Much of the Government’s recently published consultation paper on its proposals for a new approach to financial regulation was predictable.
Those parts of the FSA that deal with, and are of concern to, small firms such as IFAs, will be transformed into the Consumer Protection and Markets Authority and the CPMA will be the sole regulator of all those firms.
Those people now at the FSA who are responsible for the authorisation and regulation of small firms will presumably continue to carry out the same tasks when their employer becomes the CPMA. But in its consultation paper, the Government says the transition from the current structure to the new one “obviously carries the risk of some operational disruption of regulation.
To address this issue and to ensure FSA staff and regulated firms have sufficient clarity and certainty to prepare for the change to the new regulatory structure, the FSA will move as fast as possible towards the structure envisaged under the new regime on a non-statutory basis”.
Thus, the same staff at the FSA will continue to do the same jobs but they will begin to do those jobs in a new way.
The new primary objective of the CPMA will be that “of ensuring confidence in financial services and markets, with particular focus on protecting consumers and ensuring market integrity”.
Although the formal refocusing of the FSA’s statutory objectives into the new ones of the CPMA will have to wait for the necessary legislation to be passed by Parliament, it must be expected the general tone of the FSA will begin to move in the direction of the new objectives.
This is likely to mean the FSA will develop a more proactive approach to regulation as the consumer’s champion.
One probable consequence is that some products such as the now discredited payment protection insurance contracts will be officially discouraged at an early stage. That would be a good thing.
Under the present statutory framework, the FSA has had the difficulty that some of its objectives might conflict with each other. For example, under the Financial Services and Markets Act 2000, one of the FSA’s statutory objectives is the protection of consumers (no change there then?) but it also has to have regard to “the desirability of facilitating innovation in connection with regulated activities”.
Thus, in relation to PPI, there was a conflict between taking steps to discourage their sale because that could be said to stifle innovation and the protection of consumers.
In fact, the Government is seeking views on whether the CPMA should be required to continue to have regard to potentially conflicting matters such as facilitating innovation and maintaining the competitive position of the UK.
It remains to be seen then whether the change of focus will result in the CPMA making its views known on particular new products at a much earlier stage than has been the case hitherto. And will the FSA take steps to discourage costly complexity in products where the complexity is unlikely to benefit the consumer and is there chiefly for marketing purposes?
Another likely result of the shift towards being the consumers’ champion will be an increased tendency to require firms to carry out reviews of past business. Indeed, in a separate development, the FSA has just published its guidance note on the new consumer redress schemes which were introduced by the Financial Services Act 2010. That is a new power and will operate in addition to all the other powers wielded in the past.
A disappointing development is that it is proposed that the CPMA should be independent of the Government. It is not clear how independent it could be in practice, given its duty to work closely with the Bank of England and the Prudential Regulation Authority, which is to be a subsidiary of the bank.
But one of the dangers of its nominal independence is that it might be excluded from the jurisdiction of the Parliamentary Ombudsman. The office of the Parliamentary Ombudsman is an important part of the constitutional arrangements of the UK. The Parliamentary Ombudsman produced a much admired report in which she exposed the maladministration of the FSA relating to its prudential regulation of Equitable Life during the 1990s.
Thanks to her, it is still possible that Equitable Life policyholders may receive some compensation. The CPMA should be brought within her jurisdiction so any future maladministration could be investigated and exposed.
It is also disappointing that the FOS will continue much as before. The Government proposes that the CPMA will take on the FSA’s existing responsibility for the FOS.
Here, the Government has got itself into a muddle. The consultation paper says: “It will be important for FOS to remain independent of the CPMA, as is currently the case with respect to the FSA. Its claim to impartiality, and hence its legitimacy in making rulings which is binding on firms, is only credible if it does not favour, or appear to favour, consumers. Therefore it should not be part of a consumer champion.
imilarly, FOS decisions to reject particular complaints will only be credible if it is independent of bodies with, for example, a financial stability objective.”
The Government is right to emphasise that the legitimacy of the FOS depends on its impartiality, which, in turn, depends on its independence. In particular, the Government is right to say the FOS should be independent of the CPMA which will be “a strong consumer champion”.
But the Government has reached the wrong conclusion. It makes no sense to propose that the FOS should continue to be subject to the supervision of the very body from which it should be independent.
On the contrary, the point made by the Government should lead to the conclusion that the relationship between the FOS and the CPMA should be completely severed.
Most people involved in the financial services industry do not regard the FOS as independent of the FSA, because, for example, the FSA makes the rules relating to time limits within which com-plaints may be entertained by the FOS, and is responsible for the much criticised and disliked failure to include a long-stop time limit.
The FSA also appoints members of the board of the company that operates the FOS and has the power to dismiss them in certain circumstances. The FSA must approve the budget proposed by FOS before the start of each financial year.
Further, there is a wide-spread view that the FOS appears to favour consumers. That may not be an accurate perception but it is widely held. The fact that that perception is held should be a powerful argument for correcting it.
The first corrective step should be to sever the relationship between the FOS and the CPMA.
The FOS should then become part of the tribunal system. That would ensure its independence and its impartiality.
In other words, the FOS should become a specialist tribunal, run by the courts’ service under the Ministry of Justice. That could be done without making many changes to the broad way in which the FOS currently operates. But two advantages would be that decisions of the FOS would become appealable and the ombudsmen would apply the law of England, including the law of limitations.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court