People who have read Ayn Rand’s classic ode to capitalism Atlas Shrugged tend to fall into two camps – those who think it is a prediction of dystopian horror that the world could face if corporations are not kept under control, and those who believe it is a sacred treatise that could save the world from interfering, bumbling governments.
In Atlas Shrugged, the heroes are staunch capitalists who have no patience for health and safety policies, global warming, or most importantly, any government intrusion in their money-making activities.
The 2008 financial crash provided many lessons, the main one being, that with human nature what it is, if businesses are given too long of a leash, greed can take over, leading to disastrous social and economic consequences for much of society, much like what happens in Ayn Rand’s novel. In light of the consequences, governments are continually balancing a tightrope between allowing businesses the freedom to take the risks needed to grow so that profits and jobs can be generated, and providing enough regulation to ensure that corporations do not operate unchecked.
The Financial Conduct Authority
Financial markets require tougher regulation than most industries because it is the cog at the centre of a country’s economic wheel. Investments, loans, savings and pensions are a few elements that keep the economic wheels turning. When financial institutions fail to adhere to regulations, the country, and in some cases, the world’s economy suffers.
The Financial Conduct Authority (FCA) is one of the most powerful regulatory bodies in the United Kingdom. It regulates the conduct of 56,000 financial services firms and financial markets in the UK. In addition, it is the prudential regulator for over 18,000 of those firms.
The main role of the FCA is to protect the (often) unsophisticated consumer of financial products from the more knowledgeable seller.
The FCA is independent, funded by contributions from the bodies which it regulates, and is responsible to the UK Treasury and to Parliament.
Although most financial institutions invest large amounts of resources to ensure that they comply with government and FCA regulations, they sometimes fail. This can have severe consequences across the wider community. One recent example, post the 2008 financial crash, would be the mis-selling of interest rate swaps to small businesses.
Interest rate hedging products (IRHP) and the role of the FCA
In 2012, the Financial Conduct Authority, (or the Financial Services Authority (FSA) as it was known then), investigated and discovered that some banks were mis-selling structured collars, swaps, simple collars, and cap products. This has come to be known as the ‘interest-rate swap’ scandal, which involved some of Britain’s biggest banks and sent some small businesses to the brink of ruin.
An interest rate swap enables banks to offer customers the right to fix the base rate on a loan at an agreed level, to ensure that a rise in interest rates would not lead to the customers having a debt so large that they would be forced to default. The concept can be likened to that of a fixed-rate mortgage.
Although the rate swaps protected customers when interest rates rose, they often carried a heavy cost when the interest rates fell. In addition, many sales staff failed to alert borrowers of the ‘break costs’ attached with terminating or prepaying their loan arrangements. The scandal was uncovered when customers tried to terminate their contracts. The Sunday Telegraph gave an example of a businessman who took out a five-year loan for £5 million and was left with a break cost of terminating the 30-year swap of £4.1 million[1].
The FSA investigated the alleged mis-selling which led to “around 13,900 customers accepting a redress offer; £2.2 billion has been paid out, including £509 million to cover consequential losses” according to the last update on the FCA’s website[2].
Pensions mis-selling
Earlier this month, it was reported that the Financial Conduct Authority (FCA) was concerned that another pension mis-selling scandal may be developing[3]. To provide background, between 29 April 1988 and 30 June 1994, thousands of customers were mis-sold pension products. Since then, the FSA took disciplinary action against 346 financial providers, resulting in fines totalling just under £10 million[4].
Recently, the FCA has been examining the advice being given to people who are thinking of withdrawing from their defined benefit retirement schemes by their financial advisors. The FCA discovered that less than 50% of people who were considering to cash-in their company-backed pensions had received “suitable” advice.
Teresa Fritz, a member of the Financial Services Consumer Panel, which advises the FCA on consumer issues, stated to the Financial Times that the regulator’s findings were “worrying and terrifying…there should be no excuse for this”. “I am hopeful that the FCA has caught this [any mi-selling] in time.”[5].
Making a claim for compensation for mis-sold products or negligent financial advice
Although the Financial Conduct Authority may investigate an incident of mis-sold financial products or negligent advice, many businesses require compensation quickly to restore their cash-flow. In addition, many owners are left fighting to be released from contracts which they would not have entered into had they been correctly advised.
An experienced solicitor can assist in discovering whether a person has been the victim of mis-selling and put pressure on the financial institution responsible to reach a settlement within a reasonable period.
The FCA provides a safety net for everyone, ensuring that financial institutions play fair and that consumers of financial products are protected. Without them, the world of Ayn Rand could become a terrifying reality.
Saracens Solicitors is a multi-service law firm based opposite Marble Arch on the North side of Hyde Park in London. We have years of experience advising on financial and banking law matters. For more information, please call our office on 020 3588 3500.
[1] http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9136132/British-banks-hit-by-new-mis-selling-scandal.html, http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9135846/How-the-derivatives-sold-by-the-banks-work.html
[2] https://www.fca.org.uk/consumers/interest-rate-hedging-products
[3] https://www.ft.com/content/56928ab4-a823-11e7-ab55-27219df83c97
[4] http://news.bbc.co.uk/1/hi/business/2070271.stm
[5] https://www.ft.com/content/56928ab4-a823-11e7-ab55-27219df83c97