Many IFAs seem possessed of the idea that the burden of regulation should shift away from them, but where will it go?
The FSA, in a sudden and very uncharacteristic burst of touchy-feeliness, is asking the IFA profession for input on the future shape of regulation through its discussion paper on product intervention.
As I understand it, the idea is to move from current point-of-sale regulation to a product approval/risk rating approach. But how will that work?
Presumably, before any new investment is launched it has to be stress-tested and the Consumer Protection and Markets Authority will have to approve the provider’s proposed risk rating or even determine the risk rating itself. Either way, this raises a number of fundamental issues.
That means CPMA, or now FCA, staff will be of equal or greater mental acuity and have wider experience and greater risk assessment skills than the designers of the financial products they are examining. Other than run-of-the-mill products, which generally do not fail spectacularly, why should we have any faith in their ability to do that?
Let us assume the FCA sets the risk rating of a new product as low/medium. It is bought by swathes of people relying on that rating. Let us also assume it fails.
Would that be deemed to constitute misselling on a scale requiring a thematic review and regulatory action? If so, against whom?
Who does the disgruntled client pursue for compensation? Surely not the IFA because, applying suitability criteria, if he sold the product to a client with a low/medium attitude to risk he is fireproof.
The Financial Ombudsman Service could not possibly rate the risk differently than the FCA, as that would de-stabilise the whole system.
The client would have no alternative other than to pursue either the provider or the FCA, or both, for redress for getting the risk rating wrong, assuming the test to be applied in the future is the same hindsight risk reassessment test that the FSA and FOS apply now.
I can just hear it now – the CPMA will defend itself by saying that its risk rating was correct on the basis of the data available at the time and that holding it liable for subsequent market performance would simply be reassessing risk rating retrospectively.
But if that argument were to hold good for the regulator, then it would have to be good for the provider too. Both would then be off the compensation hook. So who would be held accountable in regulatory terms and for compensation purposes?
I regret to say I cannot see a wholesale abandonment of the point-of-sale regulatory approach because it would mean there were no easy scapegoats for failures of the system and markets.
But if the FCA is wedded to change to a product-approval approach, the result could be a sea of nothing at all but bland vanilla products with low risk ratings, high charges as there would be little competition and therefore low returns for the investor.
Alasdair Sampson is a solicitor at Financial Services Advocacy