Independent Financial Advisers: Regulation

Kevin Hollinrake Excerpts

Tuesday 24th April 2018 Westminster Hall

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I beg to move,

That this House has considered regulation of independent financial advisers.

It is a pleasure to serve under your chairmanship, Mr Gray. I put on record my role as co-chair of the all-party parliamentary group on fair business banking and finance, which is primarily concerned with the business banking scandals that have devastated many viable businesses and ruined the lives of many business people and their families. The debate does not directly relate to those issues, but does have connections with the regulator, the Financial Conduct Authority, and its willingness and ability to hold those it regulates to account.

Whether as a consequence of malpractice, incompetence or deception, there will always be situations where innocent investors lose money through the failings of financial advisers. I will refer to the cases of two constituents. For the purposes of confidentiality, one would prefer to be known simply as Helen, and the other is Andy Mohun-Smith. The only connection between them is that they used the same financial adviser, Scott Robinson, who owned and operated a company called TBO Investments until 2016. He also owns a company called Mount Sterling Wealth.

Those cases and the supposed regulation of Mr Scott Robinson are truly astounding because nine years after an initial complaint was made to the FCA, seven years after the financial ombudsman ruled that he had provided unsuitable advice and ordered him to pay compensation, six years after an expert witness concluded that the investments advised by Mr Scott Robinson that were made on behalf of Andy Mohun-Smith were completely unsuitable, four years after it was established that he was providing advice without the required professional indemnity insurance, four years after Mr Mohun-Smith was awarded damages of £2.2 million, three years after Companies House issued a compulsory strike off order to TBO Investments, as it had failed to submit accounts since 2012, 18 months after Mr Scott Robinson put TBO Investments into liquidation and phoenixed those clients into his other company, Mount Sterling Wealth, and 12 months after I first asked the FCO to address those cases, the regulator continues to designate Mr Scott Robinson as an approved person and to authorise his company to provide regulated advice. Most incredibly, it does so principally on the basis that to do otherwise may deprive an individual of their livelihood.

I am sure that my constituents are two of many people who have suffered significant financial loss and distress at the hands of Mr Scott Robinson and his companies. Mr Scott Robinson is a clever salesman with a long and extremely chequered history of providing investment advice. According to the research of my constituent Helen, he has to our knowledge set up five limited companies. Three of them have been dissolved. One, TBO Investments, has been put into voluntary liquidation. Three have had striking-off proceedings taken against them. I would be happy to hear from other investors who have had similar experiences. I urge them to come forward and to make complaints directly to the FCA.

My constituents’ connections to Mr Scott Robinson began in May 2007, when Mr Mohun-Smith started to invest in supposedly safe, regulated investments with him. Over the next four years, he invested more than £2 million with the firm. By the end of 2012, he realised that the investment advice he was being given was deficient, defective and deceitful, so he took legal advice.

In January 2013, Mr Scott Robinson’s insurance brokers informed him that his professional indemnity insurance did not cover the investments he was making, but he did not reveal that to Mr Mohun-Smith until June 2014. In March 2013, Mr Mohun-Smith issued a legal claim against TBO Investments and Mr Scott Robinson. In June 2014, when the trial took place, the judge struck out the defence, because Mr Scott Robinson did not appear at the trial, and awarded damages of £2.21 million.

A court of appeal effectively decided that Mr Scott Robinson could have a rehearing, but before that could take place, in August 2016, he placed TBO Investments into voluntary liquidation. That thwarted any opportunity for my constituents to take legal action to cover their losses, and left his own lawyers out of pocket. He then transferred all his clients to his other company, Mount Sterling Wealth, which he still trades in, for a sum of £28,613, despite the fact that the company’s directors earn six-figure sums from their provision of investment advice to those clients.

I understand that the insolvency practitioner for TBO Investments is taking legal action against Mr Scott Robinson to return moneys to the firm, on the basis that he breached insolvency rules by way of those asset transfers. For Helen, the financial services compensation scheme may help, as her losses are below the £50,000 threshold. For Mr Mohun-Smith, that is of little help or consequence.

To this day, Mount Sterling Wealth continues to operate. Its website features Scott Robinson, and it states above his photograph:

“We will help you to create, build, and protect your wealth, and tax efficiently pass it through the generations.”

According to Companies House’s records, however, Mr Scott Robinson’s directorship was terminated by his resignation from that company four days ago, after nine years of directorships. Perhaps that is coincidental, perhaps not.

Crucially, what is the FCA’s role in all this? On the question of TBO Investment’s lack of professional indemnity insurance, it simply states that

“it remains the responsibility of the firm”.

That is despite going on to say that it requires firms to report on that every six months and despite the fact that the FCA eventually cancelled TBO Investment’s permission to undertake regulated activity due to non-compliance. Despite all that, Mount Sterling Wealth continues to be authorised and regulated by the FCA. It says it will consider outstanding complaints when future applications for authorisations of individuals are made, but it continues to designate Mr Scott Robinson as an approved person.

According to the FCA, an approved person needs to be able to demonstrate that they are a fit and proper person for the purposes of providing advice. Shockingly, once they are approved, there is no ongoing re-approval process or requirement. The FCA has the power to levy fines and to impose banning orders on individuals, but it has thus far decided not to.

I have met Mr Andrew Bailey, the chief executive of the FCA, and I have spoken to other senior executives there. Incredibly, the only justification I can get for Mr Scott Robinson’s continuing designation as an approved person is that they are concerned that they may be

“depriving an individual of their livelihood”,

That is this individual, with their chequered record. What about the deprivation of my constituents’ livelihoods? What about their income, their investment and their hard-earned money? Is that not what the FCA should be principally concerned about?

I turn to the solutions. The FCA must take action. It must take a more proactive oversight role of the financial advisers that it regulates; it must surely instigate a re-approval process for financial advisers; it must be willing to hold financial advisers to account where there is clear wrongdoing, and impose fines and banning orders; and it should work with the Financial Services Compensation Scheme, and with Ministers if required, to revise and raise the level of the compensation scheme from the current level of £50,000, which is totally inappropriate.

For my constituents, Andy and Helen, this has been a most traumatic experience. In Andy’s words:

“This has had a devastating effect on my life...the damage to my health has been considerable. The enormous stress my wife and I were subjected to as a result of Mr Robinson’s disastrous investment decisions was undoubtedly a major factor in the breakup of our marriage.”

Those words say more than I ever could.

The FCA, the regulator that we entrust to make sure that our consumers, investors and businesses are fairly treated, has many questions to answer. It needs to take a long hard look at itself, and it must prove to those it is accountable to—the Treasury and Parliament—that it is able to carry out the role that it is required to perform. I, for one, am very sceptical that it is capable of doing so.

[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.