Enforcement leads to advisers coughing up again

Gill Cardy

At a recent conference the FCA speaker recommended that we read enforcement notices so that we can learn from the mistakes of others.

Suitable advice?

So following reports of another FSCS levy being raised in respect of Catalyst I thought this would be a good place to start. Here is what I learned.

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Catalyst did not give advice or sell the ARM bonds directly to retail customers and was not authorised to do so. Catalyst designed, approved and distributed marketing materials and information about the bonds in the form of financial promotions.

Catalyst distributed misleading financial promotions and did not reassess or amend them at any time to reflect the true regulatory position. Catalyst also sent letters to IFAs which presented an unfair and misleading picture of ARM’s regulatory position.

Marketing brochures included the following statement: “ARM is not regulated by the FSA or any other regulator. This means that compensation will not be available from the FSCS if ARM is unable to meet its liabilities… and you will not be able to refer a complaint against ARM to Fos.” This statement was correct but it was incomplete.

Catalyst received significant benefits as a result of its breaches. It earned gross profits of £4.68m in the year to 31 December 2009 and £3.75m to 31 December 2010.

On 9 April 2010 the FSA requested Catalyst to voluntarily vary its permissions, but it refused to do so and continued to promote the bonds until the FSA used its own initiative powers to prevent this.

Catalyst made a representation in its defence that the FSA knew the regulatory position of the investments but did not require Catalyst to stop promoting the bonds.

The FCA responded that “irrespective of the authority’s knowledge, the fact that requirements were not imposed on Catalyst by the FSA is irrelevant to the responsibility of the authorised firm to comply with the principles for business”.

In response to another representation from Catalyst the FCA said that “relying on regulators to step in, even if they were aware of the issues, is not reasonable”.

Summarised: “Catalyst’s conduct demonstrated a reckless disregard for the interests of investors.”

If Catalyst recklessly misled advisers and investors, and was never authorised to deal with retail investors then why, yet again, must advisers pay for the failure of other previously extremely profitable parties in the distribution chain? And who will stand up to challenge the FSCS on this matter?

Gill Cardy is managing director of IFA Centre