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JEFF PRESTRIDGE: Regulation is failing, but what is the alternative?

by Press room

JEFF PRESTRIDGE: Regulation is failing, but what is the alternative – are we better off as consumers of financial products with or without regulation?

Here’s a juicy financial question for you to cogitate over as you look forward to a weekend extended by tomorrow’s Bank Holiday.

‘Are we better off as consumers of financial products with or without regulation?’ 

Provocative, yes, but I throw the question out there because I’m not sure what the answer is. As regular readers of this column are all too aware, I am not a fan of the current Financial Conduct Authority. 

Not a fan: The FCA has missed too many mega financial calamities – and then procrastinated over how to sort them out

Why? Because it has missed too many mega financial calamities – and then procrastinated over how to sort them out. Tortoises and slugs come to mind. 

Just think about the suspension of multi-billion pound fund Woodford Equity Income nearly three years ago. 

An event that should never ever have been allowed to happen – the FCA should have clamped down on Woodford’s obsession with illiquid stocks long before they triggered the fund’s pulling up of the proverbial drawbridge as the manager couldn’t find sufficient cash to meet heavy redemption requests from investors. 

It ultimately led to hundreds of thousands of investors suffering financial loss. Scandalously, it’s a debacle the FCA is still mulling over, wondering what action it should take (if any) against those companies involved in the fund’s demise (of course, it should also be looking at itself in the mirror, but it won’t). 

And then there’s the mini-bond disaster that was London Capital & Finance where the FCA was fiercely criticised for regulatory failure as the company collapsed, leaving more than 11,000 investors holding near worthless investments. The FCA was forced to apologise after a scathing independent review into its atrocious handling of the scandal. 

So, that’s the case against the FCA. I could present more evidence, but it’s a strong case. 

Yet, as recent events at funeral plan provider Safe Hands Plans and trust fund manager Philips Trust Corporation have shown, no regulation or self-regulation is no better. Indeed, it could be argued that it’s far worse than a bloated, ineffective FCA. 

Both funeral plan providers and corporate trustees currently operate in unregulated markets. Although most companies serve the best interests of customers, a minority don’t. 

In the case of Safe Hands, directors have helped themselves to customers’ money from a trust fund set up specifically to pay for their future funerals. And as we report on the next page, there are now fears over the quality (and ownership) of the assets held within the trust and the inflated valuation put on them. 

Matters at Philips Trust Corporation aren’t much better. This is an organisation that purported to manage trusts set up for people looking to ensure their financial affairs would be in good order when they died. 

Yet, reading through a frank witness statement published by the owner of the company in conjunction with the appointment of administrators nine days ago, it seems business ineptness has been the order of the day. 

For a start, trust assets were incorrectly recorded as company assets in the accounts, thereby misrepresenting the financial health of the business.

Trusts were invested in assets that were not appropriate for the age of client – for example, fixed-rate savings bonds were purchased for people in their late 80s when their life expectancy was not that long. 

And there was poor record keeping of how individual clients’ money was invested. 

Worst of all, the company’s client bank accounts were raided to pay people who wanted to withdraw their assets. This is because the company couldn’t sell the assets assigned to clients because they were illiquid, so cash held in client accounts was used instead to pay them. ‘I felt I had no choice,’ says the owner in the statement. Scandalous. 

Over the past five years, the owner says demands for trust withdrawals totalling £10million were made by clients. It admits it was unable to fulfil all of these requests because of money being tied up in illiquid assets. 

My consumer champion colleague Tony Hetherington says he has not seen a document like it before. 

So, regulation or no regulation? FCA or a remoulded FCA regulating across the entire financial services marketplace? What’s your view? Let me know by dropping me an email. 

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