices currently in place today.

  With regard to the sale of an endowment the FOS has provided four differing interpretations of "medium risk" and how this should be applied as suitable in the sale of an endowment. These are actual cases I have been involved in. All of them have assumed that a recorded attitude to risk at the time of the sale should be either disregarded, ignored or interpreted as being inappropriate. This interpretation has been in the complainants favour. There was at the time of these sales no requirement for the client to make a sworn affidavit to the effect that their attitude to risk was X Y or Z. It appears that the current ombudsman system requires it.

  The Chartered Institute of Insurers have very specific views regarding the need for life cover in the event of effecting a mortgage. The presence of a mortgage necessitates a requirement for life cover. There is NO mitigating factor. The basis of the examinations required to be taken by advisers (FPC 1 2 & 3) by the regulator state this in their course material. The FOS have twice denied this is the case with our company in making their determinations against the company I work for. This implies that the FOS is not only a law unto themselves but the law is malleable, wind driven (the winds of political rather than lawful change) and open to a level of interpretation which would make the most fundamentalist reactionary wince with reticence.

  Another actual case which causes concern is best summarised by the following:

  If there was an instance where the liability for advice was passed on to a third party at a specific date, one would assume that any future liability would be either shared or the period of liability apportioned between the defaulting parties. This is not true of the FSA nor of the FOS. I can provide a VERY specific example of this if pressed but am bound by the fear expressed earlier and client confidentiality. There is NO opportunity to raise these fears openly nor is there an opportunity to appeal decisions made by the FOS. The FOS did not even deign to investigate the possibility of the third party being liable—they might not have been but that is irrelevant. The company must pay and the client given cash. Even if there was no liability.

  I have more to say on this subject but would ask that the House consider the fact that I am only an individual—not a multinational, not a consumer watchdog, not a media company, not a Regulator. I do not even have the backing of my employer (consider the fact that I am a compliance manager—my job relies on the complexities generated by a careless regulator) I am simply a person who sees justice being subverted, to what end I cannot say.

  I humbly ask that the views of the less financially influential are actually addressed and weighed not by their fiscal worth but by their real worth.


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