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FCA chief: We must protect irrational consumers

Head of the Financial Conduct Authority Martin Wheatley says the new regulator will work to protect consumers who cannot be relied upon to make rational choices by banning the sale of potentially harmful products.

In an interview with the Financial Times, Wheatley (pictured) says the 2008 financial crisis has led to the regulator changing its assumptions about how best to protect investors.

He says: “You have to assume that you do not have rational consumers. Faced with complex decisions or too much information, they default…They hide behind credit rating agencies or behind the promises that are given to them by the salesperson.”

Under the new regulatory structure the FCA, set to launch next year, will ensure suitable products are sold to retail investors. The new regulator will have the power to ban products that could cause consumer detriment, or limit their sale to certain types of consumers.

Wheatley believes use of product ban powers will be rare, but also says the regulator’s more interventionist approach will mean “stepping into the footprints of the investors”.

Wheatley says : “We will work more closely with firms to make sure the products they design go through a real testing process and serve a real purpose. When we start to hear of problems with a product, we will go in much earlier than in the past.”

He says the FCA will be pursuing a more intensive style of supervision than was previously the case under the FSA before the financial crisis, and says the new regulator will be “looking at things from a consumer perspective, rather than an industry perspective.”

Wheatley told the newspaper he is hopeful that costs of the FCA will be in line of those of the FSA, but warned if the FCA is given new responsibilities such as promoting competition and regulating consumer credit more money would be needed.

He adds: “Where it is a step change, we will need more. There is not much more we can stop doing.”


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There are 34 comments at the moment, we would love to hear your opinion too.

  1. Interesting comment re FCA costs.

    Is he saying that he anticipates the FCA needing no more than the £400m p.a. that the FSA uses for advisers AND banks?

    Anther example of nanny-state encroachment. “We know what’s best for you”

  2. Martin Wheatley the designated head of the new Financial Conduct Authority, has signalled that the new body will take a much more interventionist stance when it comes to consumer protection to ensure that the public are not sold inappropriate products. This is a fine pronouncement but we are going to need evidence of how it will work in practice.

    He cites the recent scandal of the mis-selling of payment protection insurance by the banks, referred to, by him, as a fiasco, which indeed it was, the inference being that it was a fiasco engineered by the banks, but neatly dodging the responsibility the FSA had in preventing it which they manifestly failed to do. Mr Wheatley’s explanation is that the FSA did not have the necessary powers to prevent it. How interesting.

    If the FSA lacks such powers currently, can he please tell me how it came about that in November 2011, Margaret Cole made an ill-thought out, intemperate and wholly inaccurate pronouncement on Traded Life Settlement Funds that has resulted in the suspension of trading of    perfectly reputable funds, placing investors’ assets at risk and in one particular case depriving investors of an income of circa 8% p.a at a time when interests rates are 0.5%. The FSA have yet to explain how such a move has protected investors’ interests, especially against a background of failing utterly to justify or provide any evidence whatsoever that such funds are ‘toxic’, and ‘ponzi schemes’. A ponzi scheme by its nature is fraudulent and if such a serious charge is to be levied, it is usually a good idea to have sound evidence to substantiate it.

    Yes, investors can behave irrationally and they do deserve protection against unscrupulous selling of inappropriate products, but the unelected FCA must be very careful with its new sweeping powers or they will be in grave danger of disadvantaging the very people they are supposed to protect.

    Yours faithfully

    Neil Shillito
    SG Wealth Management Ltd
    NR3 3SA

  3. So now we are to assume that the customer is potentially ‘not rational’ and that it is ultimately the fault of the product provider.
    Who will they try to blame next?
    If they were made up of people who knew what the business is all about then we wouldnt have so many problems.
    Why do these bodies keep employing people at enormous salaries who do not know what they are doing?
    sic FSA ,consumer groups etc etc

  4. Perhaps it is nothing to do with the products, it may well be the greed of the selling body that is the problem. Perhaps if individuals were more accountable for their own actions, no matter what size of organisation they work for then they might think twice about selling a product for their own gain and not that of the consumer. Just a thought.

