Independent Financial Advisers: Regulation

(Limited Text - Ministerial Extracts only)

Tuesday 24th April 2018 Westminster Hall

[The Exchequer Secretary to the Treasury (Robert Jenrick)]

I begin by thanking my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) for securing this important debate. I also thank you, Mr Gray, for chairing it.

I am aware that this debate has been prompted by the constituency cases that my hon. Friend has highlighted today—those of Helen and Mr Mohun-Smith. As my hon. Friend will no doubt appreciate, I cannot comment on the specifics of the cases, although it has been extremely useful to listen to and learn from them. I was very concerned to hear the evidence he brought before us today and laid out so clearly and painfully.

Successive Governments have sought to put in place a policy framework for the regulation of the financial advice market, and they have provided the independent Financial Conduct Authority with the powers that it needs to set out the rules for this market and to enforce them to ensure that consumers are treated fairly. It is troubling to hear the issues that my hon. Friend’s constituents have experienced, which suggest either that the framework itself has not been able to give them the protection they deserve or that the FCA has not acted to enforce the rules in the way we would have hoped it would.

Consumers depend on good advice from honest and reliable individuals to manage their life savings properly, to help them make life-changing decisions and to ensure their security in retirement, especially following the implementation of pension freedoms. We want people to access help to make those important decisions, from simple guidance and information to regulated financial advice.

To ensure that the market for financial advice functions effectively, we have to protect people from unscrupulous advisers, and we also have to protect the majority of reputable advisers from those who would do down their industry and their jobs. The independent FCA has set out the rules for the market, and it has been tasked by us to enforce those rules robustly to ensure that consumers are always treated fairly.

Firms and advisers have to be authorised by the FCA, they have to be qualified to provide advice and they have to ensure that such advice is suitable for an individual’s personal circumstances. As in any walk of life, there will always be individuals and firms out there who try to bend the rules or even to commit fraud and other forms of criminal activity. The FCA has the ability to take swift enforcement action to ban individuals firms from providing financial advice, although that does not appear to have happened in the cases that my hon. Friend has mentioned, and I will give thought to the point he made about ongoing re-approval. More action may be required in that regard.

In other cases, advisers might not provide suitable advice, leading to financial loss for consumers. In those cases, consumers can refer to the Financial Ombudsman Service for compensation, which is usually up to a maximum of £150,000 per individual. The advisory firm is then legally required to provide that compensation. Sadly, it is often the case that firms go into liquidation and cannot provide the compensation that individuals deserve. There is then a second tier of protection through the Financial Services Compensation Scheme, which is mainly funded by an annual levy on the financial services industry. Since it was founded, the FSCS has helped millions of people and paid billions of pounds in compensation.

As my hon. Friend mentioned, the current limit for compensation from the FSCS for people who have received bad advice is £50,000 per person. Hon. Members will be pleased to know that the FCA has recently consulted on raising that compensation limit to £85,000, with an intention to introduce the new limit from 1 April 2019. We would strongly support such an increase. A limit of £85,000 would mean that—based on historical data, at least—only 2.5% of claims relating to investments and only 3.8% of claims relating to pensions advice would not have been fully compensated. Clearly, there will be individuals who have invested and lost far greater sums, perhaps including my hon. Friend’s constituents, but the vast majority of consumers would be protected.

Of course, when setting a compensation limit for the FSCS, the FCA has to strike a balance, providing an appropriate level of compensation to enough claimants, without placing an undue burden on the reputable financial advisers and firms that pay the levies—of course, those costs would be passed on in the end to consumers.

That is why it is mandatory for firms to be covered by professional indemnity insurance, which brings us on to another point raised by my hon. Friend. Such insurance should cover many claims, reducing pressure on the FSCS. The FCA published its consultation paper on the FSCS in October 2017, and it is considering whether to go further, to prevent firms from buying professional indemnity insurance that does not allow claims when the policyholder or a related party is insolvent. The FCA will issue a paper on this matter shortly, and we will welcome the decision that it makes.

