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Sharesoc: Discrimination Against High Net Worth Individuals?

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yorkshirelad1
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Sharesoc: Discrimination Against High Net Worth Individuals?

#469313

Postby yorkshirelad1 » December 30th, 2021, 10:20 pm

(Was stuck for which forum to put this in, so Mods please move as appropriate)

Saw this from Sharesoc and thought it might be of interest

Discrimination Against High Net Worth Individuals?
https://www.sharesoc.org/blog/regulations-and-law/discrimination-against-high-net-worth-individuals/

ShareSoc wrote:The cost of the Financial Services Compensation Scheme has been increasing substantially in recent years, as more mis-selling scandals have proliferated and firms have gone bust. This has led to complaints from those firms who fund the scheme and has led the FCA to undertake a “Compensation Framework Review”. This includes looking at possible changes to the scope of protection such as limiting it to “mainstream” products. But a more serious proposal is that High Net Worth or Sophisticated Investors be excluded from compensation.


I have no connection with Sharesoc other than as a subscribing member

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#469366

Postby GeoffF100 » December 31st, 2021, 10:32 am

"But this is a very dubious argument when High Net Worth persons only need to have liquid assets of £250,000 or more to qualify."

I agree. Perhaps we should all reply to the FCA consultation. I better proposal is that the FCA should do a better job of weeding out the cowboys.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#469494

Postby GeoffF100 » December 31st, 2021, 9:07 pm

I have read a sizeable part of the Compensation Framework Review:

https://www.fca.org.uk/publication/disc ... dp21-5.pdf

I do not think that there is any great cause for alarm at this point. I expect that execution only investors like us will continue to have compensation on much the same basis as in other major markets. The main problem facing the FSCS is clueless people given bum advice. Restrictions in our ability to make claims in that area would not have a direct effect on us. Indeed, an excessive compensation culture is not in our interests, given that the FSCS is funded by levies on financial services firms. We just want the investments that we have bought to be held safely. We do not want to have to pay our brokers hefty commissions to compensate people who transferred their pensions to a scam.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#469711

Postby Aegis » January 2nd, 2022, 1:13 pm

It's worth remembering that you need to specifically ask to be categorised as a high net worth or sophisticated investor, and you have to sign a form stating that you understand the consequences and the reduced risk. This wouldn't affect retail clients, and by default every investor is a retail investor regardless of fund size or experience, so you would need to consciously make the choice to be recategorised as one of those additional classes. The usual reason is to allow you to invest in high-risk ventures, like EIS and VCT portfolios, which should always have been considered the very high risk side of investing.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470011

Postby GeoffF100 » January 3rd, 2022, 6:35 pm

Good point Aegis. I have read the relevant sections of the perimeter Report:

https://www.fca.org.uk/publication/annu ... 020-21.pdf

Currently, to self-certify as a ‘high net worth’ investor, a consumer
needs an annual income of £100k or more, or £250k or more in net
assets excluding their primary residence and pension assets. This
is significantly lower than the threshold used in other comparable
jurisdictions to classify consumers as ‘high net worth’. The
introduction of pension freedoms has also weakened the effect of
excluding pension assets from the calculation of ‘net assets’, as older
consumers can now readily convert their pension into cash.
There is also no requirement for firms to check that consumers
meet the relevant criteria to self-certify as ‘high net worth’ or
‘sophisticated’. We have seen evidence of unauthorised firms abusing
these exemptions by coaching ordinary consumers to self-certify.
Investors who do not meet these tests are being ‘pushed’ through
them, often by unregulated firms.


