The FCA has recently all but admitted that retail distribution is a catastrophe. At a meeting with the public accounts committee the regulator’s outgoing chief executive, Tracey McDermott, conceded its £1.5bn experiment has reduced access to financial advice and made it more expensive.
To add to its miseries, in March the FCA released its thematic review on due diligence (TR16), which resulted in unilateral derision from advisers, compliance firms and consultants alike. The principal complaint focused on the size of the report. For such an expansive subject, a mere six pages led to accusations of providing insufficient information on what the FCA expects from advice firms.
It is time the industry called into question the FCA’s research methods, and its quite frankly dreadful approach to solving important problems, including attitude to risk, costs and product selection.
The FCA begins any exploration into improving outcomes for consumers with a positivist, inductive approach. Inductive reasoning (as opposed to deductive reasoning) is based on using experimentation as the basis to forming conclusions or theories. The FCA’s philosophy seems to be exclusively based on inductive methods.
The regulator believes consumers suffer poor outcomes through flawed product selection, as a result of unsound due diligence. Perhaps most telling in the report is the FCA’s admission that it “did not carry out any individual file reviews to test outcomes of research and due diligence or test their approach in practice.” It therefore appears that the regulator makes no attempt to link its perceived assessment of poor due diligence by a firm to the outcome for the client.
We must conclude that the FCA launches thematic reviews biased towards its own positivist theory. It seems that any semblances of deductive methods are ignored, along with any correlation between its original flawed theory and actual outcomes. The FCA simply looked at a firm’s due diligence and processes, decided it wasn’t suitable (without any evidence), and then failed to check in any way whether clients actually suffered poor product solutions.
The RDR and the banning of commission payments – which has resulted in the evidenced reduction of consumers receiving regulated financial advice – was also based exclusively on positivist, inferred theory. Some consumers were mis-sold products because of the influence of intermediary commission payments. Therefore commission ought to be banned.
The millions spent on improving educational standards was also implemented on this basis. Modestly educated advisers sell poor products. Therefore improving educational standards would improve client outcomes. This was suggested with no evidence from the regulator.
It must be exasperating for firms subject to this recent thematic review who, based on poor evidence and inappropriate research methods, are now subject to ongoing compliance reviews from the FCA as well as the costs of reviewing their files.
The industry is just allowing the regulator to get away with it. The FCA is now like a totalitarian organisation. It is instigating its positivist doctrine and ordering firms to conduct file reviews with little evidence and has inexcusably forced the industry to spend £1.5bn to implement its flawed dogma.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser
