Confusion over where the regulatory boundary lies, and where consumer protection applies, was first identified in the FCA’s initial report last June © Jonathan Goldberg/Alamy

The UK financial regulator has admitted that people are still confused about which products are covered by its rules despite pledging last year to clarify its consumer protection role.

The Financial Conduct Authority said it was still “difficult for consumers to identify if they are dealing with an authorised firm carrying out a regulated activity” as it warned that the coronavirus pandemic had increased the risk that people would lose money by accessing unregulated products.

The difficulties consumers face in understanding what the regulator can and cannot police “remain the key issues”, according to the FCA’s interim chief executive Chris Woolard writing in the watchdog’s second annual report on the so-called regulatory “perimeter”.

Misunderstandings about whether an activity is regulated were a factor in a string of recent scandals, including the collapse of mini-bond issuer London Capital & Finance, which led to 11,600 savers losing £236m, and the 140,000 borrowers who have become “mortgage prisoners” — unable to switch from expensive deals with unregulated lenders.

Confusion over where the regulatory boundary lies, and where consumer protection applies, had first been identified in the FCA’s initial report last June. At the time, the regulator promised to “clarify our role and improve consumers’ understanding of the protections they have.”

Mr Woolard, who hands over to Nikhil Rathi in two days’ time, also warned the pandemic had increased the scope for consumers to lose money through unregulated products. With many households and businesses having to cope with a loss of income, and take on more debt, the regulator said that they would be “more susceptible to harm when engaging with both regulated and unregulated activities”.

Some of the 3.4m people who have taken mortgage or credit repayment holidays may now turn to unregulated debt advice providers, the FCA said. Others struggling to generate a return on savings “may be enticed by promises of higher returns in a low interest rate environment” from “speculative or illiquid assets,” it added.

Concerns about companies outside the FCA’s jurisdiction, or in regulatory grey areas, have been growing since LCF collapsed in January 2019. LCF, which was itself regulated, had offered mini-bonds, which were not and were much higher risk and harder to exit than stock market-traded bonds. This put the mini-bonds outside the scope of FCA product rules and meant they were not covered by the Financial Services Compensation Scheme, unless they were bought with advice.

Thousands of investors ineligible for compensation are now awaiting an independent report into the FCA’s handling of the scandal, to see if there are grounds for legal action.

Action has since been taken to prevent similar products being promoted to savers. In January, the FCA imposed a temporary ban on the mass-marketing of any speculative illiquid debt securities to retail investors for 12 months.

Lawyers believe this tougher approach to consumer protection will be maintained. “Today’s perimeter report confirms that the FCA’s approach to mini-bonds has not changed since this year’s temporary ban was introduced,” said Michael Cavers, a financial services partner at law firm CMS. “We . . . fully expect the temporary ban on the promotion of speculative mini-bonds to become permanent from the end of this year.”

However, the FCA said it needed more powers to stop online platforms such as Google carrying unauthorised financial promotions. Last week, the FCA accused Google of not doing enough to stop fraudsters using its internet search pages to target victims, noting that there was no regulatory power to force the US tech giant to refuse advertisements in advance.

In its report, the FCA said Google and others should “bear legal liability for the financial promotions they pass on — at least to the same extent as traditional publishers of financial promotions.” It added that discussions with the Treasury to extend this liability — first announced in July — were taking place.

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