16th August 2012

FOS urges

It is not often that one could say that the FOS has assumed a high moral ground position but this may be just one of those occasions if not an actual regulatory landmark.

It has, some may rightly say, urged Liverpool-based IFA The Matrix Model Group to pay out  more than the £100,000 maximum compensation it can demand, to a couple it said had been miss-sold unregulated collective investment schemes.

What is an urge? Well it is defined as “to force or drive forward or onward” and in Regulation Street E14 the next logical step to urge is to enforce.

The FOS adjudication said Matrix was wrong to deem that several UCIS and enterprise investment schemes were medium risk and suitable for the clients.

What the outcome will be we do not know but this move should be taken by IFAs as a very big wake up call. It will also sound alarm bells at the FSCS as payouts of this level could finish many firms, leading the FSCS to be ‘encouraged’ to pay out more.

UCIS are what they say on the can. UCIS are described as unregulated because they are not subject to the same restrictions as a regulated CIS in terms of their investment powers and how they are run.

Although these schemes themselves are not authorised or recognised, persons undertaking regulated activities in the UK in relation to UCIS (including providing personal recommendations, arranging deals and establishing, operating and managing schemes) will be subject to FSA regulation, and that is where it all starts to go wrong.

There is no doubt that for some clients this could be an appropriate investment opportunity. But given the regulatory quicksand in an IFAs path and the significant dangers presented in recommending regulated products that could turn out to be either unsuitable or not fit for purpose, one must ask why would anybody in their right mind touch anything that is unregulated if that places you, as a result, into the regulated world the UCIS product has been designed and built to avoid? And no matter how good a recommendation it would be for your client. 

In some 135 days time the seismic shift to an advice based business model from a product distribution and associated reward model will be complete. Yet products will remain unlicensed and not deemed fit for purpose by the regulator. Advisers must have a start the day mantra that says "it is all about the advice stupid". If they do not it will all end in tears.

And what of PI with this type of product and FOS decisions?

Consumer detriment, intentional or otherwise will be an even bigger focus post RDR than it is now. PI insurers are very experienced at seeing the increasingly expensive consequences of retro regulation and the effect it can have.

This knowledge extends itself to considering the experiences of many well run and untainted firms having great difficulty in getting PI cover not for what they have done wrong but for what a regulator has not done right.

Regulation, Panacea Comment