Sometimes even the best people need to ask for help.
The Financial Conduct Authority (FCA) is no different. As much as it has been trying to crackdown on “rogue” advisers in the sector, it simply does not have enough capacity to keep an eye on every single firm.
This is where “whistleblowers” come in. Intelligence passed to the FCA from inside the advice industry is vital.
Cases like the British Steel Pension Scheme and the London Capital & Finance scandals prove the financial watchdog can’t do it all.
Tim Sargisson, chief executive at Sandringham Financial Partners, told International Adviser: “Part of the problem is the size of the universe and, with it, the amount of resources required to police it effectively.
“In our own solar system, there are 5,281 retail advice firms and 89% of firms have five advisers or fewer, that’s 8,763 advisers in total.
“You only need a few outliers to create systemic issues. This size and limited resource creates the real need for advisers to speak out about bad practice when they see it.”
FCA whistleblowing process
The UK regulator has an online page sharing its steps for whistleblowing firms or individuals.
There is a phone number, an email address or a postal address for anyone who wants to report a firm for wrongdoing within an area the FCA regulates.
Debbie Gupta, the FCA’s director of life insurance and financial advice supervision, said in September 2019 that the most valuable way of tackling the firms that cause the most harm is through intelligence gathered from the financial advice community.
Whistleblowing has helped the FCA issue fines and warnings, vary and withdraw permissions and other kinds of early involvement, such as asking firms to change their business activities.
But does the industry think the FCA’s whistleblowing is a waste of time?
More than a shrug
IA submitted a freedom of information request to the FCA in July 2019 to get an idea on peer reporting in the sector but the UK regulator said it did not know the answers to its questions.
In November 2017, law firm Byrne and Partners made an FOI request and found the number of whistleblowing cases opened by the FCA fell consistently to 793 in 2017 from almost double that number in 2014.
Gupta pointed the finger of blame in the direction of financial advisers and their failure to report bad practice to the regulator.
Unsurpringly, the industry does not share that view.
Phil Billingham, director at Perceptive Planning, told IA that he would argue that when advisers alert the regulator to “toxic” products, they “should be met with more than a shrug”.
Adam Benskin, chief executive at Strabens Hall, concurred and believes “there is a concern that the FCA does not listen to whistleblowers and therefore whistleblowing is a fruitless exercise”.
But not everyone agrees.
“The FCA gathers a lot of intelligence from the sector, which shows overwhelmingly that the advice profession is delivering good outcomes for consumers,” Keith Richards, chief executive of the Personal Finance Society, told IA.
“For example; in 2017, FCA research showed the sector provided suitable advice in 93.1% of cases, with only 4.3% of cases providing unsuitable advice and 2.5% of cases the sector providing unclear advice.”
With such high levels of suitable advice, it is natural that the level of complaints would decrease.
Improvements
On 4 June 2019, the financial regulator confirmed it will review its whistleblowing guidance following a recommendation from the Complaints Commissioner.
In particular, it needs to set out clearly who meets the standard definition of a whistleblower.
So, what can the FCA do to improve its whistleblowing process?
The PFS’ Richards said the lack of ‘relationship managers’ at the UK watchdog may make advisers feel that if they do say something, it might get “lost in the system”.
“There is always more that can be done, however, and if the FCA put an individual forward as its own whistleblowing champion, that may help people feel they are dealing with individuals as well as the regulatory ‘system’,” he said.
Alex Welsh, financial planner at Lewis Brownlee Financial Services, told IA: “We would suggest a more clearly defined process to make people aware of what they need to do.
“There needs to be greater awareness of what the process actually is. So perhaps more initiatives to heighten awareness would be a good call.”
Benskin added: “I think the FCA needs to demonstrate that it takes whistleblowers seriously, as there have been recent cases publicised in the media where they have clearly not been listened to, which of course undermines confidence in prospective whistleblowers.”
How it affects the industry
If firms can get away with playing outside the rules for too long, it can have a huge effect on law abiding and compliant financial advisers.
James Pearcy-Caldwell, chief executive at Aisa Group, said to IA that the FCA’s response to rogue firms has led to a “massive rising costs of Financial Services Compensation Scheme and professional indemnity insurance premiums” and a feeling of “isolation” for “decent UK firms for doing nothing more than their jobs”.
And it is not always costly in terms of regulation and levies, but also reputation.
Sandringham’s Sargisson said inappropriate defined benefit (DB) pension transfers, Woodford’s failings, questions over charges for advice and “being carpet bombed by the broadsheets over cruises and cufflinks” make it understandable people prefer to “cross their fingers and hope” rather than seek out an IFA.
“An old saying has it that one glass of wine in a barrel of sewage still produces sewage, but one glass of sewage in a barrel of wine also produces sewage,” said Perceptive Planning’s Billingham.
“So it is with the 0.001% of rogue advisers. They pollute the public and media perception of us, out of all proportion to any actual impact in the marketplace as a whole.”
Moral duty
Therefore, if the financial advice sector is tarnished by bad practice, then there surely must be a moral duty for IFAs to whistleblow to the FCA, if they know of misconduct being carried out.
“If you are having to pay rising FSCS and PII premiums then you have a responsibility to your own company, and those of others, to report rogue firms,” said Pearcy-Caldwell.
Jacqueline Lockie, head of financial planning at Chartered Institute for Securities & Investment (CISI), said to IA: “We all have a responsibility to weed out those firms behaving outside the letter of the law.
“Behaviour of these firms leads on to further regulation and more resources being needed for monitoring and enforcement by the FCA, all pushing up costs of regulation that fall on the regulated firms and, ultimately, are passed on to the consumer.”
The PFS’ Richards agreed with the notion that advisers should be “open with the regulator about everything they see, including poor practice in the market”.
“However, we must always remember that there is more than one version of good practice, and just because another firm does things differently from us, that does not mean it is not conducting itself in a professional way or are equally as committed to the best outcomes for their clients,” he added.
Long lasting effect
If advisers did more to help the FCA with its investigations and ability to clean up the industry, will it help firms with issues like the rising FSCS levy?
“Eventually, yes. In the short term, it is likely to increase it as action is taken,” Pearcy-Caldwell said.
“However, the new senior managers and certification regime (SMCR) will place far more liability on to the shoulders of individuals in rogue firms; whereas up to now they have been able to walk away, that is unlikely in the future.”
Eugen Neagu, head of financial planning at Montfort International, told IA: “I would think that if more people will whistleblow, there would be less consumer harm, and result in a lower FSCS levy.
“The earlier the regulator could intervene, the smaller number of clients are at risk.”
However, there are some in the industry who believe change is the only way to improve the sector for financial advice firms.
“I think the issue is resources to investigate promptly. [The] FCA can then use its powers of enforcement to act quicker for the protection of the consumer,” CISI’s Lockie said.
