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Chris Gilchrist: FCA deserves ridicule for ‘consumer engagement’ stance


Imagine the boss of car safety regulator VCA saying “consumer engagement with cars is essential” or the boss of the Medicines and Healthcare Products Regulatory Authority saying “consumer engagement with pharmaceuticals is essential”. These bosses would first be ridiculed and then fired.

Yet the FCA’s request for input to its Financial Advice Market Review contains the statement: “Consumer engagement with financial services is essential.” Why is the FCA not being ridiculed and its boss fired? (Okay, he has been, but not for this.)

The implication of the FCA’s statement is that consumers can only expect to get good results if they “engage”. Yet no one considers engagement a reasonable requirement for buyers of cars, drugs or food. Why? Because regulators in those fields have well-defined objectives: they set policies and rules that ensure consumers are safe if they obey the law and use common sense.

You can kill yourself by driving too fast or carelessly, by taking too much of a drug or eating too much of almost anything. Regulators do not worry much about this. They require manufacturers and retailers to provide essential information and assume consumers will use this information intelligently, or at least not stupidly. They make products safe for non-stupid users.

Could you reduce the number of UK car deaths each year by requiring car salesmen to investigate car buyers’ capabilities, habits and “previous” and to base their recommendations on this? Almost certainly the answer is yes but the cost would be ludicrous, the hassle unbelievable and the forms on which would-be buyers’ lies were recorded would wallpaper hell several times over.

So why do we put up with the notion that consumer education or engagement is necessary for the financial advice “market” to work? In essence, because the regulator has chosen to regulate advice rather than products.

When regulating products, it is easy to answer the question: does it conform with the relevant laws and regulations? And does it do what it says on the tin? If it does not or the manufacturer lies (see Volkswagen), it pays up. Negative outcomes (deaths, crashes, illnesses) are evidence of failure and can be treated as smoking guns by regulators.

When regulating advice, the implicit aim is that consumers always get the right advice for them. Yet it is impossible for detailed regulation of the advice process to ensure this. Nor can regulators set rules for the outcomes of advice, as they can with products, for given the near infinite variance in personal circumstances and needs the “right advice” is idiosyncratic.

To a man with a hammer, every problem looks like a nail. While a gale blows through the roof, the FCA hammers nails into floorboards. It defines the problem as regulating advice when it could deal with many of the problems consumers face by regulating products.

Since the FCA has had its legs blown off for failing to sort out the dysfunctional annuity market, any new boss will realise the political response to another failure is likely to be lethal. I predict the regulator will first fudge the advice rules and then edge towards product regulation while pretending not to.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing editor to Taxbriefs Advantage and edits the IRS Report 



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There are 14 comments at the moment, we would love to hear your opinion too.

  1. Pardon the pun Chris, but well done for hitting the nail firmly on the head!

  2. So how is regulating products likely to ensure that product recommendations are appropriate to the needs, circumstances, objectives, ATR, CFL and so on of those to whom they’re presented?

  3. Excellent article and so true.

  4. Spot on Chris I have been prattling on about this for years and great that someone like yourself agrees. I am sick to the hind teeth of the ridiculous regulatory regime which assumes clients are allowed to be idiots and claim for things because “they didn’t know what they were doing” or “they didn’t understand what they were told”. Caveat emptor exists in pretty much every other area of products or services. And in most other industries it is indeed the products that are strictly controlled and regulated not the advisers of those products. Clearly I am not advocating carte blanche but you are bang on with the need to focus on products rather than client engagement.

  5. I agree up to a point, the products need to be tightly regulated but I do feel advice needs sensibly regulating as well.

  6. There is a lot of common sense here and maybe the potential cost savings in the advice process would open up access to advice for the less well off, who perhaps need it most!

  7. Do not under estimate the FCA’s insatiable appetite for perpetuating their own existence

  8. Great article and could not agree more. The reason they will NOT do this is very simple (not meaning voluntarily do it). It will make it a black and white category and the FCA will not want to put themselves in a position where the blame for consumers detriment can easily be demonstrated to have come from buying (or being sold) a product they have classified as “good”. That will never do. They will always want to have the ability to lay the blame for any failure at someone else door, never their own.

  9. Chris G, Having served on the Smaller Business Practitioner Panel of the FSA / FCA for 3 years until 2014 I can confirm that this was a subject which was raised many times. The reason given by the regulator and supported by just about all of the product manufacturers on the panel was that regulation of the product would stifle innovation and slow down the advent of new products coming to market. An argument I found disappointingly difficult to refute. Dick Carne

    • “…… would stifle innovation and slow down the advent of new products coming to market…..” SO they think the current system is better? This really proves to me that those serving within the regulator really have no clue about the reality of the situation. Surely it would be a whole to better to have a slower rate to market for products having had the products “vetted and approved” so we have confidence that they are fit for purpose before being unleashed to the masses leading to the total mayhem which exists under the current system when it goes per shaped. Allowing providers to invent new “crap” to sell and let it loose on the general public with the Regulator having no clue whatsoever about the product(s) until after it has been bought directly or sold en mass. Only then when things go wrong does the regulator start a very long, slow, clean up act at huge expense to the industry and advisers (some of each sector are guilty of selling this stuff but a lot more who didn’t go near it, still foot the bill). It is a truly pathetic situation. Regulating the products would have a huge impact of lowering detriment (regulator term which I hate) to end users, lead to more confidence in the overall system an improve outcomes to product users.
      This would lead to a lot less regulation in other areas and so reduce the need for the amount of power in the regulator. They would not be able to self perpetuate their own expansionism (the total reverse actually).
      I could have had no problem refuting their argument. I think the real reason for them not doing it is summed up in my previous paragraph. Its only my humble opinion of course

  10. Richard Carne, I agree that the vested interest lobby of providers is driving FCA policy. But in the retail market we don’t need much innovation: innovation led to PPI insurance embedded in credit products, low-cost mortgage endowments… I could go on, but name me innovations that have hugely benefited consumers? And then let’s add up the costs and benefits in monetary terms.
    Marty Y, you mistakenly link responsibility for products with regulation of products. No-one sues the German government because its laws permitted VW to cheat.
    Julian Stevens, regulation of advisers should focus on duties of care and applying professional standards, not on outcomes. ‘Best practice’ allows for a variety of different approaches being applied in different circumstances – which is what FCA rules don’t.

  11. A disappointigly flawed analogy. Advice is more like answering “how do I get to Edinburgh?” – there are lots of options (train, car, coach, plane, etc.) that have different costs, risks and timeframes associated with them. And sometimes the weather will be so bad that the best advice is don’t go there – and it’s this latter type of advice that your suggestion doesn’t solve.

  12. Precisely. That’s why there isn’t an advice gap. Those that are deemed to fall into this gap fall into three categories.

    1. Those with insufficient resources.
    2. Those who fail to engage for numerous reasons. Parsimoniousness, ignorance or stupidity being the three most likely reasons.
    3. Those who prefer to DIY (and often make a pigs ear of it).

  13. Adam Smith, I don’t claim regulating products will solve all problems, though it would have avoided both PPI and low-cost endowment disasters. But your analogy reveals why regulating advice doesn’t work – people’s personal priorities/views/fears/prejudices/health/etc will all play a part in deciding how they want to travel to Edinburgh. Without knowing all of that there’s no way of knowing whether what anyone has recommended is ‘right’ or even ‘good’.

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