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Aifa: The dangers of a meddling regulator

One of the major issues for financial services is how the new regulator will work.

Much has been made by the Government and the FSA about the Financial Conduct Authority being more proactive, market oriented, and generally better than the FSA. We are told its new approach will address all past failings.

The autumn will see the regulator share more of its thinking about what all this means in practice, but a number of recent events and pronouncements have given me concern about whether the FSA is capable of morphing into the market oriented success that is promised.

First, there is a recent speech from Martin Wheatley, chief executive designate of the FCA, about its approach to supervision. He said: “The FCA’s core purpose is to make sure markets work well so consumers get a fair deal.” He then acknowledged this will require a new supervisory approach and new culture. I could not disagree with this.

But Wheatley went on to outline an approach to supervision that seems to involve meddling in the inner workings of firms. He talked of ensuring that everything a firm does is done with good consumer outcomes in mind. I may be reading too much into this, but this suggests a regulator trying to micro manage firms’ inner workings.

The way I understand markets, is that firms aim to maximise profits. To be successful they must offer attractive products and build trust with consumers. This is where the FCA has leverage and should be looking to act, working with the grain of the market. I can see how its powers relating to product intervention have a role to play here, focusing on outcomes and reinforcing market pressures. What it should not be trying to do is make firms tick boxes recording that staff have considered the consumer at every meeting and every day.

Secondly, there was the FSA’s reaction to Honister Capital’s failure.

The FSA’s initial stance was bureaucratic – it said it has its processes and they must be followed. This was not the reaction of a body thinking about making the market work well for consumers left without an authorised adviser, but of a bureaucracy clinging to its rules and procedures.

Thirdly, the FSA is consulting on funding arrangements for the Financial Services Compensation Scheme.

In respect of the possibility of introducing a product levy, FSA officials have said it would not be appropriate as the customer would pay for it. In its consultation document, it says it must be an “industry funded model”.

This seems to reflect a fundamental misunderstanding of how markets work. The customer pays for the goods or services they receive. Any consumer buying a financial product is also, in part, paying for regulation (through FSA) and investment insurance (through FSCS). Some subsidise others as not all use these services – at least not in a given year. The revenues for the financial services sector all come from customers.

There is a long way to go on this and the FSA acknowledges the transformation in culture that is needed. However, if it really is to make markets work so that consumers get a fair deal, there needs to be a better understanding of how markets work and how to work with them.

Chris Hannant is policy director at Aifa


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. A great article that reinforces how out of touch AIFA is. Chris Hannant needs to understand the adviser market.

    Products?? Products are dead, certainly in terms of IFA distribution.

    As for Honnister I think your blaming the wrong people. Honnisters systems and controls failed not the FSAs.

    One think is for sure AIFA will follow the same route as the FSA and disappear due to its complete lack of understanding about the market it’s in.

  2. Sorry Chris, but AIFA should have been shouting from the roof tops years ago about the FSA, instead of bending over Hectors desk and fluffing his ego. Now you are in the situation, that the FSA treat you like an annoying little parasite and most of the IFA’s have lost all respect and confidence in you.

    AIFA needs to pull out some bloody big rabbits out of the hat to salvage anything it terms of reputation and clout.

    And nothing is going to alter come the sign change over the FSA’s door to FCA, the incestuous job hopping that happens to keep it all in the family would make a certain small village proud, no wonder they are all barking at the moon.

  3. The consumer pays for everything. Why is this so hard to understand. A product levy is just more transparent. I think everyone in the industry should be required to disclose to every client the regulator cost to income ratio. We know what we our charged by them and most other fixed costs. We know what our turnover should be.

    The reason the regulator does not want a product levy is it would mean that everyone would be aware of just how much their gluttony actually costs them.

    Every time the regulator increases costs and requirements they are actually reducing potential returns, because that is the only place the money can come from, what the poor client gets back.

    The headline seeking politicians complain about product charges, but fail to grasp that if you pay low fees, the people looking after the investments are paid low wages.