It is clear from that passage that we count as gullible and penniless as far as the FSCS is concerned, unless we declare ourselves to be otherwise to gain access to very high risk investments. The FCA clearly wants to make it harder for us to self certify as high net worth, rather than make it easier. I do not believe that there is an issue here.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470034

Postby Aegis » January 3rd, 2022, 9:22 pm

Aegis wrote:It's worth remembering that you need to specifically ask to be categorised as a high net worth or sophisticated investor, and you have to sign a form stating that you understand the consequences and the reduced risk. This wouldn't affect retail clients, and by default every investor is a retail investor regardless of fund size or experience, so you would need to consciously make the choice to be recategorised as one of those additional classes. The usual reason is to allow you to invest in high-risk ventures, like EIS and VCT portfolios, which should always have been considered the very high risk side of investing.


Should say "reduced compensation", not "reduced risk". Definitely not what I meant to say!

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470069

Postby scrumpyjack » January 4th, 2022, 8:28 am

A better way to reduce these scams would be for the norm to be that the perpetrators get long term prison sentences, though I also have much sympathy for the view that people generally should be more responsible for their own serious errors of judgement and that compensating everyone for their own stupidity creates a 'moral hazard'.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470075

Postby Aegis » January 4th, 2022, 8:46 am

scrumpyjack wrote:A better way to reduce these scams would be for the norm to be that the perpetrators get long term prison sentences, though I also have much sympathy for the view that people generally should be more responsible for their own serious errors of judgement and that compensating everyone for their own stupidity creates a 'moral hazard'.


Yeah, there's a hell of a lot more the regulator could do, but they seem happy to just be fairly toothless against real scams.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470088

Postby Dod101 » January 4th, 2022, 9:26 am

scrumpyjack wrote:A better way to reduce these scams would be for the norm to be that the perpetrators get long term prison sentences, though I also have much sympathy for the view that people generally should be more responsible for their own serious errors of judgement and that compensating everyone for their own stupidity creates a 'moral hazard'.


I think that is the point. If so called investors know that compensation is available anyway, why should they turn down what seems a more attractive offer rather than do some real diligent investigation? The result could be more compensation paid out which has got to come from somewhere. It is similar to the popular misconception that inflating insurance claims does not matter as somebody else will pay and insurers over charge anyway.

I have no argument about excluding so called High Net Worth individuals although the definition of HNW seems quite modest. We should remember though that most of us contributing here are unusual in having a fair amount in liquid assets.

Dod

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470112

Postby BobGe » January 4th, 2022, 10:52 am

In order to be able to trade / invest in some fairly simple instruments brokers / nominees require clients to submit that they are sophisticated / HNW individuals. This regime has been tightened considerably in recent years. At the same time there is nothing to stop ordinary folks investing (often speculatively) in firms listed on AIM (etc.) where the very existance of the firm is dubious, momentum 'investing' (riding the wave), speculation on Crypto and alike (surely gambling?). But the same investor will likely be blocked from participating in a subscription share, warrant, or simple debt instrument. Even when 'signed off' it is increasing difficult to find a competitively priced on-line platform which will support such products. As a result the inspiration for anyone to educate themselves wanes and stupidity is the general order of the day lead by 'app' users on commission free platforms following trends fed to them via social meeja. Whilst the 'street savvy' have increasingly expansive, sophisticated and low cost tools at their disposal, dumbing down is the accepted way forward for the general public. Is it any wonder that the scammers (in the broadest sense) are having a field day?

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470140

Postby 88V8 » January 4th, 2022, 11:39 am

I have had to certify as an HNW to buy some products such as convertibles, even something as innocuous as BBYB (now redeemed) and AXI which is an investment trust.

If that were to lead to me being totally excluded from compensation if my main-stream broker went bust, so be it, though it does not seem very fair nor at all logical.
I thought we had elected a Conservative govt, but it does sometimes seem more like Labour by proxy.

V8

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470266

Postby GeoffF100 » January 4th, 2022, 6:38 pm

88V8 wrote:I have had to certify as an HNW to buy some products such as convertibles, even something as innocuous as BBYB (now redeemed) and AXI which is an investment trust.

