Consumer Protection

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

I was very interested in ShareSoc’s proposals for the Labour Party concerning the review of financial services. My particular focus was the section headed “Consumer Protection”.

I have been a tax adviser since 1985 and a financial planner since 1991. I have always considered the client’s understanding of the pros and cons of an investment strategy to be a pre-requisite for any investment advice. However, the constant impact of regulation on the advice process has led to poorer understanding by the client when faced with choosing long term investments.

The process these days is to get the client (now called consumer) to complete an “Attitude to Risk” questionnaire which will allocate a number (1-7) to the client’s purported capacity for investment risk/loss. The adviser uses this number to hunt around for a collective investment that has been allocated the same number.

There is rarely any discussion about the pros and cons of collective investments, whether open-ended or closed-ended, small-cap or large-cap, UK or overseas.  It is quite usual for the adviser not to have any idea about the underlying investments. (Apparently, that’s the job of portfolio managers.)

So, not only is the advice process reduced to a tick box to identify how someone might feel about losing money, but the recommendation is also limited to the name of the fund and a number provided in the Key Information Document (KID).

As you can guess, the client has no idea how his/her money is ultimately invested. The adviser knows little more perhaps, and so the client’s understanding of the pros and cons of choosing one investment strategy over another is never raised.

When it all goes wrong, the adviser may well head for the door and wind up the company, leaving the remaining advisory firms to foot the bill through higher FCA, FSCS, FOS and PII fees.

Of course, if the client understood some parts of the investment process, such as single company shares vs. collectives; open-ended funds vs. closed-ended funds; the risk/returns offered by new companies vs. well-established companies; investing in overseas companies and the associated foreign currency risks, they would understand some of the potential problems, restrictions and benefits associated with a recommendation.

More importantly, the client would be knowledgeable enough to discuss these issues with the adviser. (Just look at the cost of the collapse of Harlequin. When my car insurer came round to discuss an accident claim he told me his SIPP was wholly invested in this fund. He thought it was a “safe” investment.)

In short, ShareSoc is correct that standards are woeful and that clients should be able – and allowed – to look after their own financial interests. Despite initiatives from the FCA, such as Treating Customers Fairly (2005), Retail Distribution Review (2007), Vulnerable Customers (2021), Consumer Duty (2022) and all the data that regulated firms must upload onto the FCA’s website at least every six months, the regulator only reacts to a problem after it has arisen. It does not anticipate one, such as a firm suddenly showing profits of millions following hundreds of defined benefit pension transfers.

I seem to recall a “Which” report in 1997 which recommended a small levy on all collective investments, so that in the event of loss or collapse of a collective fund there would be funds set aside to provide compensation to investors. That option was rejected. The option is raised again from time to time but is either ignored or rejected once more. Instead, the firms that are trading are asked to fund the compensation shortfalls.

And, yes, I agree that clients should be encouraged to understand their portfolios, but this will only be possible if the adviser is encouraged to explain the basis of his/her investment recommendations and perhaps, like me, suggests that clients join ShareSoc to become familiar with at least some of the investment terminology.

I consider my job easier if the client understands my recommended investment strategy. A good client is someone who understands what the adviser is trying to achieve.

Author: The Secret IFA

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