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Doubt cast over FCA’s risky sales data

Advisers who recommend investments that could be deemed “non-mainstream” remain unclear over what products should fall within the FCA’s new reporting rules.

As part of its review of the Financial Services Compensation Scheme, the FCA incorporated a new question into Gabriel returns from this April asking advisers to supply data on the number of “non-mainstream pooled investments” they had advised on in the previous year.

However, planners and compliance alike report feeling uncertain over what should be covered by the definition, arguing it is too nebulous or should be tightened.

FCA figures showed a third of all FSCS claims in the three years to 2016 were linked to the sale of NMPIs, characterised by “unusual, speculative or complex” assets.

The move to gather data on risky product sales would inform any potential risk-raiting of FSCS levies in the future, the FCA said.

TCC director Phil Deeks says he has been fielding queries from advisers on how best to disclose necessary information, and there is still a lack of clarity over what should be included.

Deeks describes it as a “rabbit hole” to determine which investments are caught by NMPI rules.

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Threesixty managing director Russell Facer, who was part of an FCA panel feeding into the FSCS, also expects advisers to be confused.

Few advisers recommend NMPIs given the regulator’s suitability concerns for how appropriate they are for retail and intermediary sector clients. Facer says those that do report using them should expect continued questioning from the FCA moving forwards.

He says: “The adviser needs to have a good understanding about how and why exactly they used them, because there have been huge losses in terms of payments that need to be paid out still by the FSCS. The regulator has been so clear that they don’t believe NMPIs are appropriate.”

Meldon & Co director Mark Meldon says the average adviser is not affected by the further reporting commitments and should favour a conservative approach to protect themselves from further regulatory scrutiny.

He says: “Why chase after esoteric investments? It is a tough market and there is a gloomy outlook anyway and more than enough choice in the pallet of conventional investments.”

Yellowtail Financial Planning director Dennis Hall also says advisers need to be careful as the association of the FSCS with bad advice inadvertently suggests recommending riskier products is not good advice.

He says: “There is a danger this view ends up restricting the market, or that the higher regulatory costs are simply passed on to the consumer.”

There is hope the introduction of the new reporting and the data collected will help the regulator identify bad apples sooner rather than later however.

Facer says: “A lot of firms were still involved with NMPIs up until about 2008 and it did have nice commission payments for those involved.”

Whether or not the reporting will shed light on the degree to which an adviser is involved in NMPIs is not yet certain.

Facer says: “It doesn’t ask you what you recomennded in the past which is potentially a bigger issue for the FCA to identify where the risks are, and would be very useful data.”

The FCA handbook gives some information on the requirements for reporting on the use of NMPIs under its reporting rules.

As an example, the FCA’s says a firm may have earned £5,000 from arranging deals in units in qualified investor schemes on behalf of 26 investors. Additionally, it has earned £400 from advising two clients to purchase unlisted shares.

Units within qualified investor schemes are classed as NMPIs, while the unlisted shares in this example are non-readily realisable securities.

The firm would report the annual income per single unit of currency in the NMPIs and separately in the non-readily realisable securities, along with the number of clients in each. Firms who do not have 12 months’ worth of data are responsible for doing a pro-rata calculation to estimate an annualised figure.

Facer says the process of reporting is complex and advisers who do not already have plans to at least partially outsource the reporting to a compliance team may have to reconsider.

The lack of clarification around how to report and what to include may turn advisers off recomending NMPIs at all – potentially reducing the overall level of risk in the advice market.

Meldon says advisers who are toying with whether or not to diversify across NMPIs should consider whether clients will be better off.

He says: “There were always 20-25 per cent commissions on these kinds of products but it can be a waste of time and client money where concentrating on income is far more important than capital growth. Its a tried and trusted best friend.”

High net worth clients are most likely to have a portfolio that includes NMPIs, butmany advisers feel that most clients are serviced well with mainstream solutions.

Facer says: “There are very few circumstances in which you would use them in a portfolio and so while it will be useful data to see who is involved with NMPIs, it can be anticipated it won’t be many in the retail or intermediary sector.”

Money Marketing also understands that the FCA is currently in the process of commissioning a skilled person review, also known as a Section 166 investigation, into a firm, as part of which the reviewer will be required to establish whether a product was an NMPI or not.

The FCA declined to comment on exactly how it would use the NMPI data.



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

  1. It’s basically simple, if it isn’t a regulated product don’t consider it! FSCS fees have risen disproportinatley due to the type of adviser who recommends NMPIs to appear more sophisticated than the ‘mainstream’ adviser. The products at our disposal are more than adequate to serve our clients but also, ‘taking a punt’ with client’s funds is otally unacceptable!

  2. “It doesn’t ask you what you recomennded in the past which is potentially a bigger issue for the FCA to identify where the risks are, and would be very useful data.”

    I’m sure it would, but those risks are already in the system. It’s *more* useful to know who’s doing stuff now so you can stop the bleeding – you’re not going to be able to scoop the blood off the pavement and put in back in the victim.

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