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Revealed: consolidation is fuelling FSCS bills worth millions

Three advice giants have acquired businesses, client banks or advisers from firms that have racked up FSCS claims worth a combined £46 million. This is just one of the findings from exclusive research by New Model Adviser®

Revealed: consolidation is fuelling FSCS bills worth millions

The current trend for buying advice businesses is exacerbating claims on the Financial Services Compensation Scheme (FSCS), exclusive research by New Model Adviser® can reveal.

Just three advice giants – AFH, St James's Place (SJP) and Fairstone – can between them be linked to 35 collapsed firms with FSCS liabilities worth a total of £46 million.

In some cases advice giants are buying only certain assets from advice firms. In others they are purchasing only one advice firm in a related group of firms. Or they are just hiring the owners or people who worked for the advice firm. Typically these firms are then declared in default so the FSCS has to step in.

The crucial point is that the advice giants typically are not taking on the liabilities of the firms. They are cherry-picking the good parts. This means there is less incentive or assets to fight or meet claims from disgruntled clients when they come in, heaping liabilities onto the FSCS.

When New Model Adviser® asked the FSCS why it was unable to pursue liabilities in these cases, the organisation’s chief corporate affairs officer Alex Kuczynski said it is powerless in its position.

‘We can only claim where there is a legal liability from whoever it is to the original investor,’ he said. ‘So the original investor would not have been able to make a claim against a successor, a subsequent owner or a new principal, and neither are we.

‘We are in no better place than they would be.

For us the problem is often that claims don’t manifest themselves straight away. Everything has moved on; the regulator only has information that was available at the time.’

New Model Adviser® is not saying the advice giants have done anything illegal or are cheating the system. Indeed, they are often the biggest contributors to the FSCS themselves because of their scale.

But our findings raise important questions about how the FSCS system operates in a market rife with consolidation and whether changes need to be made to protect the FSCS and the advisers who contribute to it.

Our findings and methodology

We wanted to know what happens to claims made against firms after they have been acquired.

New Model Adviser® trawled through data from the Financial Conduct Authority (FCA) register and Companies House filings relating to firms declared in default by the FSCS over the past five years. Our research revealed:

  • AFH, one of the most prolific consolidators in the UK, has bought firms that later generated FSCS liabilities worth £28 million in one deal and £5 million in another.
  • The UK’s largest advice business, SJP, has recruited 29 directors from firms that subsequently faced claims of £8.1 million that fell on the FSCS.
  • Fairstone, a consolidator that manages £5 billion of clients’ money, has also taken on 14 directors from firms that have faced £5 million in FSCS claims.

New Model Adviser® collected information on all pension and investment advice firms declared in default by the FSCS between July 2013 and October 2018. This involved using the FCA register to establish whether directors or, in the case of LLPs, partners, were still active in financial services.

Our findings showed SJP, Fairstone and AFH had the highest number of active directors from these firms.

After this was completed, we asked the FSCS for details of how much it has paid out for claims against individual businesses that appeared to have been bought by or joined a larger firm.

This is where we discovered the figures for compensation paid out mentioned in the article. 


AFH purchased the assets of Rochester-based CIB Wealth Management in March 2015 in a deal worth up to £973,350. However, this acquisition did not include the business CIB. Life & Pensions, which, according to the FCA register, traded from the same address as CIB Wealth Management LLP, and acted as the principal for the business whose assets AFH acquired.

Just nine months later in December 2015 the FSCS declared CIB Life & Pensions in default. Since then New Model Adviser® can reveal the FSCS has paid out £28.6 million in compensation for claims connected to CIB Life & Pensions.

Another case involved Specialist Solutions. In April 2011, the Financial Services Authority fined Cheltenham-based Specialist Solutions £35,000 over mis-sold unregulated collective investments schemes (Ucis).

In June 2012, AFH acquired just the assets of Specialist Solutions in a deal worth up to £100,000. It did not buy the company itself.  In April 2014 the FSCS declared Specialist Solutions in default. New Model Adviser® has discovered that since then the FSCS has paid out £5 million in relation to claims against Specialist Solutions.

What does AFH say?

‘Our due diligence was extremely thorough. We actually had our lawyers do the due diligence,’ AFH chief executive Alan Hudson (pictured below) told New Model Adviser® in 2012. ‘The advice liability, because of the structure of the deal, remains with Specialist Solutions, not AFH.

'The individual advisers responsible for the Ucis sales are no longer with Specialist Solutions and therefore not transferring to AFH. I don’t think it is something to ignore. Clearly when you have a history like that it just makes you look a little bit closer and that’s a good thing.'

When asked recently by New Model Adviser® about the FSCS payouts in relation to CIB Life & Pensions and Specialist Solutions, a spokesman for AFH said: ‘AFH bought certain assets of Specialist Solutions in 2012. The company was declared in default in 2014, more than a year after AFH paid the company for those assets.

‘AFH did not buy Specialist Solutions. Neither did it buy CIB Life and Pensions. AFH bought certain assets of CIB Wealth Management in 2014. CIB Life and Pensions was a separate business, from which AFH did not buy any assets.’


SJP has often decried the fact it pays what it feels are ‘elevated’ FSCS fees. In 2017 it paid a levy of £21.2 million, close to the maximum contribution. It has paid in around £100 million since 2013.

Yet New Model Adviser®’s research has discovered that since July 2013 SJP has taken on 29 directors from firms that have later fallen on the FSCS. Claims against those firms usually arose only after they had been acquired. However, the businesses represent a total compensation bill of £8.1 million.

In a statement to New Model Adviser®, SJP said: ‘Full due diligence is always carried out before any company or adviser joins the St. James’s Place Partnership and we will look to ensure claims are resolved where appropriate.’

