16th January 2009

It’s not my fault, but it is me that pays

Having worked under 4 different regulators as an IFA, I can speak with some experience about how, over the years the onus of responsibility for when things go wrong, and therefore in the eyes of the regulator of the day, need to be put right, falls and continues to fall squarely on the shoulders of the IFA firm that gave the advice and/or sold the product.

With regulation now focussed on a principles basis, the future does not look good for complaint resolution.

Regulation is of course important, but the rules and regulatory framework should create a playing field that is fair to all parties involved. Even the FSA is now starting to talk about “caveat emptor” which, as one might guess, is not going down too well with FSA consumer panel.

Over the years many IFAs have asked, “Why it is that the product is not regulated by way of licence as, for example, drugs and medicines”? This could reduce the need for a number of layers of regulation. For example, drug companies that develop medicines have to have the product tested then licensed; the “distribution” channels are either doctors, by way of prescription, or chemists if the product can be sold over the counter with some restrictions. If the medication subsequently develops a fault, it is the drug company who is ultimately responsible and not immediately and absolutely the person who prescribed or dispensed it in good faith in accordance with the conditions the drug was licensed to treat.

At the moment, for those providers who rely on IFA distribution, in all or a major part, for their product sales, we have the somewhat odd situation that if the product is found to be flawed (its literature classed as misleading or inaccurate, it fails to perform in line with illustrative expectations or has other unforeseen failings that come to light after the “sale”), it is more often than not that the IFA firm is responsible for the redress and under current FOS rules seemingly forever.

Such situations can be avoided if the product is licensed and, in addition, the client answers a number of simple yes/no questions at the point of sale, on the application or proposal form such as:

1. A full fact find of my circumstances has been undertaken
2. My attitude to risk has been discussed
3. This product’s risk profile is… high/medium/low
4. I have been given and have read and fully understand all the product information in relation to this product
5. I understand that the illustrative values are not a guarantee, the actual value at maturity or encashment may be more or less than the amount invested
6. This product suits my current financial requirements in regard to… (investment/protection/ pension/ retirement planning).

This suggested sample of the type of confirmation required is based upon what clients most often cite they had no knowledge of when lodging a complaint. So, given that most consumer complaints fall into the above categories, such a simple step would significantly reduce the liability burden of IFAs going forward and if the product was “licensed”, such a simple combination of licensed product and client declaration would remove, in most if not all cases, the possibility of an IFA firm being responsible for redress in perpetuity. It would also deal with the very difficult situation of consumer “selective memory loss” when making a complaint!

Your thoughts on this would be greatly appreciated, click here to comment.

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