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A busy year ahead for the FSA

As N2 approaches, the industry is wondering aloud what this monolithic creation it is paying for will do to keep itself busy once its birthday celebrations are over.

After all, FSA spokespersons are constantly espousing the new attitude towards regulation they plan to adopt which will see fewer company visits and a less prescriptive approach to regulation.

FSA staffers will no longer be running around preparing for the new regime – a spokesman says most of that work has already been completed. So given this, what will it be doing to justify its existence?

Those concerned that the regulator will not have enough on its plate to remain occupied need not worry.

Between all the reviews, both ongoing and upcoming, the new areas of regulation that will be brought into the realm and thematic studies looking at how certain areas of the industry operate, the FSA will be very busy indeed.

The regulator is conducting reviews of the polarisation regime, disclosure of information to consumers and with-profits products. There is concern that much of this work will be absorbed by the Sandler review into the retail financial industry, which raises serious questions about the point of having an independent regulator at all.

A further consultation paper on polarisation is expected before the end of the year, where it is likely the FSA will outline its strategy for going forward. If the timing of the first phase of the review is any indication, it is likely any changes will not take effect until 2003.

With-profits products have been dragged through the mud because of a number of factors, including the level of discretion available to investment managers, the perceived high costs investors are charged and the level of understanding by consumers about what they are investing in.

In response to these concerns, the FSA announced in March it was embarking on a wide-ranging review of the products. Having released one bulletin, the next report, which will probably deal with questions surrounding orphan assets, is due before long.

Since its initial observations that disclosure practices by IFAs were not acceptable, nothing further has been heard from Canary Wharf about this particular review. It is possible this silence may continue as disclosure, like with-profits, figured heavily in the Sandler consultation paper in July.

It has not taken long for the FSA&#39s mandate to extend beyond what was originally set out in the Financial Services and Markets Act. In fact, well in advance of N2, announcements were made regarding the intention to bring in the regulation of mortgage lenders and credit unions under the FSA umbrella.

The decision to regulate only mortgage lenders and not advisers has been criticised by virtually everyone, including many of the advisers themselves. To be fair to the FSA, it was the Treasury&#39s decision not to include mortgage advice in its plans for the industry and the regulator has been left to take a lot of the resulting flak.

Mortgage regulation begins at what is known as N3, tentatively scheduled for September 2002, nine months after N2. But there are already doubts this will proceed on schedule. The CML is actually pushing the FSA to delay this date until the end of February 2003 to give lenders time to prepare.

Credit unions are to be regulated by the FSA from July 2002. This small and rarely heard from player in the financial services arena is being strengthened so as to improve access to financial products for the disenfranchised.

Another area of regulation expected to come under the FSA&#39s control for the first time is that of long-term care insurance although an official confirmation from the Treasury has not yet been announced.

This is another form of regulation which has been welcomed by the industry as providers say one of the reasons the market has not grown is because it has not been subject to FSA scrutiny.

Timing is unclear, with an FSA spokesman saying it is unlikely to take effect before the end of next year.

In his speech to the FSA&#39s annual board meeting in July, chairman Howard Davies announced two “themed” approaches to regulation. This idea of not only looking at one specific issue but a snapshot of a particular area is thought to be favoured by the FSA.

The two studies which best sum up this thinking, ann-ounced by Davies in July, involve looking at ways to harness market forces to deliver regulatory aims and studying the issues surrounding retirement.

It is the latter which is possibly more interesting for IFAs. It deals with all types of retirement savings products, including annuities and income drawdown, as well as considering ways to convince younger people they need to think about their life in retirement.

Both of these thematic reviews will be played out over the next year although not much more information has been made public about what they will involve.

In the light of the huge blow to confidence the Equitable Life debacle has handed to the insurance industry, how it is regulated must weigh heavily on the minds of the FSA.

One definite change will be for the regulation of conduct of business and that of prudential insurance to be brought together as one operating unit instead of looked at individually, as has been done in the past. It is likely there will be further changes made to how life offices are overseen but, like most other major regulatory shifts, this will take time.

Finally, the consumer protection objective is very important to the regulator. As a result, two contentious advice tools have been created by the FSA – decision trees and league tables. At the moment, the scope of both of these devices is quite narrow, with decision trees only available for stakeholder and league tables for Isas, but it is thought both will be extended depending on their success.

It is clear there will be no shortage of things to do over the next year. And given the propensity of the FSA to take on new projects and reviews on a regular basis, IFAs can be sure there will be plenty of consultation papers to respond to before the regulator celebrates its first anniversary.

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