20th August 2020

What have the Romans ever done for us?

Switch this to “what have the regulators ever done for us” because you could be forgiven for thinking you’ve woken up on the set of a Monty Python film.  Regulation is there to protect the consumer from bad advice but surely not at the price of removing rights and liberties afforded the rest of the population? 

Back in 1999 when the revised Financial Services and Markets Act was being argued through Parliament we continually heard from Economic Secretary to the Treasury, Melanie Johnson, that there would be checks and balances to offset the enormous powers granted both the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). 

The cunning reality is that the whole shebang was artfully designed to allow both of these bodies unfettered powers to circumvent UK law enabling them to respond to whatever political expedient their overall taskmaster, the Treasury, required of them. 

When we scrutinise the FOS we see that advisers have no independent appeal process, no right of a personal hearing and no access to the otherwise universally available 15 year longstop.  The Dispute Resolution rules (DISP) contain both rules and ‘guidance’ yet the FOS treats the ‘guidance’ as a set in stone rule.   

Similarly, in September 2001 the Treasury issued Statutory Instrument 2326 which told the FIS to take into account what the previous Ombudsman body would have done when dealing with pre 2001 advice.  When I questioned former Chief Ombudsman Walter Merricks about this he gave a crocodile smile and explained they did take it into account and promptly ignored it.

The FSCS exists to protect consumers who have received bad advice which has resulted in a financial loss and where the firm responsible has gone out of business.  Nobody questions the sense of having such a body, if operated using common-sense. The financial impact of this scheme is such that it now constitutes the major regulatory cost for every advisory firm.

For years advisers have railed at the unfairness of a scheme where the innocent pay for the sins of the guilty yet it is worse because the FSCS is able to ignore both the law and the Freedom of Information Act. 

Whilst the FOS opts to ignore the 15 year longstop it does accept the 3 and 6 year rule enshrined within the Limitation  and Latent Damages Acts.  Not so the FSCS, they have a get out within the DISP rules – COMP 8.2.4 01/10/2018 which enables them to disregard any form of limitation.  Unlike the FOS, where there are two parties to each dispute, the FSCS works in isolation so the concept of checks and balances, the restraints inherent in any other form of dispute, have been removed enabling them to reach whatever decision they wish. 

As always, when it is other people’s money being gifted, the largesse is distributed liberally to the extent that regulated firms are forced out of business or are compelled to increase their fees to the ultimate dismay of their clients.

Here is a scenario that has likely already played out.  During 2008 Mr Smith complains to his adviser about his endowment plan.  The complaint is rejected then escalated to the FOS.  The FOS reject the complaint because Mr Smith received three ‘red traffic light letters’ from his insurer between 2002 and 2006.  In 2016 Mr Smith’s adviser goes bust and is declared in default by the FSCS.  Mr Smith is encouraged to make a complaint to the FSCS.  They look at the case and, because they ignore the ‘traffic light’ limitation defence, decree that compensation is due.

A read of Derek Bradley’s recent findings on FSCS discretionary payments will make your blood boil I’m sure.

The thread running through all of this is that The FCA and its predecessor body the FSA are responsible for the rules that both the FOS and the FSCS operate under.

Kenneth Willliams famously cried “infamy, infamy, they’ve all got it in for me”.  It’s no surprise that advisers can be heard shouting this when their FCA fee letters drop heavily onto their mats.

Panacea Comment, Regulation