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Blog: 10 regulatory rumours busted

Advisers operate under a greater volume of regulation than ever before. That is an undeniable fact when looking at the paginations involved in Mifid II, Priips, GDPR and the like.

Yet at the same time, there can be understandable frustration on the part of the various regulatory agencies that some advisers still fail to understand the spirit, not to mention the letter of the rules.

The vast majority of this is borne of unnecessary complexity in regulatory drafting; that much is for sure. I feel sorry for advisers trying to keep up with all of this, I really do.

It is a shame that some of the misguided statements and perceptions below persist, in that they unnecessarily serve to add to advisers’ workloads should they be believed outright. While some are certainly false in the format presented, others require significant qualification, which I hope to provide here.

So, in no particular order, here are some areas that have grabbed my attention where there may be misconceptions about the current regulatory framework.

  1. “You need to say why you didn’t recommend everything you didn’t recommend”.

I have spoken to a fair number of advisers who believe this to be the case, and several compliance consultancies that encourage it as good practice. But it is simply not true. Here is what COBS 9.4.7 actually says. The suitability report must, at least:

That is all that needs to be in a report. It does not mention a full assessment of discounted products, only why you did recommend what you did recommend. It is also something I have heard former FCA man Rory Percival note at a number of conferences.

The only exception is stakeholder pensions, wherebizarrely, you do specifically have to note that one would not have been suitable. (Its the old FSA rule RU 64, if anyone wants to have a look, now translated into COBS 19.2.2R (1), on which the FCA recently released a discussion paper questioning whether it is still relevant.)

2. “We can’t advise on simple stuff like regular Isa top ups because they need a new suitability report, which costs too much”

COBS 9.4.3 makes it clear you don’t need to issue a suitability report, or an updated one:

Packaged products in this case include Isa and child trust fund wrappers holding units in regulated collective investment schemes or investment trust savings schemes.

3. “There is no long-stop on complaints to the Financial Ombudsman Service”

While this is true, strictly speaking, it is misleading. Again, let me refer to the FCA’s Handbook, this time a section regarding dispute resolution:

What this essentially means is that, at some stage, a three-year clock will begin that will time-bar FOS complaints. True, that clock can start at any point, but it has to start some time; when the client should have known that they were suffering detriment.

More to the point, because advisers face so few complaints more than 15 years since recommendation, worrying about losing a complaint from that long ago is like worrying about what you will say on your first date with Beyoncé; it’s an issue, but its not the issue.

As part of the Financial Advice Market Review, data was uncovered that only around 200 complaints a year across the entire market date that far back. Only 30 per cent of those are upheld, and half of the complaints considered that would be prevented by a longstop are around mortgage endowments, which are inevitably going to tail off anyway.

4. “FOS always rules in favour of the consumer”

While we’re on the FOS, it is worth noting that the average complaint uphold rate against financial advisers is around 30 per cent. This tends to be lower than the general uphold rate across financial services (43 per cent in 2016/17).

There are just as many people who think the FOS is biased in favour of advisers or financial services firms at large as those who think it is too pro-consumer. I dealt with this topic in greater detail here, and why I don’t think a significant bias either way is likely given the complete independence of each FOS adjudicator to rule based on what they personally feel is fair and reasonable (for better or worse).

I have also heard advisers ask the question “why do we pay FOS if we don’t get any complaints?”. The answer is you don’t, unless you have more than 25 complaints, because the first 25 cases are free.

FCA data shows that, compared to the 9,657 financial advisers submitting regulatory returns to its Gabriel system in 2015 that had fewer than five complaints, just eight had between 20 and 49 complaints, and none had more than 50, so practically no small advice firms will have to pay for the privilege of defending themselves at FOS.

For advice networks, this may come into play, because they are entitled to the same 25 free cases regardless of membership size, but since FCA data shows that since the vast majority of advisers have no complaints at all or fewer than five, this should not be a significant issue.

The smallest advice firms only contribute £100 in general levy to FOS. That’s pretty good value for access to an independent complaints adjudicator instead of having to settle everything in the courts or through your own firm.

