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Peter Hamilton: Counting the cost of the FCA’s failure on unsuitable products


In February, the National Audit Office published a report on how effective the FCA is in dealing with, and preventing, misselling. The conclusions were damning. The summary of the report notes misselling of financial products can cause serious harm, not just to individuals but also to the financial stability of the UK. The summary of the report says:

“The FCA sets objectives for individual interventions and learns lessons from them. But it does not yet systematically draw together aims and success criteria of related interventions, evaluate how they fit together, or link the outcomes of intervention to their costs. This creates a risk that interventions may not be well coordinated, and means that the FCA cannot be sure that it has chosen the most cost-effective way of intervening.”

That measured language does not disguise the sting in the NAO’s rebuke. That is particularly so in light of the FCA’s recently published budget for 2016/17, which is 8 per cent higher than its costs for 2015/16 and of which the largest share is to be borne by advisers.

The starting point for the FCA must be its statutory objectives; one of which is to secure “an appropriate degree of protection of consumers”. One might be forgiven for thinking the cost-effective prevention of misselling would be an appropriate objective to protect consumers. Yet the NAO says the FCA cannot be sure that what it does is cost-effective.

It is fair at this point to acknowledge that much as the police will never know whether any particular action taken will have prevented a crime that does not take place, so the FCA will never know whether a particular kind of misselling was or was not prevented by the action it took. That said, it is still incredible the FCA does not know whether what it does to prevent misselling is cost-effective.

The regulator must have appraisal systems with criteria by which it measures its performance against its objectives. Those criteria must be objectively measurable if the successful performance claimed has any validity. Clearly the NAO did not think the FCA had any such criteria.

“The NAO concluded the gaps in the FCA’s ‘understanding of the costs of its activities could hamper its decision-making’”

The NAO went on to point out the FCA did not have a complete estimate of the direct costs of its misselling work. It does not estimate the overall costs of complying with its regulations and the regulations aimed at preventing the sale of unsuitable products could have unintended consequences, such as discouraging innovations that could benefit consumers.

Thus the NAO concluded the costs of the FCA’s responses to misselling were very substantial but the gaps in its “understanding of the costs of its activities could hamper its decision-making”. On any view, that is a serious criticism but it is something we all pay for –  either directly through the charges paid by firms  or indirectly by their customers – and that makes the failure all the more unacceptable.

The NAO went on to make some basic recommendations, including:

  • The FCA should “develop further its strategic view of the risks of misselling and its approach to tackling them. It should communicate its expectations with regard to misselling clearly and consistently to firms…”
  • It should “develop a stronger understanding of the total costs and benefits of its work, and use cost and benefit information more routinely in its decision-making. This should include detailed evaluations of how regulatory changes affect the costs of compliance. It should use a wide range of data sources to help it to assess how consumer behaviour responds to regulatory interventions. This would support its evaluations of the effectiveness of its work and increase confidence that it is achieving value for money.”
  • It should “formalise its approach to evaluating redress mechanisms, including their costs, rates of uptake by consumers and how quickly they provide redress to consumers. It should set out clear criteria and compare the effectiveness of different types of schemes. This would help it to identify more clearly the factors that contribute to successful outcomes and to make more informed decisions between different approaches.”

The really depressing aspect of this report is that it shows yet again how ineffective the FCA is and the FSA was before it. The hundreds of thousands of words written in the many reports about the regulatory failings since 2001 seem to have brought about no fundamental change in the performance of the regulator of the conduct of financial services firms. Indeed, it cannot answer the simple question the NAO asked: does it deal with misselling cost-effectively?

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of 



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Good article but the outcome is not surprising. On a more simple note, the FCA cannot even tell how many registered advisers are Indy or restricted. This article emphasises the regular is not fit for purpose in a lot of what it actually does.
    Be interesting to see how “accountable” they are by the changes they make based on the report.

  2. Douglas Baillie 18th April 2016 at 3:23 pm

    A very big and significant part of the problem (not referred to in the article), is the unknown number of ‘unregulated investments’ being sold by ‘unregulated advisers’ over whom the FCA, and the FOS appear to have no juristiction and no control.
    The solution is to regulate all advisers and all investments, and to take punitive action against those who fail to comply.

  3. An unfair criticism perhaps, as they’ve (FCA) just reiterated their 2014 mantra regarding ‘Provider Hospitality’ for advisors, golf days in particular it seems, so surely they must be ‘on the ball’.

  4. What we have here is simple; there are 3,000 employee’s at the regulator all pulling and going different directions, its not cost or time effective and this is the fault of the senior management.

    I echo Douglas’s comment above, and would add, we need a product levy, if they (FCA) are not willing to regulate products then this levy needs to be extended to Un-regulated products.

  5. As stated there is the issue of unregulated products. I firmly believe it is time to regulate a few minor areas needed to gain a complete investment package for regulated advisers. Once this is achieved, make it clear to all, that unregulated products are taken at your own risk, no protection at all.

    At this point it becomes possible to gain meaningful figures, as we are all being judged when much of what is happening is out of our control, including the regulator.

  6. This article seems to go a very long way round the houses to articulate what most of us already know, namely that the FCA:-

    1. never undertakes a Cost:Benefits Analysis on anything and

    2. is allowed completely and wilfully to ignore the requirements of the Statutory Code of Practice for Regulators, a key element of which is (and I quote from Paragraph 1.1), Regulators should avoid imposing unnecessary regulatory burdens through their regulatory activities1 and should assess whether similar social, environmental and economic outcomes could be achieved by less burdensome means. Regulators should choose proportionate approaches to those they regulate, based on relevant factors including, for example, business size and capacity.

    How can regulation improve unless the regulator itself is held meaningfully to account?

  7. It’s amazing that they (the FCA) creates an absolute monster task for most of us advisers with their angelically named Gabriel Report, when it seems to have no bearing on the real issues that emerge as complaints later on. Douglas Baillie is correct about the non-regulated advisers and so too is Marty Y about not even being able to identify Independent and Restricted advisers despite the Regulator feeling it is such a major differentiator to require a specifically unequal declaration on a disclosure document. Of more concern to me though is the overlap of these two contributors – namely regulated advisers (independent or otherwise) who recommend non-regulated products and then by some miraculous event are covered by the FSCS.

    As I am currently completing the said FAMR it strikes me ‘once again’ as bizarre that regulated advisers do not have a formal declaration of non regulated advice they have provided to their clients. VCT, EIS’s Structured Products, Tax Avoidance Schemes, Film Partnerships, Offshore African Property UCIS and the like are absent as far as I can see from the return. They cover areas that we all instantly understand and recognise like ‘non investment insurance chains’ in section I of the return but the only reference to the potential recommendation of a non regulated product or service to a consumer is in section E as far as I can see and that’s for the PII Self Certification and simply asks if the adviser has cover in a specific area.

    So they never do find out – until its too late – that a rogue or misguided adviser has seriously gone off piste with their recommendations. Nothing to worry about though as the rest of the non-polluters will cover the future losses with their FSCS levies.

    A regulated adviser recommending regulated products and services has to be a significantly lower risk category than one who recommends the next great film scheme or Panamanian Trust – but the regulator never even asks the simple question, as far as I can see anyway, ‘do you recommend non regulated products or services?’ and if so provide details. It’s not rocket science and I’m sure the NAO would agree.

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