THE FSA RECENTLY PUBLISHED its finalised guidance aimed at mitigating the risk of mis-selling. This aims to help financial services firms meet their regulatory requirements when developing incentive schemes and addresses concerns that using performance management and target setting could be more likely to increase mis-selling than financial incentives.
Mis-selling is a perennial issue for the financial services industry and any form of guidelines aimed at preventing this should be welcomed, but it’s important to remember that incentives are only one factor in the cycle of mis-selling.
Indeed, the FSA must not forget to look at the bigger picture – which includes compliance systems and processes, oversights in regulation, and training & education – as well as doing its bit in ensuring that any investors facing losses as a result of mis-selling are properly compensated.
We at Rebus Investment Solutions deal with fallout from mis-selling in the context of Unregulated Complex Investment Schemes (UCIS) – a phrase that many in the accountancy profession will associate with so-called “tax avoidance” schemes, among other things.
UCIS are a prime example of how these different factors come into play. Indeed, according to a recent FSA report into the marketing of UCIS products, the majority of firms assesse could not demonstrate that they took reasonable (or, in some cases, any) steps to ensure UCIS were promoted to eligible customers.
The majority also failed to demonstrate that they took reasonable steps to ensure that UCIS recommendations were suitable for their clients (of particular concern, given the FSA’s view that UCIS are unsuitable for the vast majority of retail investors) and did not have adequate systems and controls to support their UCIS activities.
So, aside from the hefty commissions offered by the promoters and operators of these risky investment schemes, what has allowed the issue of UCIS mis-selling to mushroom in the way that it has?
Regulation is perhaps the key issue. The Financial Services & Markets Act 2000 and resultant de-regulation, as well as the fact that the FSA for years failed to monitor firms that promote these products, allowed the market to grow aggressively over the past decade.
The FSA has recently started focusing more carefully on the regulatory framework that exists around UCIS – for example by banning their promotion to the bulk of retail investors in Britain.
Under the proposed rules, it will only be possible to offer UCIS to wealthy or ‘sophisticated’ investors, with the onus on those selling such products to make sure the prospective buyer is suitably qualified to buy. This, too, should be welcomed – yet it’s viewed by many as a case of shutting the door after the horse has bolted. For years, this lack of proper regulatory oversight and lack of clarity about regulatory obligations among the professional advisory community has contributed to a wholesale failure of compliance procedures among financial advisors and accountants.
And that brings us to the issue of compensation. While the FSA, unlike the Financial Ombudsmen Service (FOS) and Financial Services Compensation Scheme (FSCS), is not in the business of compensating investors for products that were mis-sold, its role as a regulator is still an important one.
Take, for example, an issue that we are seeing again and again: that of independent financial advisory (IFA) firms entering into liquidation and, as a result, hampering investors’ (who have been mis-sold) ability to claim compensation.
We are currently pursuing more than £35m worth of claims on behalf of clients who believe that they were mis-sold complex investment schemes from one of the leading players in the marketing of complex tax products. The firm is now preparing to go into liquidation and, as a result, there will be countless clients who will now face an uphill battle to bring claims.
This is magnified by the serious shortcomings in FSA regulation. Companies such as this one are vastly under-insured – largely because, for a long time, they did not have to report if/when they were selling UCIS.
This was subsequently not taken into account in respect of the firm’s capital adequacy tests, and therefore didn’t factor into its professional indemnity policies. There’s now a significant risk that many companies will be under-insured or under-capitalised as a result and, as always, it is the investors that will bear the brunt of this.
The problem with mis-selling scandals is that, by the time they become scandals, it’s too late. A lot can be learnt from the UCIS issue, but while the FSA is doing its best to prevent the same mistakes being made, the industry as a whole, including the regulators, must not forget about the need to ensure that investors are effectively protected and the victim is meaningfully compensated where firms (regulated or otherwise) are in breach.
Richard Rhys is from Rebus Investment Solutions, a company representing investors that have been mis-sold complex investment schemes
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