  5. Love it. System working well, send more money.

  6. Derek Bradley ceo 25th January 2012 at 9:12 am

    I start to worry when I hear such phrases as “protect consumers who cannot be relied upon to make rational choices”.

    Is the public now so incapable of rational choice that another protective layer is needed to make life’s financial journeys safer? Is the FCA to be a financial version of the Health and Safety executive?

    In principle though this is quite laudable but it is a mery-go-round that is difficult to know where to either get off or on.

    Surely it would produce a better consumer outcome to simply licence products and instruments as fit for a particular purpose rather than ban them after they have demonstrated toxicity?

    This could result in very positive consumer outcomes but that would mean the FCA taking responsibility for any decision they make regarding fit for purpose rather than being wise after the event.

    Sorry I was in a dream then, that would never do would it?

  7. It will be interesting that if the FCA decides a product is suitable for a certain category of customer as to wether they will take any respobsibility if that product then becomes a disaster.
    I guess not.
    I remember not so long ago, when we arranged a mortgage & did not sell a PPI with it you had to document why you were NOT selling PPI. Amazing how things change with hindsight

  8. Lawyers will be laughing all the way to the Bank!!
    As soon as they see an admission that the system is faulty they will get their greedy noses out of the claims trough to add this one to it!
    Buyer be aware,or should it be seller be aware?
    Either way its more money for those who are making a fortune of the inadequacies of our so called ‘protection system’.

  9. The body of evidence from behavioural finance backs up the irrationality point. So stopping poor products is a very good start. His problem is that the RDR was and is predicated on an intelligent consumer able to make rational decisions about what they should and shouldn’t pay for…and here lies the nub. Irrational consumers are highly unlikely to pay someone to persuade them to do something that they know they should do anyway. Or at least by the time the adviser has persuaded them, they don’t see the value in the persuasion. And yet we all know that this is where the costs sit.

  10. Nigel
    Do I get a taste of ‘bitterness’ that someone is making a living out of selling advice?
    Good intentions go out of the window when we become besotted with restrospective actions!
    How many people who make their living from selling Financial servcies are you going to include in your statement?
    Get out there,sell something and then stand by your principles and dont be afraid of the bogeyman(FSA et al)
    its called having the balls to stand by what you believe!

  11. It still wont stop clients handing their money over to boiler rooms.

    How will they be stopped?

  12. Perhaps we should stop selling cars. And knives. And, come to think of it, forks. Oh. Better stop those greedy shops selling high fat foods too as they result in “poor outcomes” for many consumers – especially the less well educated.

    Where do you stop with this thinking? Close the banks for sure as they have an appalling record of mis selling leading to naive customers.

    Having said that, if it can keep a few more highly paid civil servants in a job with far better pension benefits then most of us can dream of then I’m all for it.

  13. Stable Door closed, horse bolted (KIS/Lehman/Integrity and much more)
    In 2007 the FSA had the opportunity to protect investors regarding KIS Ltd and did nothing to prevent the inevitable disaster they knew would occur. If the new regulator is to vet products before going to market, all well and good, but if it goes wrong what protection do advisers have?
    Answer – NONE!

  14. Michael Wainwright 25th January 2012 at 9:48 am

    Not to worry. Mars Bars will in future carry a health warning and the checkout girl will need to check that the customer is rational and will not eat too many. If she has any doubt she will be empowered to forbid the customer to buy any sweets. Should the customer buy and eat too many Mars Bars he will be able to complain, as clearly it is not his fault, and the store will be fined. So will the makers of Mars Bars for not making the Warning clear enough.

  15. Terence P O'Halloran 25th January 2012 at 9:48 am

    and who protects financial professionals from irrational regulators?

