We are about to witness the dismantling of one regulatory regime under the FSA and the creation of a new regime under the auspices of the Bank of England and a new Consumer Protection and Markets Authority.
It will take two years to get the basic legislation on the statute book to create the framework for the new regime and probably another three years for the CPMA to create its own rulebook, relying on relevant FSA rules on an interim basis.
Intensive and intrusive regulation is here to stay for the time being while we have a debate about what the new regime needs to do.
What can we learn from the old regime to inform a useful debate about the next era of financial services regulation?
The current regime has been too heavily focused on protecting consumers from detriment in a market where manufacturers and distributors know much more than their customers
The regulatory response to this market imperfection, with its perceived information asymmetry, has been to force stringent conduct of business regulations on the industry, with a heavy emphasis on ever more information disclosure and intensive supervision from the regulator.
Some of this focus is justified. Imperfect markets have episodes of bad behaviour and need to be regulated. But intensive and intrusive regulation has other impacts. While driving up the level of protection afforded to consumers who engage with the industry, it has also driven up the costs of that engagement.
A recent report by Charles River Associates for the Association of British Insurers estimated the average cost of providing advice to a consumer was £670 and, on average, the advice process took seven hours to complete.
However, there is another side to this coin. Charles River also states that around two-thirds of consumers are unable to engage with the industry as they cannot afford to.
The FSA’s RDR impact analysis suggests that doing away with indemnity commission will disenfranchise a further 11 per cent of consumers from accessing advice and that the cost of advice will rise in the short term.
The net result is that some consumers who already engage with the industry will get even more transparent disclosure of costs and have even greater trust in the market but, overall, fewer consumers will engage as a result. Is this good public policy as we enter a period of austerity?
Part of the underlying problem lies in the fact that not enough consumers engage voluntarily with the savings and protection market. There is a lack of demand, so the productivity of advisers is low as they have to search hard for customers and for business to sustain their livelihoods.
The fact that new business and new money is hard to find makes the need to focus on managing and moving existing money all the more necessary. This leads to questions of consumer detriment and the need for ever tougher regulatory responses – a vicious circle.
Australia has one way of dealing with the demand issue – compulsion. That has been seen as a political step too far in the UK but policymakers are taking half a step with auto-enrolment into personal accounts, so why not take another half-step and introduce simplified advice proposals that enable more consumers to engage more cheaply and quickly with the financial services industry?
One reason why this is difficult for the FSA is it has no statutory objective to do it. Its objectives predominantly focus on consumer protection and its rules are written for that purpose.
Here is an idea for the industry and policymakers to debate. The market failure is on the demand side of the market and it leads to the need for stringent controls on the supply side. This exacerbates the demand-side failings. Why not address the demand-side issues?
Give the CPMA an additional statutory objective to increase consumer engagement with the savings and protection industry and to support innovation by the industry that leads to greater consumer engagement.Time taken to deliver full advice by productSource: Charles RiverAssociates calculations. Research by Charles River Associates on behalf of the Association of British Insurers, Cost of providing financial advice:Identifying and quantifying the costs of the key components of a full advice service, May 2010
Mark Penton is director of Lansons Public Affairs and Regulatory Consulting.