In a speech at the Annual Lubbock Lecture in Management Studies in Oxford this evening, FSA chief executive Hector Sants said the regulator will take a new approach to conduct regulation.
He said: “We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs. We will do this through using our integrated model of risk analysis and research to identify earlier sources of conduct risk, intervening further up the value chain and scrutinising products at the design stage.
“This approach will be combined with a greater willingness to test outcomes through mystery shopping and on-site visits, which should increase the probability of identifying issues before they gain industry-wide momentum.”
Sants admitted the FSA’s focus has been “too late in the product lifecycle” to ensure it identified issues early enough to prevent consumer detriment.
Sants said the FSA’s treating customers fairly initiative has not delivered “substantial, on-the-ground benefits to consumers”, adding that the new approach will make the retail market work better for consumers.
Sants also raised a number of possible actions the FSA may include in its “cocktail of measures” to address the risks posed by large, too-big-to-fail companies, including higher capital and liquidity requirements.
He suggested an industry levy to pay for a future crisis has the advantage of raising funds from firms in a risk-based manner and avoids the problem of those who fail avoiding paying, although it increases moral hazard.
He said a combination of a pre-event levy and post-event tax may be the best way forward although further analysis is needed.
The out-going chief executive stressed that the FSA should not be judged on the rules in place for firms, which he says are made internationally and in conjunction with the Treasury and Bank of England.
He also warned that future policy and rules will be determined in Europe. “The new European regulatory structure will mean that in the future policy and rules will be determined in Europe, and the FSA, or any successor organisation, will be a locally-based supervisor delivering European rules,” he said.
KPMG head of RDR and TCF Fiona Fry says: “The FSA is very clear they intend to examine all stages of the value chain so firms will need to be able to demonstrate they are treating their customers fairly throughout; not only on sales and after sales processes but also on product development, pricing and rigorous stress testing.
“Now is the time for firms to start remediation-proofing their business. They need to be thinking about how they will incentivise compliant product development and invest in the right people so they end up with a much more coordinated and less risky business and, most critically, senior management must make it clear from the top of the organisation that consumer protection is a fundamental priority.”