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Nic Cicutti: Why unregulated investments should stay covered by FSCS

Pimfa is calling for an exclusion of the products from FSCS coverage. But while a product itself may be unregulated, advice to invest in it is not.

One of the things I have learned over the years writing for Money Marketing is that it never pays to say nice things about the Financial Ombudsman Service.

You can guarantee the online comments section of almost any story about FOS decision-making will have someone leaping in with a hostile diatribe, questioning the financial knowledge of the ombudsman staffers.

The fact that, whether they find for or against advisers’ clients, FOS findings in respect of the vast majority of complaints are unexceptional in their conclusions, is neither here nor there for most of the haters.

This strikes me as bizarre. By and large, the findings published in Ombudsman News that I have read are not just correct in their own right but also often demonstrate both excellent detective – and deductive – skills on the part of the assessor.

Last week, for example, I found myself reading up on some of the FOS’ findings in relation to Ucis products.

This is partly to support a friend of mine who found herself investing in a Ucis as part of her Sipp, without fully understanding the risks involved. My reading was also in the context of an interesting article by Money Marketing editor Justin Cash on the current proposals to reform the Financial Services Compensation Scheme’s funding structures.

Justin reported how Pimfa – like Apfa before it – is campaigning for unregulated investments to be excluded from FSCS coverage. My gut instinct tells me there is not a snowball’s chance in hell of the FCA agreeing to that demand.

Even so, Richmond House Group managing director and Pimfa board member Paul Beasley was quoted by Justin as saying: “Pimfa is not letting this drop. Unregulated investments should mean exactly that, with no compensation, or no compensation by the back door if you like. We will continue our lobbying in the strongest possible terms.”

If so, I would direct him to FOS rulings in this area of investments. In its May/June 2015 edition of Ombudsman News, it published an article detailing some of its findings in respect of a number of complaints relating to unregulated investments.

In one complaint upheld by the FOS, an elderly couple were persuaded by financial advisers to invest £40,000 across several commercial property funds. When the wife died a few years later, the husband reviewed his finances: he found his investment had dropped by 30 per cent.

He and his spouse claimed they were told this particular investment scheme would keep their money safe. But the husband then found out that the investment arrangement involved gearing, which magnified the scale of any gains – or losses in this case.

The elderly gentleman contacted the firm, saying he was unhappy at not being told the scheme was a geared Ucis fund. The firm responded by saying they had no record of advice being given and believed that the couple must have made the investment decision themselves on an execution-only basis. At this point the gentleman went to the FOS.

One of the first steps the assessor took was to establish whether the couple had received advice. The FOS asked for the advisers’ fact-find and suitability letter. The advice firm said it no longer had this document but then supplied records of several meetings the adviser had with the couple, as well as their application forms.

The FCA’s proposals for FSCS reform in full

On an internal note attached to one of the forms, the now-retired adviser was asked to fill in the boxes relating to commission, which more or less killed off the notion that this had been an execution-only transaction.

Moreover, in the notes of meetings with the couple, they had both been categorised as having a “medium” attitude to risk and had been looking to diversify their assets by investing a small proportion of their savings into property.

But there was no record in any meeting with the couple of gearing being mentioned in relation to their investment. The brochure they were given about the investment only referred to gearing halfway through its 90 pages. The firm was also unable to explain why less risky, non-geared funds had not been suggested to them.

It should be stressed that not all of the FOS findings in relation to Ucis investments have been in favour of complainants.

In another case, in which the complaint was not upheld, the assessor identified that the investor had invested in similar products in the past, that his tolerance of risk was “high”, that the documents sent to him stated the risks of this product clearly and unambiguously. A record of a face-to-face discussion in which those risks were discussed was also provided.

What this points to is a clear fact: while the product itself may be unregulated, the advice is not, and the starting point for assessing a claim for compensation, whether paid by the FSCS or directly by a firm of advisers, should always be to consider whether the advice was suitable given the client’s individual circumstances.

Given its occasionally morally-dubious approach to issues of consumer rights, it is perhaps unsurprising Apfa took the view that unregulated investments should be excluded from FSCS coverage. But for Pimfa to follow suit compounds the insult to its members’ clients.