It is much more productive to look at the justifiable anger at how Financial Services Compensation Scheme bills are apportioned with regard to regulatory fees than the FOS.

5. “The FCA cannot justify its fee increases”

While advisers are right to complain about the upward pressure on their costs that comes with new regulation, the FCA has had to incur more costs than its predecessor. That can explain to some degree why it has had to pass these on to the industry.

It is charged with a new objective to ensure markets are competitive, taking on the job of the former Office of Fair Trading. It has taken on responsibility for regulating consumer credit firms, and will soon be tasked with being the watchdog for claims management companies too. (Not to mention a £30m Brexit bill, for which it is only levying an extra £5m on firms, and incurring costs on EU legislation such as Mifid II that were beyond its control.)

The FCA costs challenge is a close cousin of “all staff at the regulator are all overpaid”. Here are the pay brackets, for reference:

The first thing to note is that each range is pretty wide. The second is that while compared to the average salary in the UK most staff at the FCA are indeed well paid, the vast majority are not paid nearly as well as the private sector. Some also argue that FCA staff are underqualified or underachieving; this is obviously tough to improve without improving salaries, so we can’t have it both ways.

When it comes to funding control, commenters have asked “why is there never a cost benefit analysis of the FCA’s work?” But the fact is that, under the Financial Services and Markets Act, it must  by law publish a cost benefit analysis before making any new rules (with limited exceptions). Recent examples include planned changes to defined benefit transfer advice and the Senior Managers and Certification Regime.

 6. “Only the one perfect recommendation is good enough for the FCA”

If this was true, frankly, the FCA wouldn’t allow restricted advice at all. The standard is just “suitable”, not “most suitable”. For the avoidance of doubt, see these FCA notes used to train file reviewers for its recent review of advice suitability. The regulator stresses “outcome not process,” – i.e., the FCA isn’t going to hang you on every detail so long as the client isn’t disadvantaged.

File reviewers are also reminded to “keep it balanced” in their judgments, with comments recognising “compromises” and that there is “no perfect solution”.

More generally, the FCA is a principles-based, not a rules-based regulator. That’s why it didn’t take enforcement action over the 7 per cent of cases failing the suitability review or the 42 per cent that breached disclosure rules – it wasn’t actually out to get anyone and most clients ended up with good outcomes.

 7. “The FCA only wants us to drive down our fees”

A similar argument to “the regulator thinks we earn too much”. Both suggest that the regulator is not sincere when it has said repeatedly that it is not up to the FCA to tell advisers how to run their businesses and what they can and can’t charge clients.

Here’s a snippet from those FCA notes used to train file reviewers for its recent review of advice suitability. It is emblematic of the pretty consistent position that the FCA has taken that high charges are not necessarily a sign of bad advice, provided the client understands them.

This same lack of trust over what the regulator says runs through challenges such as “the FCA wants a small advice sector so it’s easier to regulate”; the espoused aim of the entire Financial Advice Market Review and the rest of the regulator’s work in the advice space has been to increase access to advice, not limit it.

8. “The FCA never uses Gabriel returns”

The FCA frequently publishes data bulletins from Gabriel on everything from pensions and retirement trends to adviser charges. Its most recent one presented us with a much-needed picture of the professional indemnity insurance market.

It also repeatedly fines firms for failing to submit returns, and is able to provide specific breakdowns as to exactly which sections have and have not been filled in and when that happened, not to mention the involvement of Gabriel in identifying firms to review as part of its inquiry into British Steel transfers.

There is a better case to be had for the underlying grievance “the FCA never engages with advisers”, which is often lumpedin with regulatory returns claim. There used to be a strong ring of truth in this, but with initiatives like Live and Local, the Regulatory Sandbox and a greater willingness of FCA staff to turn up at events, particularly those run under Chatham House rules, this is also starting to lose a bit of credibility.

9. “The FSCS just pays out for anything”

In rare cases, the FSCS will sanction compensation payments automatically, for example in the recent case of collapsed discretionary fund manager Strand Capital, where client assets could be traced to Sipp providers. However, even in that case, any additional payments for negligence or mismanagement need to be filed separately.

