Britain has a new regulator and judging by recent statements, the Financial Conduct Authority – which oversees wealth management – is taking a tough line on issues such as ensuring clients are sold products that the watchdog deems “suitable”. However, there is a risk of its vigilance turning into paternalism and putting it at odds with principles about sanctity of contract, a law firm argues.

The FCA – which took over from the old Financial Services Authority in April when the FSA’s regulatory functions were split (bank supervision is now under the Bank of England) – has been busy in ensuring that regulations such as the Retail Distribution are enforced. And with memories still fresh of the financial crisis, the watchdog is also clamping down on products and services it thinks just don’t make sense for the broad mass of the UK public to buy. The FCA is also looking at the wealth management industry as a whole to find potential dragons to slay.

Which is all well and good, but this raises other, not always intended issues, lawyers Laurence Lieberman and Jonathan Rogers at told WealthBriefing in a recent interview.

For example, the FCA is very focused on “best interests”, stating that a firm must always invest/advise in the best interests of a client, Lieberman explained when discussing the philosophy of the regulator. A problem with the FCA requiring firms to think always about the best interests of clients could, in some circumstances, lead to a sort of financial “nanny state”, he said.

“Also, whatever happened to the sanctity of contract?” he said. Lieberman said his banking clients are not always certain that their clearly written terms of business will be enforceable if the regulator decides they are not in the best interests of customers.

This position of the regulator, he said, can be contrasted with the courts' approach of interpreting clear contractual clauses with customers, which is different from just taking the customer's side regardless. For example, courts have said that certain clauses in their terms of business are not in fact exclusion of liability clauses (and so potentially subject to reasonableness) but are in fact non-reliance clauses - in other words, that the customer cannot rely on the advice being given, and so cannot later complain, Lieberman continued.

Lieberman specialises in investigating and resolving financial services disputes and regulatory investigations – of which there have been many, although the shape and nature of his work has changed since 2008. “Up until a couple of years ago, the sort of work I was doing was more on the civil litigation side dealing with breach of contract and negligence cases,” he said.

Now there is more of a focus on regulatory intervention, he said. Client lawsuits have declined in frequency as the regulators have taken a more aggressive stance, filling some of the space once occupied by lawsuits by providing a remedy to customers that may have been mis-sold.  The proactive approach of regulators such as the FCA has given customers more information and tools to seek redress from their bank, he said.

Lieberman’s client base is wide. He acts for domestic and international retail banks, private banks and investment banks and a wide range of other financial services organisations. His practice includes disputes relating to structured products, spread betting and contracts for difference, debt securities and bondholder disputes, derivatives, trade finance, investment funds, claims by banks against their professional advisers and complex financial frauds.

And he brings varied experience to the role. As described in his biography on the firm’s website, Lieberman spent nine months on secondment to a “global wealth manager” managing its European litigation portfolio, since when he has specialised in "mis-selling" issues, particularly negligence claims brought by wealthy private customers against their private bank or wealth manager, or advising institutional clients on supervision and enforcement by the FSA (now FCA) in this area.

Meanwhile, Rogers is a partner in the Financial Institutions and Markets group in the London office and he specialises in financial services regulation advising insurance companies, investment banks, wealth managers, funds and other FS sector institutions on the full range of FSA regulation. A typical issue will be authorisation and perimeter issues, advising firms over the regulator’s exercise of its supervisory powers, prudential matters, implementing conduct of business rules, market conduct issues and matters coming out of the European Union. On the latter point, for example, he’s involved in helping clients understand the Alternative Investment Fund Managers Directive (AIFMD), which took effect on 22 July.

“We certainly now see firms trying to rationalise the RDR,” Rogers said, explaining how businesses that had been preparing for the changes have subsequently been trying to justify and deal with the aftermath.  “A number of firms indicated that their business models were aligned with the objectives of the RDR anyway.”

In the run-up to the RDR, there was a lot of commentary from industry figures, in some cases based on  media and other reports, about how the division between “independent” advice and “restricted” advice would lead to very different business models and outcomes. In practice, the significance of this difference had been exaggerated, he said.