UK: FSA Still Has Not Provided Proper Clarification Of What Mis-selling Is
Last Updated: 5 June 2003

  • Legal limbo will not be a welcoming new environment for mortgage and insurance advisers
  • Lack of clarification will inhibit savings

The FSA’s response to the Sandler Review’s calls for a clarification of what constitutes mis-selling is of little help to the financial services industry and ultimately to consumers, said Reynolds Porter Chamberlain (RPC), the leading commercial law firm, at their Financial Services Seminar, held today (June 3) in the City of London.

According to RPC, the FSA’s response to the Sandler Review (issued on April 17) declines to give a set of specifications of what is expected of financial advisers and merely says that mis-selling is a failure to comply with the FSA Rule Book and its broad Principles of Business. Jonathan Davies, Partner, of RPC, says this gives financial advisers no new information. "The FSA tells firms to ‘Give consumers a fair deal’, but this does not tell firms when they may in future face massive liabilities for mis-selling."

"The Sandler Review warned that because of past reviews, notably the Pensions Review, financial advice had become too bureaucratic and costly, and a clear definition of mis-selling was needed to deliver the Government’s agenda to promote savings."

"When the FSA wants to, it can go into excruciating detail but on the subject of mis-selling the rules are so general they can be applied, after the event, to anything. When losses have occurred, it is all too easy to allege that consumers were not adequately warned of the risks."

RPC also pointed out that unless the question as to what really constitutes mis-selling is resolved, then mortgage advisers and general insurance intermediaries will be entering a legal limbo when they come under FSA regulation in 2004 and 2005 respectively.

RPC say that the huge costs of mis-selling claims and the resulting compliance measures that have to be put in place are partly caused by the FSA and its predecessors’ use of a looser definition of what is professional negligence than the English courts.

Traditionally professional negligence has been seen by the courts as a failure to adhere to the standards of a competent professional at the time of the event. FSA instead ask what they consider firms ought to have done, with all the benefits of hindsight.

Says Jonathan Davies; "Most claims have been caused by breach of the rule that firms must take reasonable to steps to ensure customers understand the nature of the risks involved. But who in the late 1980s would have perceived there to be a significant "risk" that inflation would consistently average well below 5% - without which virtually ever pension transfer would have been profitable? Who at the turn of the millennium would have believed there to be a significant risk that stock markets would fall over 40% in the next three years?"

Press enquiries:

Jonathan Davies, Partner, RPC - Tel: 020 7242 2877

Nick Mattison or Paul Arvanitopoulos, Mattison Public Relations - Tel: 020 7645 3636

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