As investors who suffered losses during the bear market of 2000 to 2003 will testify, there is always a risk that shares will simply fall in value, no matter how much research you have done. Unfortunately for investors who have lost money simply because of a fall in the stock market, there is no way to gain recompense if you have decided to invest of your own free will.
But investors do run the risk of losing money through no fault of their own. There is, for example, the risk of losing money because your stock broker has run off with your money. Or perhaps you have been encouraged to invest in a product that proved unsuitable for your needs.
All advisers and brokers have responsibilities when dealing with consumers and you should understand what to look for in a company before you hand over your money. You should also know what to do if something does go wrong. You should also understand what your responsibilities are as an investor.
Your rights and responsibilities
Who is responsible for what?
What to do when things go wrong
Before you take investment advice from anyone or hand over any money you should check the person you are dealing with is authorised to conduct investment business.
All firms who conduct investment business and who deal with the public, whether they are banks, building societies, stockbrokers or independent advisers, must be authorised by the UK’s regulator, the Financial Services Authority (FSA), or be recognised by the FSA as a Recognised Professional Body (RPB) or Recognised Investment Exchange (RIE). These firms have to prove to the FSA that they are competent, financially sound and treat their customers fairly. If you have received any advice, the firm must make sure that any recommendations are suitable for you.
However, you are only protected by the UK’s complaints and compensation schemes if you deal with authorised firms so check carefully that the firm or individual you are dealing with is authorised by the FSA to conduct investment business before you hand over any money.
As an investor you do have to accept some responsibility as well. You should never invest any money in any share or financial scheme without understanding exactly what you are getting into. Make sure you read any literature you are given too. It may look boring but remember that you may end up putting your money at risk if you are not careful.
Another responsibility you have is to make sure you do not profit from any inside information. You might think you would never find out any inside information but it can be as easy as overhearing a conversation on a train or in a pub. If you find out any information not generally available to the public and use it to make a profit, it is insider trading and is illegal.
There are a whole host of organisations responsible for making sure that financial companies follow strict rules designed to protect investors.
The main organisation responsible for the regulation of UK financial companies is the FSA. Any financial companies whose main business is investment must be authorised by the FSA. That includes stockbrokers and independent financial advisers. These firms are required to ensure all the people who work for them meet the standards laid down by the FSA.
But not every firm is authorised by the FSA. Some firms, such as solicitors, accountants and actuaries are often involved in the investment business but as a sideline to their normal work. The FSA allows these firms to be authorised instead by an RPB, such as the Law Society or the Institute of Chartered Accountants.
You will also come across an RIE. These organisations, such as the London Stock Exchange, are recognised by the FSA and provide a market place for investors.
Another important organisation is the Financial Ombudsman. This body is responsible for settling disputes between consumers and financial companies and, awarding compensation where appropriate. There are also arbitration schemes, which work in a similar way to a court.
There is also a Financial Services Compensation Scheme, which will pay out up to £48,000 to private investors if an authorised firm goes out of business and cannot afford to pay compensation.
Although the whole system of regulation in the UK is designed to ensure financial services firms carry out their business responsibly sometimes things can go wrong.
If you think, for example, that a firm has given you misleading advice there is a chance that you may be able to get all or part of your original investment back. Your first step should always be to contact the firm that sold you the product or provided the service. If you are not satisfied, you should then take your complaint to the Financial Ombudsman, or an arbitration scheme.
If you decide to go to an arbitration scheme you give up your right to take the case to court. This is not, however, the case if you seek recompense through the Financial Services Ombudsman.