Nic Cicutti can be contacted at



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There are 18 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 16th November 2017 at 1:19 pm

    I kind of agree with you Nic.

    The issue is that unregulated investments should be subject to special permissions that the FCA should only grant to IFA’s that:

    1. Can actually demonstrate that they know what they are doing and
    2. Have sufficient PII cover to ensure that the rest of us don’t pay when things go wrong.

    Giving advice on unregulated investments outside of this should be a criminal offence and the personal assets of the adviser should be accessible to meet any claims.

    Given that this is such a blindingly obvious and simple solution that both protects the FSCS and the client whilst still allowing access to product, it is remarkable that the FCA has not put it in force.

    The question is why?

    • No the question is how.

      How do you stop anyone from recommending these products – the providers aren’t regulated so they wont help. Its impossible – the first anyone would hear about it is years down the line when its all blown up.

      Nic is totally right here. The FSCS is a valuable asset advisers should be holding dear, as it allows us to tell prospective clients that should something go horrendously wrong, they are protected. Many clients value that as a priority.

  2. Here’s Nic on the wind up again – shame I have to read this guys drivel in order filter out the useful information Money Marketing can sometimes provide.

    • Steven: I wasn’t aware that you are forced to read anything from me in order to access the rest of Money Marketing. This is a serious technical glitch and you should ask MM to sort it immediately!

      • Glad to see you haven’t abandoned your facetious and sarcastic comebacks Nic. My point is you often make inflammatory comments in order to get attention and I am in no way convinced your headlines are not intentionally irritating for those people who pay for FSCS – but you knew this. Why should the majority of brokers pay for the greed of a few who wish to advise on nonsense without conscience? it is morally wrong and the FSCS have no appetite to put it right because they seem more interested in funding for growth within their own little industry. You have a position to make good influences Nic, I simply don’t see you bothering with the real issues, easier to simply wind people up!

  3. 23 years in the advice sector, one experience of FOS – in 2016. They were absolutely excellent in terms of their balance, their application of the principles of civil law and most reassuringly, their grasp of the context of the complaint. Not at all what I was expecting to be fair……..based on years of hearing little but negative comment on their adjudications.

  4. Totally agree with Nic.

    However, I could and would have resolve this issue years ago. All it would take is to regulate a few products outside current regulation. Then restrict regulated advisers to regulated products only. Have an additional permission to advise on non regulated investment.
    Why O why you may ask has this not been done. Well, its simple really, they need every adviser to pay, even those that do not advise on unregulated investments, as the regulator and FOS know they would not get the funding needed from those registered to offer unregulated advice alone. Most advisers would not apply, as long as certain investments had been regulated.
    I can already hear the shooting before I even finish this sentence. Fact, most advisers do not push unregulated investments, fact, certain products and investments should be regulated and are not.

    The system works by levying the vast majority that do not use unregulated investments, which is unfair, unethical and not treating advisers fairly.

    My clients are paying for others mistakes, that cannot be TCF.

  5. I agree with Nic on this one

    Regulated advice on a non regulated product falls under the FSCS …end of !

    This brings into question the need for product levies both regulated and unregulated …. if one wants to market a unregulated product or indeed an regulated one a levy must be accounted for or ….. regulated advisers have special permissions to deal in unregulated products and increased levies apply !

    I am, and my clients are; sick to death of paying out for other peoples mistakes and robbery, and I include the FCA in that…. they should have the gumption to have got this sorted out years ago.

    This is important stuff and thank you Nic, the regulator needed to be thinking of this years ago but as usual looking the opposite way, yes the FOS has many faults…. but who is really culpable ?

    The organ grinder or the monkey ?

  6. In relation to the FOS the central issue isn’t how clever the adjudicators/ombudsmen are nor how many exams they may or may not have passed.

    The central issue is that they sit in summary judgement, without being compelled to mirror UK law, there is no independent appeal process and they can award compensation of up to £150,000.

    Not only is the service free to complainants and their assisters but if the complainant fails he/she can still pursue the matter through the courts.

    Quite simply the position is unfair. As Walter Merricks famously stated, when Chief Ombudsman, it is a game where one side is playing uphill.

