80 per cent of compensation claims against financial advisers are for unregulated investment sales, according to Financial Services Compensation Scheme chief executive Mark Neale.
Speaking at the Money Marketing In Focus conference today, Neale said the vast majority of the £125m paid out by the FSCS this year concerned unregulated investments in areas like forestry and storage pods.
Neale said that the pension freedoms have unlocked a wave of money that is finding its way into high risk areas of the market.
He said: “Most people do receive good advice, but it does go wrong and that tends to be in high interest investments where desperate people are looking for income.
“They typically involve advice from a regulated firm to take out a pension scheme and transfer it into a Sipp, and sometimes to hold it in very risky illiquid assets – storage pods and tropical forestry are fairly typical.”
However, both Neale and FCA director of competition Mary Starks, who also spoke at the conference, cast doubt on the merits of removing unregulated schemes from FSCS coverage or getting the FCA to pre-approve certain products. Currently advised clients can claim on the FSCS, even for unregualted products, because they have taken regulated advice, and advisers do not need any additional permissions to recomend unregulated products.
In response to a suggestion that unregulated investments should be restricted to sophisticated investors only, Starks said she did not believe this would be a silver bullet.
She said: “I don’t think it is as simple as that. We get a lot of mail at the FCA from investors who are furious that they are being considered retail rather than sophisticated investors. Restricting the market is not necessarily the answer.”
“Also the relationship between how sophisticated you are and how likely you are to be ripped off is not totally linear. Many of these investors are highly experienced.”
Neale added that making sure compensation remained in place for unregulated investments helped give the public the confidence to use financial planners. However, he suggested that advisers who do more unregulated business could have to pay higher regulatory fees as the FCA continues to review the FSCS’ funding.
He said: “Our research shows that the protection we provide is encouraging people to go and seek advice. There is still a lot of distrust – around pensions particularly – and the FSCS scheme is reassuring, but clearly costs do have to be pooled across the industry.
“The FCA has recommended making a broader, deeper pool. It’s not for us to say how that should be done, but we think fees according to risk is appropriate – firms that do recommend unregulated products should pay a higher levy.”