I’m not talking about the naivete of investing in something that should set the alarm bells ringing from the outset. This is about yet another example of a flawed regulatory system failing in its duty to protect consumers from the worst of the financial services industry.
The Financial Conduct Authority (FCA) should be congratulated for banning the sale of unregulated collective investment schemes (Ucis) to ordinary investors, even if the delay until next January before the rules take effect creates an opportunity for make-hay-while-the-sun-shines sales.
The move was the culmination of more than three years of regulatory scrutiny. It was in July 2010 that the FCA’s predecessor as City regulator, the Financial Services Authority (FSA), published a damning report on the sales of Ucis by advisers.
It deemed three quarters of those sales unsuitable, warning that advisers’ heads were being turned by high commission payments. Who would have guessed?
Tough talk from the regulator was followed by a series of bans and hefty fines. Advisers were found guilty of telling people to divert their entire life savings into obscure, high risk investments. In Scotland, Edinburgh IFA Dunedin Independent faced a compensation bill of up to £6 million following unsuitable Ucis sales. It later went into liquidation – leaving the Financial Services Compensation Scheme to deal with the redress claims – although many of the advisers responsible continue to operate in Scotland.
Elsewhere, a South Queensferry IFA was last year banned for flogging high-risk investments to retired and relatively low income clients.
Still nothing was done to prevent more people being ripped off, until the new rules announced last week.
The new regulator has pledged to take a more pragmatic and interventionist approach than the FSA. This is the kind of case that underlines why that is so badly needed. There are plenty of others. Last week we also heard that Sesame, the biggest network of advisers in the UK, had been guilty of repeatedly diverting people into products not suitable for them. Its clients invested more than £6m in investment bonds from Keydata, which later collapsed in disgrace.
Advisers knew the Keydata bonds were high-risk yet continued to sell them to cautious investors.
As an example of why action had to be taken over commission on investment sales by advisers – a ban came into force on Hogmanay as part of the retail distribution review (RDR) – the Sesame scandal is a classic.
Need more examples of regulatory failure to protect consumers? Earlier this year the FSA published the results of a mystery shopping exercise which found alarmingly poor investment advice in high street banks.
Except it wasn’t so alarming, as previous mystery shops highlighted exactly the same flaws. Clearly the regulator’s approach to dealing with it amounted to little more than a gentle ticking off and a cursory “on your way, son”. Rampant investment mis-selling continued on the high street and ordinary customers – especially pensioners looking for help with their savings income – suffered grievous and irreparable losses as a result.
Widespread investment mis-selling was part of the trigger for the RDR, which brings with it potential for consumer detriment of a different kind. Abandoned by advisers and high street banks or choosing to reject them, many investors are taking responsibility for their own decisions. Better than being ripped off by a commission-hungry adviser or salesman, maybe, but presenting its own risks.
How the new regulator handles that will tell us much about its success in learning from the failure of the FSA. It seeks both to clean up the industry and to protect us from its avaricious, exploitative side It is a mountain to climb, but surely it can only improve on what went before.