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A fine way to end misselling

James Salmon looks at the Which? plans for punitive penalties

Which? has renewed its calls on the FSA to increase fines imposed on firms found guilty of misselling.

The consumer group says current fines are failing to protect customers from future misselling because they are not acting as a sufficient deterrent for firms.

In a recent paper, Time For A Change, calling on stakeholders to pull together to increase confidence in the industry, Which? urges the FSA to levy penalties that will shock shareholders into putting pressure on firms to prevent future misselling.

Which? principal policy adviser Mick McAteer says the FSA’s enforcement division needs to hit firms where it hurts – their bottom line. He is adamant that without hitting the pockets of company directors and shareholders, firms take the hit and avoid making expensive changes to the way they operate to stop similar misselling cases from occurring.

McAteer says the FSA could look across the Atlantic to what he describes as the more robust US approach to regulation and constraining corporate behaviour.

Closer to home, he says the regulator could replicate the OFT which has powers to levy fines of up to 10 per cent of annual turnover over three years. He points to the 17m penalty recently imposed on Argos for fixing the prices of toys and games, which dwarfs the biggest fine imposed on a retail financial services company by the FSA – the 1.9m fine levied on Lloyds TSB for misselling high-income bonds.

But McAteer is far from confident that his vision of fines will be realised in the current political climate.

He believes that the Government and the FSA are being put under enormous pressure behind closed doors by what he describes as the bully boys of the financial services sector. This pressure, he says, bubbled to the surface during Prime Minister Tony Blair’s controversial attack on the regulator this year.

He says: “It is not looking good for consumers at the moment. The regulator is running scared of the industry backlash over the myth of over regulation in the UK and is being bullied by some big firms that are exploiting this weakness. There is a clear divide between those firms that want to restore consumer confidence in the industry and another strand of arrogant very big companies that are bullying the regulator and the Government.”

FSA spokesman Dave Whitely says commentators who are focus exclusively on fines are missing the point. The regulator’s enforcement division does not merely slap a fine on a firm and leave it at that. Any firm found guilty of misselling may be forced to review systems and change business processes, spending more on these changes than on the fine itself. He points out that when Lloyds were fined 1.9m, it was also forced to put aside 98m to compensate consumers.

Whitely says enforcement action also takes into account issues such as consumer detriment, whether the firm’s actions were reckless or deliberate and whether the firm co operates with the FSA when the breaches are discovered.

He says: “The fine is not the be all and end all of an enforcement case and it is not in anyone’s interest to impose disproportionate penalties.”

Aifa deputy director general Fay Goddard believes fines are already sufficiently punitive to put small firms out of business and adds that most would never deliberately missell a product. She also says that raising fines will only affect the public in the long run, through increased charges on customers and diminished returns for shareholders. Goddard calls instead for greater personal accountability at management level and says the FSA needs to use its powers more effectively to impose sanctions on individuals, such as stopping them from trading in extreme cases.

A similar stance is adopted by Tenet group sales and marketing director Keith Richards. He agrees that sanctions against individuals are the best deterrent but warns that increasing fines could increase operating costs, forcing more IFAs out of the market and reduce customers access to advice.

Legal & General media relations director John Morgan believes it is difficult to pin blame on individuals within companies, as shown by the difficulties the Government has had over corporate manslaughter.

But he believes the levels of fines imposed by the FSA are enough to deter any firm from repeatedly breaching the rules. He says: “We all have a reputation to protect and being fined is a deterrent in itself. This is even more the case as firms consolidate.”

Gaeia Partnership director Brigid Benson finds the notion of increased fines equally unattractive and says the FSA should not even contemplate this step before it gets its house in order after depolarisation.

She says: “IFAs are on a hiding to nothing and are being fined retrospectively for actions they could not have known were wrong at the time. There are far too many unresolved questions for the FSA to even consider increasing fines. Depolarisation has not even got its feet under the table.”

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