Peter Hamilton: Financial services regulation needs drastic reform

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In my last column I urged that the FCA should be properly accountable and the best way of achieving this was to bring it in-house, making it into a government department as part of the Treasury with its own minister, who would be responsive to public pressure and answerable to Parliament.

For those who doubt whether Parliament can effectively hold the Government to account, it is worth considering what is happening now over the Treasury’s intention to cut tax credits in early 2016, so that even with the proposed increase to the national living wage, which will not be fully implemented until the end of this Parliament, most recipients of tax credits will be significantly poorer than they now are.

This has attracted considerable public, parliamentary, academic and media scrutiny, and demonstrates how Parliament, with others, can put pressure on the Government. Whatever one thinks about the merits of this particular issue – and who knows how it will end – it is clear there is pressure on the Treasury. That is how it should be in a parliamentary democracy.

The FCA regulates a huge swathe of the UK’s economy and should be subject to the same scrutiny as the Treasury. It certainly should not be theoretically independent, but subject to considerable control by the Treasury. That needs reform.

Bringing about substantial reform at a national level is likely to be a slow and frustrating process. But it can be done. One has only to look at the dogged determination of Baroness Lawrence’s efforts to obtain justice arising out of the murder of her son more than 20 years ago.

During that period she has fought to bring the murderers to justice and the police to account. Now, the National Crime Agency has been appointed to investigate allegations that corruption in the Metropolitan Police shielded the murderers of Stephen Lawrence. That is another significant step towards the uncovering of the full facts she seeks.

The financial services industry needs to agree on the top two or three aspects most in need of reform and coordinate a campaign to persuade MPs and peers to act. That is easier said than done, but if Baroness Lawrence could make headway in the face of odds that would have defeated a less determined person, it must be possible to do the same for financial services.

So what aspects of financial services regulation are most in need of reform? In my view, first is the need to change the status of the FCA from a so-called independent body into a government department with a minister responsible to Parliament.

The second is surely the Financial Ombudsman Service. For a start, it is unbalanced in favour of the consumer/complainant. The complainant pays nothing when he or she complains and is not bound by the FOS decision. But if it is accepted, the firm is bound to pay compensation up to £150,000. What is more, the FOS does not apply the law but decides complaints on the basis of what it considers to be fair and reasonable. There is no appeal.

Anthony Speaight QC and I have proposed the form of the FOS should be fundamentally changed. Very briefly, we propose all FOS cases be decided by the adjudicators, who already decide at least 93 per cent. The position of the ombudsman would be abolished. Instead, both the customer and the firm would be able to refer the adjudicator’s decision to a new first tier tribunal. If the firm wished to refer the case, it would have to pay the amount awarded to be held by the tribunal, where it would be held pending a decision.

The case would be completely reheard, with examination and cross-examination of witnesses. English law would apply. Customers would not be exposed to a costs order against them. If a firm initiated a reference and lost, it would have to pay the customer’s costs. The money saved by the abolition of the position of the ombudsman would be used to create a legal aid fund to help customers present their cases to the tribunal. Of course, the details would need to be worked through.

Finally, the way in which the system of regulation is financed needs to be changed. At a time when the Treasury is demanding the entire Government reduces its spending, it makes no sense for the FCA to be able to maintain or increase the fees exacted from the firms it regulates. If the FCA were a government department, its costs would be subject to the same scrutiny as all other departments.

Those changes are needed. It will take time to bring them about but if we do not start pushing for them now, they will never happen.

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