    If companies do not make a profit there is no investment in infrastructure, there ate tedundancy

  4. Perhaps to the surprise of many I will come to AIFA’s defence on this.

    I find nothing in Chris Nannants words to disagree with. For the past five eyars AIFA has been emasculated by its support for the RDR and the personal ambitions of some of its main players.

    Having met Chris I am of the belief that he could be the person to turn them away from regulatory bottom-kissing and back to the original blueprint of an adviser-supporting body.

    Regulation is bust, it’s just that the Government doesn”t yet know it. The FSA cannot dictate commercial logic with the results we are already seeing – thousands of advsiers leaving, bancassurers pulling out of the market, direct sales forces being culled or vastly reduced, an ever reducing number of regulated funding the monster that is FSCS, etc.

    Martin Wheatley has a once in a lifetime opportunity to start afresh and distance himself from the failed policies of his forbears. If AIFA has the appetite and if advisers believe in them sufficiently to improve funding and enable them to compete more comprehenisvely then there may be an opportunity to save the industry before it is flushed down the tubes for career-minded, unthinking bureaucrats

  5. So the FCA’s new approach intends to address all past failings [of the FSA]. Wow! All of them?? That’s a pretty massive mission statement. Where will it start? The list of failings to be addressed is long indeed.

    Will it start by living up to the claims on the FSA’s website to being “an open and transparent regulator”? Or will this claim be conveniently omitted from the FCA’s website home page?

    Will it observe the requirements of the Statutory Code of Practice For Regulators (which the FSA totally ignores)?

    Will it make a sincere attempt to reduce its budget by relocating three quarters of its staff to vastly less expensive accommodation well away from E14? Will it scrap the £20m+ it earmarks each year for staff and directors’ bonuses of highly questionable merit? Will it put a stop to all-expenses-paid first class international jollies for its senior people (whatever was the justification for Adair Turner visiting Korea, of all places, a couple of years back)? Will adherence to defined expense limits be properly enforced instead of being routinely and casually over-stepped? Will it submit to the imprimatur of an independent outside body as to how it spends its vast yearly operating budget?

    Will it from now on publish ALL feedback received in response to its consultations, for all to see and to debate in open forum? Will it actually take any notice of that feedback? Or will it continue to regard (and dismiss) them as being based merely on self interest?

    Will it scrap proposed new initiatives if its Cost:Benefit Analyses are found to have been a wildly, perhaps even criminally, inaccurate understatement of the true costs (as seen with the RDR)?

    Will it take responsibility for the consequences of any motorway pile-ups that it should have anticipated and averted but which it fails to (instead of dumping the costs onto the IFA sector)? In any future cases where the findings of an Arrow visit have not been acted upon, will it offer an explanation as to just why?

    Will it put an end to its practice of reviewing everything by hindsight and holding everybody else to account for its failure to have issued proper guidance? On this one, it has apparently said it will, though whether or not it actually manages to abide by this undertaking remains to be seen (see previous paragraph).

    Will it issue an unequivocal undertaking not to twist round provider failures to being intermediary failures (as the FSA has done with KeyData)?

    Will it undertake not to direct the FSCS to make blanket assumptions of mis-selling on matters such as ArchCru and to pay compensation willy-nilly without allowing the normal complaints process to run its proper course? Will it undertake not to instruct the FSCS to engage firms of lawyers such as Herbert Smith to issue to IFA firms unsubstantiated demands for payment without being in possession of proper evidence of bad sales practices?

    Will it admit that the MAS ~ launched without either a consultation or any Cost:Benefit Analysis ~ has been a hugely costly and ineffective white elephant? And scrap it?

    Will it discard the FSA’s patently mendacious claim to being a body independent of the government?

    Will it ~ as a body supposedly in favour of accountability ~ actively participate in the creation of an Independent Regulatory Oversight Committee, to the will of which it will be statutorily obliged to submit?

    Will individuals within the FCA be named, shamed and sanctioned when found to have failed in their duties? Will the FCA ensure that massive pay-offs for the likes of Clive Briault (an offensive affront to all those of us forced to fund them) are never again permitted?

    Will it publish for all to see and to debate in open forum just how much of Hector Sants’ estimated £50m the transition from FSA to FCA actually ends up costing in practice?

