IMA calls for reform of Financial Services Compensation Scheme

An independent review into recent investment failures, including Keydata, should be held.

The call came last night from Douglas Ferrans, speaking at the Investment Management Association Chairman’s Dinner last night.

He also called for a reform of the Financial Services Compensation Scheme, after his industry was hit with a £230m bill, largely to pay for the Keydata scandal.

Ferrans, chairman of the IMA, said: “In the last three years the failure of investment firms has led to a total compensation bill approaching half a billion pounds.

“The scale of recent failures – on a par with the Barlow Clowes scandal in the 1980s – cannot be ignored. 

“There is a need for these events to be the subject of an independent review and for lessons to be learned. 

“While we understand that legal and process issues may mean that such a review may not be able to start immediately, it will need to take place in due course and its conclusions must be published. It will then provide valuable lessons for the new Financial Conduct Authority to take on board as it starts its work.”

He went on: “Probably the biggest event to hit the UK asset management industry over the last year was a bill for more than £230m from the Financial Services Compensation Scheme. 

“The liability was largely the apparent failure of a small structured product provider which had been promoting bonds issued in Luxembourg backed by a life settlement portfolio. This had nothing to do with the fund management industry, but the impact was on us.”

He said: “Time and again when firms are asked what they need from the regulatory and business environment, the answer comes back ‘stability’. 

“Firms need to be able to plan and to invest with confidence that they will not be derailed by regulator or government-induced events. It is one of the tests by which, in a competitive global market, jurisdictions are judged.

“An unexpected bill for £230m arriving out of left field comprehensively fails that test. Our regulators and legislators should be in no doubt about the impact that this episode has had not just in the UK but among global investment management firms around the world. 

“Major firms may even now be developing plans as to where to locate their European operations. If there is no reform of the Scheme, this will become a big item in the column headed ‘not the UK’.”

Ferrans said: “Reform of the Compensation Scheme is a matter of urgency. I urge the FSA and the drafters of the forthcoming legislation on regulatory reform to make this a high priority.”