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Consumers deserve stronger, faster protection


Another one arrived today. It offered me up to 120 per cent return by investing in gold. If I didn’t have enough money to make the most of this opportunity, I could borrow some — leveraging, the email called it — to maximise my profits.

I shall pass it to the Financial Conduct Authority. I always do. It always says thanks. But the offers keep coming.

Most are for flats in city centres near the offices people used to work in which will pay me 8 per cent assured yield for 10 years. There are films with up to 125 per cent return on investment and a lifetime income from on-demand rights. And there are the ones that don’t even pretend to be investments, one offering me 300 per cent success on a gambling site. That one is registered in the Caribbean island of Curaçao.

That is definitely outside what the FCA calls its perimeter. Indeed all of these investments — and I have 265 of them stored away — are outside its regulatory perimeter. Though I am not too sure about leveraging, which sounds like credit to me, and that surely is a regulated activity. I’ve asked the FCA to look into it. I shall carry on forwarding them; carry on getting thanked; and carry on receiving them. Because the FCA is like the mills of God — it grinds exceeding slow.

Consumers come first in the three statutory duties of the FCA which are set out in the Financial Services Act 2012. But it only has to offer “an appropriate degree of protection”. Appropriate is an otiose adjective — no law would state it should offer an inappropriate degree of protection. So why not just “Objective 1: To protect consumers”?

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Last month, an independent review led by former judge Elizabeth Gloster was clear that the degree of protection the FCA had given to 11,700 people who lost £237m investing in the partially regulated firm London Capital & Finance was completely inappropriate. So much so that treasury minister John Glen announced he would set up a compensation scheme for LCF bondholders who might otherwise not receive redress from the LCF administrators, the Financial Services Compensation Scheme or the FCA complaints procedure.

The Gloster report made it clear that by regulating the marketing part of LCF, the FCA helped the unregulated, mini-bond-selling part flog dangerous investments to naive investors. We have still to see who will get what compensation from which of the now potentially four places they might go.

Perhaps stung by this criticism, the FCA fought back this week. Under the headline “FCA clamps down on consumer harm”, it announced it had stopped 343 firms becoming authorised, opened 1,500 supervisory cases, and received 24,000 reports of unauthorised activity.

Forgive me, but only the first of those actually prevented anything. Opening cases or receiving my emails from firms flogging unregulated and hopelessly ambitious “investments” is not protecting consumers.

The FCA’s problems were illustrated by its own figures published this week on people transferring defined benefit pensions into a scheme where they could cash them in.

Between pension freedom beginning in April 2015 and the latest figures (March 2020), some 57 per cent of clients who were given advice were told to transfer their pension — in other words to do what the FCA says should not be done by “the majority of people”. Good independent financial advisers I have spoken to go much further and say that 90 per cent to 95 per cent should be advised not to do it.

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Throughout that period the FCA allowed firms to operate “contingent charging”. This means the adviser was only paid if the client moved their pension and the adviser took a hefty percentage of that fund. The conflict of interest is obvious but the FCA did not begin to recognise it until 2018. It took two more years before it decided to end contingent charges and then delayed the actual ban to October 2020.

While the FCA was working out what to do — it apparently has no department of the bleedin’ obvious at Endeavour Square — 211,503 customers were advised to leave a good, safe guaranteed pension scheme and take the cash, while 110,939 were advised not to do that. The mills of God indeed.

The Gloster report recommended the Treasury consider whether the FCA needs more resources to supervise almost 60,000 firms. Doing that cost £591m in 2019-20. But that is less than the £877m it cost the Financial Ombudsman Service to examine complaints and the Financial Services Compensation Scheme to pay people failed by regulated firms.

If the FCA supervised the financial services industry better in the first place it may end up costing less overall to protect consumers. It is a cost we all pay in the prices the industry charges.

The FCA needs to grind more quickly — be a miller not a God. People need to buy their bread and know it is safe tomorrow, not the year after next. Urgent action does not mean a second market study, a third consultation, and a policy paper giving six months’ notice of the change.

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Nikhil Rathi, the FCA’s new boss, is said to be very much on the consumer’s side. He has a great opportunity to turn the wheels quicker and stretch the perimeter — even reach over it — to protect people from the immense financial harm that can be done to them. The only appropriate degree of protection is protection that works quickly.

Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney





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