Under pressure: Is the FCA’s growing remit hurting regulation?

WEB_280716_CoverStory_Image1

Financial services firms have raised concerns the FCA’s ever-expanding remit could be hampering effective policymaking as the regulator is increasingly being stretched too thin.

The regulator’s scope has grown steadily since its inception in April 2013 as policymakers continue to increase its oversight of the financial services sector. It has taken on regulating consumer credit companies from the Office of Fair Trading, had the Payment Systems Regulator subsumed into it, and now has powers  over competition.

In the most recent Budget it was told to take control of regulating claims management companies from the Claims Management Regulator – a unit in the Ministry of Justice – and it must prepare for the fallout from negotiations over the UK’s exit from the European Union.

Yet the regulator’s widening responsibility has occurred against a backdrop of marginal increases in staff numbers and high rates of staff turnover.

So, what can the regulator do to handle its increasing workload? Will advisers have to accept they may have to pay more if they want more effective oversight from a better resourced FCA?

Resource issues

Issues with resourcing are becoming evident in both internal and external reports about the FCA’s performance.

One suggestion for improvement in the Complaints Commissioner’s annual report, released this month, was that the FCA should more adequately resource its complaints department.

Commissioner Antony Townsend says in the report: “The FCA complaints team faced both a significant turnover of staff and a significantly rising workload, in the context of a year in which the organisation as a whole faced some significant criticisms and uncertainty.

“My observation, gleaned from studying the FCA’s internal complaints papers and the interactions of my colleagues with FCA staff, is that these factors increased the FCA’s tendency to defensiveness in the face of criticism.”

The regulator’s own report on its service standards in the year to 31 March detailed resourcing issues within its call centre.

The report said that in February the FCA fell short of its email service standard – replying to 90 per cent of emails from firms within two working days – because of a high volume of telephone calls leading to it shuffling staff around its various contact channels.

As a result, it is hiring a part-time telephone team.

WEB_280716_CoverStory_Graph

Authorisations is another area where the regulator has been forced to boost staff numbers to meet unexpected demand. Asked at the annual public meeting last week why the auth-orisations process was “slow and time-consuming”, retail and authorisations supervision director Jonathan Davidson said that in some cases the volume of firms seeking authorisation had exceeded the regulator’s expectations.

Davidson said: “For example, 13,000  more firms applied to become part of the consumer credit market than we were expecting. What we have done in response to the volume question is we have added staff.

“We have also started to look at our process to see if there is anything we can do to speed it up.”

Money Marketing has also witnessed signs of strain in other parts of the organisation, with the FCA’s Freedom of Information Act team struggling to keep up with the volume of requests it has received.

While staff numbers are a problem, those in the market consider high turnover also has a part to play in the regulator creaking under the weight of its growing remit.

According to its most recent annual report, staff turnover at the FCA in the 12 months to 31 March was 11.5 per cent and 36 per cent of its current employees have been with the FCA for two years or less.

Independent regulatory consultant Richard Hobbs says it is easy for the private sector to prise people out of the FCA and describes the regulator as a “revolving door”.

Hobbs says: “The FCA is a training ground for the compliance teams of the big firms in the industry. Because of that its turnover is high. If there are stresses and strains with resour-ces it is not necessarily the number, it is the through flow resulting in people being relatively inexperienced.”

“That is because the industry poaches their best people. If the industry doesn’t like the inexperience of the people in the FCA, then stop poaching them.”

For Bovill managing consultant Prem Griffith, who worked at the regulator for 10 years until 2014, the FCA has a difficult balancing act to achieve between being a public sector body and retaining good staff.

He says: “It is located in London so it is competing with the bigger financial services firms, who can generally dangle a bigger salary and package in front of good staff. So retaining good staff has always been a problem because the regulator should not pay top salaries, but it does need to pay a competitive salary.”

The regulator’s planned move to Stratford in east London in 2018 is likely to add to staff retention problems, Pinsent Masons senior associate Michael Ruck suggests.

WEB_280716_CoverStory_AdviserView1

He says: “The question that flows from the move is how do they intend to retain staff? They have got 11.5 per cent turnover in Canary Wharf. They move further out of London. Is that retention rate going to increase because the travel costs for individuals are going to become too high? Will the length of travel time be problematic? Or does everybody move to the east of London or Essex?”