  7. I think the rational advisers in this matter are suggesting a blanket ban on ALL FCA-regulated firms promoting, advising upon and selling unregulated products. It is fair to say that just calling for a ban on FSCS coverage for unregulated products in itself is not enough, for the reasons you state.

    Not sure why that isn’t abundantly clear to some!

  8. I cant see the logic of this.

    If the investment is unregulated, it should be excluded from the FSCS and flagged as such.

    Advice should be regulated (and as Mr Pleasure suggests, subject to specialist permissions)with the onus on the adviser to prove that the client was insistent / sophisticated etc. Any appropriate redress then comes from that adviser, not from the FSCS or from increased PI premiums charged to those not regulated to advise in this area.

    The problem with including non regulated investments in the FSCS is that this will be seen as a justification to effectively restrict access to them by sophisticated investors / HNWs etc, which is unwarranted nannying.

  9. Nic, in your article you say your friend invested in a SIPP without “fully understanding” Dare I say it but I expect she has no understanding of the Combustion engine, let alone diesel combustion! But I bet she drives a car

    Why should the honest Adviser have to subsidise the unscrupulous Activity of the few by contributing towards the FSCS on none regulated Products, What we should have is Regulated Advice on Regulated Products, both covered by the FOS & FSCS, Non Regulated Products should have no protection, that would be fair. My FSCS levy this year was over £3000 for each RI within my firm, We have NEVER had a complaint. The current funding for the FSCS is untenable,

  10. “Mr IFA, thank you for my report and investing my money for me. I know its a very boring piece of work for you being pensions and ISAs but it’s what I want. Your bill seems very high and you have explained to me that some of it is to bail out investors who have signed documents saying they want very high returns/ rewards and have subsequently lost money. Please can you talk me through why I and many other boring investors should subsidise these high risk investors?”

  11. As noted, payouts are dictated on the grounds that the advice, not the product, is regulated. That’s why we’ll all get milked when idiot ‘advisers’ start putting little old ladies into Peer-to-Peer lending ISAs. See my earlier article:

  12. “By and large, the findings published in Ombudsman News that I have read are not just correct in their own right but also often demonstrate both excellent detective – and deductive – skills on the part of the assessor.”

    So they do not put anything bad about themselves in their own publication.

    That is a bit like saying turkeys do not send out literature advocating Christmas.

  13. “The fact that, whether they find for or against advisers’ clients, FOS findings in respect of the vast majority of complaints are unexceptional in their conclusions, is neither here nor there for most of the haters.”

    Why demonise people with a legitimate argument by labelling anyone who disagrees ‘haters’? Is that really quality journalism?

    That aside, I think this misses the point. I have plenty of experience with the FOS and I agree with the statement about most decisions being unexceptional, they are also nearly always correct too. Nearly. And that’s the problem. Alan Lakey has laid it out quite clearly.

    Summary judgement without appeal in the sum of £150,000 is not only unfair but plain wrong whether it was about financial advice or anything else. No other profession is or would be treated in this way. The article is a red herring when it comes to the real issue.

  14. The purpose of the FSCS is to cover the liabilities of regulated firms which have defaulted on their responsibilities for bad/unsuitable advice. The product/s (and their failure or unacceptably bad performance) that may give rise to those liabilities isn’t the issue.

    The prospect of the FCA changing its rules so that, if their adviser goes bust, consumers who’ve been mis-advised to invest in certain products will be left high and dry with no fund of last resort from which to seek recourse is so remote as to be not even worth debating.

    What needs fixing is the FCA’s patently defective GABRIEL system which, indeed, it has FINALLY admitted, albeit obliquely, in that it intends to start asking firms to declare recommendations to invest in potentially dangerous off-piste products. But, as many have already pointed out, this new initiative is far, far too late. The FSA should have started doing it at least a decade ago instead of standing by and doing nothing. Was it unaware of this looming crisis, which may well get still worse before it gets better, or did it choose simply to ignore all the warning signs? On the latter, it certainly has form. As a result of its regulatory negligence, the damage has already been allowed to happen and its consequences will take probably a decade to wash through the system.

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