In one case, the directors of Cardiff-based firm Ingram Graham joined SJP in August 2013. One year later the business was declared in default by the FSCS after complaints surfaced. So far the lifeboat fund has paid out £546,500.

Another case involved a different Cardiff-based firm, Castle Court Consulting. This firm stopped trading in 2012, but two of its directors set up a new business called Castle Court Wealth Management in the same year. It became an appointed representative of SJP in June 2012. The new business traded from the same address as Castle Court Consulting.

In March 2018 an historic claim was made against the original business, which prompted the FSCS to declare it in default. The FSCS has now paid out £267,500 in relation to claims against Castle Court Consulting.


Fairstone is a national advice business with 41,000 clients and more than £5 billion in assets under management. It is also one the largest consolidators in the UK in terms of the firms it buys: in 2018 it bought five firms across the UK.

The FCA register shows that one director of Yorkshire-based firm Watchovia joined Fairstone Financial Management in November 2014. The firm’s other director also joined Fairstone Financial Management in January 2015. 

In July 2016 Watchovia was declared in default by the FSCS. To date the lifeboat fund has paid out £498,000 in compensation in relation to claims against Watchovia.

It is unclear whether Fairstone bought the assets of Watchovia. If it did, there was no announcement of the deal, and no trace of an acquisition in documents filed at Companies House. But the two directors of Watchovia certainly joined Fairstone at around the same time, a year and a half before the FSCS declared the original advice business in default.

Fairstone also lists its Doncaster office at the same address as the original premises for Watchovia. Fairstone has not provided New Model Adviser® with a comment regarding the specifics of the Watchovia deal.

Fairstone chief executive Lee Hartley (pictured above) responded to New Model Adviser®. He said Fairstone would only engage with firms ‘who are not harbouring contingent liabilities’.

‘Where certain business owners have chosen to go through a restructuring process in order to put themselves on a stronger footing for the future, commonly as a way to extricate themselves from other shareholders who have different values and aspirations, we insist that historic liability is provided for by run-off cover to ensure clients are not disadvantaged and any unnecessary burden is not being directed towards the FSCS,’ he said.

Fairstone would not engage with firms that had recommended ‘higher-risk products’ such as ‘toxic funds, Ucis or tax schemes’, he said, adding his business ‘looks closely into the past conduct of all shareholders and advisers to ensure they as authorised individuals have not provided poor advice, as distinct from the regulated businesses in which they have previously operated.’

He said each director must go through a ‘fresh re-authorisation with the FCA’ to become a registered individual with Fairstone. ‘Ultimately, this serves to provide us with the added assurance that the regulator is comfortable with the conduct of the advisers and shareholders themselves before we proceed with any acquisition.’

What about PI insurance?

Professional indemnity (PI) insurance should in theory pay for some of these claims, and stop the FSCS from picking up the bill. After all, every firm is required to hold cover in case of claims made by clients.

But in reality the FSCS struggles to collect anything from PI insurers. According to the FSCS's Kuczynski: ‘We do not think we make enough recoveries under PI policies.’

The FSCS’s corporate affairs chief said there were a number of reasons for the low retrievals, including the fact some PI contracts exclude FSCS payouts. The FCA will ban this practice from June this year.

‘That will help in part, but part of it is that sometimes the firm has stopped trading and the claims comes to light after the policy has lapsed,’ Kuczynski said.

‘Sometimes it’s because of the nature of the firm: either it is in difficulty or it has not had the greatest management, and they have not properly notified [the insurer].’

He also said in some cases PI insurers were setting their excess for claims at the FSCS’s maximum payout limit of £50,000. This means insurers will claim back the first £50,000 of any successful claim, effectively stopping the FSCS from making a claim against them.

‘Sometimes...the excess is too high. So if you have a £50,000 excess per claim, we obviously only pay out at £50,000. Not many of our claims go above £50,000, so there’s actually no commercial value in the policy for us. In fact there is not much value for the firm either.’ 

Citywire view

It is not illegal or against FCA regulations to buy the assets of a company while leaving the liabilities behind. But it is unfair on small firms to expect them to fork out for compensation in the form of the FSCS levy when large firms with deeper pockets are able to buy the good bits of businesses and leave behind what they do not like.

The purpose of the FSCS is to compensate victims of poor advice who have nowhere else to go. It is not intended to indirectly subsidise or facilitate acquisitions by allowing large businesses to pick and choose which parts they acquire.

New Model Adviser® is not suggesting the consolidators have caused £46 million in claims. These claims have usually arisen because of advice given by a business before it was bought, and are not a reflection on the quality of advice given by the national businesses named here. It could be argued these claims would fall on the FSCS regardless of whether a business was bought.

However, in our view, consolidation is creating a situation where the FSCS is paying out more. This is because claims are less likely to be contested when a firm no longer trades independently. PI insurance contracts are also less likely to be invoked, and in many cases have run their course by the time a claim is brought against a business.  

Often the regulators are blamed for rising bills. But, as the FSCS’s Alex Kuczynski admitted, it is powerless in these situations to chase up acquiring firms for the liabilities left behind. It is therefore up to the consolidators to pick up compensation bills so others do not have to.

Equally it places clients in an odd situation. They might not understand why the firm they thought had been bought is now being treated as if it went out of business, just at the point when they want to lodge a complaint. Worse, they can see a larger firm, with deep pockets, which is also telling them it does not need to answer their complaint. These clients deserve clarity and accountability.

With rising numbers of acquisitions across advice, the FCA should look into this issue urgently and take any necessary steps to protect the FSCS scheme. We will be sending the results of our findings to the FCA.

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