The Financial Inclusion and Markets Centre (FIMC) is pleased to submit a response to such an important consultation. The scale of the challenge of transferring a very complex EU set of regimes into a more effective, relevant UK regime for investment products should not be underestimated. The FCA should be congratulated for the work that has gone into this initiative.
Our submission can be found here: CP24 30 Consumer Composite Investments FIMC submission 0325
We support the overall structure of the FCA’s proposed regime. But, we do have some concerns about how the FCA intends for past performance to be used. Past performance data must be decoupled from the effect of charges and past performance decoupled from future performance in investors’ thinking.
We cannot use past performance to predict future performance whereas we can model the effects of high charges on fund values. Past performance should not be allowed to be used to create the impression that a firm or intermediary has superior investment skills which are likely to be repeated and so influence investor decisions. Nor should past performance data be allowed to create the impression that superior future performance can compensate for high charges and costs.
With regards to the other main issues, we make the following brief points. We do agree with the FCA’s proposals on the scope of the CCI regime. This should be as permissive as possible in the sense that all products with the characteristics described in the CP should be presumed to be covered by the new regime.
We generally support the high level proposals for responsibility along the distribution chain. But, we are concerned about some of the proposals in relation to unauthorised manufacturers including overseas funds available through the OFR. There is no compelling evidence that enabling access to an even greater number of products in an already oversupplied market will promote real competition and enhance consumer outcomes. Indeed, there is a case for saying that more choice creates additional confusion, adds to market complexity, increases search costs, and exposes investors to greater redress risk but with little or no enhancement to investor welfare to compensate.
The FCA does intend to apply basic governance standards to unauthorised manufacturers. But, we would welcome further scenario analysis of whether this would be robust enough to protect investors from the type of harm caused by firms and funds in the past that were not within (or fully within) the FCA’s perimeter. Moreover, as the FCA acknowledges whether a manufacturer is authorised or not can affect access to redress. We are not convinced that disclosure, even if is well designed, will be enough to protect consumers from the risks associated with unauthorised manufacturers. Therefore, we think there is a case for requiring distributors who choose to distribute funds from unauthorised manufacturers to take on the full responsibility in the event of things going wrong.
As we have covered elsewhere, we are very concerned about the Advice Guidance Boundary Review (AGBR). We consider this to be a weakening of consumer protection as the boundary of responsibility and liability for poor outcomes is being moved away from the market to consumers.[1] Therefore, it is critical that the CCI regime ensures that claims about superior investment performance are not allowed to influence investor decisions.
We fully support the FCA’s intention to streamline and remove unnecessary information. The preceding EU regimes are far too complicated. We also fully support the FCA’s intention that this should be a digital first regime.
[1] FCA Advice/Guidance Boundary Review CP24/27 | The Financial Inclusion Centre