The regulator must put more effort and resource into gathering, analysing and acting on intelligence
This is my final piece for Money Marketing, and that fact has caused me to look back over the 40 years during which I have been involved in the retail end of financial services.
Like everyone else with a professional interest in the industry, I have spent much time dealing with the regulators and keeping in touch with what they have been up to.
Over the last 25 years, there have been three regulators in the UK: the Treasury, which delegated the task to the FSA after 1998, then the FSA in its own right from the end of 2001, and now the FCA.
A review of the overall performance of the FSA and the FCA shows neither has done well. Both have been reasonably good at routine tasks such as authorising firms to carry on business in financial services and approving individuals to work in the industry.
But like the FSA before it, the FCA is a huge bureaucracy and designed to carry out procedures; it has never been good at spotting developments in the market in time to prevent misselling to the public and other serious events. The following spring to mind:
- The failure of the FSA in the 1990s to spot a huge market in the inappropriate transferring of workplace pensions to less suitable personal pensions;
- The failure by the FSA over three years (beginning of 1999 to the end of 2001) to carry out proper prudential regulation of the Equitable Life Assurance Society, so causing it to close to new business because it could not afford to honour its promises to guarantee the rates offered for annuities. The Parliamentary Ombudsman found the FSA had been guilty of maladministration. The FSA’s internal audit department concluded the regulator should have done better and should “be prepared to act more proactively… to ensure the interests of customer are properly protected”;
- The failure of the FSA to spot in time that Northern Rock was in financial trouble. Again, its internal audit department reported it should have done better in that there was no proper challenge and a failure to take appropriate action;
- The failure of the FSA to spot that the HBOS business model was flawed and to take appropriate action to save the HBOS group. The report into the HBOS failure concluded the FSA did not appreciate the full extent of the risks it was running and was therefore not in a position to intervene before it was too late;
- The failure of the FSA to take appropriate action to prevent RBS from collapse and effective nationalisation;
- The failure of the FSA to stop the industrial scale of PPI misselling; and
- The failure of both the FSA and FCA to prevent the misselling of interest rate swaps.
Now the FCA is wringing its hands at the prospect of many car-financing deals becoming unstuck, with the probable result that many people will default on their deals and suffer substantial losses. And so it goes on.
What should be done? It is generally accepted that a regulator cannot be expected to prevent every disaster but the scale of the failures listed above calls into question their overall effectiveness at a fundamentally important level.
It is worth comparing the success of the security forces in their ceaseless fight against terrorism. One acknowledges there have been failures to prevent terrorist attacks and many people have lost their lives. But equally, many such attacks have been prevented.
We see evidence of this in the criminal trials arising from successful police work, and we are told from time to time that many other attacks have been foiled. The police and MI5 tell us that the key to their comparative successes is intelligence. They put much effort into gathering and analysing it.
So why can’t the FCA put more effort and resource into getting out there, and gathering, analysing and acting on intelligence?
I accept it is easy to be wise after the event, but if the regulators had been properly in touch with advisers, perhaps by building solid and trusted relationships with individuals, they would have been able to stop at least the misselling of pensions and PPI much earlier and saved many thousands of people from losing colossal amounts of money.
Compared to the difficulties of finding out what potential terrorists are planning in their dark and secret cells, it ought to be easy to discover what is going on in broad daylight and in the open market.
The FCA is a ponderous bureaucracy geared to administration. It ought to be much more fleet of foot and vigorous in its policing function.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk