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FCA orders IFAs to disclose risky product sales

Risk-reward-attitude-profitAdvisers will soon have to tell the FCA how many esoteric investments they have recommended as part of their regulatory returns.

The move comes as the FCA continues its review of Financial Services Compensation Scheme funding, and would allow the regulator to introduce risk-based levies if it chose to.

FCA analysis shows that around a third of all FSCS claims over the three years to 2016 were linked to the sale of so-called “non-mainstream pooled investments” by regulated advisers.

NMPIs are characterised by “unusual, speculative or complex assets”, and include unregulated collective investment schemes, traded life policy investments and some special purpose vehicle securities.

While the FCA did not consult on specific proposals to risk-rate FSCS contributions, where those selling higher risk products would pay more towards the compensation pot, it did say in its consultation that it was considering adding a section to advisers’ Gabriel returns to give it the data it would need to calculate a risk levy in the future.

How are your FSCS levies calculated?

In a board meeting on Thursday, the FCA approved additional reporting requirements. They will come into force on 1 April 2018.

The board also agreed other FSCS reforms, including extending coverage to structured deposit intermediation, making Lloyd’s of London contribute to the pool of funding that comes from retail firms, and amending payment arrangements so that some firms can be asked to pay a proportion of the levy on account or be prevented from paying by direct debit.

Full details of the FCA’s FSCS reform will be revealed a policy paper from the FCA in the coming weeks.

Other options on the table include providers having to pay more towards the FSCS. The FCA also floated the idea of introducing mandatory terms  on professional indemnity insurance cover after FCA chief executive Andrew Bailey acknowledged the system was not working for IFAs.


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. It was during this same month six years ago that I first read with some dismay, but an overall lack of surprise, that the then FSA had opted not to license or pre-approve financial services products, due to what it claimed were a “lack of resources”.

    I’m sure I don’t have to remind anyone reading this that back in 2011 the consumer had already faced considerable detriment as a result of financial products such as PPI. And the regulator’s helpful response almost every time was to point out flaws in product design, marketing or understanding of the product – all with the benefit of hindsight.

    Fast forward to 2017 and the same issues rumble on as a result of the regulator’s inaction to preapprove products before they are made available to consumers. Around this time last week, for example, the news broke that the FSCS had begun accepting claims for bad investment advice in relation to a failed property scheme Harlequin.

    Anyone invested in Harlequin would have, at first, been deemed ineligible for FSCS compensation as the product would have been considered a direct investment. But the FSCS reviewed this position and found new evidence that the Harlequin products likely fall under the banner of unregulated collective investment schemes (UCIS), which qualifies them for FSCS protection. The FSCS is also already paying claims against firms for bad mortgage advise and pension switching, if the underlying investment was in a Harlequin resort.

    If I’ve said this once I’ve said it a hundred times and I’ll keep doing so in the hope that one day the regulator will finally see the light: regulation should not be about being wise after the event. It should be about utilising experience when things going wrong to make sure mistakes and failures do not happen again. To licence a product as fit for purpose, with that purpose clearly defined, as part of the regulatory process is the surely best way of achieving this? I’d even go one step further to say it’s the single most effective consumer benefit a regulator could put in place.

    The situation with Harlequin, and most other examples for that matter, are always about the advice and not the product. The FCA has been careful to point out that any adviser recommending Harlequin was expected to have carried out thorough due diligence on any Harlequin investments “to fully satisfy themselves that it is a suitable investment”.

    In no way aim I suggesting due diligence isn’t a crucial part of the advice process but let’s consider a slightly different approach for a moment. If products were regulated from the outset, and advisers regulated by the FCA were not allowed to engage, at all, with unregulated products – commission paying or not – problems and losses such as this would not happen. And crucially, the tab would not have to be picked up by the FSCS.

    I’ve been suspicious for a long time now that the FCA’s decision back in 2011 was really nothing to do with resource and instead was all about responsibility and, ultimately, who the finger points at when things go wrong. Sadly, this latest development in the Harlequin case only confirms my suspicions yet again.

    It seems that without something to bash the regulator would perhaps feel it has no purpose, or as Keith Richards of the Rolling Stone’s, not PFS, once said of the policing system, “in the business of crime there’s two people involved, and that’s the criminal and the cops. It’s in both their interests to keep crime a business, otherwise they’re both out of a job.”

    Some have suggested that the resource needed by the FCA to pre-approve products would have resulted in a huge increase in fees. But then there’s the alternative, logical, argument that perhaps if products were licenced there would be fewer failures to fund? Just a thought…

    • I accept the FSA/FCA’s response to the idea of pre-approving investment products. Not only are there thousands of them out there but any such panel would need to be constantly revisited AND a product that might well be suitable for one type of investor could well be entirely Unsuitable for another. The creation of such a panel is completely impractical.

