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Peter Hamilton: FCA needs to be proactive on culture change

Peter Hamilton MM blog

The brave new world of regulation is upon us. On 1 April this year, the Financial Services Authority will change its name to the Financial Conduct Authority.

At the same time, some of the FSA’s prudential regulatory duties will be transferred to the Prudential Regulatory Authority, which will open its doors for business for the first time.

Everyone in the UK must hope that the PRA is able to grapple with its role in a sharper and more business-like way than that exhibited by the FSA. No one wants a repetition of the failure of the FSA to spot and deal with the business model of Northern Rock, or to prevent the hubristic downfall of the Royal Bank of Scotland, to mention only two of the failures of the FSA. We have yet to see a report by the FSA on the collapse of HBOS.

The FSA is a huge bureaucracy and is, as a result, inflexible. Martin Wheatley, the CEO designate of the FCA, is trying to inject a new note of pragmatism and relative flexibility into the way in which the FCA will embark on its new functions.

On 2 July last year, he spoke at the FSA’s Enforcement Conference in London. His speech was about the work then taking place to prepare for the new regulatory structure. Getting the culture of the FCA right, Mr Wheatley recognised was the key challenge.

He said: “I want my staff to have the confidence and backbone to use their judgement effectively, and to be curious about what is going on in firms and the market… understanding the industry better, and the issues that consumers face, will allow the FCA to deliver more effective regulation. I want to lead an organisation of people who are themselves conscious consumers, and who understand that the firms they interact with have an impact on people’s lives.”

Will he succeed? Will the financial services industry and the public look back on 1 April 2013 and say the FCA really has made a positive difference to the way in which the financial services industry operates?

The early signs are mixed. Even if Mr Wheatley does manage to bring about the desired cultural change, there are pressures created by statute which reinforce the tendency to be inflexible and bureaucratic.

A few days ago, the FSA issued a paper in which it is seeking feedback on guidance relating to the making of a super-complaint under section 234C or a reference under section 234D of the Financial Services and Markets Act 2000 (the Act).

A few words of explanation are called for. These two sections were inserted into the Act by the Financial Services Act 2012, the latter Act being the vehicle by which this government is bringing about the changes it has wanted to make in the regulatory scheme.

Section 234C has introduced the concept of a super-complaint. The idea is simple. The Treasury will designate consumer bodies which represent the interests of consumers. Any one of those bodies then has the standing to make a complaint to the FCA “that a feature, or combination of features, of a market in the [UK] for financial services is, or appears to be, significantly damaging the interests of consumers”. That means almost anything which is damaging to consumers, including conduct.

Under section 234D, the FOS has a similar power to refer to the FCA a regular failure by one or more firms to comply with their regulatory duties.

When the FCA gets such a super-complaint or reference, the Act requires it to publish a response setting out how it proposes to deal with the matter, giving its reasons. That must be done within 90 days, unless it considers that the reference is “frivolous, vexatious or made in bad faith”.

The Act also requires the FCA to issue guidance about the presentation of a super-complaint or reference. So, doing its duty, the FSA has issued the consultation paper which runs to 19 pages.

The guidance could have said simply that it will consider those complaints and references on their merits, will seek more detail or evidence if necessary, and will publish its conclusions and proposals for action within 90 days. That would have been enough.

But the FSA has created a bureaucratic procedure including unnecessarily detailed definitions of what can and cannot be the subject of a super-complaint or reference, what evidence will be required and what action it is likely to take.

There are at least two potential dangers lurking in the procedures for super-complaints and references.

The first is that the FCA will rely on getting super-complaints and references before it takes any action in the market. Thus, something like the PPI mis-selling scandal would not even begin to get dealt with until a consumer body brings a super-complaint, and the FCA spends another 90 days investigating the matter.

In an ideal world in which the staff in the FCA are “curious about what is going on in firms and the market” (as Martin Wheatley hopes), someone in the FCA would raise the alarm about that sort of mis-selling long before a super-complaint comes in.

And what about the individual complaint? Would the FCA simply park it because it comes from an individual, without investigating whether it is an early sign of some mis-selling already common in the market.

In that ideal world, the FCA should have an effective mechanism for gathering and reviewing what is going on in the market, and the incidence and content of individual complaints and what whistle-blowers are saying.

Perhaps there should be a regular meeting of the right people to sift through it all, and to spot where things are going wrong. But the impression most observers get is that rumours of a particular problem, like the mis-selling of a particular product, circulate amongst practitioners.

Then the media begin to write about it, and only some time after the papers are calling for action from the regulator, does it begin to investigate the issue. By then thousands of consumers have suffered damage and loss.

Ideally, therefore, the FCA should be much more pro-active than the FSA has been, and super-complaints and references from the FOS should not be necessary. They should be seen only as failsafe mechanisms.

The second danger is that it will have to put sufficient resources into investigating super-complaints and references so that it can satisfy its statutory duty to respond with proposals for action within 90 days. That may mean that it will have to divert staff from other tasks.

