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Nic Cicutti: Sellers still need policing

Am I irrational? Do I make decisions based on completely incorrect reasoning that, had I given them a nanosecond’s thought, would have been radically different and better?

As I write this, I can already imagine one or two if you sharpening your quills and other writing implements, ready to strike.

But my question is a serious one. As Money Marketing told us last week, it is an issue that has recently been uppermost in the minds of the new honchos at the Financial Conduct Authority.

FCA head Martin Wheatley gave an interview to the FT in which he argued that regulators need to “step into the footprints of investors” – who cannot be counted on to make rational choices – to limit or ban the sale of potentially harmful products.

He said: “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.”

Which is why, when the FCA is launched next year it will have the power to ban products that could cause consumer detriment, or limit their sale to certain types of consumers. Wheatley told the FT such interventions will be rare.

I was baffled by his reference to “hiding behind promises given to them by a sales-person”. I would have thought that, yes, while the capacity to independently assess and make up your own mind about the suitability of a product is important, what a salesperson tells you about it is equally vital.

Maybe Wheatley was referring to the kind of boiler-room product where dodgy telephone salesmen try to ram shares down the throats of elderly victims.

Either way, despite the sarcastic opprobrium poured onto his head by some MM regulars on the website, the approach is a sensible one. Wheatley is not saying the FCA will regulate and/or ban every product on the market only that some will be limited in terms of how they are sold, or barred in very rare cases.

The PPI analogy Wheatley gave is quite a good one. After all, what we had here was a potential need by some consumers for a product that protected them in the event of not being able to repay their loans. Yet what was designed was, in a massive number of cases, completely unsuitable for their needs and benefited only the seller.

I will come back to PPI later but it is also worth nothing that it is impossible to completely protect consumers from their own irrational financial purchase decisions.
Human beings are not, in the main, cold calculating machines. We do not have perfect information about all the alternatives and it is difficult to weigh up all the pros ands cons.

Sometimes we make rule of thumb decisions, for example, when deciding where to go and buy our foreign currency from. Yes, online could probably deliver a better deal but the Post Office is good enough for most of us.

Sometimes, decisions are highly emotional – buying a car or a house spring to mind. At that point, consumers are highly aroused. Small wonder then that so many of them will opt for a loan through the showroom, or the mortgage and accompanying repayment vehicle available from the estate agent.

I recall a former compliance officer at a national firm of estate agents telling me the mortgage endowments his company sold needed to grow by 6 per cent annually simply to meet inflation and charges. Yet sales were spectacularly good for years.

For some of us, the context in which we buy has an effect. As a regular online user, a company’s website design, its layout and navigation, the way information is provided, the ease of use generally and how much I am prepared to trust it as a potential provider, all have a major effect.

There are also other fears and so-called cognitive failures on the part of consumers, for example where I am scared to realise losses. I still hold a small proportion of my overall portfolio in a former internet fund. Since losing 70 per cent of its value 10 years ago, it has moved sideways. Yet I persist with it, in the forlorn hope that the fund manager may eventually be proved right to the same spectacular extent as he lost my money in the first place.

All this makes me a realist. Contrary to what some MM readers believe, I do not assume the FSA, or the FCA next year, can protect me in every eventuality. But assuming consumers need some protection, product regulation – as opposed to designing products – is part of that strategy.

Which brings me back to PPI. You see, PPI products were not just poorly-designed products that were simply placed on some financial shelf for unsuspecting punters to pick up. They were actively sold by human beings to other human beings.

Quite rightly, the vast majority of IFAs had nothing to do with them but over the years there have been plenty more inadequate products that independent advisers filled their boots with.

You can regulate the product all you like. But at the end of the day, the seller still needs policing too.

Nic Cicutti can be contacted at


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. If you regulate the product then you at least minimise any massive sales debacle at a later date. Surely history shows us this. Improper sales will always be a factor of this market. If a car is unsafe do you check and penalise the sales outlet or the manufacturer?

  2. Maybe the answer is to ban all financial products except ones which are deposit based or gilt based, that way the risks to capital only occur if inflation hits the value of the capital and / or government defaults on its debts.

    That would effectively do without the need for a regulatory body altogether and all IFAs could close down their businesses and get real jobs (tongue in cheek guys and gals!)
    You could then close down the financial markets altogether and make firms live within their income and only borrow money for expansion via our wonderful banks.

    Seriously, had this sort of pre market double check been applied to products such as KIS, Lehman, Integrity, Arch Cru funds etc, we would not have to pay levies to FSCS support the FOS and of course we could put financial journalists on the dole as well, thus, negating the need for these blogs, which serve no other purpose than to allow us to vent our spleen at the injustices being perpetrated on the iFA community.

    Then again the motto “Illegitimus, non tatum carborundum” comes to mind.

    Keep the faith, get the exams, set the fees, advise properly, select suitable products from the whole market, which will inevitably shrink, making our job easier and go forward to our inevitable last journey in the little wooden box, to the laments applicable to our status.

