Peter Hamilton: Counting the cost of the FCA’s failure on unsuitable products


In February, the National Audit Office published a report on how effective the FCA is in dealing with, and preventing, misselling. The conclusions were damning. The summary of the report notes misselling of financial products can cause serious harm, not just to individuals but also to the financial stability of the UK. The summary of the report says:

“The FCA sets objectives for individual interventions and learns lessons from them. But it does not yet systematically draw together aims and success criteria of related interventions, evaluate how they fit together, or link the outcomes of intervention to their costs. This creates a risk that interventions may not be well coordinated, and means that the FCA cannot be sure that it has chosen the most cost-effective way of intervening.”

That measured language does not disguise the sting in the NAO’s rebuke. That is particularly so in light of the FCA’s recently published budget for 2016/17, which is 8 per cent higher than its costs for 2015/16 and of which the largest share is to be borne by advisers.

The starting point for the FCA must be its statutory objectives; one of which is to secure “an appropriate degree of protection of consumers”. One might be forgiven for thinking the cost-effective prevention of misselling would be an appropriate objective to protect consumers. Yet the NAO says the FCA cannot be sure that what it does is cost-effective.

It is fair at this point to acknowledge that much as the police will never know whether any particular action taken will have prevented a crime that does not take place, so the FCA will never know whether a particular kind of misselling was or was not prevented by the action it took. That said, it is still incredible the FCA does not know whether what it does to prevent misselling is cost-effective.

The regulator must have appraisal systems with criteria by which it measures its performance against its objectives. Those criteria must be objectively measurable if the successful performance claimed has any validity. Clearly the NAO did not think the FCA had any such criteria.

“The NAO concluded the gaps in the FCA’s ‘understanding of the costs of its activities could hamper its decision-making’”

The NAO went on to point out the FCA did not have a complete estimate of the direct costs of its misselling work. It does not estimate the overall costs of complying with its regulations and the regulations aimed at preventing the sale of unsuitable products could have unintended consequences, such as discouraging innovations that could benefit consumers.

Thus the NAO concluded the costs of the FCA’s responses to misselling were very substantial but the gaps in its “understanding of the costs of its activities could hamper its decision-making”. On any view, that is a serious criticism but it is something we all pay for –  either directly through the charges paid by firms  or indirectly by their customers – and that makes the failure all the more unacceptable.

The NAO went on to make some basic recommendations, including:

  • The FCA should “develop further its strategic view of the risks of misselling and its approach to tackling them. It should communicate its expectations with regard to misselling clearly and consistently to firms…”
  • It should “develop a stronger understanding of the total costs and benefits of its work, and use cost and benefit information more routinely in its decision-making. This should include detailed evaluations of how regulatory changes affect the costs of compliance. It should use a wide range of data sources to help it to assess how consumer behaviour responds to regulatory interventions. This would support its evaluations of the effectiveness of its work and increase confidence that it is achieving value for money.”
  • It should “formalise its approach to evaluating redress mechanisms, including their costs, rates of uptake by consumers and how quickly they provide redress to consumers. It should set out clear criteria and compare the effectiveness of different types of schemes. This would help it to identify more clearly the factors that contribute to successful outcomes and to make more informed decisions between different approaches.”

The really depressing aspect of this report is that it shows yet again how ineffective the FCA is and the FSA was before it. The hundreds of thousands of words written in the many reports about the regulatory failings since 2001 seem to have brought about no fundamental change in the performance of the regulator of the conduct of financial services firms. Indeed, it cannot answer the simple question the NAO asked: does it deal with misselling cost-effectively?

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of