The Financial Conduct Authority has responded to adviser criticism it should have been more alert to risks posed by failed Catalyst Investment Group, saying earlier enforcement action could have led to more investor losses.
On Monday (11 April) the regulator fined and banned Timothy Roberts, CEO of the firm which promoted ARM ‘death bonds’ to advisers before his company collapsed costing investors millions, after he lost his final appeal.
The win for the FCA comes after a three year battle to secure the enforcement action.
But some IFAs questioned whether the Catalyst issue, which the Financial Services Compensation Scheme said is among the biggest failures driving recent adviser levies up, could have been spotted by the FCA sooner.
Simon Webster, managing director of Kent-based Facts & Figures Chartered Financial Planners, said: “There are cranks in every walk of life, but the FCA only deals with this stuff after millions of pounds has been lost by investors.
“Instead they [the FCA] are worried about what sort of information we should put in a suitability report; they spend all their time looking at the minutiae.
“That we have to pay more levy is irritating, but the full failure is the lack of imagination at the FCA - if they regulated properly we wouldn’t have these problems.”
Paul Howard, a financial adviser with Reading-based Box Financial Planning, asked why the regulator allowed Catalyst to promote ARM bonds to UK advisers in the first place, arguing it should have been much more aware of what was happening.
“I have worked for a firm which did give advice on the ARM life settlements and they were generally not aware it was unregulated,” he added.
But an FCA spokesman defended the regulator’s decisions over the case, saying they were designed to limit investor losses.
“This has been a lengthy process but if ARM had been successful in becoming authorised in Luxembourg or transferring to Ireland the bonds could have been issued.
“If we had intervened, it is likely that this would have caused a run with a large number of investors withdrawing their money and ARM and/or Catalyst would have collapsed putting investors’ money at risk.”
The regulator added its supervisory action ensured pending investors were told that the ARM bonds were not covered by the FSCS and they had two opportunities to withdraw their money.
“No new money was invested in the time between us discovering ARM was unauthorised and us announcing that we had taken action.”
Clayton Cumming, a partner in Glasgow-based Advice & Wealth Management Solutions, said the FCA could not be expected to pick up every single issue before it blows up. “It is probably hard for the FCA to be on the front-foot all the time and to be on top of everything.
“I think controls are getting a lot tighter around unauthorised investments, but they need to look at the FSCS levy system, because firms that have good processes and don’t get involved in things like Keydata are still getting hit.”
The FCA has said that over the course of this year it will be conducting a review of the FSCS levy, with particular emphasis on its fairness to advisers.
The regulator’s banning and fining of the Catalyst boss followed a ruling by the Upper Tribunal which upheld the FCA’s previous attempts to take action against him and his fellow Catalyst director Andrew Wilkins.
Catalyst was the primary UK distributor of ARM bonds, sold to the public from about October 2007 to October 2009. They were structured products issued by a Luxembourg entity, ARM, the underlying assets of which were senior life settlements purchased in the United States.
In July 2009, the FSA told Catalyst that ARM did not appear to be authorised. At that stage, the FCA said, it was not clear whether ARM needed to be authorised. That same month ARM formally applied for authorisation in Luxembourg and also took steps to transfer to Ireland in May 2010.
In April 2011 the Irish regulator, the Central Bank of Ireland, gave ARM conditions it would have to satisfy in order for its statutory exemption from the requirement to be licensed to be re-instated.
ARM was not able to meet these conditions so the exemption was never re-instated and in August 2011 the Luxembourg regulator, the CSSF, said it would not authorise ARM either.
