Advisers’ £90,000 bill for recommending failed funds

Ashley Wassall

So we finally know what the Arch Cru failure - or rather the assumed failings on the part of adviser firms that recommended the funds - is going to cost intermediaries.

It could have been worse, I suppose: Financial Conduct Authority data published today (27 January) reveal a total redress cost of £31.47m; opt-in rates could have suggested a payout in excess of £50m.

Its controversial consumer redress scheme covered £141m of Arch Cru losses. With the regulator predicting in August 2013 that 80 per cent of advice would be deemed unsuitable and that 48 per cent of consumers would opt in, rudimentary maths suggested the payout would be around £54m.

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In its update this morning the FCA revealed that advice was declared unsuitable in 85.4 per cent of cases, with the expected close to 48 per cent opting in to receive a payout from their adviser.

Given the higher rate of unsuitable advice, one might have expected the payout to be even higher still than that feared in August. That it came in lower was either blind luck or remarkable prescience on the part of the regulator and suggests the scheme has paid out to more consumers at the lower end of the investment spectrum.

But the affected advisers will not be jumping for joy. The payout equates to an average of £89,150 per firm, much of which in most cases will come out of their own reserves due to professional indemnity insurance exclusions and excess charges.

Speaking to FTAdviser in 2012, Neil Pointon, PI expert with advisory insurance specialist Howden Insurance Brokers, said most PI policies carried a standard excess on a per-claim basis of £5,000. He added many firms may increase this in exceptional cases such as Arch Cru to £10,000 to £20,000.

And that is if your policy still covers Arch Cru - many insurers have introduced exclusions in the years since the scandal first emerged that cover the failure of these funds, as well as other mass detriment cases such as Keydata.

The FCA data reveal that a total of 3,405 investors will be paid out under the redress scheme, equating to an average per-case cost of £9,218.

What are we to make of all this?

Well, even despite the unexpectedly lower total outlay this is a big hit and some smaller firms will feel the pinch. Whether you feel sympathy depends on whether you feel it was right to lay the cost at advisers’ doors in the first place.

Should advisers have seen what was to come or is this an unfair cost levied with the full benefit of hindsight? Did these advisers do enough research to ensure risk claims were verified and suitability of clients properly considered?

All I’ll say is this: 85.4 per cent seems a high proportion to assert wilful negligence to the extent that such compensation cost is deserved.