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FSCS: 80% of claims are for unregulated products

FSCS chief exec Mark Neale speaking at MM In Focus

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.”


Onshore bonds: Still going strong 

Onshore bonds are a once-beloved product, now seemingly ignored by many advisers in favour of the supposedly more glamorous international investment bonds or collective investments. Yes, most onshore bonds don’t have ‘open architecture’ and none deliver exemption from tax on capital gains at fund level or the ability for investors to use their annual exemption […]


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There are 38 comments at the moment, we would love to hear your opinion too.

  1. If ever there was a case to stop regulated firms from advising and effecting unregulated products this is it.

    Firms need to be protected from themselves as do consumers,

    For regulated firms to be funding unregulated claims beggars belief.

    “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”.

    Christine Keeler died today and to quote her best mate in the 60’s, Ms Mandy Rice Davis, when in evidence at the trial of Stephen Ward, charged with living off the immoral earnings of Keeler and Rice-Davies.

    In reply to James Burge, the defence counsel, who pointed out that Lord Astor denied an affair or having even met her, she replied, ”

    “Well he would, wouldn’t he”?

    • Regulated firms are not funding unregulated claims. They are funding regulated advice on unregulated products.

      Its all about the regulated bit – the advice.

  2. So why are the regulated bona fide advisers who only deal with regulated investments expected to pay for unregulated investments?

  3. Mary Starks 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.”

    Really??? I am staggered by this comment. I find it difficult to imagine any situation in which this would apply. Does anyone else have any ideas??

  4. There is a balance to be struck between protecting consumers and stifling innovation. And I don’t think that we have got this right.

    Carve unregulated products out of FSCS and put a big warning sticker all over them. Then let it be a matter of caveat emptor.

  5. Anthony John Etkind 6th December 2017 at 3:52 pm

    And why would the FSCS support regulatory changes that would eliminate 80% of their work?

  6. Regulated Protection such as the FOS and the FSCS should only be given to those utilising Regulated Advice on Regulated Products, and nothing else, any and all unregulated products even those contained within a Regulated Wrapper should not get FSCS protection and the warnings should be clear, It is completely untenable to invoice the remaining Adviser firms for the reinstatement of client funds because the client was duped/Fraudulently, advised to invest in unregulated schemes. The current funding of this compensation culture is scurrilous obfuscation.

  7. I know I am far from alone when I say that this situation is ridiculous. What is the point of all this regulation if people are able to sell unauthorised products and then dump their liabilities onto the FSCS.

    IOF the Regulator is too lilly-livered to ban these entirely then at least ensure that they come with a warning in 24 point font explaining that if the purchaser has any beef at all they are on their own. Very much buyer beware. No redress other than in civil law.

  8. Nicholas Pleasure 6th December 2017 at 4:11 pm

    This just need sorting out and quickly.

    Vanilla clients of regulated advisers are paying for the reckless (both clients and advisers).

    Unregulated investment should be a special permission with significant capital adequacy (around £200K) and comprehensive PII. There are very few occasions (IMHO) where only an unregulated investment will do so they should be the exception and not regular business.

  9. This still comes back to the same problem. Advisers who do not recommend foolish investments are charged to sort out the folly of those that do – and the prudent clients of the wise advisers ultimately pick up the cost for compensating the greedy investors,

  10. So if I am a fully regulated and authorized adviser why have I got to pay a levy to cover unregulated advice. Do NHS GP’s pay a levy for medical negligence carried out by doctors operating in the Private medical sector?

  11. Hi Mark

    Imagine you were an adviser paying 10s of thousands of £s in FSCS levies.

    Now imagine that you were told that 80% of what you were paying was being used to compensate consumers whose adviser sold them UCIS products because they got paid a high percentage in commission

    Now imagine the leader of said FSCS organisation said this should continue.

    How would you feel?

    As an aside maybe we should all start flogging UCIS products to generate the commission so that we can all pay our FSCS levies… i

  12. Response translated.

    We need all you adviser that do a great job and don’t recommend these poor unregulated investments, to keep paying for those that do. The reason why is we cannot see a way to give consumers their money back if you don’t keep paying.

    We have to tell you its to hard to place additional permissions or regulate additional products, as the 80% of you that don’t recommend these products would not apply for the additional permissions. I mean, where would we be then, we would not have any money. No, far easier to tell you it actually makes you money as it gives consumers confidence to use advisers.

    Do these people actually read their statements, do they actually believe the 80% is gaining from the 20% recommending these toxic investments. How do they sleep at night.

  13. Now this is the sort of stat we need to see. It is a MASSIVE problem so let’s get it addressed!

    i agree that one cannot choose in advance who is and isn’t going to advise on unregulated products, that is unless it is a process which is banned altogether for regulated firms.

    If people want to invest in unregulated products, set them free with their funds to do so without advice and stop trying to milk every fee-earning opportunity, because that is what it really boils down to for many firms!!

