City regulator the Financial Conduct Authority recently released an advert reminding people that they can still claim for Payment Payment Insurance (PPI), a scandal that has been going on for more than a decade and has cost banks billions of pounds in compensation.
Such high-profile cases grab all the headlines, highlighting one small part of the extensive regulatory framework that exists to protect the consumer of financial products, including investments. Some of the duties of these bodies overlap, adding to the confusion for the unitiated. Here are some of the most important elements of UK investor protection:
The Financial Conduct Authority
After the credit crisis a new set of regulatory bodies was created, including the Prudential Regulation Authority, which is part of the Bank of England and looks at the financial stability of regulated firms. The Financial Services Authority (FSA) became the Financial Conduct Authority (FCA) with a range of new powers. Two of the FCA’s three operational objectives relate to consumers: the first is to secure “an appropriate degree of protection” and the second is to promote effective competition.
The FSA launched an initiative called “Treating Customers Fairly”, which has been taken on by the FCA to tackle problems as they occur, rather than cleaning up in the post-sales period.
The FCA has defined six “consumer outcomes” that are central to treating customers fairly. Among these are that products sold to retail investors are designed to meet their needs, that consumers are given clear information and kept up-to-date before, during and after the sale is made. Also when consumers receive advice, the advice is suitable and takes account of their circumstances. This tenet is being enhanced under the new version of the Markets and Financial Instruments Directive (MiFID 2).
In practical terms, the FCA since its inception in 2013 has levied fines on financial firms of all sizes, clamped down on rogue intermediaries and withdrawn unsuitable retail products from sale.
The FCA is accountable to government through HM Treasury, and its senior management must gain the trust of politicians to push through its regulatory agenda.
Complaints
While the average retail investor may not have any direct dealings with the regulator, he or she may have had some contact with the following organisations. Financial firms are no strangers to complaints, and the Financial Ombudsman Service (FOS) is often called on to intervene in disputes between individuals and companies.
The Ombudsman fielded around 170,000 new cases in the first six months of this year, 13% higher than the second half of 2016. The FCA expects regulated firms to deal with and resolve complaints without recourse to the FOS.
The Ombudsman’s judgement on a firm is binding, but the consumer is not obliged to accept it. Retail investments are covered under the “compulsory jurisdiction” of the ombudsman service.
When Firms Go Bust
In extreme cases, a company that has received savers and investors’ money fails, and that’s where the Financial Services Compensation Scheme (FSCS) comes in. Since it started in 2001, the deposit protection scheme has paid out under £30 billion. After the financial crisis, the UK government was under pressure to beef up the protections afforded to savers after a number of high-profile failures like Bradford & Bingley and Northern Rock.
At the time the European Union compensation was €100,000, but the savings of a UK individual were only protected up to £50,000. This was raised to £85,000 at the start of 2011. The level of compensation has been dropped to £75,000, but a couple can double this to £150,000 in they hold products jointly.
The level of protection is lower for investment products than deposits, with investors protected up to £50,000 per person, per firm. Mortgage advice is also covered up to £50,000 and insurance products have an unlimited protection, up to 90% per claim.
The scheme is funded by levies on firms authorised by the Prudential Regulation Authority and the Financial Conduct Authority.
There is an argument that larger firms are now less likely to fail: credit markets are more stable than 10 years ago and companies are forced by regulators to keep bigger capital buffers to cope with “stress test” scenarios like a sharp fall in house prices or the stock market.
Now smaller firms are more likely to put savers and investors’ money at risk, such as failed property and investment schemes, or financial advisers going bankrupt. For example, the FSCS has just started to accept claims for bad investment advice in relation to a £400 million Caribbean property scheme called Harlequin. Advisers were paid commission to promote the scheme to pension investors.
Effective Competition
The Competition and Markets Authority was formed in 2013 from the merger of the Competition Commission and the Office of Fair Trading. It has responsibility for financial services and works “concurrently” with the FCA to investigate breaches of UK and EU competition law.
But its remit extends beyond finance to cover most consumer sectors. It investigates mergers, conducts market studies and enforces consumer protection legislation. The CMA has in the past reviewed overdraft charges and high street bank competition.
The Bank of England
The Bank's powers have grown substantially since it was given operational independence from government in 1997. The financial crisis was the defining moment for the Bank of England as it took on the FSA's former oversight of the country's financial sector.
While consumers know the Bank as the body that sets interest rates, its financial policy committee takes a broad view of the economy and passes on its concerns to the Prudential Regulation Authority. On a daily basis the Bank monitors inflation, credit conditions, the housing market and general economic conditions.