      Consumers did not face considerable detriment as a result of PPI. Some (considerably too many, that’s not in question) suffered a financial loss as a result of being improperly sold a product which, in many cases they’d never have been able actually to claim against. For many others though (and I know a few), being able to claim on their PPI policies went a large way to preventing them defaulting on a few mortgage payments. Amazingly, many such people are being offered and are accepting compensation for having been mis-sold PPI.

      • Would it really be that difficult? MiFID II product governance rules are already a step in this direction, forcing providers to identify target markets for their products which includes whether it’s appropriate for retail clients.

        Take that a step further and ‘batch’ products such that some are automatically available for retail clients (e.g. UCITS and/or those that meet set criteria), and for anything else the provider must get approval via the regulator for retail client use (would they bother?). Only then does suitability become an issue and the current rules apply.

        It would require law and rule changes (though not complicated) and wouldn’t be perfect. It might also result in a few products not being available that should be, but it would cut out the crap and make it more difficult for rogue (or negligent) advisers to do wrong.

        • That sounds sensible and achievable to me.

          • Nicholas Pleasure 24th October 2017 at 10:43 am

            Product regulation should be relatively straightforward as it is only the fringes where intervention is required. Big, well capitalised providers do not need product regulation because they have the trust to do the right thing and also the resources to put things right if they get it wrong.

            It’s only the small and unregulated players that are a problem and the FCA really should be checking that the stuff they bring to market is sound. Surely that is what the FCA are there for? IFA due diligence is virtually pointless because we can only see what the provider wants us to see, the regulator has the power to see everything.

            Let’s be clear, none of this would stop future advice scandals, because even the best product can be misused, but we might see an end to failing or fraudulent products (which are then often blamed on advisers – sometimes correctly).

            Also (obviously) regulated advisers should not be allowed to recommend anything unregulated. The FCA could create a category of advisers that can recommend unregulated investments but they would require insurance to cover these activities.

        • No product is or ever could be suitable for everybody. Hence, regulation can never be merely about products.

  2. I have to say about time (and I kept that clean) with regard to telling us to report on ‘high risk’ business. It begs the question how and why it has taken SO long to get to this stage, but we can’t change the past so lets hope the future is better controlled/regulated for these so called esoteric investments.

    I’m also surprised that such claims account for only a third of all the FSCS settlements. How are so many firms failing so badly in ‘mainstream business’ that they have to cease trading and then have caused so much financial detriment to consumers that they seek and win settlements from the FSCS in essentially what has been a ten year bull run. I’m sure the data is out there but I’ve never seen it, so I find the size of the problem a shocking surprise.

    Where is all this rubbish advice ‘outside’ esoteric investments actually coming from and how is the regulator managing this issue.

    • Nicholas Pleasure 24th October 2017 at 10:17 am

      I’m not certain but I would suspect that if, for example, you had a SIPP and then invested in Harlequin (as that’s the one in the article), then this would be counted as poor SIPP advice and therefore not esoteric.

      Such categorisation probably suits the regulator as it reduces the appearance of them having been totally asleep at the wheel. “This utter catastrophe is bad we admit but look, it’s only a third of the claims”

      Regardless, when you consider what a small proportion of advice relates to esoteric investments, for them to cover a third of the FSCS payouts is astonishing anyway.

      If I’m wrong I’d like to know what those other 2/3rds of claims are.

  3. At last, but as stated above, why so long?

    If the product is not fit to be regulated then it’s clearly not appropriate for it to be recommended by the regulated. Sell it outside your regulated firm and defend any complaint via the courts.

    Oh and it’s not just IFAs’ that this new requirement applies to, as your headline implies!

    • The FCA doesn’t and will never regulate products, only advice on them. Whilst it authorises most providers, it has regularly stated that authorisation should not be inferred to mean approval, though one wonders why it doesn’t insist that all providers of all investment products must, at least, be authorised.

  4. How will the FCA regulate this.

    Those advisers that do a good job, and where suitable, recommend esoteric investments will declare them whilst those that are just out to make money will not report them on their GABRIAL return. How will the FCA ever know unless they can cross refer what an adviser has declared with a list of taken up investments?

    • Deliberate omission from a firm’s GABRIEL return of certain activities is, at the very least, a failure to deal with the regulator in an open and cooperative manner and (I believe) individuals can be pursued and fined even after they’ve ceased to be authorised. But, of course, the main issue here is that the regulator should have been demanding (and acting upon) data on high risk, off-piste sales since at least a decade ago.

  5. This is a good idea, specific licences would be too. It’s in keeping with the cost of insurance, the greater the risk the more is paid. Firms not recommending this stuff should obtain reductions in fees. The problem is of course FSCS and its structure which means that the polluter hardly ever, if at all actually pays.

    As for monitoring, HMRC requires all firms marketing tax avoidance schemes to decalre these in advance. Why could the FCA not follow suit?

  6. Can’t come soon enough as far as I’m concerned.
    We are heartily sick of the FSCS burden being driven ever-upwards by a band of reckless advisers recommending products that, in most cases, their clients shouldn’t be anywhere near

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