Picking an IFA who’ll stay the course.


John Quinlivan

My friend John Quinlivan is fond of asking me “capital or covenant?”

He means me to answer whether my business case is  based on the weight of money I can call on , or my trust that I am right.

He is right to ask the question, when you are dealing with other people’s money, it’s right to have recourse to capital – if you make a serious error.

Most IFA’s have little capital; you only need £20,000 in reserve to do the basics and while your reserve rises as you expand an diversify, the bar isn’t very high. If asked whether they have additional capital to call on in case of a negligence claim, they would point to the limits of their professional indemnity insurance.

The covenant or “promise” made by an IFA is not based on retained capital but based on trust. You trust in qualifications, websites, listings, ratings and ultimately the word of the IFA – that things will go right.

Most people chose an IFA based on covenant rather than capital. They are not expecting an IFA to go bust.  But going bust is precisely what many IFAs have been doing –  at an alarming rate ; especially in the hinterland of the large steelworks where steelworkers with large BSPS transfer values, looked for their services.

Such was the demand in 2017/18 for these transfer values to be realised as more readily available capital that could be drawn on, that for many steelworkers, capacity was the issue. There simply weren’t enough IFAs in town. Questions about the covenant of the IFA were secondary, the job had to be done and Terms of Business were signed with little thought to resulting risks.

The latest intervention from the FCA is against an IFA that is known to me, one of the Directors is a member of my AgeWage and Pension PlayPen linked in group. The unfolding story shows how the slow car-crash following the debacle of “time to choose” is playing out as  a series of mini-catastrophes.

None of the players would have ever thought that the consequences of what appeared a “no-brainer” decision, would be so public or so ruinous.

The FCA’s decision to prevent AJH from depleting its capital without its permission poses many questions as to how the protections that the FCA put in place – fell away. What is clear, from reading the judgement and AJH’s accounts, is that the dividends payable to AJH Directors are small relative to the claims being generated by the Financial Ombudsman.

The sad end-game

What is the context for this intervention?

And why has it taken till 2022 for this action to be taken?

Rich Caddy, a steelworker himself, has taken the trouble to look at the IFA’s accounts, these show the depletion of capital has been going on some time

IFA Andy Boyt, who after 40 years service, describes himself as a “financial services survivor” , questions the proportionality of this judgement.

Capital or Covenant?  Can the customer make that choice?

If we were to determine our decision on who to take advice to those properly capitalised, we would find ourselves with a short list of what IFAs call “nationals”, firms with private equity or insurance company capital and recourse to more if time get hard.

The lucky claims are against IFAs whose pockets are lined with inward investment.

But most IFAs are not like that, they pride themselves of being their own masters and indeed the value that many place in such IFAs is that they are able to operate with a personal service that is lost by the homogenisation of the processes which comes with scale.

But choosing an IFA primarily on trust (covenant) means that you are in danger of falling back on the FSCS minimum, if things go wrong.

The National Audit Office will no doubt be noting this and the fact that many of these smaller IFAs were promoted on websites such as “Unbiased”, “Vouched For” and the Government’s own directory at MaPS.

Should such listings have included a “financial strength” assessment or score? It is easy to ask such questions in retrospect, but I doubt that many potential clients would have acted on such information in the circumstances of Time to Choose.

The NAO will have to ask itself whether small IFAs were properly insured and why that insurance fell away in cases where IFAs went bust because of professional negligence claims.

And the NAO will have to ask whether the FCA should have reacted sooner to the capital depletion going on , not just at AJH Financial Services Limited.

The FCA has made this statement on the matter

We will act to prevent firms from disposing of assets which may be required to pay redress. We will look to impose requirements where firms have not acted in accordance with the expectations in our Dear CEO letter or have attempted to phoenix or put in place structures to avoid potential redress liabilities. We will continue to monitor firms who have advised on BSPS transfers and take action where necessary.

No doubt this is the right way to go but it will be scant comfort to many whose redress has been capped because the IFA did go bust, for whatever reason

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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