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Aifa chairman warns of ‘regulation by hunch’

Steve Tolley interviews Aifa chairman Lord Deben who wants judgement-based regulation to be axed.

Aifa chairman Lord Deben is calling on the Government to abandon its plans for a judgement-based approach to regulation, branding it “regulation by hunch”.

The Financial Services Bill will break up the FSA and end its rules-based approach to regulation. In its place, the Prudential Regulation Authority and the Financial Conduct Authority will exercise a judgement-based approach.

Speaking to Money Marketing, Lord Deben says this approach, as well as the FCA’s power to ban products and to announce investigations into firms and individuals before the enforcement stage, are “unacceptable” and should be scrapped. He says a rules-based approach must be kept, so firms know what the regulator expects of them.

Deben says: “These proposals are regulation by hunch. The first hunch is that this product is not what we want, so we will stop it. The second is that there is something wrong with you, so we will tell everyone and if in five months we find our hunch was wrong, the fact your business has gone down the drain does not matter.

“In this country, we have a free society and that means there are rules. Individuals do not just use their judgement to decide whether other individuals have got things right or wrong. That is not an acceptable position.”

Currently, the FSA can only publicise investigations once it has taken enforcement action against a firm. The FCA will be able to publicise the fact it is investigating the firm.

Proponents of the change say it brings the regulator in line with the police, which must announce when it makes an arrest.

It is a comparison that Deben rejects. He says: “The police only arrest someone if they have sufficient grounds and there is no requirement in this power that the FCA shows any grounds for what it has done at all.”

Seeking to dampen industry criticism of plans to allow the FCA to ban products for a year when it judges they pose a risk to consumers, the Government now wants the regulator to set out “rules and the factors it will consider” before using the power.

Despite this concession, Deben says the product intervention power gives “carte blanche to bureaucrats” to reduce the availability of financial products.

He says: “It assumes the judgement of the regulator is better than the judgement of the finance industry and there is no evidence of that.
“The people asking for this power are the same people who failed to deal with Northern Rock.

“I am very keen the public should be able to access financial services and this bill makes that more difficult.”

Deben says his connection to Aifa means it is better that others in the House of Lords lead the charge against the bill but he says Aifa has been busy briefing peers on its views on the bill and promises “quite a debate”.

Aifa has criticised the new direction in regulation, calling it a “worrying shift” away from the judicial principle of innocent until proven guilty.

Deben says the correct analogy would be if courts were scrapped entirely.

He says: “It is as if the police said: ’We have tried all kinds of ways of convicting drivers who speed but by using clever lawyers and new defences, they keep getting off, so we will have a system where we use our judgement and we say you have been speeding, so you will be arrested and fined’.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Rip Van Winkle woke up and is now taking the mickey out of someone afflicted with a ‘hunch’.

    Where have you been for the last few decades Mr Gummer??

  2. The great danger of early publication of investigations into financial instutions lies in being the cause of a run on that organisation, regardless of whether or not the underlying issue is actually that serious in relation to the strength of the firm.

    It’s very easy to “spook” the general public into thinking that something is seriously wrong with the firm holding their funds and the next thing you have is queues around the block.

  3. He reminds be of an extinct dinosaur – gone extinct long ago and totally irrelevant in today’s world.

    Can we please have representation at the AIFA who actually know what it’s like to be a small IFA firm in today’s market!!!

  4. Julian Stevens 6th March 2012 at 9:32 am

    What system of checks and balances will exist to prevent the FCA from playing fast and loose with what looks very much like a self-granted open charter to arrive at whatever determination it wants? Already the FSA has the power to hike by 43% any fine it decides to hand out, should the subject exercise his right to refer the matter to the Upper Tribunal for independent examination of its merit or otherwise. It’s like telling consumers that if they refer a rejected complaint to the FOS, then even if their complaint is ultimately upheld, the amount of compensation they receive will be reduced by 30%. How can that be right?

    And now the government is proposing to remove the powers of the Tribunal to override any decisions imposed by the regulator. This seems to be yet another nail in the coffin of the rights of regulated entities.

    Now we hear of the FSA having ordered the banks to write to all their MPPI clients who haven’t yet complained, all but urging them to now to do so. Surely this issue has received sufficient media coverage for it hardly to be necessary for policyholders to be urged to try their luck with a complaint that hitherto they hadn’t been considering making?

    It seems to be a policy designed deliberately and maliciously to make an already bad situation even worse.

    Why didn’t the FSA do its job and prevent the whole business from reaching this state of affairs in the first place? For how many years were banks mis-selling MPPI before the FSA finally woke up to the fact that it ought to be doing something other than beating up IFA’s? Will this be a re-run of the Pensions Review, where PI insurers declare that the issue of such letters will invalidate cover?

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