If that were to lead to me being totally excluded from compensation if my main-stream broker went bust, so be it, though it does not seem very fair nor at all logical.
I thought we had elected a Conservative govt, but it does sometimes seem more like Labour by proxy.

The Compensation Framework Review is the basis for a consultation. One possibility aired is blocking HNW individuals for certain aspects of compensation (undefined). I do not think that means insolvency of an investment platform. I think they are suggesting that if you can reasonably be expected to know that an investment is very high risk, you should not be compensated if it tanks. That would be true anyway if you are an execution only client. If you pay for advice, it would be very dubious to claim that you did not need advice because you have £25K available.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470270

Postby GeoffF100 » January 4th, 2022, 6:53 pm

I do not have a clear picture of how most of the FSCS claims arise.

In recent years, we have had two failures of brokers that none of us would have touched with a barge pole. I suggest Googling Beaufort Securities and SVS Securities. The stories are horrible. Beaufort did cost a lot of money, and the FCA should have done a better job managing the situation. SVS was probably relatively cheap. Nonetheless, failed brokers are a small part of the FSCS bill, which was about £700 million last year.

Advisers are supposed to have insurance. The FSCS only picks up the tab if the money cannot be obtained from either the adviser or his insurer. What remains? Criminality, gross mismanagement, and failure of oversight perhaps.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470509

Postby murraypaul » January 5th, 2022, 3:03 pm

There is a list of failed firms here: https://www.fscs.org.uk/making-a-claim/ ... irms-list/

I don't think there is any information about how much, if anything, each failure has caused compensation to be paid from the fund.

Edit: There is a breakdown by class, with some of the larger failures listed for each, here: https://www.fscs.org.uk/globalassets/an ... final1.pdf

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470534

Postby GeoffF100 » January 5th, 2022, 4:41 pm

murraypaul wrote:There is a breakdown by class, with some of the larger failures listed for each, here: https://www.fscs.org.uk/globalassets/an ... final1.pdf

I looked at the first failure on the list: London & Capital Finance:

"After LCF entered administration, FSCS carried out an extensive and complex investigation into how LCF operated. Our aim was to determine if any of the activities LCF carried out were regulated, as this is the only way its customers could be eligible for FSCS compensation."

If they were not regulated, why should the FCA be paying compensation? (The government is also paying compensation that is not covered by the FSCS.) Do investors not have a duty to check that a financial services firm is on the FCA register before investing their money? We also have banks being made to compensate people who give away their money to scammers. Ultimately, we all pay for this.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470738

Postby murraypaul » January 6th, 2022, 10:26 am

GeoffF100 wrote:
murraypaul wrote:There is a breakdown by class, with some of the larger failures listed for each, here: https://www.fscs.org.uk/globalassets/an ... final1.pdf

I looked at the first failure on the list: London & Capital Finance:

"After LCF entered administration, FSCS carried out an extensive and complex investigation into how LCF operated. Our aim was to determine if any of the activities LCF carried out were regulated, as this is the only way its customers could be eligible for FSCS compensation."

If they were not regulated, why should the FCA be paying compensation? (The government is also paying compensation that is not covered by the FSCS.) Do investors not have a duty to check that a financial services firm is on the FCA register before investing their money? We also have banks being made to compensate people who give away their money to scammers. Ultimately, we all pay for this.


They investigated to find out if they should pay compensation.
Specific activities are regulated, not just firms.
We worked as quickly as possible because we know LCF’s failure has had dire consequences for its customers. By 19 April 2021, we had finished our review of the evidence gathered during our investigation and had paid over £57.6m to 2,871 bondholders who were eligible for compensation under our rules


The government then chose to also compensate people not covered by the FSCS, that is their decision, not the FSCS's.
Also on 19 April 2021, the government announced the details of a one-off compensation scheme. This scheme will provide compensation to eligible bondholders who FSCS couldn’t compensate. FSCS is administering this scheme on behalf of the government, and we will pay compensation to all eligible bondholders by 20 April 2022. More details about this scheme can be found at www.gov.uk/LCF-compensation-scheme.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470749