  14. As stark an example as any of the dismal failure of the FCA’s GABRIEL system. The adviser firms selling these patently flaky investment schemes should have been identified by the regulator and pounced upon years ago. Why has this not happened?

  15. The problem isn’t unregulated investment sales. It’s the sales of unregulated investments by regulated advisers.

  16. So lets make this incredibly simple –

    1) The sophisticated investor who takes it upon themselves to invest in an unregulated investment vehicle or took the advice of an unregulated adviser, should have no recourse whatsoever to the FSCS.

    2) Those investors that invested in unregulated investments on the advice of a regulated adviser, should have full recourse to the FSCS.

    3)The FSCS bill for these cases should then be split equally between the regulated advisers that engaged in unregulated investment sales.

    This will achieve two things, firstly it will act as a deterrent to those regulated firms that engage it this activity, as their costs will rocket and secondly it will save the rest of us a fortune in future FSCS levies

  17. Hey and idea for all those F-pack folk who are keen to keep the current broken system in place, because it is too hard to fix. If I was in charge, I’d ban all new unregulated products from inclusion under FOS/ FSCS from 1 Jan 2018 for the masses but allow advisers who want to sell the “newly unprotected products” apply for FCA approval whilst they hold more capital / PII to cover. Try that system for a year, collect complaints from those who feel the market is being distorted and then weight that up against the £125M you have saved in poor outcomes. If we are all so wrong, revert back to the old model in 12 months, whilst you “consult” the life out of the industry !

    • Sounds a good move to me, especially after the £7m the FSCS have paid out due to Cherish Wealth already.

    • The trouble with this is; this kind of unregulated crap is not advised on by good sound advisers and their practices, what do you think will happen to the cap ad when faced with losses running into hundreds of thousands ?

      Cap ad is a nonsense, sat doing nothing and gathering dust for the good advisers, the bad, at the first scent of something going wrong will strip out everything to is bare bones and fold with nothing (enter left of stage the FSCS)

      And the PII just wont pay out; if said person or persons had any ? lets face it if you are honest enough to disclose all, to your PII provider you are doing this kind of business in spade loads, you would never afford the premium.

      And the FCA will fall back on the senior persons regime……. yeah good luck with that one Ppphhhfffttt !

      • Nicholas Pleasure 7th December 2017 at 3:48 pm

        How about say £250K CapAd in an Escrow account for firms that would like to do this.

        We put a man on the moon 50 years ago – surely this cannot be impossible to solve.

  18. Re Mary Starks’ comment, I think the description ‘sophisticated’ is seen by clients as a badge of merit, rather than them being laid open to ultra high risk and/or unregulated products.

    If they realised this, probably they would be furious they were being so considered, not the other way round.

  19. Do I think unregulated products advised by regulated advisers should be covered by the FSCS ….Yes,

    Do I think the whole FSCS funding debacle is fair ….NO

    The trouble is, the FSCS, PII market, FOS and the FCA all have their own agendas, which makes the ability to get any kind of symmetry across them impossible, so the simplest thing for the FCA to conclude is keep it as it is or look like we are doing something by rearranging the deck chairs.

    Ditch the need for PII (it doesn’t work anyway.
    Mutual funding is the only answer… premiums set by, risk, product spread, complaints, turn over. And collected from the advisers levy and product levy alike

    Any unregulated product that has anything to do with cash, equities, property, land or gearing, has to be regulated !!!

    • I think that will end up being the solution, but worth trying Lindsay’s idea for a year first as most of the damage has already been done between about 2009 and now, it’s just the “sh””” hasn’t got as far as the sewage plant (FSCS) yet, so one more year will not make a blind bit of difference to FSCS levies if Lindsay’s idea doesn’t work.

      • Lindsey’s idea wont work as you cant legislate for advisers needed qualifications for investments that sit outside of said legislation.

        Also – Who would enforce it? The unregulated product providers are not going to care who sells their rubbish – they certainly wont report it to the authorities.

        It just wouldn’t work.

  20. Standing back a bit, this is essentially a regulatory failure. If the sale of unregulated products continues to produce poor outcomes for clients then the system needs to be changed.

    Despite the FSCS there will be many clients whose loss exceed FSCS coverage, and the emotional turmoil and worry that goes with an FSCS claim is also a very bad outcome for clients.Is it acceptable for the FCA to shrug its shoulders and say nothing can be done? In many ways it’s quite weird that the FCA isn’t addressing a known issue that persistently affects clients, and the most vulnerable at that. Is there something we’re missing here?

    Doing nothing is unacceptable. Can you imagine what the FCA would say if there were equivalent failures within a firm and the management suggested there wasn’t much they could do and it was only a small number of clients anyway…

    • And the police should be stopping all attacks before they happen. Every time a miscreant breaks the law its not blamed on the police its blamed on the miscreant.

