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FCA continues probe into high-risk investment advice

Money Marketing unveils further details as FCA chases up firms selling esoteric products

More than half of the firms that were approached by the FCA for information on their high-risk investment activities have said they either did not sell any, or did not reply to the regulator’s request, Money Marketing has learned.

In its annual report earlier this year, the FCA said it had written to 152 firms for more information on risky investments they were involved in, including how they disclosed the products to clients before they invested, and had analysed their responses.

The FCA wrote: “We know consumers suffer harm when firms recommend they buy unsuitable products. This includes high-risk investments that are not appropriate for consumers with lower risk appetites and those without the financial capability to cope with a significant reduction in their capital.”

However, the regulator did not publish the results of the exercise.

While the FCA said that it was unable to share the exact documentation sent to firms, a Freedom of Information request from Money Marketing shows that, of the 152 firms that were part of the inquiry, 88, or 58 per cent, are listed as a “nil return” on their response.

It is unclear how many of the nil returns were from firms who ignored the request, or how many did not have any high-risk investments to report so returned the request with zero entries to the regulator.

The FCA did not respond to requests for comment.

Nine firms – 13 per cent of those that did return data – shared information about unregulated collective investment schemes sold, with 151 sales recorded. In total, 61 firms – 87 per cent of those that responded – provided data on “high-risk investment products to minimise tax liability”, with 1,848 sales recorded.

The FCA confirmed to Money Marketing that all the firms included in the sample were retail financial advice firms, as opposed to fund managers, platforms or discretionary managers. The FCA sent further information requests to two firms. It also conducted file reviews and sent a feedback letter to one firm.

For details of any further work planned, the FCA referred to its Business Plan for 2018/19.

The Business Plan said: “We will carry out a programme of work to tackle incidences of consumers entering into high-risk investments unsuitable for their needs. This will enable us to identify problems with high-risk investments.

“We will also strengthen our authorisation’s gateway and supervision for firms that provide advice on high-risk and complex investments. This will ensure they improve their disclosure and reduce the risks of harm to retail investors.”

TCC advisory director Phil Deeks notes that there may have been a variety of reasons for firms not responding to the request.

He says: “There are always firms that, although they have the regulatory permissions, do not transact any business under this permission. These firms generally immediately disengage and dismiss or ignore the data request as it is not relevant to them. In fact, as lots of data requests are driven purely by permissions rather than Retail Mediation Activities Return data, it is therefore one of the reasons why the FCA implores firms to give up permissions they are not using.

“Some firms will contact the FCA either to request an extension or an exclusion from having to complete the data return. Generally, the smaller the firm or limits of resource, the more understanding the FCA tends to be.

“Some data requests go to old email addresses. Despite a regulatory requirement to keep contact details up to date, some firms forget, and the email will be bounced back or not delivered to some firms.

“Some firms, unfortunately, will make a proactive decision not to engage with the regulator and not respond to the information request.

“No direct action is likely to result of this, principally due to those other factors.

“However, if substantiated, it is an adverse cultural indicator that, as we know, the FCA is using in an increasingly targeted fashion to identify the firms that present a disproportionate degree of risk compared to their size, nature and complexity.

“This will increase the likelihood of the firm being involved in proactive market-based supervision or other broader supervisory initiatives or pieces of work.”

Compliance and Training Solutions director Mel Holman says investments that may have caught the FCA’s eye over tax minimisation could include film partnerships, business property relief and Aim portfolios, as well as more commonly used vehicles like venture capital trusts and enterprise investment schemes.

Advisers have reported increasing professional indemnity insurance bills recently, as underwriters have become more sceptical of risks associated with some advice, such as on defined benefit pension transfers.

After its review of Financial Services Compensation Scheme funding, the FCA added a new section to the Gabriel regulatory return for advisers to collect more data over risky investments on a regular basis, so it could assess whether this could be used to risk-rate the levies advisers pay to the lifeboat fund.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Human nature tells me that a dodgy adviser is the last person to tell the FCA that they have been up to no good.

    In an ideal world all investments would be recorded on a central database, but I suspect those providers and advisers operating on the fringes would prefer to remain anonymous, making it harder for the FCA to police.

  2. Dear FCA

    You’re over a decade late tackling this. The horses have already bolted. Any comment?

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