Out-Law Analysis | 16 Oct 2014 | 10:36 am | 3 min. read
The FCA is conducting consultations on why there is not more innovation and automation in the way that financial products are sold. One of the issues it has identified is that the FOS, with a history of consumer-friendly decisions, is a 'barrier' to automated sales based on simplified advice.
That the FCA is finally recognising this is good news, but despite this consultation's identification of the problem it is simply not likely that it will allow products sold with simplified advice to bypass the FOS process any time soon.
This is a shame, because the FOS's approach to complaints prevents effective decision-making and product development by firms in retail investment.
Criticism of the FOS
Where retail investment industry professionals gather, talk often turns to the FOS and its output. Its perceived lack of consistency is criticised and professionals bemoan the impact of particular decisions and industry-wide statements.
This is more than just an industry bristling at any regulation. The FCA made plain in the consultation paper that roundtable discussions and responses to its thematic review had demonstrated a clear level of industry concern.
The FCA has also made it clear that it understands that firms will take FOS outputs into consideration when deciding whether to embrace the kinds of change that regulators are looking for.
FOS as a barrier
Industry figures have said that the FOS's refusal to take different approaches to different kinds of advice is stopping them from offering the kind of automated services based on simplified advice that the FCA wants to see the in the market.
This is understandable. Any business in this sector is likely to want to develop straightforward processes around the simplest forms of advice, otherwise the economics of such policies can prove challenging.
If criticisms can be made in the future about the outcome of simplified advice and this results in a business review, costs and more damage to the industry’s name, this would be disastrous.
So companies want the FOS or the FCA to set out a series of rules, case studies and strong guidance to mitigate these risks for firms. Sadly those calls are being resisted.
The FOS response
The FOS does not accept these criticisms. The consultation paper is robust. It sets out the FOS’s view that its assessments “take the regulator’s rules and guidance into account” alongside “good industry practice”. The FOS does not appear keen on limitations on how it treats complaints beyond the current system, confirming that “in any complaints we might receive, we would judge the advice in the specific context in which it was given”. For some firms, such statements make automated practices more susceptible to review.
The FCA and FOS are unlikely to want to set out the rules, case studies and guidance that the industry would like. Mindful of potential abuse of rules by firms, it is likely that the regulator would point firms in the direction of the principles for business.
Regardless of debate about which rules apply, it has been clear that some firms have adopted a cavalier approach to advice and are yet to incorporate customer centric practices within their sales approach. Regular readers of Ombudsman News in 2014 are more likely to find examples of firms demonstrating a real failure to embrace what are now clearly laid out principles, rather than fine legal distinctions.
Regulators must be concerned that a focus on rules designed to make forms of advice unchallengeable in terms of recourse to the FOS could lead to outcomes outside the current approach and undermine public confidence. In August 2014, the FOS promoted an internal candidate, Caroline Wayman, to become its new chief ombudsman and is not expected to alter its position on these key questions ahead of any change in the political climate or media critique of the practices of financial institutions.
Fighting the last war
Some of the complaints about the FOS have resulted from decisions made in relation to claims management companies (CMCs) and their handling of issues such as PPI mis-selling. But with numbers of CMCs falling and with their conduct improving, it would be a mistake to base views of how the FOS should act in the future on its behaviour in relation to CMCs.
The FCA would argue that the July consultation paper limits 'CMC-risk' by setting out a range of distribution models designed to give greater clarity to firms looking for steers on structure, pricing and extent of advice giving to consumers.
Unsurprisingly, in all cases it says that customers should be able to have recourse to the FOS in relation to the practices it outlines.
Together with the robust statements made on these issues by the FOS itself, it is difficult to see the regulator agreeing to take away from any customer – however simplified the advice – recourse to the FOS.
Colin Read is a litigation specialist at Pinsent Masons, the law firm behind Out-Law.com.
This article first appeared in a white paper by Pinsent Masons addressing different aspects of the FCA's consultation. You can also see our analyses of retail investment advice; 'Project Innovate'; digital technology; social media and financial advice, the barriers to simplified advice; pensions product advice, and local authority duties to advise on social care funding.