Quotation Marks
“A more stringent approach to enforcement would also act as a deterrent. Regulatory and criminal penalties should be levied with far greater force and frequency.”

The FCA needs to act now to prevent major financial scandals

The FCA needs to act now to prevent major financial scandals


Ben Rees explores how mis-selling and fraud can be prevented

The Financial Conduct Authority (FCA) should take more robust enforcement action against financial advisers who engage in mis-selling and fraud, amid the complexity of the pension transfer market. Improved data collection and more focused investigatory activity could help to underpin a more effective regulatory approach.

What is the problem?

The vast majority of financial advisers who advise on complex pension matters such as defined benefit or final salary transfers take their ethical and regulatory obligations extremely seriously. Yet, unfortunately, a small number of unscrupulous advisers have sought to personally profit at their own clients’ expense. This has resulted in some remarkable scandals, which have undermined faith in the FCA as a regulator.

The FCA has faced strident criticism as the scale of scandals such as the British Steel and London Capital & Finance scandals were revealed. It is remarkable that, despite reports of whistleblowing and advance warning being given by vigilant financial professionals, the FCA so often  seemed unable to react with sufficient speed or force.  Robust systems must be created to ensure that early warnings of wrongdoing are detected and reacted to swiftly, since prevention is of course far better than cure.

Very often, by the time the problem presents itself to the FCA, it is too late to take effective action to protect those impacted by the wrongdoing. By that stage, the pensions will often have been transferred into fraudulent or unregulated investments.

Yet I believe that there are some rather obvious steps which could be taken to combat such activity. The FCA could collect data which would help it to identify riskier activity, so that its enforcement activity could be more focused on firms that present a greater risk to consumers. Many cases of fraud could be avoided if the right preventative measures were taken by the regulator to identify improper activity at the earliest possible stage.

What more could be done?

Obtaining data to identify suspicious activity should not be difficult. Regulated firms must submit very detailed returns to the FCA at least twice a year. Yet, for some reason, those returns do not ask a firm to disclose, for example, whether they advise on unregulated investments. This data is omitted even despite the profession repeatedly pushing the FCA to ask for this information routinely. If such data were gathered, the FCA could better focus its surveillance and investigatory efforts on those advisors engaging in more risky activities. Notwithstanding the reality that the most unscrupulous out there may fail to properly report their activities, such an approach should lead to greater levels of detection and may help to prevent losses arising.

A more stringent approach to enforcement would also act as a deterrent. Regulatory and criminal penalties should be levied with far greater force and frequency. For example, those individuals involved in perpetrating the British Steel scandal should not be treated with kid gloves. More stringent enforcement can be achieved without criminalising honest mistakes. A clear distinction can be made between negligent or innocent mistakes and systematic mis-selling or fraudulent conduct.

Annual audits should provide early warnings that something is amiss. Yet audits have too often painted a misleading picture, thanks to the often ineffective regulation of the auditing sector. Inadequate auditing is being investigated as playing a role in enabling scandals such as London Capital & Finance (LCF) to occur, which cost investors some £230m. Last year, the Financial Reporting Council announced that it was investigating LCF audits.

What next?

The UK government plans to abolish the Financial Reporting Council and replace it with a new and more potent regulator, named the Audit, Reporting and Governance Authority (AGRA). This shows that the UK government can take robust action to improve inadequate regulation.

It should now take steps to improve the FCA’s regulation of the pensions industry. For example, the recent British Steel pension scandal saw some 8,000 steelworkers collectively transfer around £2.8bn from the company’s pension scheme when it was restructured in 2017. The House of Commons select committee recently found that the workers were the victims of "vulture" financial, in what they called a "mis-selling scandal".

The Parliamentary Spending Watchdog needs to now investigate this matter robustly and set out clear ways to improve matters. The FCA, for its part, should rapidly rake such recommendations on board to help prevent future scandals.

Ben Rees is technical director of the investment fraud & mis-selling group at Keller Lenkner UK: kellerlenkner.co.uk