19th January 2021

A Call for Input

The FCA created another document entitled “a call for input” whatever that means. It appears to be another fishing trip by the FCA for increased powers and an attempt to blame others for its failure. It is important to note that this was not a Consultative Paper rather “a call for input”. This meant that it was not in the list of Consultative Papers and had a member not alerted us we could have missed it. Maybe it was only sent to favoured creatures who could be trusted to follow the party line!

It starts with a foreword from Christopher Woolard, that makes several cowardly allegations against the current advice market as he escapes from the FCA waving his CBE as he goes.  

His words identify, more perfectly than he could have ever intended, the failure of regulation in the advice market.

He starts with a statement of the obvious, namely that consumers face complex issues made more difficult by longevity. It is also made more difficult by Government Policy or in many cases the lack thereof. It might follow then that these complex issues need the maximum number of advisers advising the maximum number of Consumers. But not in FCA World!

Unfortunately, RDR has removed from professional advice from 12 million consumers and banking advice from another 5m. In doing this the FCA has exposed 17m consumers to scammers. Instead, Mr Woolard rather sniffily dismisses those still trying to give advice as “small firms”. Presumably if advice was given by larger firms it would be more socially acceptable to him. 

In this opinion, Woolard identifies a long-held regulatory view that the advice market is somehow too beneath the dignity of principal regulators who would be far more comfortable sharing great thoughts with their banking friends. Maybe it is more the case that the advice market is too small to engage in the revolving door so beloved of by Whitehall.

Unfortunately, the advice market, like most professional activities, is by nature a small business activity. Over the last 3 decades, several advisory firms have attempted gain scale. Even those consolidators who have gained size are generally run as a collection of small businesses. It is a fact that most of the firms of scale in the advice market are incapable of making consistent profit. The outlook of regulators on networks changes on a regular basis from seeing them as a high-risk option one minute; to being the answer to Mr Woolard’s issue with small firms the next.

The FCA has deliberately failed to employ those with industry experience so have created a regime which is theoretical, impractical, and incapable of identifying issues or acting on them until way after the horse has bolted. If there is a fault in the advisory market, the FCA has created it.  

So, what has the FCA missed in its “Call for Input”? 

Objectives: The FCA has 3 objectives set out for it in the FSMA – namely: 

1. Protect consumers – to secure an appropriate degree of protection for consumers.

2. Protect financial markets – to protect and enhance the integrity of the UK financial system.

3. Promote competition – to promote effective competition in the interests of consumers. 

The IFAA suggests a 4th objective is added: 

 4.  “Encourage consumers to invest and protect themselves in order to improve their financial independence and personal responsibility. 

Whilst this would be a great addition to any new legislation; but the FCA Board could simply adopt it as part of their Annual Review. Without this 4th objective, the regime could happily deliver the first three objectives to a single rich consumer and leave everyone else untended. If we are serious about the savings and protection gap let us make it an objective of the FCA to close that gap.

This creates another question. Do the Metropolitan elite who have captured policy making, want an electorate that has independence and is personally responsible? Lip service perhaps but little will be done to deliver it. Many “progressive” people look upon the populace as people who pay tax and get told and nudged what to do. They also believe that an individual should have money only after the state has no further use for it.

This is not an ethereal point. It impacts particularly on pension policy. Should individuals make private provision or pay more tax and hope the state will provide. We cannot even get political agreement on whether private provision is a good thing. The FCA’s media output seems to make people think that providing for your future is inherently dangerous. 

Debbie Gupta gave an insight into the FCA’s thinking in a letter to advisers. In this she suggested that consumers could avoid the terrible fate of taking professional advice and will soon `be better getting advice from Robo-Advice. 

Understand Apathy: In general, consumers do not seek to spend any time considering their financial futures. Therefore, advice is so important. The first task of an adviser is to challenge his clients to consider their financial futures. If this fails nothing else follows. A lack of advisors will lead to a lack of challenges and a sub-class who have the funds to invest in their futures but not the encouragement or knowledge.

Consumers do not expend any energy reading documents the regulatory system creates for them. Consumers can invest £20,000 in an ISA and receive 110 pages for their troubles. You can take out a £20,000 loan with less than a page including the application form.  Is that consumer protection?