Postby scrumpyjack » January 6th, 2022, 11:00 am

I think the reason HMG pays up is that it is generally where there was negligence on the part of the FCA or other state body (eg they had been warned that a company was engaged in nefarious practices but did nothing about it). You would think that if civil servants have been negligent they should suffer in some way but it seems rather that they get promoted! The Equitable compensation was certainly paid out for that reason and I suspect it was the same with London and Counties. The likes of Howard Davies and Andrew Bailey then carry onwards and upwards.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470775

Postby Dod101 » January 6th, 2022, 12:05 pm

GeoffF100 wrote:
murraypaul wrote:There is a breakdown by class, with some of the larger failures listed for each, here: https://www.fscs.org.uk/globalassets/an ... final1.pdf

I looked at the first failure on the list: London & Capital Finance:

"After LCF entered administration, FSCS carried out an extensive and complex investigation into how LCF operated. Our aim was to determine if any of the activities LCF carried out were regulated, as this is the only way its customers could be eligible for FSCS compensation."

If they were not regulated, why should the FCA be paying compensation? (The government is also paying compensation that is not covered by the FSCS.) Do investors not have a duty to check that a financial services firm is on the FCA register before investing their money? We also have banks being made to compensate people who give away their money to scammers. Ultimately, we all pay for this.


These comments are all somewhat confusing. If the FCA or the Government are paying compensation anyway, whether the firm is regulated or not what is the point of regulation? And why then should investors check that a financial services firm is on the FCA register if it makes no difference?

Dod

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#470790

Postby GeoffF100 » January 6th, 2022, 12:21 pm

Dod101 wrote:
GeoffF100 wrote:
murraypaul wrote:There is a breakdown by class, with some of the larger failures listed for each, here: https://www.fscs.org.uk/globalassets/an ... final1.pdf

I looked at the first failure on the list: London & Capital Finance:

"After LCF entered administration, FSCS carried out an extensive and complex investigation into how LCF operated. Our aim was to determine if any of the activities LCF carried out were regulated, as this is the only way its customers could be eligible for FSCS compensation."

If they were not regulated, why should the FCA be paying compensation? (The government is also paying compensation that is not covered by the FSCS.) Do investors not have a duty to check that a financial services firm is on the FCA register before investing their money? We also have banks being made to compensate people who give away their money to scammers. Ultimately, we all pay for this.

These comments are all somewhat confusing. If the FCA or the Government are paying compensation anyway, whether the firm is regulated or not what is the point of regulation? And why then should investors check that a financial services firm is on the FCA register if it makes no difference?

The FCA does not appear to be good at proactively identifying companies that are carrying out regulated activities. It should reduce the number of claims (which is the point of the consultation) if they only have to look at registered firms.

The present situation appears to be confused. The FSCS recently did not pay compensation when a money transfer firm was permitted to hold client money for three days, but held it for longer. In that case, they do seem to have taken the position that the client should have checked the register.

The difference between the two cases may that the LCF clients were perceived to be more deserving in some way than the money transfer clients, certainly as far as the government element of the compensation is concerned.

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Re: Sharesoc: Discrimination Against High Net Worth Individuals?

#472586

Postby UncleEbenezer » January 12th, 2022, 10:37 pm

Dod101 wrote:I have no argument about excluding so called High Net Worth individuals although the definition of HNW seems quite modest. We should remember though that most of us contributing here are unusual in having a fair amount in liquid assets.

Dod

Yeah, but the majority of Brits own their own home. I made it to £250k 'cos I was saving for a house without having a sufficiently reliable income to qualify for a mortgage[1], so surely by definition my net worth was below the UK average.

[1] Even a low loan-to-value one. I tried to buy a house at a point when my available deposit was about halfway to the £250k, but noone was lending.


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