    Will it take the side of the industry in lobbying the government on issues such as its failure to honour the Conservative party’s pre-election manifesto pledge to put right all the damage done to the pensions framework by successive governments over the past 25 years and finally to enact true simplification measures to restore some scrap of public confidence in long term saving for retirement?

    The FCA may well claim that it isn’t, shouldn’t and cannot be a lobbying entity. However, I suggest that such a claim constitutes a baseless denial of the fundamental reality that politics and regulation are inextricably intertwined. If the framework for retirement saving was made genuinely simpler and more attractive, then the advice process on it would be vastly simpler and less difficult and costly to regulate. Surely, wouldn’t that be a good example of politics and regulation working together?

    Will the FCA provide answers to any of these questions? Or is this undertaking to address “all past failings” of the FSA just a bit of window dressing to kid us that the FCA is actually going to be something better, more cost-effective and more accountable than an FSA Part II?

    If it doesn’t, then Mr Wheatley can hardly be surprised if the FCA is viewed in very much the same light as its reviled and discredited predecessor.

  6. @ Julian S

    Well done! Brilliant list of questions for FCA to address.

    Are they listening?

    Will they address them?

    Or do we fear that we already know the answer?

  7. As I said elsewhere it is a sad reflection that as far as I’m aware no industry practitioner – from a bank, to a fund manager, to a life office, to a professional body, to a trade body, to an IFA can actually have an unequivocal good word to say about our regulator.

    No one expects a regulator to be loved, but surely mutual respect is a prerequisite.

    This state of affairs is a condemnation that should be seriously taken into account by the revamped entity and government.

  8. Here’s a thought ~ on its website, the FSA describes its constitution as “a company limited by guarantee”. Yet, to the best of my knowledge, nobody has ever explained exactly what this means, least of all the FSA itself.

    And, if anybody HAS actually asked, no answer has ever been published, least of all by the “open and transparent regulator” that the FSA so glibly proclaims itself to be. So just what IS “a company limited by guarantee”? Are any other organisations, any at all, similarly constituted? Perhaps it’s a special status reserved exclusively for government quangos.

    The word company implies some sort of trading entity, yet clearly the FSA doesn’t trade.

    Just what aspects of the FSA’s constitution or activities are “limited” and in what way? Does the word “limited”, in this context, mean that the FSA can (as it so often does) do whatever it pleases without liability for the consequences of its actions?

    Just what does this “guarantee” constitute? Is it a guarantee that no matter how badly the FSA does its job, no matter how badly it fails to fulfil its statutory obligations, no matter how wilfully it ignores statute (as in the Statutory Code of Practice For Regulators) and no matter how much collateral damage is caused by its regulatory failures, both it and its directors are guaranteed immunity from being held to account? That certainly appears to be the case, doesn’t it?

    And exactly what body provides this “guarantee”? It cannot be the industry, which means the only possible candidate has to be the government, from which the FSA continues to claim to be independent, despite the fact that EVERYONE knows such a claim to be patently untrue.

    Does anyone out there know the answers to these questions?

  9. I should have done an InterNet search prior to my last post. is interesting and perhaps gives some insight into the way in which the FSA has been set up, not least as far as immunity from any personal (financial) liabilities on the part of the directors is concerned. That having said, I don’t quite understand how this differs from an ordinary limited company and, in any event, the FSA can never become financially bankrupt (even though it’s clearly morally bankrupt), for the simple reason that however much money it spends/wastes it has unlimited and completely unaccountable powers to extort from the industry however much money it wants.

    That aside, shouldn’t those of us forced to fund the very existence of the FSA be classified as members with appropriate voting rights? Many would consider that we should, but clearly that’s something the FSA would fight tooth and nail and it would be surprising indeed if the FCA has the slightest intention of being any different.

  10. Julian – I love you comments and completely respect your views expressed on here.

    Sadly since the dawn of New Labour the UK has been slowly but surely heading down the route of a totalitarian police state. Organisations constituted like the FSA would sit quite comfortably within China, Burma or North Korea. They have no place in a country that claims to be a democracy.

    Before you dismiss the above as a mad rant just stop and think about the increasing control that government exerts over your everyday life.

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