Understand Cost:  The direct regulatory costs are at least 25% of fee income. This is a major disincentive to new clients, presuming they can find an adviser. More worrying is the effect that any further increase might have on existing consumers. 

This “call for input” is totally silent on the fact that regulation has been overseen by organisation incorporated in the same company for 32 years. It has for the last 20 years had total freedom to create its own agenda, set its own budget. Whilst not, in any practical sense, being accountable to anyone. 

FCA- You broke it, so you own it.

Finally, in our response we maintained the illusion that FCA rules have any relationship with FOS decisions. It is painfully clear - they do not.For instance, in the case of Connaught, FOS decided that all investors were not experienced investors. Alternatively, when it suited, they have also decided the opposite. So, whatever the rules, say FOS can do whatever it likes. 

Much of the regulatory regime holds to the misinformed concept that consumers are university educated, state funded, with a healthy distrust of commerce and love researching detail. The reality is facing your financial future is the very epitome of a distressed sale and is studiously avoided by millions of consumers. 

Are Investors allowed to lose?

The issue for the regulator is it allowed for investors to lose or are you, as it appears, attempting create a no loss investment market? If so, you will, by definition, create a no profit market too.

FOS has clearly decided that if investors lose money someone in the industry must be at fault. The reality may also be that either the client is at fault or that their losses are caused by government intervention. Example - If a client invested in the pub group Wetherspoons whose fault is it if they lose all their money due to the Government’s COVID shutdowns?

What about Fair Compensation? 

Attempting to do “fair” is pointless. It is too subjective and destroys the PI cover. If client “A” decides to invest in something and loses. Is it “fair” to restore their funds because in retrospect they claim they did not know what they were doing?

FOS is desperate to invent a new method of remediation which avoids Civil Law. But process created by civil law allows the evidence to be delivered and tested. “Fair” encourages evidence to be avoided or not tested. Clearly no one wants legal courts to be involved but previous Ombudsmen created a regime which reflected how such courts would have treated both parties. This had the support of the PI market.

Now we have a lottery in which the pursuit of “fair” is often paying out on cases that no court would contemplate. It does not take long for being “fair” is being a cover for the failure of regulators or to cover political and policy embarrassment.

The only way that you can do “fair” is only to have large firms who may be willing to make payments for the benefits of silence and no inward questioning of their actions. I note when it was suggested that FOS larger cases should be decided by tribunal which would have been fair; the opposition came from the bankers who did not like their dirty washing shown in public. 

If regulators had the courage to say, much as way Woolard sniffily suggests, that Financial Services was the exclusive regime of big firms, then we could have a discussion with Parliament and watch democracy work. Now we have a silent attrition of smaller firms across the industry.

So, can the FSCS be made to work?  

Yes, but you need to make powerful changes. 

a) Return the rule of law.  That way PI cover would be of assistance over time.  

b) Drop the Longstop – It is illegal. 

c) You cannot tinker with something that already profoundly unfair. Looking at the last FSCS list 60% of the claims came from firms which had closed (presumably in good order for at least 1 year earlier some 15 years+) Those that caused the loss are probably dead. 

d) FSCS is a derivative of the Policyholders Protection Act (PPA) which allowed all consumers to “insure” themselves against the catastrophic failure of their firm. The premium cost of that being a de-minimis loss of bonusses or small increase in costs. Like all insurances you have a much larger number of premium payers than claimants.  

e)FSCS currently has at least 20m consumers who have, in some cases, multiple potential cases and you have 5m clients who are still accessing advice doing the paying. In other words, the obverse of normal insurance and you are surprised it is controversial? How fair is it that those taking advice currently pick up the tab for millions who have done so in the past? 

f) The ONLY way to square this circle is a form of product levy where, just like in the PPA, many payers are paying for small number of claimants . 

These are big changes that neither the FCA nor the Treasury will contemplate. The current regime is too convenient.

Perhaps they think it is useful tool to remove Woolard ‘s small firms left sitting below the salt.

More infomationn on Libertatem

 

Regulation