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Discrimination Against High Net Worth Individuals?

The views expressed in this article are those of its author and not necessarily those of ShareSoc

The cost of the Financial Services Compensation Scheme has been increasing substantially in recent years, as more mis-selling scandals have proliferated and firms have gone bust. This has led to complaints from those firms who fund the scheme and has led the FCA to undertake a “Compensation Framework Review”.

This includes looking at possible changes to the scope of protection such as limiting it to “mainstream” products. But a more serious proposal is that High Net Worth or Sophisticated Investors be excluded from compensation. The FCA suggests such individuals might be expected to absorb losses, might be able to take their own private action against a failed firm, or would have a better understanding of the risks they were taking when dealing with authorised firms.

But this is a very dubious argument when High Net Worth persons only need to have liquid assets of £250,000 or more to qualify. Many moderately wealthy individuals would have more than that in direct shareholdings, ISAs and deposit accounts. But they would hardly be in a position to finance complex legal actions and FSCS compensation is limited to £85,000 already.

It is not clear what moral principle is being invoked here except that it would potentially save the FSCS scheme money.

I suggest that high net worth or sophisticated investors send in a response to the FCA’s review – go to this link for information and an online response form.

Roger Lawson (Twitter:  )

  1. Cliff Weight says:

    Good point Roger. Anyone who has invested £20k p.a. in an ISA for 20 years will be way ahead of the £85,000 limit.

    Also the Pension Lifetime allowance is more than £1million, so why should the FSCS limit compensation to £85,000.

    The Beafort scandal highlighted the need for a better Special Administration Regime and a higher FSCS limit.

  2. David Harris says:

    The ISA contribution limit was not always £20K per year but none-the-less I understand the point…

  3. David Nicholas Martin Starkie says:

    I share Roger’s sentiments and wonder how such a criterion of £0.25m liquid assets might be enforced. Apart from an argument about what is liquid, will it be based on self-declaration or involve further bureaucratic, intrusive form filling. For example, Fidelity, where I have in total less than the average amount in ISA Equities, invested about 20 years ago, have asked me to complete an 11 page form providing details of my lifetime wealth (including details of where legatees, who may be long dead, got their money from)!!

  4. Paul Greenwood says:

    Totally agree with sentiments expressed above including how would they reliable establish a persons wealth.

  5. Peter Michael Reiss says:

    My wife and I may freely pass assets between ourselves. Would the spouse’s worth be included in any HNW assessment? In terms of liquidity, what happens if I am in the middle of a transaction eg housing which gives me temporary liquidity way in excess of my usual position?

  6. Alan Frederick Selwood says:

    How is the average investor supposed to know that there is a review in progress and how various proposals might impact their finances, other than by being in ShareSoc? Is it widely publicised among those who might be adversely affected? Not likely!
    Using the principle of ‘no taxation without representation’, it should not be permitted for public bodies to reduce or cancel their duty of care and financial support without the agreement of the people at large. And if they don’t ask for people’s agreement to changes, it is tantamount to a breach of the Unfair Contracts legislation.
    It is grossly unfair to remove any support from individual investors on the grounds that they are ‘sophisticated’ or ‘high net worth’.
    My own background in financial services would doubtless put me in the ‘sophisticated’ category, quite apart from any ‘high net worth’ potential. But why should my background or my total assets influence my protection against crooks or incompetents? I am not the culprit, but could easily be a victim. Think Icelandic savings accounts in the late 1980s, or Beaufort, or Globo, or Patisserie Valerie, all of which I could have lost money on, through no fault of my own. There but for the grace of God, I could have gone!
    I don’t think that public bodies can have it both ways. Either they provide proper protection, or they dismantle themselves and give a very public warning of Caveat Emptor. Otherwise they get paid for not providing the expected service, and become merely ‘snouts in troughs’. There are enough of those already.

  7. Alan Selwood says:

    From my experience of dealing with the public over some 25 years in the past in financial matters (pensions, investment and life assurance), I know that virtually all members of the public have no knowledge of, or understanding of the complexities of investments, savings, insurance and pensions – nor would one expect FSCS staff to understand the first thing about surgical procedures, Mandarin Chinese or low-temperature physics! Those in the higher echelons of finance rarely seem to understand that what is to them very simple and straightforward is an impenetrable fog to everyone else.

    Mr & Mrs Joe Public are not trained in finance or risk assessment, and do not have the experience to sense which advisers are more interested in their own take-home pay than the financial well-being of their clients. Clients need very simple, clear-cut guidelines brought prominently to their attention (and not skated over or buried in the small print of a wad of documents). They need to know that what they do is either protected from bad or misleading advice, malpractice, fraud, or that it is not. All the lawmaking in the world will not protect the public from wrongdoers varnishing the truth or concealing the true implications of the investment, savings, insurance, pensions or other financial products that are advised or advertised.

    Rather than loading the financial burden of mitigating risk on to the ‘good guys’, I believe that all providers of financial products should be required to take out insurance that would cover them in the event of failure or claims for mismanagement – the size of the premiums would be rapidly adjusted in the light of claims to ensure that firms and individuals covered their own levels of risk to the consumer. Those with an exemplary record would pay relatively little, while those considered dubious would have to pay heavily to obtain cover, and have a considerable incentive to either mend their ways or drop out of the field. Much better than the loading of greatest cost on those that survive to pay the bill.

    As for trying to offload provision of compensation on to those with big portfolios or with prior specialist knowledge, this would be grossly unfair, because (for example) an elderly investor with dementia who has accumulated wealth over decades without ever really understanding anything much about investment types, their risk and reward would be penalised for having become accidentally “rich” (perhaps only because of the inflationary effects of government policy over decades). Equally, a ‘sophisticated’ investor may have specialist knowledge of (for example) Contracts for Difference, but could be totally clueless about other ‘sophisticated’ financial products or about the level of authorisation applicable to advisers, and their adherence or otherwise to rules governing their use of unauthorised products, etc.

    The level of compensation at £85,000 for many products is low compared with that available in certain overseas countries, and given the rise in the values of investment asset classes largely caused by the policies of central banks, is often inadequate, and can cause fragmentation of investment portfolios over several platforms, splitting of deposits over several deposit-takers, and possibly even creation of multiple SIPPs over several platforms, all in an attempt to ensure that the assets are fully covered by compensation schemes. This adds to costs and complexity. If the limit was £500,000 or £1 million, most of the need to diversify would disappear for almost all investors.

    If instead of adequate compensation, the approach was pure Caveat Emptor, the majority would revert to cash under the mattress, savings accounts with big banks, and perhaps certificated holdings of share certificates, in an attempt to mitigate risk – and this would be extremely harmful to the wealth of the private investor.

    Requiring all ISAs and SIPPs and share accounts to be held by law within a personal Crest framework would also help, and if platforms had to offer these at a realistically low cost in order to be authorised at all, these would soon be provided, thereby removing the Beaufort problem at a stroke.

  8. Paul Greenwood says:

    I strongly support the all ISA’s and SIPP’s moving from nominal accounts to a Crest framework with a link to the individual. aswellas helping with the compensation issue it would solve many other problems with right s and voting etc

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