The FSA is notoriously slow in dealing with the relatively routine, but important, tasks such as processing applications for approved persons’ status, and the re-approving of individuals when they move after the firm they have been with goes under. It would be a serious matter for the industry as a whole if the FCA had to divert already scarce resources from those areas in order to deal with a spate of super-complaints.

Let’s hope, therefore, that Martin Wheatley’s aim of achieving the necessary culture change comes about soon, that it is never necessary for there to be a super-complaint or reference from the FOS and, most importantly: that the FCA improves on the FSA’s performance of its routine functions.

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

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Did the FSA “fail to spot and deal with the business model of Northern Rock” or was it more a case of failing to to take any notice of all the information submitted to it, failing to recognise the significance of that information and failing to act on it? However you look at it, it’s a litany of fail, fail, fail. The only thing it didn’t fail to do was to use hundreds of thousands of pounds of OPM to pay off Clive Briault with a massive golden parachute.

    How about Martin Wheatley declaring unequivocally that one of the fundamental differences between the FSA and the FSA is that there’ll be no more rewards for failure? That would surely be more constructive than uttering decidedly unhelpful soundbites such as shooting first and asking questions later.

  2. If the FSA/FCA does its job properly it should not even be contemplating the use of a ‘super complaint’ procedure.

    In its current guise the FSA/FCA is a pointless organisation, acting after the event and bringing in procedures that suffocate the life out of the industry.

    If the purpose of regulation is to try and instill confidence into the market then the FSA’FCA must become proactive to prevent miselling scandals and business model collapse ever happening. Once they have happened the confidence is gone.

    It needs to start ‘rubber-stamping’ products so they are fit for market and suitable for the retail market and working closer with the larger institutions to reduce the chances of an event that has a detrimental effect on the economy as a whole.

    Allowing everyone to continue to play on a pitch with no visible markings will not provide the results the industry needs.

  3. Soon there will be no FS in Britain.
    Upside…. No more need for mindless bureacracy or Quango masters.

  4. derek Bradley ceo Panacea Adviser 12th March 2013 at 12:49 pm

    A well observed piece as usual from Peter.

    It will be interesting to see if the FCA read the Regulators Code. This is an important document and should be considered by the FCA, it was not by the FSA..

    The regulators code makes interesting reading.

    Its aim is to embed a risk-based, proportionate and targeted approach to regulation and enforcement among the regulators it applies to.

    The term ‘regulator’ is clearly defined in the code as any organisation that exercises a regulatory function.

    This does not apply in Wales, Scotland, and Northern Ireland!

    A regulator is not bound to follow a provision of the Code if they properly conclude that the provision is either not relevant or is outweighed by another relevant consideration.

    Importantly, the Code does not relieve regulated entities of their responsibility to comply with their obligations under the law.

    The code is based on the Hampton Principles and states regulatory activities should be carried out in a way which is transparent, accountable, consistent and proportionate; and that regulatory activities should be targeted only at cases in which action is needed.

    The following are among its stated aims and intentions consideration-

    To act as an enabler to economic activity.
    To consider the impact that their regulatory interventions may have on economic progress, including the costs, effectiveness and perceptions of fairness of regulation.
    They should ensure that any decision to depart from any provision of the Code is properly reasoned and based on material evidence.
    Where there are no such relevant considerations, regulators should follow the Code.
    They should only adopt a particular approach if the benefits justify the costs and it entails the minimum burden compatible with achieving their objectives.
    Regulators should seek to reward good levels of compliance by way of lighter inspections and reporting requirements where risk assessment justifies this.

    They should also take account of the circumstances of small businesses, including any difficulties they may have in achieving compliance.

    The Regulators code of 2007 has been overlooked/ ignored by the FSA. It spells out clearly what it is not being applied to the thinking of the FSA when it established the framework for the RDR. Will the FCA do likewise?

    Or has the FCA concluded that the concerns of so many, including MP’s are not relevant or are totally outweighed by “other relevant” considerations?

    You can read the code via this link: http://v2.panaceaadviser.com/img/20/documents/Regulators%20Compliance%20code.pdf

  5. So the FCA is damned before it starts. The legal profession are sharpening their pencils and reviewing the regulations to ensure the new regulator gets just as hamstrung as the FSA so it cannot effectively regulate against the fraudulent and greedy who are likley to be their clients.
    Civil servants who draft leglislation are another class of interested incompetents who keep their jobs by drafting regulations that have to be reviewed later on as it either has unintended consequenses or provides so many inconsistancies that the legal profession has a field day.
    I want the FCA to be able to suspend, prosecute, ban or fine anyone or any organisation who attempts to steal from clients (this includes undisclosed fees and costs) mislead investors or provides unregulated advice on risk based investments, including self serving share tips and boiler room operations. Anyone with a website who proports to advertise any investment future returns will have to have concrete evidence and full disclosure to back this up, otherwise Jail.
    The disconnect between the FSA and Parliament has been huge, but Mr Wheatley seems to understand this is not good for the FCA.
    Lawyers, keep out, a properly run regulator will provide slim pickings.

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