The FCA has to remain vigilant in cases where firms go into liquidation to avoid paying compensation to consumers before re-forming as “new” firms. Andrew Bailey, the chief executive of the FCA, whom my hon. Friend referred to, has recently said that this practice, which is often called phoenixing, is actively being examined by the FCA and that the FCA is also considering whether the existing rules are sufficient or the creation of new rules is required.

For example, the FCA placed asset sale restrictions on eight advice firms last year in an effort to clamp down on phoenixing. That was done to prevent the common practice of transferring assets that belong to the collapsed firm, including from the client bank, to its former directors, who of course go on to set up a new firm.

[Kevin Hollinrake]

I am grateful to my hon. Friend for addressing so accurately and so well the points that I made. Is he surprised, as I am, that what he referred to as professional indemnity insurance beyond an insolvency, which is commonly known as run-off cover, is required in many other sectors but not currently in this sector? Is he also surprised that the FCA countenances a situation whereby an adviser it licences as an approved person is able to carry on activities with professional indemnity insurance even though that insurance does not cover the activities they are advising people about?

[Robert Jenrick]

I am surprised by both the points that my hon. Friend has just raised. He and I both worked in professions before coming to this House—I worked as a lawyer, and he worked as an estate agent—and it is surprising that, in the profession of financial adviser, those practices are permitted. I hope that answering such questions will be part of the scope of the FCA’s inquiry and the work that it will subsequently do.

To return to phoenixing, we will work with the FCA to ensure that appropriate rules are in place. I intend to ensure that action is taken in this area. Phoenixing in these circumstances is wrong. It leaves consumers and taxpayers out of pocket and tarnishes the reputation of the industry. Just as with phoenixing in other businesses, these practices can be deeply corrosive to public confidence and to trust in the system, and the effects are, in time, passed on to the whole economy. We want an economy and a society that understand that entrepreneurs and businesspeople can fail—and often do so on the road to later success, wealth, job creation and flourishing new businesses—but those who fail deliberately or recklessly damage our economy and public faith in capitalism, and they must be stopped.

I would like to use this opportunity to raise some additional critical points. The Government have been implementing other policy areas to ensure that we have a better-functioning market for financial advice that benefits consumers. The first of these is the retail distribution review launched in 2006, which drastically altered the current charging market for independent financial advisers, encouraging them to charge set fees and prohibiting them from receiving commission from product providers. That was an important step forward, reducing incentives for advisers to recommend investments in which they had a financial interest, and improving the overall quality of financial advice. It has been welcomed by the sector and those who rely on it.

More recently, under this Government, the Treasury and the FCA launched the financial advice market review in 2015, with the goal of improving the accessibility and affordability of financial advice. Research we have done shows that those with high incomes generally—although not always—have access to quality advice, but those with moderate or low incomes, who arguably have the greatest need, have found decent advice far less accessible. The final report, which we published in March 2016, set out a package of 28 recommendations, which the Government and the FCA have now implemented. Although the recommendations of that review will take time to take effect, we have had encouraging feedback from market participants that the work we have done, which the FCA must now take forward, will make a real difference to consumers, and we are already seeing some tangible results in that respect.

I thank my hon. Friend for bringing this discussion on a very important topic here today. I will raise the points he made with Andrew Bailey at the Financial Conduct Authority again—I appreciate that my hon. Friend has already been to see him. I will highlight the cases he has brought to my attention and will ask for further explanations. He does not bring cases to this place lightly. He has a great deal of experience in business. He and the constituents he has talked about deserve answers and actions, and others in his constituency and across the country deserve to be protected.

The issue is not static; the Government and the FCA are committed to ensuring that it remains under constant review. I will urge the FCA to step up its efforts, particularly in respect of phoenixing, which is a wider problem and a challenge for all of us who believe in a free economy and who want to see its reputation protected. Like all Members of this House, I want to see consumers and members of the public protected, and the reputations of those who choose to pursue careers as financial advisers protected, not tarnished by the actions of the few.

Question put and agreed to.