By 
Finance industry heavyweights have backed this newspaper’s calls for the City watchdog to close a loophole that allows regulated advisers and firms to sell risky unregulated investments.
This gap in the rules has led individuals to lose life changing sums after ploughing their cash into high-risk schemes wholly unsuitable for ordinary investors. Pension savers have had their retirement plans destroyed after they were recommended inappropriate unregulated investments by companies that had the watchdog’s stamp of approval.
In one high-profile case, people who invested via London Capital & Finance (LCF) face huge losses on its unregulated “mini bonds”, despite the firm boasting of its authorisation from the Financial Conduct Authority (FCA).
- The FCA must stop letting wolves masquerade as sheep
Today, Telegraph Money is calling on the regulator to ban the sale of unregulated investments by regulated firms. This simple remedy would remove the veneer of consumer protection those touting these speculative schemes exploit.
Unregulated investments entice savers with the lure of high returns, but do not benefit from the same scrutiny and controls as regulated funds.
Even though financial advisers must be regulated by the FCA, the loophole allows them to sell their clients unregulated investments.
Thousands of people have transferred “gold-plated” final salary pensions into self-invested personal pensions (Sipps) in recent years after being advised to do so. Around £6bn of retirement savings is now thought to be in risky unregulated schemes, where consumers have little protection when things go wrong.
Last year seven pension providers collapsed or had to be rescued, leaving thousands of people’s retirement plans in tatters.
Rory Percival, a consultant who worked at the FCA for 10 years, backed calls for a ban, arguing the good of the many should outweigh the whims of a few. “It’s hard to conceive of any scenario where an unregulated investment would be suitable for a person’s retirement,” he said.
Some have argued that people should be given free rein to invest how they wish, but Mr Percival said the benefits of a ban outweighed the disadvantages. “Despite the tiny minority for whom that type of investment is appropriate, denying access to it is the right thing to do for the benefit of the majority who are getting into investments they really shouldn’t,” he said.
Baroness Ros Altmann, a former pensions minister, added: “It is far too easy for people to be enticed into unsuitable investments by so-called ‘advisers’. There needs to be an urgent consultation on banning unregulated investments in Sipps.”
Consumer danger
The rules have left investors in the dark about what protection they have. As many discovered during the collapse of LCF, where investor losses totalled £237m, the FCA’s powers only covered the firm’s promotional activity and not the underlying investments it offered.
Despite this, the firm prominently displayed the FCA’s accreditation on its advertising materials, leading many to believe the investments themselves were authorised.
Antony Townsend, the Complaints Commissioner, who investigates complaints against financial regulators, said he first warned the FCA of this confusion in 2016.
“The current system is impossibly complex for many ordinary consumers to understand,” he said. “Expecting occasional financial services consumers to know that a firm advertising itself as FCA-regulated may be offering an unregulated scheme is simply unrealistic and dangerous.”
The FCA said it had issued a warning to firms about this issue in January and had run several campaigns to alert consumers to the danger.
But even investors who do check with the regulator are often left none the wiser as to a firm’s status. Telegraph Money has repeatedly uncovered errors with the FCA’s register, which savers are advised to check before they deal with financial firms.
Mark Taber, a bond analyst, said the language was not consumer friendly, so it was hard to tell what aspects of a firm had been approved by the watchdog.
As recently as April, the FCA’s website incorrectly advised consumers that all bonds were under its regulation. “The current situation is ridiculous,” Mr Taber said. “It is virtually impossible for consumers to unravel the confusion.”
Mr Townsend added that he was currently dealing with a complaint over an investment where “FCA staff gave contradictory information about whether or not it was regulated”.
The FCA said it was spending £5m to revamp the register, although it is unclear how this money will be used.
Earlier this summer the watchdog’s own report conceded many customers were confused about what level of supervision the FCA had over firms.
Yesterday the Treasury Committee group of MPs intervened, calling for the introduction of a formal structure that allows the FCA to ask for its scope to be extended. It warned that the current system allowed consumers to be “preyed upon” as the difference between regulated and non-regulated activities was unclear.
Baroness Altmann added: “The regulator seems to assume all customers understand the rules, but in reality they don’t. It is high time it paid closer attention to the needs of customers, rather than making complex rules that confuse them.”
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