Push regulated advice to protect innocent from outlaws

He said: “The increasing danger of consumers finding their way into unregulated activity is worrying. It is now time for all activity to come under the same umbrella, to provide consistency of standards and consumer protection.”

There is no doubt, in broad terms, clamping down on unregulated investments has great appeal. Why on earth would you spend so many years constructing a strong system of consumer protection, only to allow a non-regulated market to grow alongside it?

At worst, you could describe this as the Wild West of financial services, and it may be an uncomfortable consequence of the pension freedoms that this sector is receiving a substantial fillip.

At worst, you could describe this as the Wild West of financial services

Indeed, there was a stark contrast between the remarkable flexibility and speed with which the fraudsters moved to take advantage of the Budget announcement that the requirement to buy an annuity was being scrapped, and the response of regulators.

Over-55s set to benefit from the opening up of the market started receiving calls in a matter of weeks, if not days, after the announcement.

Of course, outlaws can move speedily precisely because they are outlaws.

What is a worry is that, with the freedoms in particular, consumers may be offered unwise or highly optimistic investments, but these won’t technically constitute scams unless they involve pension liberation or outright fraud.

So before we get tied in too many philosophical or regulatory knots, what we need to understand better is the extent and volume of sales in the grey market, whether pre-retirement or, more importantly, post-retirement.

We might then consider taking action to bring this market in from the cold, but the barriers strike me as pretty formidable. For example, putting suitability constraints on what is being offered might be possible, but the right answer in most cases would surely be: don’t touch this type of investment – it isn’t suitable.

Extending regulation in terms of conduct, ombudsman and perhaps compensation scheme cover has some initial appeal. Part of the problem, however, is that many of these schemes are too exotic to be covered fairly. Extending compensation coverage would be very controversial, given that many advisers have been baffled over the years at several things they have had to pay for, including failed US stockbrokers.

I wonder, therefore, if a better approach might be to make sure regulated financial services – providers of full advice, execution-only and perhaps a better-defined simplified advice channel – can reach many more people. Some of this might take the form of offering a regulatory dividend by putting in place some limit of how far the existing regulatory system can levy costs on advisers in particular.

This clearly involves regulatory clarity and information, guidance and advice, and more co-operation between the different regulators.

Essentially, though, it would involve defining which products are to be included and which are rejected as unacceptable, and making it clear that if consumers take rejected options, they will be pretty much on their own.

John Lappin blogs on industry issues at www.mindfulmoney.co.uk