Threesixty managing director Phil Young adds that visibility of the regulator to the sector is important but so is the quality of staff.

He says: “It is a combination of not just pure numbers but having the right people in there, and if they have got such high staff turnover it might be that they have got the bodies in place but there is something wrong with how they are paying them or [with attracting people]. There is something not right that there is such a high turnover of staff.”

Staff turnover is a particular problem for large firms that can experience frequent changes in case managers. One former FCA employee, who left within the past two years, shed some light on what resources the regulator allocates to these firms, explaining that a firm categorised in the medium- to high-risk bracket would have much less than the equivalent of one full-time staff member assigned to it.

More money?

Should advisers simply accept they might have to pay more if they want a better-resourced regulator?

Young says: “The sessions [the FCA] runs out in the field are well-received and should continue, but there are not a lot of footsoldiers out there in terms of supervision so advisers don’t necessarily want to pay for it.”

While he concedes the regulator does not have the resources to monitor small advice firms closely, the suitability of advice review, which covers 700 advice providers including 500 smaller firms, is a good start.

Young says: “If advisers knew they were paying more money for a better-resourced FCA that could police the sector and the knock-on effect would be a reduced [Financial Services Compensation Scheme] levy in the long-run, that feels like a reasonable trade-off.

“The issue for advisers is they have seen regulatory costs slightly increase at the same time as the FSCS levy increased a lot and there does not seem to be more resources being diverted into the adviser sector as a trade-off for those increased FCA costs.”

Hobbs does not think advisers should have to pay more for a better-staffed regulator, citing a tendency for tighter regulation to be put forward as the answer for most things that go wrong in financial services.

WEB_280716_CoverStory_AdviserView2

He says: “If that is the answer to everything then you must accept the corollary that regulatory bodies struggle to keep up.”

As for anticipated work coming from the UK’s decision to leave the EU, the regulator is, at this stage, playing down the effect this will have on the organisation.

At the annual public meeting, chief executive Andrew Bailey said resourcing of the FCA following the Brexit vote was a case of “suck it and see”.

He added: “It’s not our intention that Brexit and the work that goes around it will distract us from our obligations.

“We have statutory obligations in the UK. I am not going to suspend the pursuit of our statutory obligations to start giving all our time and effort to the European process because that would be wrong.”


Bailey fights back against calls for FCA break-up

MPs in the influential Treasury committee are calling for the FCA to separate out its enforcement division following a damning report into the collapse of HBOS.

In a report published this week the committee says an “independent enforcement function” should sit between the FCA and the Prudential Regulation Authority.

It says the current system – where one body supervises, applies and prosecutes the law – is “outdated and can be construed as unfair”.

It continues: “Separation would allow all three regulators – the FCA, PRA and an enforcement body – to enjoy much greater clarity over their objectives.

“There is a danger, especially with the FCA, that its multitude of objectives and initiatives are leading to regulatory overload. An FCA with fewer objectives, and a single separate body responsible for enforcement, would probably result in better accountability and better outcomes.”

The report adds: “The Treasury committee expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body.”

However, when asked at the regulator’s annual public meeting this month if some of the FCA’s functions would be better served in different agencies, FCA chief executive Andrew Bailey was against the idea.

He said: “We have had a lot of changes in the institutional structure of financial regulation. I have just finished 31 years at the Bank of England and now I am starting a new career. In 31 years we are on the fourth system of financial regulation in my career, so that tells you that the institutional structure has not yet achieved a degree of stability.”

Bailey praised the existing twin-peak regulatory system. He said: “It works because it creates an appropriate degree of specialism in the two agencies. The FCA has been asked to take on regulation of claims management companies. We have got to have some framework to think about how we will do this otherwise you are attracting this portmanteau of stuff. We have got to have a real unifying philosophy.”

In a statement released after the committee’s report, the FCA says the separation of enforcement would potentially lessen its ability to be an effective regulator.

It adds: “We believe that locating the supervision and enforcement functions in the same organisation, with shared organisational priorities, optimises co-ordination, and the ability to deliver the right regulatory response.

“The practical and legal issues arising from separation – for example, in terms of information sharing – would potentially impair the efficient, effective delivery of that response.

“Having both enforcement and supervision within one organisation has been the adopted model by global regulators who accept the need for close co-ordination between the separate divisions.”