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Emma Simon: Regulation is getting in the way of advice

The FCA’s determination to crack down on historic bad practice is pushing a safety first approach on advisers, in some cases where it is not wanted or needed.


There is a reason why we have rear-view mirrors in cars. And I can personally attest to the fact that you will not pass your driving test if you don’t check them at the appropriate time.

However, you would be a menace on the road if you kept your eyes glued to them rather than looking at the oncoming traffic. There is a reason why windscreens are larger than wing mirrors.

But I wonder if the regulator has not been guilty of this in recent years. Many in the industry think so. It stands accused of focusing too much on past crimes and misdemeanors, rather than giving its full attention to the dangers lying ahead.

One fund manager I recently met is convinced that the regulator’s focus on  “safety first” and its obsession with process, means consumers now get poorer financial advice.

At the crux of this matter is the reliance on questionairres, risk-rated funds and the box-ticking audits, which seem to form the backbone of the advice process. Is this leading some advisors to recommend funds, that they don’t really – hand on heart –  have much faith in?

Funds that are solely, or heavily invested in bonds are a good case in point. Interest rates have to go up at some point and when rates do rise it is bound to have a negative effect on the valuation of these bond funds. But as these are less volatile assets, that are suitable for those of a risk averse nature, many middle-aged, middle-class savers are being shovelled into these funds where there is relatively little upside in the medium term, but potentially quite significant downsides when its comes to the preservation of their capital.

But don’t worry, no-one is mis-selling these funds, because the advisor has undertaken all relevant fact finds and risk assessments, the details of which have been property audited and filed correctly.

In some ways I have some sympathy with the FCA. There was a need for far greater due diligence on risk assessment, particularly among the “sales advisors” that used to be prevalent in the banking sector. Many stockmarket-linked bond or equity products were sold on mass to customers, with barely a check as to whether the risks were appropriate for the individual.

Similarly, within the advisory sector there have been problems with a minority recommending high risk unregulated funds without taking proper account of whether it was suitable for each client.

But has the pendulum swung too far the other way? Is this risk-based matrix failing to allow advisers to treat customers as individuals – but simply pooling them into large sub-groups based solely on age and attitude to risk?

There will be 59 year-olds, surely, who may not want all – or any – of their money in bonds, despite the fact that they are approaching retirement. Equally there may be those of a similar age who are quite prepared to take a mortgage into their retirement – whatever the regulation rule book suggests. But it’s a brave IFA who lets his clients take such actions. Presumably you need it signed off in triplicate that you categorically warned against it.

I would bet that the question IFAs hear most often from clients is “what would you do?”. There’s a real danger at present that the regulatory guidance will steer the recommendations down one route, but an IFA’s knowledge, gut instinct and good common sense might suggest quite a different course of action.

But if they follow the latter route they potentially leave themselves open to significant mis-selling claims if the investment does not perform as expected, or some unforseen event derails it.

In an ideal world, I think both options should be explained to the client, with the reasoning behind it. Sadly, in regulatory terms we are still a long way from this utopia.

Emma Simon is a freelance journalist



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. A good assessment Emma. Those of us who had many years experience as independent advisers knew this would happen, but FSA knew best! Now most IFAs who had over 25 years exerience have been pushed out by RDR. There always was a problem in the advice arena because it seemed to me that some IFAs forgot they worked for the client not the product provider! Perhaps those who came from being sales people for a bank or other product provider found it too difficult to change. It is very sad to reflect on a destroyed advice market where ‘ordinary folk’ are now largely deprived from getting independent advice

  2. Emma

    I could write an essay on the topic and it has little or nothing to do with reduction of adviser numbers or the so called disenfranchised. But a brief response to your headline is an unequivocal – YES.

  3. Good article, and well presented

    You have to ask yourself; do we just make things fit for regulations sake, is it simpler or harder (as the case may be) to satisfy the regulator (or compliance dept) first and the client second ?

    Personally I am advising clients on future events and needs, and it just not that clear cut that one can just put a nice round peg in a nice round hole, we are after all “advisers”

  4. Emma, i don’t think you are going to get any argument on this forum. I have worked on both sides, bancassurance and the IFA world, and the problem of over regulation is slowly destroying both. Believe it or not banks are running scared of the FCA and complaints from clients due to investment advice. It has gotten to the point where a clients info will go into the banks system and the system will recommend a product based on, exactly as the article stimpulates, age, existing assets and ATR. Many a time i have has a conversation with a client who has bought into the idea of investing but the “computer says no”.

    Having made the change to being an IFA (partly for the reason above) i haven’t escaped this problem. Sometimes what is best for the client doesn’t sit 100% with what the FCA or our compliance provider want us to do.

    The FCA should be looking at making sure the pro’s and con’s of investing are adequately communicated to a client after that advisers and clients should be able to come to a mutual agreement as to which option is taken forward. It seems so simple but the regulator makes it so complicated.

  5. I dont really understand this article. Why would it take a ‘brave IFA’ to recommend something that was suitable for their client and had the records and required disclosures to confirm it?

    If bonds are suitable for the clients circumstances, ATR and capacity for loss, why would you recommend anything else? Especially something with more risk than the client is willing and able to take.

    If the issue you describe is FOS then surely the answer to any recommendation ‘outside the ordinary’ would be to record client agreement, client understanding and the relevant disclsoures on file to leave no doubt regoarding the suitability.

    Issues seem to arise where there is no adequate records to back up the advice given.

  6. I used to think that too Matthew, but recent observations have shown it not always to be the case unfortunately. The customers needs are uppermost, and that includes when the complaints come in…Wherever and from whatever source that may be!

    I am no longer convinced that there is a ‘bullet-proof’ option when defending complaints.

  7. goodness gracious 29th January 2014 at 12:00 pm

    If you know your customer really well, what you get as a result of a risk analysis and questionairre does not tell the whole truth. To many times I have seen clients who had been pushed down one particular route just to satisfy regulation, whilst when broadening out the conversation gets a different need/ risk attitude and capacity. You need to spend a heck of a lot of time over these needs, asking a lot of what ifs, exploring, cajoling until you get an agreement on how to proceed. This is where the points scoring risk programmes fail. I hear from a lot of my compatriots that the majority of clients are cautious, mine are not. Is it me? Is it I ask them what their real fears are to attempt to get down to the real nub of their feelings, Some that are cautious are just that and I really try to see if they need any investment at all. But everyone likes to make money, even if they really don’t need it. Are these allowed to be higher risk? Just record what was said, client’s responses etc. and you’ll be fine.
    What is the difference between income and growth if you need to maintain your lifestyle from your savings/investments? Why use so much corporate bond funds? As an opended fund, their risk increases compared to single personally held funds, wheras equity investments’ risk decreases within a fund structure. Where does this risk equalise?
    Answers on a postcard please to: FCA, @ Canary Wharf

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