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Nic Cicutti: We need a brave and tough regulator

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About 15 years ago, I received a call from a functionary at a newly-formed regulatory body: would I like to speak at its first “town hall” meeting in Bristol? The FSA, then in its infancy, had decided to embark on a meet-the-people tour of Britain.

And so it was that several months later I stood on the same platform as FSA chairman Howard Davies, FSA consumer relations director Christine Farnish and PIA non-executive director Amanda Davidson, quaking in front of several hundred Bristolians as they bombarded the panel with difficult questions.

The meeting was dubbed a huge “success” and two more were held in the course of 1999, although I don’t recall the FSA persevering with the concept after its third run-out in York in March that year. Certainly, Sir Howard, as he later became, never went on the road again after his first Bristol gig.

In fact, since then he is no longer in the regulatory frontline at all, having decamped to France to lecture on the subject, following several years in charge at the London School of Economics. As they say: “If you can’t do, teach.”

Christine Farnish has also left financial services, after a confused trajectory that took her to the NAPF and Barclays, while picking up non-exec directorships and sinecures from sources as varied as the Family and Parenting Institute and the Civil Service Commission, Abta, Consumer Focus and Aggregate Industries, where she presumably contributes her insights into asphalt, concrete and paving. Nice work if you can get it.

Only Amanda is still bravely soldiering on, recently transferring from the FSA board to that of the new Financial Conduct Authority. She also previously served on various PIA bodies. In becoming one of the longest-serving directors within the regulatory establishment, she is probably in line for a damehood. If not, she deserves to be.

Quite whether the FCA will mark a radical new departure for Amanda and the 3,000-odd staff who have transferred over from the FSA is open to question, however.

Over the past few months we have seen a number of contradictory comments emanating from the new regulator. On the one hand, its incoming chief executive Martin Wheatley talks about more hands-on regulation, where the FCA will “be much more proactive, acting earlier and more decisively.”

On the other hand, he has given interviews in which he points out – correctly – that simply fining sections of the industry for regulatory failures does not work effectively. The cost of fines ultimately is either borne by shareholders or by consumers. Only rarely do those responsible pay the price of their failure to oversee the sales activities of their staff.

This despite the fact that one of the striking aspects of so many mis-selling scandals of the past two decades was the way most were well signposted long before they came under the FSA’s belated microscope.

PPI is a classic example of this. Journalists were writing about PPI at least 10 years ago. Yet no action was taken by any of the major banks involved, despite the issue staring them in the face for a long time. And no senior executive bit the dust for a catalogue of failures that is costing the banks many billions to put right. Had the regulator listened to scribes, the bill would only have been a fraction of this.

PPI also raises another crucial question, that of the FCA’s much-vaunted promise to intervene in the marketing of products where it believes they are harmful or confusing to consumers.

There are two aspects to this. The first is that the idea of PPI itself was not a bad one. Arguably, some people would find it highly beneficial to insure their loans or credit cards against the possibility they might become ill or lose their jobs.

The real problem, however, was not with the cover itself but with a confluence of factors that were never addressed by previous regulators.

First was the way it was designed: it was deliberately structured on a single premium basis, with all costs loaded on the policy at the start and consumers having to pay it back over the lifetime’s policy. This made it highly uneconomic, with PPI premiums making up almost 50 per cent of some personal loans.

Second was the fact that claims experience was very poor: a report from Citizens’ Advice found that PPI policies were less likely to pay out to claimants than any other protection product on the market.

The third factor was the hard sell technique from the banks themselves. Their staff used every trick in the book to ram these products down the throats of unsuitable customers.

The reason for mentioning these issues is that while Martin Wheatley has said that, unlike Hector Sants’ comments about the FSA, he does not intend to rule by fear and he favours light touch regulation, the reality of the market is that it does not respond to carrots.

If Wheatley genuinely wants to establish greater long-term consumer confidence he will need to be incredibly quick to intervene, pro-active in terms of assessing product issues and hard on those who err, if only to show he means business.

Arguably, it did not need a new regulator to deliver this, just a better old one – without the town hall meetings.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. RegulatorSaurusRex 11th April 2013 at 10:05 am

    “First was the way it was designed: it was deliberately structured on a single premium basis”

    Er… and on a monthly basis.

  2. Firms need a proper working relationship with the regulators.

  3. I don’t think the FCA could ever be accused of not having been either tough or brave. Its major failings were that it:-

    1. didn’t listen (or at least appeared not to listen) to warnings from third parties,

    2. it largely ignored (and certainly wouldn’t publish) all feedback submitted in response to its “consultations (claiming instead merely to have “taken them on board”),

    3. it largely ignored or just casually dismissed all and any representations from AIFA,

    4. it failed to act even on the findings of its own ARROW visits (e.g. the one to KeyData in 2007),

    5. it wasn’t in any meaningful way accountable to any outside body and even now the powers of the TSC are very limited,

    6. it steadfastly ignored the Statutory obligations of the Code of Practice For Regulators (rumours abound that for some peculiar reason it’s exempt from the Code ~ why?),

    7. It spent OPM as if it were Monopoly money and made no effort to economise in any area at all (remember its £1m stationery bill in 2010?),

    8. it certainly held none of its own people to account for the derelictions of duty (the notable exception being Clive Briault, and look what he got in the way of a golden parachute),

    9. Its Cost:Benefit Analyses were a total sham (a prime example being its estimated costs of implementation of its RDR, originally £600m yet now £2.6Bn) and

    10. It’s taken virtually no notice of pleas from the IFA community that we’re being strangled by excessive bureaucracy and red tape whilst the banks were allowed to get away with sales and lack of TCF practices for which most IFA’s would have been fined and/or struck off.

