In the last few weeks mortgage firms have been invoiced for the latest interim levy from the Financial Services Compensation Scheme. These were for eye watering amounts of money.  The background to the majority of these costs are failed unregulated investments.  Some were to fund Eastern European property builds whilst others were on carbon credits, forestry schemes, film funding and other esoteric investments.  As some were undertaken through a SIPP vehicle brokers are held liable as they are part of the life and pensions intermediation class. The main cost in this bill however comes from compensation to consumers who borrowed money on an interest only basis to fund Eastern European property.  They were dependent on the rental income to service the loan and for the sale proceeds to repay the capital.

As the property has never been built, indeed perhaps was never going to be, the broker advising the loan is being held liable due to the further borrowing, rather than the lender or any investment adviser involved.  As the broker firm which gave the original advice no longer exists, the remaining good firms must pay up.  Most of these transactions took place in 2007 and 2008, so it is surprising they have taken this long to surface.  It is perhaps also a shock to brokers that all of the cost falls on them as the lender had a responsible lending rule to comply with and some responsibility to assess affordability.  Particularly at that time brokers were paid for the introduction of the case, not generally for the suitability of any advice.

Given the complex nature of the history of these transactions and that we would expect the customer would have to prove financial dependence as part of both the original advice and now, we are asking the Compensation Scheme to take us through their policy and processes in some detail.

Part of our concern is that firms are paying compensation as the customer cannot afford to repay their interest only loans, but the funds go direct to the consumer not the lender.  This seems unfair.  If the customer cannot afford the loan then the compensation should go to eradicate the debt.  Of course part of the problem might be that the vast majority of these cases are being brought via lawyers or CMC’s who want compensating for their involvement.

These are complicated areas and the judgements being made to compensate or not has fine margins.  We already know that many claims are refused, but we want to ensure that such significant sums of money being charged to firms who operate responsibly with narrow margins of profitability are being given a proper duty of care.

Finally we are interested in those who ran these firms and where they are now.  How much knowledge did they have of the schemes and if their firms failed leaving such large legacy liabilities behind, are they still being allowed to operate within the regulatory landscape.  Indeed are any of them as guilty of fraud as some of those being vigorously pursued through the courts by the FCA for insider dealing.  AMI will keep asking questions of both the FCA and FSCS until we get full answers to our questions.

Robert Sinclair
February 2017