FSA enlists providers to ‘snoop’ on IFAs’ practices

02 September 2010

The FSA has been carrying out covert monitoring of structured product advice and has asked a number of providers to keep an eye on IFA firms, as part of a discreet review of the controversial sector. The regulator has been writing to organisations over the summer asking them to monitor the IFA firms who introduce business to them and conduct due diligence of the firm’s business model, client type and future plans. The secretive ‘snooping’ by the watchdog has angered a number of financial advisers and providers, many of whom have privately condemned the tactics. Ian Lowes, managing director of Newcastle-based Lowes Financial Management and founder of comparison website, Structured Product Review, said: "I would expect all providers to be vigilant as to who they are dealing with, but I am surprised at the suggestion that the regulator is effectively inferring that the role of regulation also falls on the provider. "It is not the product providers' responsibility to judge who is a bad adviser. "To a degree you can see where they are coming from - if everyone polices everything, none of it is a bad thing. "The principle is not bad from a regulatory perspective, but it does potentially overstep the mark. You do not see the same in life insurance where there are high commissions." Arthur Childs, managing director of Surrey-based Arch financial planning, said: "You cannot really use product providers to be the tools of the regulator. It is pretty clear what we have to do as IFAs and financial planners. "We produced a guide to structured products so our advisers are singing from the same hymn sheet. "I would be a bit annoyed if I found one of the providers was giving us the third degree over whether we were suitable or not. It seems a strange way of dealing with it. The FSA has done this in the past with people selling life bonds. It is a bit crazy" John Gracey, director of structured products for provider Merchant Capital, said: "We have noticed increased expectations on the part of the FSA in relation to our obligation as the product provider to monitor the capability of IFAs selling our products." The FSA has been keeping an eye on structured products since the fall-out from the collapse of investment bank Lehman Brothers in September 2008. The City watchdog identified more than 5000 UK retail investors who had invested a total of £107m in structured investment products where the protection of their capital at maturity had been provided solely by firms within the Lehman's Group. Three of the firms, NDF Administration Limited, Defined Returns Limited and Arc went into administration and the Financial Services Compensation Scheme is currently considering whether to compensate the clients. A thematic review at the end of last year of the suitability of advice given to customers who had invested in Lehman-backed structured investment products found significant levels of unsuitable advice and substantial systems and controls failings. Three firms were referred to the FSA's enforcement division for investigation and a further seven undertook past business reviews. An FSA spokesman declined to comment on the content of correspondence with structured product providers. She said: "Our review of structured products and firms' promotion of them is ongoing and we hope to have something more to say on the findings of our ongoing review in this area in the first quarter of 2011. "As you would expect we keep in regular contact with firms about their use of these products as part of our supervision process. " A spokesman for the Information Commissioner’s Office said: "Monitoring must be justifiable and employees should be made aware that such a system is in place and that their work may be under review. Any individuals who feel their information has not been processed in line with the Data Protection Act can contact the ICO for further advice and guidance.” Published by FTAdviser.com