In any claim, the FSCS judges each case individually, and each must pass a “civil liabilities” test – i.e. the same standard a court would have used. Just because one client of one firm got compensation doesn’t mean another client of the same firm will.

10. “St James’s Place has a special relationship with the FCA”

There is an element of both truth and falsehood here. Because of its size, SJP is on what is called a permanent supervision account with the FCA, which means it has dedicated staff overseeing it. Former chief executive David Bellamy has marshalled this as evidence that SJP is treated equally by the regulator – all other firms its size will be receiving the same level of scrutiny under that regime.

But finding another firm that is allowed to charge exit fees in the way SJP does is another matter.

Bonus: “Clients love St James’s Place”

Not regulation, strictly speaking, but a worthy footnote nonetheless. I’m not saying that the above statement isn’t true, but it should be taken with a pinch of salt about how the data is actually gathered and presented. Here are the oft-cited and impressive looking numbers from SJP:

For the value for money question, the phraseology leans slightly towards a yes but, more importantly, is much more likely to be answered by satisfied clients who still have a relationship with their adviser, and therefore more likely to be answered positively given most people don’t want to speak ill of the man managing their money, and can’t speak ill of them if they’ve left as a client already.

There are also four options to rate value for money, of which three are positive, which is not a level playing field. SJP tends to only present the overall number combining good and excellent in literature too, masking the fact that more clients consider the proposition good than excellent value for money.

For the recommendation question, it is a two positive to one negative split which, again, is not the most robust way to gather the data.

Justin Cash is editor of Money Marketing. You can follow him on Twitter @Justin_Cash_1


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 24th July 2018 at 5:33 pm

    Interesting article – thank you.

    I guess when you have a 10,000 page manual, COBS, PRIPPS, MiFID II, there is always going to be a lot of misunderstanding.

    If there is one lesson for the FCA to take away it is that they need to simplify their rules. They really should be ashamed that firms feel it necessary to pay compliance consultants a lot of money for advice. Really, a constructive, engaged regulator should be offering a service that offered advisers help and advice and allowed them to understand their requirements.

  2. Julian Stevens 24th July 2018 at 5:59 pm

    A very good article, Justin. A few points:-

    1. If memory serves, a complaint referred to the FOS in respect of advice given in 1995 was recently upheld which rather suggests that we have no long stop of any sort.

    Also, the FCA’s refusal to restore the longstop on the grounds that there are hardly any complaints more than 15 years old so what are we worrying about is pure mendacity. If there are hardly any complaints more than 15 years old, then why not shut them out altogether and allow advisers to retire without worrying what might hit their doormat 15 years later?

    2. I think the gripe about firms who never receive any complaints having to pay the FOS refers to levies rather than case fees. Obviously, any firm with no complaints isn’t required to pay any case fees.

    3. Whilst the FCA may by law be required to publish a Cost:Benefits Analysis for each proposed project, does it take any notice whatsoever of any challenges to such Analyses? Or are they little more than a formality with a foregone outcome? Sheila Nicoll’s claim that the FCA “takes on board” such feedback was widely derided.

    4. Were the FCA actually to examine and act upon the data collected as part of its GABRIEL system or if the GABRIEL system were actually to ask the right questions in the first place (i.e. be fit for purpose), surely it would have been in a position to identify, home in on and take action against firms selling toxic UCIS? These, as we know, are the main reason for our endlessly escalating FSCS levies.

    That’s it for now. Maybe I’ll think of something else later.

  3. The FOS are able to decide when they believe the 3 or 6 year period commenced.

    As an example of similar capriciousness I recall another adviser telling me that he advise don an endowment in February 1988. The complainant went to the FOS and even though the advice was pre-regulation they upheld the complaint because the plan started on 1 May 1988 and they contended that asking the insurer to start the plan was part of the advice process.

    Similarly, with a pension, any top up or indexation is used as a reason to restart the clock.

    Only those who have been advisers can understand the venality of the system and the unfairness sit produces.

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