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Emma Simon: The new regulator is talking tough (but talk is cheap)

Emma Simon MM blog

 The FSA is dead, long live the FSA. Sorry, that should be the FCA.

On the face of it, it’s not hard to see why the two can be so easily confused.

I must admit when I first heard that the Financial Conduct Authority was taking over from the Financial Services Authority I was a entirely underwhelmed, particularly as this new watchdog seems to be largely staffed and run by incumbents from the previous regulatory body.

True, this new watchdog appears to have a slightly fiercer sounding bark. One of its remits is to “stamp out practices that can lead to customers detriment”.

But haven’t we heard such fine sounding sentiments before? Not just from the FSA, but the PIA and Lautro before it.

Remember Treating Customers Fairly? This “guiding principle” was in force while banks mis-sold payment protection insurance by the bucket-load, complex structured products were flogged to grandmothers and critical illness insurers could turn down cancer claims because policyholders had failed to disclose in-growing toe-nails.

But despite my natural cynical instincts, I have to admit that in these first few weeks the FCA is doing a very good impression of taking a markedly different approach to its predecessor.

In his first speech as chief executive, Martin Wheatley effectively blew away one of the fundamental principles that has underpinned financial regulation for years: caveat emptor, or buyer beware.

Banks have been warned that that can no longer rely on this defence when selling complicated financial products to customers. The onus will now be on them to sell suitable products, and prove they have explained the risks involved, rather than on the customer to have grasped what they are buying before signing on the dotted line.

And this does not seem to be the only line being redrawn.

A recent change to insurance law also shifts the responsibility for disclosing medical information from the consumer to the insurer.

Previously, it was the responsibility of the consumer to volunteer all relevant facts that could impact a future claim. Now, if the insurer has not asked a specific question to elicit this information, then it can not turn down a claim for non-disclosure at a later date.

This has been part of a voluntary code for a couple of years now, but it is appearing on the statute books just as the regulator appears to be taking a similar tack.

This new approach will affect all financial providers, and advisers. But it is banks that are in the cross hairs of the regulator’s aim, as they sell such a wide range of products to the mass market.

As Wheatley said it is hard to defend the concept of caveat emptor when unsophisticated customers are buying seriously complicated financial products – it is just not the same as buying bananas in the supermarket.

The only problem remains deciding what exactly constitutes a “complex” financial product. Will a paid-for current account, with added insurance, a range of authorised and unauthorised overdraft charges and linked credit card offers meet this criteria?

What a protection product that offers partial payments for some types of cancer, full payout for others, and no payment at all for certain conditions? Or how about a pension or annuity?

Without more details this overarching principle may have as much lasting impact as Treating Customers Fairly. But there is the danger that with the detail, what was once a relatively simple concept gets bogged down in strategic and operational objectives, scoping papers, supplementary consultation exercises and sub-clause 3.1 which is worded almost entirely in regulatory jargon.

Still, if all else fails, there are always simplified products to fall back on, the bananas of the financial world.

At least the banks – and no doubt the regulator too – will not have to take responsibility if customers slip up on the inevitable skins.

Emma Simon is deputy personal finance editor at the Telegraph Media Group


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

  1. Good article but the problem is that all regulators set out making the right noises. It does not take long for things to then recind a bit here and there and increase elswhere and the odd extra thing needing done to justify the sale. Next thing you will see is that it will take 120 pages of A4 paperwork to be given to a client for even the most simple sale – Say a stocks and shares ISA. On top of that you might find that we will have to have copies of these on file to so that could mount to 240 pages for a £50pm ISA. Surely noone in the regulator would be silly enough to let this situation arise?……. Oops thats right we are already there. 240 pages which includes our copies of: Client agreement, client proposition, fee agreement, fact find, research, Key features illustration, KFD, KIID, ATR questionnaire, the subsequent subsequent report following on from this. Then we have the provider research, fund recommendation. That is just the presale stuff. Then you have the suitability letter which re-writes the fact find and lots of the KFD etc etc etc. Maybe 18 pages long (of which 2 pages are the negatives of the plan abd all the reasons you should ot do it – just to totally cover our asses). Next we have the application form and any associated AC facilitation letters or forms and clients letter of authority to confirm AC (if it is being facilitated). 120 pages (minimum) of glorius paperwork for each client that does a simple piece of business with us. 99% of which is of no value to the client, the clients dont want it, they dont read it all as there is simply just far too much of it. Never mind what it is doing to the trees. It is time the regulator took the bull by the horns and gave some very serious thought as to how to provide short AND meaningful paperwork to clients that actually add some value instead of this endless ream of red tape. It has to stop and the FCA has the opportunity to do this. The only question is ….”will they?”. Answers in a single word of no more than a max of 3 letters will be gratefully received.

  2. It is a suitability report and not a suitability letter. Repeating/redrafting the fact find and/or Key Features Document or what was said in the meeting or telling the client the chargers 3 or 4 times detracts from what is important for the client to know and understand. Keep it simple stupid, the KISS principle. If there is a verbatim record of how you “know your client” and of the advice given in a durable medium which can be referred back to, the actual regulatory requirements can actually be met with NOTHING in writing from the adviser. Don’t believe me? So what if the client is blind or illiterate? How would you meet FCA know your clkient and suitability reporting? Think about it as this is a disability discrimination issue you need to consider. Once you have, think the reverse. My old compliance managers mantra was if it wasn’t written down, it never happened. The fact is, if it was written down, that actually proves nothing! If it was recorded with both adviser and client speaking, I think even the FOS would have to agree it DID happen.

  3. “In his first speech as chief executive, Martin Wheatley effectively blew away one of the fundamental principles that has underpinned financial regulation for years: caveat emptor, or buyer beware.”

    I would love to know when this has applied in financial services – it appears to be the very opposite with the principle of ignorance is a defence in the eyes of the law appearing to be the norm.

  4. “In his first speech as chief executive, Martin Wheatley effectively blew away one of the fundamental principles that has underpinned financial regulation for years: caveat emptor, or buyer beware”
    You are talking nonsense Emma

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