1st May 2012

Insolvency too

This came to me by e mail on Friday, it was a mail to an IFAs accountant raising some interesting points: The identity of the adviser has been kept out of the ether for now for obvious reasons.

"I have a query about how a potential or contingent liability effects both a firms FSA capital adequacy requirement and the potential for a firm to be deemed insolvent. 

If I use my firm as an example, as you know, we have to carry a minimum of �£10k of assets under the FSA's current rules. This can be made up of fixed assets, cash, debtors etc. From January 2013, it will be a minimum of �£15k of LIQUID assets, which will be a pain, followed the next year by an increase to �£20k or 3 x monthly regular expenditure, so about �£24k in my case. 

The FSCS is pursuing over 562 individual FS firms to recover monies paid out for the failure of Keydata alone and will probably pursue advisers who recommended Arch Cru too. My firm is not on either list of those being pursued, firstly as we had no involvement with Arch and with regard Keydata, probably because of 1 of 2 things 1. Unlike some idiots, we only recommended a modest proportion of a clients portfolio used these Keydata plans and 2. The FSCS legal action is being done in stages, starting with those who used the plans first (we were late adopters)

If in a few months time I get a letter from the FSCS threatening legal action to recover the monies, whilst I have no doubt I like many other firms would be able to defend myself robustly, especially as none of my clients complained about the advice, they all complained about the misleading statements of Keydata itself, the issue becomes how should the potential or contingent liability shown on our next accounts? My belief is that it would reduce our capital adequacy by the potential amount and could result in us being deemed insolvent. Ironically that would mean the FSA would have to suspend our permissions to advise and would put us in the position where we could not earn the money to defender ourselves against the legal claim! 

Firms PI insurance (like mine) is annually renewable and vast swathes of advisers when their policies came up for renewal have had Keydata claims excluded, so have no PI cover. Even if they did have cover, most PI has an excess on each and every claim of �£5k, so multiplied by just a few clients recommended to use it could wipe out a firms capital adequacy if the legal battle is lost with FSCS. 

It is my suspicion that of the 562 firms who have already received notification of the claim that a VERY large proportion are as a result already insolvent, just no one including the FSA has thought about it. 

I want to head the problem off before I even get a letter (if I do), by making sure the proverbial hits the fan with regard the other 562 firms as the FSCS might not then issue the letters until they have carried out an investigation to actually identify the true culprits rather than going for the easy target (IFAs). 

Any pointers or comments would be greatly appreciated".

Adviser Letter of the Week, Panacea Comment