London's financial district
The notoriously fangless British Financial Services Authority issued a report Wednesday that should have advocates of law and order in the industry cheering, as the FSA proudly proclaimed it was going after some of the most blatant fraudsters in U.K. finance. The joy of those who believe finance should not be a Wild West may be short-lived, however, given the revelations in the report. Reuters

The announcement Wednesday that the notoriously fangless British Financial Services Authority is going after the most blatant fraudsters in U.K. finance opened a window on some of the sleaziest financial hucksterism in Great Britain.

The FSA notice, which also said it launched enforcement action against seven firms, announced an investigation of so-called bucket shops that target unsophisticated investors and offer them allegedly once-in-a-lifetime opportunities to put their hard-earned pounds in such Ponzi-tastic investments as bamboo greeneries and "land farming."

Attached to the announcement was a rather densely written 92-page document entitled "CP12/19*** - Restrictions on the retail distribution of unregulated collective investment schemes [UCIS] and close substitutes. The document explains that in violation of securities law -- and basic ethics of the profession -- financial advisers steer clients for whom these UCIS products are not suitable to these investments.

An eye-catching example provided by the FSA: "an 88-year-old being advised to switch 70% of her investments from mainstream investment bonds, totalling nearly £1m, into two UCIS funds."

The document also explains how investment advisers improperly use loopholes to offload UCIS products, for example, including them as a substantial portion of life insurance-based products bought by conservative investors and "wrapping" them in other alternative investments labeled as "special purpose vehicles" or "qualified investor schemes". Attention also is paid to how advisers market these products, such as claiming pitches to clients are part of "one-off communications," exempt from some regulatory rules, and not part of ongoing campaigns.

Perhaps the best gems in the document are descriptions of how some financial advisers understand what their jobs entail. Many brokers seem to think their job requirements include mistreating their consumers and fleecing them whenever possible.

"Where a retail consumer seeks professional financial advice they will generally rely upon their financial adviser's judgement in making their investment decisions. They have a reasonable expectation that their adviser will understand the product they are recommending and that the adviser's conduct and any transaction will be compliant with FSA rules," the regulator wrote. However "our supervision of this market, however, has found that this is not generally the case."

In particular, brokerage firms told the FSA firms that "they class distributors or investment partners as their 'customer' and therefore pay less attention to the end investor" and generally did not take care to "identify the types of customer for whom each UCIS was likely to be suitable (or unsuitable)."

The FSA found some advisers were just plain incompetent, noting "many distributor firms do not understand that providing advice generally includes making a financial promotion."

In other words, the people that sell sophisticated, illiquid, obscure investment alternatives for fat fees can't quite grasp the concept that suggesting investors put their money in a portfolio of products is akin to "promoting" those products.

Other times, the FSA found that "some advisers appear to think that they must actually recommend all types of retail investment product in order to demonstrate that they offer independent advice."

"This is incorrect," the FSA report deadpanned.

In what appear to be the worst cases, the regulator found "providers failing to undertake adequate due diligence on investment partners or investment opportunities" while also "failing to monitor investment partners' activities during the product lifecycle to check that funds were being invested appropriately."

In other words, the advisers don't understand how the products they are suggesting/promoting actually work.