FSCS and FOS in confusion over Harlequin IFA compensation

Tightrope Index

A collapsed adviser firm that gave advice to Harlequin investors has defended a number of Financial Ombudsman Service complaints, only to fold with more than £250,000 in compensation payouts to investors.

The history of Yorkshire-based Stuart Black Limited throws up questions around what criteria the FOS and the Financial Services Compensation Scheme use to judge when redress is due.

Stuart Black was an investment adviser at St James’s Place from 2001 to 2004, according to his FCA register entry, before setting up his own firm.

According to FOS decision notices passed to Fund Strategy’s sister title Money Marketing, Black had at least four similar complaints regarding investments into unregulated overseas property scheme Harlequin dating from September 2015 and through 2016.

One of these involved two clients who had been introduced to Harlequin by timeshare broker Regal Consultants. The clients were looking to sell their existing timeshare and thought Regal would buy it from them if they invested £50,000 in another off-plan property.

50/50 Finance, another firm, told the clients to speak to Black for the remortgage they would need to release funds for the property investment, and the clients thought Harlequin would pay the monthly mortgage payments.

The clients complained Black mis-sold them a lifetime mortgage, and they would not have put money in the Dominican Republic property scheme, which was never built.

The fight between the FOS and the FSCS

All four complaints were rejected by the FOS, which defended Black’s “detailed” suitability letters, and noted Black did not actually sell the investment but only provided mortgage advice.

The FOS says Black also advised the clients to take legal advice on the investment’s risks, and that the clients had decided to invest in Harlequin before they met him.

Stuart Black Limited was declared in default by the FSCS in October. In FSCS rulings against Black, more than £255,000 has been paid out in compensation.

The FOS operates on what is fair and reasonable by adjudicators, while successful FSCS claims must pass a civil liabilities test, that is, whether a court would have awarded damages where contractual or legal duties were breached.

Payments from the FSCS are funded out of the adviser funding pool, whereas FOS compensation is paid directly by the firm that loses the complaint.

The Claims Bureau chairman Peter O’Donnell has written to FOS chairman Sir Nicholas Montagu to highlight the discrepancy.

O’Donnell says: “This disparity needs to be understood and tested to affect change. Otherwise victims will be subject to the risk that if the defendant remains in business and a complaint is considered by the FOS, compared to the FSCS, the chances of it being upheld is probably 98:1.”

Montagu wrote in response: “You say that senior members of staff at the ombudsman service have conceded that complaints we have handled are too complex to be appropriately assessed. I have to say that I completely disagree with this interpretation. It is misleading to compare our handling of individual cases with those being handled by another body with a quite different remit, or to attempt to draw general conclusions from doing so.”

FOS spokeswoman says: “While both the FSCS and the ombudsman service were set up under the Financial Services and Markets Act 2000, we were given different rules and powers to reflect our different roles. This means that it is quite possible that we can come to different answers on the same cases.”

An FSCS spokesman says: “The FSCS assesses cases individually and the civil liability test is applied to our decisions which, in summary, means we need to be satisfied that the firm owes a legal liability to the consumer before paying compensation. The FOS is a separate and independent statutory body and has its own set of rules.”

Black did not respond to a request for comment.

Adviser views

Michael Saunders
Managing director
Kent Carlyle Wealth Management

It is very unfair on the fee-paying IFA community and everybody else who contributes. It seems those without a moral compass are happy to swan off into the sunset and not worry about paying for the damages they left behind.

Our customers as a proxy pay for that. It is so easy for companies to say they do not like the look of that and fold. It seems the FCA allows too many tainted operations to phoenix. I do not know what the solution is but the funding is a thorny issue.

Boyle-JeannieJeannie Boyle
Executive director
EQ Investors

It’s not a great position to be in, but from a consumer perspective they need to know that that last line of defence is there.