    There’s more, of course, but you get the picture. Will the FCA be any better? We wait in hope, if not expectation.

  4. @ Julian
    Julian you are a proper investigative journalist.
    If you decide to change career, you should have no problem finding work.

  5. ‘We need a brave and tough regulator..’

    Speak for yourself mate. I need a lottery win and a very long holiday.

  6. My first thought was a tough regulator required for the press to keep reporters in check, but no, they still think they do not need any regulation. But it should be self-evident that financial reporters should be regulated by the FCA. When I read some of the junk in personal finance pages and I think of all the people who must act on the basis of some of that stuff it’s quite appalling to think that they are not regulated.

  7. What this industry needs is to go back to Square one, re-adopt the Fimbra rule book, which was in plain english and only 1 inch thick, discard any opportunity for any organisations or individuals to be anything other than an IFA service and use our fees to actively promote IFA as the only method of obtaining financial advice, re-introduce a commission system which is the same for all providers products, limit the charging structures of product providers to a maximum permitted level, I would deem 1.5% pa maximum AMC and let us do our job, in addition a period of calm reflection on the total screw up that RDR has become.

    Too many pundits, regulators and politicians think they know how to do our job, protect clients from dieing too soon, suffering a critical illness or loss of income through incapacity, assist them to save into sensible asset allocated pensions and investments in order to enjoy their autumn years and protect their estates from the vicious state sponsored theft that IHT has become.

    That is what this industry needs, not more regulation !!!

  8. Actually, we need a sensible and balanced regulator.

    One that’s also less resistent to the consumer lobbyists (inc the FSCP).

    For them to spend our money with less alacrity wold be a sizeable bonus.

    What’s the odds?

  9. Meant ‘more resistent’ sorry.

    Do I qualify as a regulator now……did I pass the test?

  10. I could not agree more with your comments on the causes of PPI mis-selling, and with the FSA’s appalling failure to step in sooner.

    Sadly, I’m unconvinced the FCA will handle future mis-selling scandals any better!

  11. A piece worthy of the term ‘journalism’, for once…

    I remember a conversation in 2005 with my then FSA relationship manager about the problems with PPI. The FSA were fully aware of the issues. Not just in passing but fully aware. They opted (by default, I’m not suggesting an actual decision was made) for a passive approach, hoping fines and pronouncements would have the desired effect.

    Even a basic understanding of behavioural economics at the firm level would have told you the result. There was a feeding frenzy, thinking was not part of the equation and it would have taken a brave executive or manager to say ‘no’… Option 1 – sell as much PPI as you can, look good, make profits, get paid a good salary, match your peers. Option 2 – reduce or stop PPI sales, look bad, reduce profits, reduced salary/get sacked/reduced prospects, look like a dork. Hmmm… give me a moment…

    Interesting that the FCA is looking at the behavioural side of things. One question though. What is it that drives regulator’s behaviour and is that conducive to real results?

    I would suggest that behavioural problems at the FSA/FCA also need to be addressed. How much is driven by politics, the need to look good, no accountability for decisions, guaranteed salary and benefits, and the expectation of future roles in the industry it regulates (at ll levels)?

    Acknowledging one’s own weakness is the first step to wisdom.

  12. You have to bear in mind that there is probably one regulatory supervisor for every 200 financial services firms in the UK. Things will get missed, the key is focusing on the right issues and maintining an appropriate risk appitite.

  13. A lot of good comments so far. Mic, how does it feel to get positive comments on the whole for once rather than negative?
    Back to your olds ways next week or sticking to a NMC (New Model Nic)?

  14. All the behavioural economics stuff is the present equivalent of the FSA Town Hall meetings Nic.

    Expect it to be quietly dropped when the proverbial hits the fan again.

    An institution’s culture can only truly be changed from within and that applies to regulators as well as providers.

  15. Nic probably appreciates positive comments from those who manage to spell his name correctly, Fil.

    As for the compliment elsewhere on my prowess as an investigative journalist, it’s just a question of remembering ~ and there are many FSA failures to remember. Perhaps I might be suited to a job along the lines of the Night Crawler, as played by Darren McGavin in the 70’s TV series set in Las Vegas.

  16. PPI not just single premium but also monthly… big cause of miss-selling was that many people didn’t even know they had it, it was just added to their debt they weren’t actually asked (or in my case I was asked said NO and they added it anyway)… anyway thats an old issue. Nick you don’t half dribble on about stuff that has already been spoken about… do love how you keep showing up your lack of knowledge though… does make me chuckle.

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