Keith Richards calls on govt to reinvest fines into financial services

The former chief executive of the Personal Finance Society, who now heads up the CDA, said fines were originally designed to be fed back to contribute towards the cost of the regulatory system.

Fines are currently being sent to the Treasury to be used towards general government expenditure on public services. This is a requirement by law and Richards said amounted to a "stealth tax".

Fines for 2022 amounted to some £216mn, while for 2023 so far the total is approximately £23mn.

Richards said this could be used to support advice firms amid ever-rising levies, and to fund some much-needed education initiatives, following the government's consultation on the advice guidance boundary.

A HM Treasury spokesperson said: "The revenue from these fines helps fund public services and redirecting the funds would have a negative impact."

Richards' comments come in the wake of the FCA's proposals to force firms to hold extra capital to cover any claims that may arise.

it's hardly fair to call that firm a polluter when the incumbents have nothing to do with the poor advice that was given 10 years ago.Keith Richards, Consumer Duty Alliance

He said the new measures, though a "sensible thing to do", did not fully address the bad firms issue, which has seen the FSCS levy soar.

He told FT Adviser there was a difference between advisers who phoenix to rid themselves of their liabilities from reckless behaviour and firms that folded because their capital adequacy requirements did not meet the cost of an unexpected claim.

"I think, you know, all those sort of things are sensible, but really and truly ... the vast majority of firms it won't impact because the vast majority of small firms that have got a relatively small client bank don't get claims against them.

"What it will do for the good, genuine firms is it will protect their interests and the interests of their clients."

He explained: "As painful as it might sound, the risk is if you end up with an unexpected compensation that isn't fully covered by your PI, for example ,it could have a catastrophic effect for the firm.

"That doesn't make the firm bad. In fact, it might even have been as a result of past advisers who no longer work in the sector.

"So it's hardly fair to call that firm a polluter when the incumbents have nothing to do with the poor advice that was given 10 years ago.

"So it will make it slightly more difficult for people to deliberately churn because I suspect what the regulator might be after, it's already promised it's looking much closer at any firm that collapses and whether or not the directors are fit and proper to hold permissions again, so it's certainly now higher on the agenda not to allow phoenixing."

Reflecting on this he warned the regulator had to be careful not to stop a genuine person who was just caught by unforeseen circumstances from earning their living.

He even believes there could be grounds to take the regulator to court should that happen.

Redistributing fines

Richards said the main source of claims and FSCS costs were the spikes in business that could be observed in recent years, for instance with DB transfer advice.

"It was inevitable that things like DB transfers were going to be under scrutiny because it was a spike. So it was inevitable that we were going to end up where we've ended up," he said.

The real answer to the question of rising levies, he said, was to "now re-consider reinstating the reallocation of funds back into the system that rewards the good players and acts as a form of dividend.

"It will also provide more funding, so it will take away the uncertainty for firms, the additional impact of unwelcoming levies, but it also provides additional funding for financial education and engagement."

He said low savings rates were one of the prime issues in this country, especially in the cost of living crisis which could lead to more people borrowing themselves out of financial hardship.

Research has shown, he added, that one of the main reasons people weren't seeking financial advice was a lack of awareness of why they should, rather than a lack of trust in the profession.

The oft-cited cost also was not the main reason, more "not understanding what you get for the cost of advice", said Richards.

Politicians tend to be good at looking at strategy, they're not regulators.Richards

There was a lot more basic education and engagement in the past because it was easy to access via bank branches and insurance agents.

"The reason we are calling on the government to start investing some of the fines, rather than keep taking it as a stealth tax or an indirect tax to start reinvesting back into financial services and consumer education, is because we've had that lack of engagement."

Meanwhile, Richards said he was hopeful the government's review of the advice guidance boundary will lead to some positive development in the sector when it comes to providing guidance.

"I think we will see a more pragmatic approach for a number of reasons. Politicians tend to be good at looking at strategy, they're not regulators.

"They're looking at what the problem is and then they're looking at the most logical and pragmatic solution."

He thinks the solution will come from big manufacturers, who will not give advice but guidance that helps people decide whether they want to buy a product.

Richards added: "It's got to be simplified when someone hasn't got complex needs but the only way you could do that, you can't do it through a regulated process...

"I think we are going to see a different approach this time.

"I'm not saying it's easy but you've only got to look at how many consumers are unengaged and see how horrifying it is that some people are approaching their mid-50s and they've got but £10,000 in their pension pot thinking that they'll still be able to retire at 67."

carmen.reichman@ft.com