  16. A quick precis:-
    So we have to pay more, to be able to advise about less, to people who need protecting from us because the people that we advise are incapable of understanding the advice they are given.
    If this is being looked at from a consumer perspective why do we the industry have to pay anything?

  17. So the only justification that a client needs to make in the future when submitting a claim for misselling is that they were not behaving “rationally”. I must remember to include an “Are you rational statement” in my client questionaire and suitability letter!

  18. Notable by its absence from Mr Wheatley’s pronouncements is any undertaking that the FCA will act promptly and effectively on any issues of concern that it may uncover on any of its arrow visits.

    As we know, the FSA failed to do exactly this in the wake of its 2007 visit to KeyData. The FSA has also failed subsequently and steadfastly to provide any sort of explanation for this dereliction of duty. Instead, as usual, the costs of this failure have been dumped at the door of the IFA sector. This is in spite of the fact that (as I see it) if KeyData was an intermediary, its collapse cannot have resulted in any losses to investors, as it would have been acting merely as a conduit for client monies which would, by law, have had to be held in a client money account, ringfenced from the affairs of KeyData itself. The FSA has also failed to provide any sort of explanation for this line of reasoning. The FSA fails. The IFA sector pays.

    In any future cases such as KeyData, will the FCA act any more effectively than the FSA? Or will it, instead of trying to do its job better than the FSA within the same already stupendous budget, merely demand ever more money from the contracting IFA sector?

    It’s all very well making grand proclamations about protecting irrational consumers, but what about protecting IFA’s from the consequences of regulatory failures?

  19. No, no, no, no, no. Educate people and help them make rational choices. The more people are protected from ‘complex’ decisions and products the more reliant they become on the system to protect them – and the more help they need.

    By all means stock the next Arch Cru debacle (i.e. do your job) but don’t make decisions for people; help them make these decisions themselves!

  20. I am minded about what Ian Hislop said recently at the enquiry into Press conduct. New laws and regulations are not required, there just seems to be an aversion to applying the current rules more diligently.

    There seems to be more fines on the big organisations such as the banks but a reluctance to make senior officials within those organisations personally accountable. Huge profits are made, and despite the fines, they are still in profit. This culture will only be changed when individuals are made accountable both within the big institutions and within the FSA.

    For example, payment protection insurance is not in itself a bad product, but the way the senior officials at banks allowed it to be sold was against the current rules. Does anyone know of any individual at the banks whose head has rolled?
    Does anyone know of of any individual at the FSA whose head has rolled for allowing the shameful sales practices to continue so long without check?

  21. Interesting.

    Providers must assume customers are irrational.

    Next, presumably, providers will be instructed to assume all IFAs are unprofessional, and will be required to carry out their own suitability checks for these irrational customers.

    THe FCA will then assume providers are incompetent, and issue fines for providing low-risk funds (to irrational high-risk customers) and high risk funds (to irrational low-risk customers).

    What an utterly bizarre starting point for a market.

  22. If everyone acted rationally then the Harry Markowitz theory would br great and we would all defintely make money, but we don’t. apart from the fact what is rational to invest in post office accounts when interest rates are 0.5%!!

    We are now reaching “nanny state” status, banning items always worry me there is always unintended consequences

  23. Am I being niave here but I’m hearing a criticism of customer behaviour from Mr Wheatley, in that efficient market theory suggests that investors will behave rationally when in fact emotion (fear of continuing losses, etc) causes them to behave irrationally. They then hide behind what they ‘understood’ about the investment proposition and point the finger at the adviser alleging mis-selling.

    If additional regulator focus is around checking that recemmended products are aligned to client ATR and goals, is this a bad thing if it stems mis-selling allegations from disappointed investors. Clients need to grasp the phrase, “You pay your money and take your chance!”

  24. The fundamental flaw in the current FSA reasoning and, it appears, the future FCA reasoning is a rational interpretation of rationality, and its place in any commercial transaction. Start to play around with such concepts and one is already lost.
    The Efficient Markets Theory, blown out of the water by so many events, but still held as gospel by so many, is a prime example of adulation of rationality. Rationality is a concept, it is not a fact. To build a regulatory process around such an amorphous concept suggests that the FCA will soon be in as much trouble as are the FSA.
    What is rational to me may be irrational to you, and vice versa.
    Moreover it is trying to walk on water to protect everyone from their own rationality.
    Many years ago I spoke to a person proposing to invest into an investment bond. He already had an illustration from another adviser based on a fund growth rate of 14% pa (it was legal then). The person fully accepted that it was not possible to expect a annualised return of 14% pa over an extended period but would go this the other company “because they had quoted 14%”. So the decision was based on rationality and irrationality in equal measures, at the same time.
    The problem with institutional management is that it is out of its depth trying to manage an environment in which there are individuals, so they revert to trying to control that environment, based on pre-conceived notions of correct behaviour. Correct behaviour is interpreted, more often than not, what has occurred in the past. My grand-daddy never had an iPhone, so I won’t either. The University of Essex have just released research information that indicates that the “integrity level” of Brits is lower the it was 10 years ago. Things change, often to fast we are unaware of it until we look back. Institutions tend to be cast in concrete which is why they are out of touch with reality so quickly.
    If Martin Wheatley believes he can create an environment that can comfortably cope with the type of transactional schizophrenia outline above then he is already heading for the funny farm.
    It is also interesting that the FCA will pursue a “more intensive style of supervision”. By implication therefore the FSA were applying a less intensive style, yet they claim they were so focused on Treating Clients Fairly they had no time for anything else. So whose story do we believe? And yes, I do treat them as stories, concocted for the Press, and mainly pure fiction.

  25. So he used to think that people acted rationally? Upon what plant has he been living? Has he even heard of behavioural economics? Why won’t he just regulate the product and have done with it? Because then he’d be in the dock for the duds. What a pathetic creature.

  26. Dear Mr Adviser

    I agree that there’s now’t so queer as folk.

    Signed: Mr A Client

    This should be completed prior to any discussion about investments, the client’s cat/dog/hamster/whatever and pinned to the front of the file. At the beginning of every subsequent meeting the client can initial it again for good measure.

    Problem solved…. 🙂

  27. @Graeme Law. What ‘plant’? Maybe that’s the source of the problem – the regulators are all stoned!

  28. This is a hostage to fortune. The FCA clearly is not able to deliver a fool proof vetting system and to pretend it can will only provide a false comfort that will leave consumers feeling misled, when the inevitable happens. However well meaning the FCA is, they are clearly no more rational than the consumers they hold in such contempt.

  29. Should young people be banned from their irrational urge to buy fast super charged cars?

    Maybe we should also ban cigarettes, alcohol and cream cakes.

    What happend to ‘caveat emptor’?

  30. I agree Sean
    I do not smoke but cherish the freedom to the right do so, however irrational.

  31. Most institutional mis-selling would be easy to stop overnight -simply fine the (mostly ) overpaid directors of the companies that allow it – personally.

    They already do it to IFAs but not to the banks or insurers. Make it plain that is what the regulator will do and the dodgy markets will clean up overnight.

    The fines will be smaller but the impact more profound. In the current regime innocent policyholders and shareholders pay the fines on behalf of the people who fleeced the public.

    Now that really is irrational.

  32. Mr. Wheatley qualified as an accountant in 1984. He attained his Bachelor of Arts degree from the University of York, England in 1980 and was awarded a Master of Business Administration degree by the City University, England in 1993. Considerable experience – presume he is taking qualifications relevant to the job (including regulation and ethics) before moving to the FSA (sorry silly me – of course its FCA -He’s already at FSA

  33. Anon @ 9.36.

    He’s been grandfathered in !!!!

  34. But the consumer is a good person, so whatever happens can’t possibly be his fault.

    This would be funny if were in a sit-com!

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