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Alan Hughes: Regulation is like insurance – it must allow some risk

Complaints against the FCA show that consumers are at more risk if they do not understand how regulation protects them

The Complaints Commissioner recently published two interesting decisions about advice on unregulated investments from authorised firms.

The complaints (FCA00502 and FCA00550) were made by individuals against the FCA and both concern losses as a result of advice received from authorised firms. The losses were ultimately not fully covered by the FSCS as they were about unregulated investments. Understandably, the individual complainants were upset that having received advice from an authorised firm:

  • Those firms had both given poor advice
  • The FCA, in the complainants’ view, had not done enough to prevent that unsuitable advice being given
  • The complainants did not have the ability to obtain full redress from the FSCS once it became clear the firms in question were unable to meet their liabilities and were declared in default.
The complaints raise a number of issues regarding the role of the FCA in both authorising the two firms and then subsequently supervising them.
To an extent it can be frustrating reading these decisions as, for perfectly valid reasons of confidentiality, the Complaints Commissioner cannot disclose all of the information concerning the firms in question.
It does express some concern the FCA supervisory staff do not adequately understand the “risks and implications of inadequate supervision”. The Complaints Commissioner says the FCA will continue to make its supervisory staff aware of those risks.
This could be viewed as alarming. You would expect that for someone working for the regulator in a supervisory role, an understanding of the impact of that role and whether it was carried out adequately or not, would be a basic requirement.
Striking a balance
However, the key theme I picked up from these two complaints was an implication that the complainants appeared to have an expectation that, by taking advice from an authorised firm, they were, essentially, eliminating all of their risk. And in the event something went wrong, as it did when they received very poor advice, they expected they would be adequately compensated and would not lose out. Someone else would pay.
No one disputes that the FCA is there to protect consumers, and if it executes its role correctly it will often be able to prevent harm to consumers before it has happened.
The FCA should also be continually reassessing its own processes and approach to ensure that it does this to maximum effect with the resources it has available. It is clear the FCA does not always get this right.
What also has to be accepted, however, is that the FCA, alongside the FSCS, is not intended to operate a ‘no fail’ regime, and no financial regulatory regime can or should seek to eliminate absolutely all risk to consumers.
This is for the simple reason that the only way to do that is not to allow anyone to take any risk at all, ever. Like many things there is a balance that must be struck.
One area touched on by the Complaints Commissioner in the responses is that consumers may be under the false impression that their investment is always 100 per cent protected because a firm is authorised. I certainly consider that the FCA has further consumer education work to do on this issue alongside the work referred to above in executing their consumer protection work as best it can.
If consumers believe their investment is 100 per cent protected provided they deal with an authorised firm, that essentially disincentivises the consumer from seeking to mitigate their own risk to start with by taking sensible decisions. It removes any element of caveat emptor.
That isn’t a desirable outcome as it strikes the wrong balance and creates false expectations of what the regulatory regime can deliver.
Consumers may be under the false impression that their investment is always 100 per cent protected because a firm is authorised
If you think of the regulatory regime as an ‘insurance policy’ of sorts, it also goes against the basic principle of insurance – an insurance policy is never designed to make the policyholder indifferent to whether or not they suffer a loss from the risk insured. If they do that, the risk of that loss occurring will increase exponentially and the insurance would become unaffordable.
Element of risk
Consumers must understand that the regulatory system can and will seek to protect them, but it will never be 100 per cent successful and there is always an element of risk with any transaction, even if you are dealing with an authorised firm. It is the FCA’s job to strike the right balance in conveying that message.
Consumers should also seek to protect themselves where possible and will take more effective steps to do that if they understand the inevitable limitations on the protection that any regulatory regime can offer.

Alan Hughes is partner at Foot Anstey


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Richard Anderson 11th July 2019 at 4:57 pm

    regarding Alan’s comment “if it executes its role correctly it will often be able to prevent harm to consumers before it has happened”, I dont think this is the case. The FCA collects a great deal of data on a historic basis, i.e. after the event. It then analyses that data to identify undesirable trends, then looks deeper. This means that in some cases at least, it is spotting many problems after they have happened, not before.

  2. Julian Stevens 12th July 2019 at 9:14 am

    The FCA could secure for consumers considerably better protection by requiring all advisory firms to hold PII cover relevant to ALL areas of activity. Most defaults are caused by firms having sold off-piste junk for which they don’t.

    Yet Andrew Bailey has been quoted as saying that this is an issue about which the FCA is, incredibly, not particularly concerned. Perhaps Nicky Morgan should ask him how he can possibly justify such a laissez faire stance. It’s a flagrant abdication of the FCA’s responsibilities to “secure an appropriate degree of protection for consumers”, as claimed on its own website.

    It wouldn’t even be difficult to police. Firms would be required to declare annually that they hold appropriately comprehensive cover and the FCA could police this by requiring a certain percentage of them to supply copies of their policy and their IDD for comparison. False declarations would be punishable by an immediate ban on all regulated activities.

    For heaven’s sake, why doesn’t the FCA just GTF on and DO IT?

  3. How do we square this with FSCS saying advisory firms will now pay for LCF mini bond failures when they were not even authorisedti give advice nor ever paid FSCS fees?
    Justice has to be seen to be done and making advisory firms pay for an unauthorised to advise firms failure and sales puffs from their marketing firm makes a mockery of this article

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