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SCM Direct claims FCA failed to enforce the law


SCM Direct has called out the FCA for failing to enforce legally required cost transparency regulation under MiFID II, which was passed in April 2014 and came into force on 3 January 2018.

The firm says that the FCA is fragrantly breaching its statutory strategic objective to ensure that markets function well; and its operational objectives regarding consumer protection, integrity and competition. 

Further SCM Direct claims that the Treasury should require the FCA to urgently investigate and report back to the Treasury regarding the FCA’s lack of enforcement activity in this matter.

The back story from SCM Direct is that on 3 January 2018 the UK investment industry became subject to new legislation under MiFID II requiring providers and distributors of investment products to disclose all costs and charges to consumers; in one number.

The firm writes: “The importance of implementing cost transparency to ensure better consumer outcomes cannot be underestimated. Transparency of costs and charges would allow consumers to make true comparison of products and providers and encourage more price competition which would save the public at least GBP903 million a year or GBP4.5 billion over a five-year period.”

In April 2018 SCM undertook a review of the market and sent the resulting detailed dossier to the FCA evidencing breaches by over 50 major firms.

In May 2018 SCM submitted a follow up dossier to the FCA, evidencing that many of the same firms identified in its earlier report continued to break the law. SCM had found little evidence that this situation has improved to date. 

SCM Direct writes that it has been told by a major litigation funder that it believes that investors who have suffered loss due to the failure of firms to disclose the full costs and fees, are entitled to recoup any losses via High Court litigation. The firm is investigating the merits of a group action to claim such compensation on behalf of individual and institutional investors.

SCM writes that it makes these claims having served the FCA with three statutory requests for information under the Freedom of Information Act 2000 (FOIA). “The FCA attempted to delay one request by saying it needed more time to consider whether it was in the public interest, even though the time exceeded the prescribed time limits. 

“This led to the Information Commissions Office (ICO) writing to the FCA: ‘I have written to the public authority and instructed them to respond to you within 10 working days from the date of receipt of our letter.’ The FCA then belatedly answered the FOIA request. 

“It is clear from one FOIA response that the FCA does not have proper oversight over the activities of its supervision division, admitting that half the answers in its previous FOIA response were false. If the FCA cannot be trusted to properly record its own supervisory and enforcement activities, it cannot be trusted to properly undertake its role as a regulator.” 

SCM Direct writes that the FCA responded to a FOI request that by 10 August 2018: 

  • No firms have been referred to FCA Enforcement for investigation of their non-compliance with the costs disclosure requirements and no investigation has ever even been formally considered at the FCA’s internal referral meetings;
  • The FCA has received self-reports of non-compliance with the cost disclosure requirements from only six firms – this is despite clear rules which require firms to self-report material non-compliance to the FCA;
  • The FCA has written to only eight other firms despite SCM’s April dossier finding over 50 firms were in breach.”

SCM Direct says that it appears that the threat of an application for judicial review by SCM Direct has finally prompted the FCA to take some action, even though the effort is derisory given that the FCA is tasked with regulating more than 3,000 asset managers, more than 5,000 financial advice firms and numerous investment platforms.

“The FCA now claims that in the week following service of SCM Direct’s FOIA request on 10 August 2018 it was prompted to contact a further 27 firms concerning potential breaches of the cost disclosure rules. One can only speculate whether a single firm would have been contacted, had it not been for the follow up FOI request from SCM Direct,” the firm writes.

Gina Miller (pictured) of SCM Direct says: “The FCA has had numerous opportunities to publicly state that it will take enforcement action against firms that breach new costs disclosure laws and has failed to so. The message this failure is sending to the market is that the FCA does not consider breach of such laws to be important.

“In addition, the FCA has a statutory objective to promote effective competition in the interest of consumers. But if consumers don’t know what they are paying for their investments, competition can never be effective. It’s time for Mr Bailey to demonstrate that the FCA is willing to be the industry enforcer rather than the industry lapdog.”

Alan Miller of SCM Direct says: “The FCA may foolishly believe that it is helping the industry by turning a blind eye. Instead the FCA is creating a landscape for multi-million-pound claims from litigation funds, who can step in on behalf of thousands of clients, who have been misled in relation to the costs and charges of their savings and investments.”

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