The Financial Services Compensation Scheme’s chief executive says it does not protect people from ordinary investment risk, nor encourage investors to take more risk than they would otherwise.
Writing in a blog on the subject of moral hazard and investment, Mark Neale said he did not believe investors took more risk because they could fall back on the scheme, adding that consumers usually took advice in a bid to reduce risk not to increase it.
“The concern about moral hazard is, to my mind, even harder to justify when it comes to the provision of regulated advice, they know the limitations of their knowledge of financial matters and of product markets.
“Indeed, we positively want to see the advice market expand to meet the need for advice as consumers increasingly take advantage of the government’s liberalisation of retirement savings.”
Mr Neale reiterated that the FSCS will only provide that protection where a court would have concluded that a civil liability existed on the part of a solvent firm.
“We do not second guess advisers’ judgements. We do not protect people from ordinary investment risk where appropriate investments perform less well than expected.”
He went on to say that his team do take into account the claimant’s own level of knowledge and sophistication, as well as what they are told by the adviser, explaining that they would not typically conclude a civil liability existed where an investor well understood the risks they were taking in adopting a course of action proposed by an adviser.
“In short, I see little or no evidence that FSCS protection is encouraging people to take risks in the investment field they would not otherwise take. “I do, unfortunately, see too many examples of people induced to take inappropriate risks because of bad advice,” Mr Neale added.
Earlier this year, the Wealth Management Association’s chief executive Liz Field argued that regulation should not absolve consumers of their individual responsibilities.
“It is worth understanding that while regulation might be in place to protect the consumer, it should not undermine the principle of ‘caveat emptor’,” she stated.
In 2013, the Financial Conduct Authority’s then chief executive Martin Wheatley commented that caveat emptor could be a moral hazard. “Is it fair for businesses to rely on a defence of caveat emptor if they sell a product they know is not suitable for the customer?” he asked.
peter.walker@ft.com
