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