Analysis: Uncovering the scale of FSA concerns

Freedom of Information requests submitted by New Model Adviser® have revealed the scale of the Financial Services Authority’s (FSA) concern about a wide array of investments, IFA networks’ financial strength and even its own enforcement powers.

The regulator has identified extensive flaws in networks after reviewing 13 firms, discovering six could not demonstrate they could treat customers fairly. After examining exchange traded funds (ETFs), it considered restricting access to more sophisticated offerings due to concerns about ordinary investors being exposed to too much risk. Investment risk was also a key concern after the FSA scrutinised structured products, and it was particularly worried about the recent trend to use asset classes like life settlements.

Secrets revealed

The eight reviews, completed over 2009 and 2010, had been left unpublished until New Model Adviser® was able to secure copies of the regulator’s findings through the Freedom of Information Act. In some cases there has been evidence of the FSA acting on its findings with public warnings, such as last week’s strengthening of its rules on structured products, but in others its concerns have remained hidden from advisers and the public.

The regulator even conceded the difficulties involved in keeping findings secret from the public in the results of its review of investment bonds advice. It declined to back Oeics against life assurance bonds, arguing the most suitable option for clients could only be decided on a case-by-case basis. But it has never published the findings, claiming it had no headline statement to hang its message on.

Yet it could see that its stance was difficult to defend. ‘[Publishing] would reinforce our general messages about the quality of investment advice and would be welcomed by the industry as an example of us setting out our expectations,’ it said. ‘In the event of any Freedom of Information Act request, the details would become public and it would be difficult to defend our decision not to make any external statement.’

Gill Cardy, who is seeking support for an independent adviser trade body, urged the FSA to be more transparent with its findings, although she acknowledged the dangers of harming firms by disclosing too much information. ‘There is a point where companies should be named and shamed [but] we would be concerned about the reputational damage.

Reaction to disclosures

Examining the substance of the FSA’s findings, however, it becomes clear that advisers agree on many of its positions. IFAs backed its stance on ETFs, which it revealed in its internal documents, arguing it was right to consider allowing only professional investors to use more complex and risky products, such as leveraged inverse commodity funds.

Alan Dick, principal of Glasgow-based Forty Two Wealth Management, said restrictions were needed due to a lack of knowledge about more esoteric investments. ‘I think restricting complex ETFs is a great idea because leveraged ETFs are potentially suicidal investments for those who don’t know what they’re doing. I’d count most financial advisers in that category, let alone their clients. ‘

London-based Yellowtail Financial Planning managing director Dennis Hall said the regulator was right to flag up concerns about the marketing of ETFs. ‘I’ve seen a variety of ETF brochures that have been put on my desk and the risks have not always been made clear to me. [You don’t always] see what they’re doing, how they’re doing it and why.’

Discontent with structured products

Problems with marketing and communication were also highlighted as a key concern by the FSA following a review of the structured product market, which identified problems with some of the asset classes used and difficulties in gathering information on the market.