RegulationJun 4 2019

FCA supervision blamed for market failure

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
FCA supervision blamed for market failure

In its response to the Financial Conduct Authority's consultation on the impact of the Retail Distribution Review and the Financial Advice Market Review, seen by FTAdviser, the trade body stated it is concerned about a rise in scams which was undermining consumer confidence and increasing the cost borne by the industry.

It stated "regulatory deficiencies" were as much to blame for the trend as poor behaviour from firms.

The trade body gave the London Capital and Finance scandal as an example, arguing it was unclear whether or not victims believed themselves to be receiving financial advice and were acting accordingly.

"We would welcome stronger regulatory oversight in this area in particular," it noted.

London Capital & Finance went into administration at the end of January, putting the funds of more than 14,000 bondholders at risk.

Shortly before the collapse the Financial Conduct Authority had ordered London Capital & Finance to stop marketing its fixed-rate investment bonds and Isa products and the provider had its assets frozen by the regulator.

But critics said the regulator did not act quickly enough and had failed in its supervision of the firm, leading to calls for Andrew Bailey, the FCA's chief executive, to resign.

As a provider of unregulated investments London Capital & Finance did not need to be authorised by the FCA to issue mini-bonds, but it was authorised to promote the mini-bonds which a group of MPs has claimed enabled the company to "raise money from bondholders by marketing themselves as FCA-regulated in their promotional literature." 

An early day motion calling for Mr Bailey's resignation over the issue was signed by 16 MPs in May.

Pimfa encouraged the regulator to consider if its own supervision of firms is working as well as it could be.

The body stated: "It is unclear to us whether or not this is a function of ineffective supervision or resources being too thinly spread."

The trade body warned that the impact of this was a rise in the levy firms pay to the Financial Services Compensation Scheme.

The FSCS has not yet confirmed whether it will compensate LCF investors but it stated at the end of May that it believes there are "sufficient grounds" to continue exploring investor compensation.

Simon Harrington, senior policy adviser at Pimfa, said there was "significant merit in reviewing the way in which the FSCS levy is constructed".

He argued that there was "an obvious moral hazard" in its current construction in that "well intentioned, viable firms are tasked with funding and clearing the mistakes made by firms which are not".

He added: "Ultimately in the current construction the end user – the consumer – ends up paying twice.

"We would welcome further dialogue on how the FSCS – a welcome, well intentioned and vital pillar in our financial services landscape – can be funded in a manner which is proportionate to the risks that firms represent to it and is cognisant of the current supervisory processes in place to protect consumers."

In its consultation response, Pimfa added that until a "reasonable compromise" can be made between the need for consumer protection and the costs incurred by firms in funding it, the cost of advice will continue to be high relative to what it was previously.

The trade body noted that since the introduction of the RDR, the average cost for wealth management firms to cover compliance costs has risen by around 58 per cent, according to data collected in 2018 by Compeer.

Within the same timeframe, average revenue per firm remains lower than it was pre-RDR, whilst consolidated industry profit remains substantially lower, Pimfa stated.

In May Mr Bailey refuted claims the regulator does not want companies in the financial services sector to make a profit. 

Speaking on the regulator's inaugural "Inside FCA" podcast Mr Bailey said the sector needed firms that "earn returns" but he added commercial success must be achieved in line with the FCA's public interest objectives. 

Following the publication of its call for input the regulator stated it was open to changing its regulation if the results of its advice market review showed current rules were hampering innovation or failing to deliver the best consumer outcomes. 

Nisha Arora, director of consumer and retail policy at the FCA, at the time said: "We are looking at if regulation is actually facilitating the right advice for consumers, or is actually skewing, steering, or hampering innovation in any particular way.

"The call for input acknowledges regulation should be a force for good, protecting consumers and facilitating a competitive environment in the market - but at times it can get in the way and not deliver the right outcomes, and we’re open to looking at that in the review." 

Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, agreed with the criticism made by Pimfa.

He said: "The FCA have got to take some responsibility for the rise in levies paid by firms and scandals such as LCF.

"Regarding the rise in levies, much of this relates to unregulated investments (typically via self invested personal pensions) and it’s my belief that these should not be made available to retail investors – a ban was ruled out by the FCA previously, so clearly this was a poor decision.

"Related to this are general costs for compliance and professional indemnity insurance, and over the years, most firms have seen this rise, leaving many less affluent clients underserved. This cannot be sustainable and surely was not the intention of RDR."

On the increase in scandals, Mr Chan said the regulator "needs to be allocating more resources to work closely with IFAs and regulated financial services professionals, and enable an easier way for individuals and firms to report potential scams or scandals and poor practices that could lead to consumer detriment – and more importantly, to action to be taken by FCA".

maria.espadinha@ft.com

What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.