      Taking the responsibility away from qualified regulated financial advisers as you have just done, and placing it in the lap of an organisation that has little ability to affect individual instances of advice is ridiculous.

      If you want someone to blame – Blame the advisers causing this mess!

      • Crikey Matt …

        So by your understanding… everyone in the street where said miscreant lives and plies his or her trade pays and hangs for their misgivings ….

        Grey area is bang on ( not that he or she needs me to stand by and blow sunshine their direction)

        It simply comes back to collective punishment…. go look it up … you cannot collectively punish a select group for the misgivings on the one or the few …

        This IS the failure of the regulation its broad brush approach and looking in the wrong direction …

        No one has a crystal ball granted, however ……and the more clients know this the better ….costs are passed on …and the client being at the end of the chain is the one who ultimately pay for failed regulation…the FCA, FSCS

        It’s failing you, me those who work there and most importantly of all …..the consumer !

        Added value (charges) from a good adviser is only a small part of what a client is invoiced for these days…..something mifid2 completely ignores or chooses to look the other way …..

        • To an extent yes – other people will eventually pay – even when its not fair.

          I have never claimed on an insurance policy but millions of others do and my premiums go up as a result.

          I continue to pay because I might need to claim (or my clients in this context) and others will need to foot the eventual bill.

          I’m not saying its fair – good advisers are being punished for the acts of the bad ones – but I cant see how it will change until the bad advisers have left the sector.

      • Nicholas Pleasure 7th December 2017 at 3:54 pm

        This is a poor analogy. A better one would be the police watching thugs mugging old ladies whilst the government refuses to make such an activity illegal.

        I’m a qualified regulated adviser but I haven’t sold any of this stuff. How am I responsible? I cannot change the rules; the FCA can but doesn’t, despite the fact that this is hurting both consumers and honest firms.

        It is entirely the FCA’s fault because, although this has been a problem for many years, they refuse to regulate to prevent it.

      • Thanks to DH.

        Matt, your analogy with the police is a good one but poorly applied. If the police are aware of a crime hotspot they don’t generally ignore it or simply blame the criminal. That changes nothing.

        The FCA have the ability to not only take preventive action (with powers in excess of the police), they are also able to change the rules/laws. Trying something might not work or it might inconvenience others or both. Or it might work. Doing nothing will result in more guaranteed misery for the very people the FCA is supposed to protect. For that reason alone, doing nothing is indefensible.

        So why don’t they do something? Partly politics, partly vested interests, and partly it’s a risk that someone has to be accountable for, partly it’s easier to do nothing.

    • The problem is a cultural one – for decades many advisers considered ‘advice’ as a game of golf, a churned investment and 7% commission.

      These people still exist, and the only place they can still get paid 7% commission is on unregulated products.

      That’s the root of this problem.

      • Nicholas Pleasure 7th December 2017 at 4:45 pm

        Agreed…but we all pay the FCA many thousands of pounds a year to root out this type of activity. And they don’t.

        They spend the money worrying about whether IFA’s are recommending more than one platform.

  21. “We are so disappointed that there is an advice gap. People cant afford your fees.” “A huge proportion of our costs is the FSCS. Far more than the regulatory fees which are good value.” “We charge all of our clients who invest in boring safe regulated investments to cover the costs of those who invest in high risk unregulated investments.” “Really, why?” “Because I don’t want to go bankrupt.”

  22. Surely with the numbers of advisers who stick to regulated investments relative to those who don’t (lots to relatively little) it would be sensible to make it that all those who want to advise on this type of investment undergo an enhanced vetting procedure and must demonstrate and have checked by the FCA that PII is in place specifically to cover the advice they want to give each and every year. Its not rocket science.

    • Andrew Bailey has been quoted as saying that the FCA isn’t particularly bothered about regulated firms not having PII cover in respect of all their sales activities, including of course UCIS.

      In light of such a statement, how can we possibly give any credibility to his claims to be concerned about the ever-increasing demands being made on the rest of us by the FSCS? I see no justification for asking providers of exclusively RCIS to chip in, for the simple reason that they aren’t part of the problem.

      Had it the will to do so, the FCA could stem the tide of uninsured UCIS sales in a matter of months simply by banning any regulated firms from selling them without relevant PII. The FSA should have enacted such a rule at least a decade ago. Why the FCA doesn’t take this step without a moment’s further delay is completely beyond me.

  23. I wonder how many of the firms that flog this rubbish are small, directly authorised IFA businesses?

  24. There is an ongoing cost to IFAs and their clients of circa £100M pa and we don’t really want to deal with it. Some ‘shouty’ people might write a nasty letter if they cant lose their money investing in UCIS. (They still want the FSCS cover). “We don’t want to stifle innovation.”….. In fact we are so keen on it that a £100M loss to you is worthwhile. Its OPM-Other Peoples Money.

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