InvestmentsMay 1 2013

Calls for FCA to force structured product fee ringfence

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Several structured products experts have called on the regulator to make it a mandatory requirement for custodians to ring fence clients’ fees to ensure that if the custodian goes into administration, investors do not have to pay administration fees twice.

The calls come following the news this week that investors in plans previously held by Merchant Capital are to be hit by a fresh wave of fees after the firm and its parent fell into administration.

Reyker Securities, the former custodian of Merchant Capital which has taken on the plans, said it would have to levy new fees despite investors having paid in their initial purchase price because Merchant House Group, parent of Merchant Capital, was no longer able to pay fees owed.

Merchant House fell into administration last month after Reyker issued a winding up order.

Both Ian Lowes, managing director of Lowes Financial Management, and Chris Taylor, founder and managing director of the Investment Bridge, called on the Financial Conduct Authority to make it a regulatory requirement to ensure that administrators have ringfenced funds that will be required for administration for the life of any plan.

However, FCA rules infer that there is no need to segregate the administration fee as it is no longer client money.

The Cass rules state: “Where a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations, such money should no longer be regarded as client money”.

The structured products experts also said that the UK Structured Products Association needs to step up and tackle the issue, as it has remained quiet since Reyker Securities said that investors that purchased Merchant Capital structured products will be hit with further.

Mr Taylor said: “There is surely an obvious FSA/FCA action... make the payment in advance or at least make ringfencing the funds that will be required for administration/custody/plan management arrangements for the life of any plan launched a regulatory requirement.

“I think the level of Reyker’s fees, imposed on investors, who have no ability to question, negotiate or refuse them, is also an important question.

“How can they charge investors a multiple of what hey would charge a provider, for doing less of the work involved (ie the business is already processed and on the books, which is the costly part of the process)?”

At the very least, Mr Taylor said that this is a good example of where UKSpa “could be doing so much more”.

He said: “I do also think this is a good example of where UKSpa could be doing so much more. Why doesn’t it have or get a code book of practices that it expects all members to adhere to, or face sanctions, including expulsion, from Spa?”

Mr Lowes said he “wholeheartedly agrees” that UKSpa needs to agree a code of practice and that administration fees should either be segregated or held in Escrow.

He said: “It should become a regulatory rule but acting ahead of the game shows that the industry takes these things seriously.”

On 26 April, Reyker confirmed that Merchant Capital investors will have to pay a minimum £75 fee for a “typical” investments. On top of this investors will pay £115 per annum if their product is a capital accumulation plan and £195 per annum if it is a monthly income plan with plans to cap costs at £500 and £600 respectively.

UKSpa was not available for comment.