    In 100 years from now, some wag will look back at the history of financial services and products and say “I wonder why they had such a complex system?”


  3. The FSA are too scared to regulate products.
    There would be no way to shirk their own responsibility. There would be no need for such a vast expensive quango either. It simply will not suit their empirical mindset.
    Hugh is correct, if a GP prescribes a drug which damages the patient, who is blamed? Is it the GP for lack of due diligence?

  4. They should do both. If the products had to meet a certain standards then it would remove SOME of the burden from the regulation of the Seller. A good example from the last 10 years is the self cert mortgage. The FSA wasted a fortune policing the selling, reviewing thousands of small brokers files, coming up with new policy on who was actually responsible for checking client all to establish if a system that screamed please abuse me was being abused. If they had just said self certification is not allowed then there would have never been a problem in the first place and considerable extra pressure on the housing bubble which self certification created would never have happened.

  5. Heres Nick at it again – bashing the IFA.
    I wonder what his hidden agenda is.
    I wonder how you pronounce his surname-Pratt

  6. Hugh
    Nic is like the FSA, he would be out of work if he did not bash IFAs’

  7. Take a look at his photo ……….. yes, that’s right, have you ever seen such a smug looking git!

  8. Products need policing; sellers need policing. No argument.
    The question is whether the level of rogue products/sellers relative to the size of the market require a large and draconian regime and a paranoid regulator operating in luxury on an outrageous budget, or a small, intelligent force, operating from a more cost effective location, and based on the the assumption that people act like people, and not neurotic irrationals.
    We know that inventing dragons keeps the media in profit and the regulator well paid, but it is not totally obvious whether the scandals that do occur are large lakes or small puddles. The published stats indicate that it is nearer the latter than the former. So the need for continual muckraking is questionable. It is difficult to assess who has the smaller level of integrity; the bad adviser who makes a small dent upon the world, or the wooden-spooner who spreads dissatisfaction at every opportunity to a large readership thus making them suspicious of virtually everything.

  9. @Anonymous | 2 Feb 2012 1:00 pm

    FSA had been trying to ban ‘liar loans’ for years. Trouble is, HMG at the time wanted a ‘growing economy’ so FSA were forced to go along with it.

  10. Just where is Nic bashing IFAs?

    Some people are just so paranoid, they see criticism everywhere and add that to this wierd notion being built up that the FSA/ FCA want to close down IFAs.

    For what it’s worth, I agree with – indeed I would completely support – the FSA/ FCA banning unsuitable products and they should have been doing it for years, but, sorry BUT,

    ..they need to do so in a way that does not punish existing investors or produce a default hindsight “bad advice” cnclusion when none was due.

    I refer of course to the ban on life settlement funds when some of those funds were/ are excellent and suitable products.

    What should hapen is that the FSA/ FCA should be involved in product regulation befoe they are launched. bans should be in place before advisers are put in the invidoius position of advising on a product that may be subsequently trashed by some future pronouncement by the regulator and before consumers are disadvantaged by an unintended consequence of regulatory stupidity.

    This wll not deal with the inevitability of some advisers flogging a product to make a sale of course, but then it is difficult to regulate such an activity. After all, it is rife in every walk of life, when people rely on being told something is state of the art, reliable, suitable for purpose etc etc it just happens to be that for some bizarre reason it is worse to sell someone a rubbish insurance, savings or investment product than a flimsy washing maching that breaks down immediately in ouching the popwer on button.

    As always happens, people are molly coddled to the point at which they think they shouldn’t have to think for themselves or take responsibility for their own lack of consideration.

    Ian Coley
    Medical Investment Services

  11. I don’t really see the value in the FSA / FCA regulating products. What if they ‘approve’ a product and it goes belly-up? Are the bureaucrats in Canary Wharf going to dip into their own pockets or take out some sort of PI in order to compensate consumers when they get it wrong? These are the same people who authorised a financial product manufacturer as an intermediary. Who is paying for that mistake? Yep. You and me again – ultimately the consumer of course.

    I’m afraid if the FCA isn’t prepared to stand behind a product ‘approval’ to the same extent as an IFA stands behind his advice, regulatory approval counts for nothing. This is an exercise in bureaucratic empire building. Nothing more.

    As far as regulating sellers is concerned, it is not ‘bashing’ IFAs to point out that there are some bad apples who have caused harm. I have a fantastic GP whose skill and care have enhanced my quality of life. Was my confidence in him dented when the wicked behaviour of Harold Shipman, another GP, was exposed? Were journalists who wrote about it accused of ‘Dr bashing’ by other GPs? Of course not. If we can’t do a bit of honest, critical navel-gazing in our own trade press, then where can we do it? And if we don’t do it at all, leaping down the throats of any one who so much as appears to be critical, how the heck do we grow as professionals? No business can afford to disregard its critics. No business on God’s earth. Businesses progress by taking criticisms on board and addressing them. If you are confident in what you are doing, you can roll with the punches. And if you can’t do that, then you shouldn’t be in the ring.

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