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Peter Hamilton: Does the FCA get the right intelligence?

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 

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Peter, you have identified the key flaws in the FCA’s approach to these things.

    Managing risk is turned into an administrative process. This more or less guarantees the next ‘big thing’ will be missed because identifying risks requires a flexible and creative thinking approach to intelligence.

    The knee-jerk reaction to problems is to create more rules/bureaucracy. Whilst it looks good politically, this tends to creates more complexity and places for problems to hide.

    The FCA is inherently risk adverse and this, coupled with the fact it is riskier to take action than wait and clear up later (whilst blaming others), means the default position is ‘no action’.

    All the best for the future, your articles have been very interesting, poignant and well written.

  2. The trouble is, you usually can’t see the FCA’s successes as an absence of a scandal cannot be flagged as a regulatory success. Is the absence of a CIP mis-selling scandal an FCA success? Is a market with 93% suitable advice an FCA success?

    • I would say that the credit for 93% suitable advice is down to the businesses/advisers doing the right and honest thing by their clients, so I don’t really think you can credit he FCA with that…. unless you are suggesting that we would all play by a different set of standards if it wasn’t for the FCA, which I am sure you are not!

    • I think it’s a question of balance, Mr Percival. As Steve D points out, is the FCA really entitled to any credit for the fact that the great majority of advisers do the right and honest thing by their clients irrespective of whether regulation requires that they do so? Apart from anything else, they want their businesses (and reputations) to prosper and grow over the long term.

      Were the FCA’s GABRIEL system worth a light, surely the proportion of cowboy advice would be rather lower than 7%?

    • @Rory, -whilst you were one of the good guys (as is Mark Gould and a few others) and that doesn’t imply FCA staff are “bad” some of their processes are, and remain, awful as are the refusal to accept their own mistakes and resolve them as if they are a commercial business instead of telling us to sort out their processing or systems errors. I have been involved in making a compaint for the last two days over FCS mishandling of the structured depost notification I sent them on 29th April 2017 !!!!! and chased at least twice.
      If I could choose NOT to use them for certain admin issues, I would not as they are a monopoly who seem to be under the mistaken impression we are THEIR employees, when in fact WE pay their salaries via our levies.
      The best thing they could do is move those departments which deal with advsiers nationally out of London and in to regional offices.
      I could have told anyone in London it was highlighly likely the nation would vote for Brexit (I voted remain) simply becuase I talk to a wide variety of people from all walks of Life across the country and not just a peer group of London Centric young graduates who know NOTHING about the world around them.

    • Rory, a fair point and one that would be a little more believable if the failures weren’t so conspicuous. It is difficult to reconcile the woeful lack of action on those failures with the idea that other pro-active, thoughtful and direct action has avoided scandals – if that were the case it should be relatively easy to point to, surely? I probably wouldn’t include the steady, and largely reactive, trickle of guidance around suitability as a ‘success’ in the same context of what we’re talking about here.

      A couple of examples of what I’m referring to, one of a past failure and one a potential future failure. In late 2004/early 2005 I personally raised with the FSA the serious failings taking place in the PPI market. This included clear examples of widespread dubious practices and client detriment, particularly around single premium PPI (we had banned internally because it was viewed as a toxic product). They confirmed they were aware and were looking in to it. Over the next few years the FSA expressed lots of concern and a number of firms were subsequently fined but, most importantly, across the wider market clients continued to suffer detriment. Single premium PPI was partially banned by the FSA in 2009 and things got much tougher around PPI generally. 2009. Four years after my discussion with the FSA when they were apparently already aware. Seriously?

      Looking forward, there is clearly an issue with DB transfers. The FCA’s recent work and publicly shared information (presumably there is a lot more not published) strongly suggests there is an ongoing systemic failure. The current approach is to deal with individual firms and make pronouncements. In the meantime clients almost certainly continue being badly advised on transfers. Recognise the pattern? It’s surely only a matter of time before there is another pension review and tough action. So what’s the hold up? The answer is in my original post.

      Rory, to be clear, I am not suggesting that the FSA and FCA are not good people with good intentions. On the contrary, I think they mostly are, including you when you were there. Where things fall down is the framework they operate within, i.e. the points I made above.

      It would take a brave person to make the changes needed to effect truly positive client outcomes.

  3. The reason why the FCA fails to put appropriate levels of effort and resource into getting out there, and gathering, analysing and acting on intelligence is due to its wilful disregard for and unilateral opt-out from the Statutory Code of Practice For Regulators (the original 2007 edition, not the disgustingly bowdlerised subsequent edition). I quote:-

    The Regulators’ Compliance Code is a central part of the Government’s better regulation agenda. Its aim is to embed a risk-based, proportionate and targeted approach to regulatory inspection and enforcement among the regulators to which it applies.

    Our expectation is that as regulators integrate the Code’s standards into their regulatory culture and processes, they will become more efficient and effective in their work.

    They will be able to use their resources in a way that gets the most value out of the effort that they
    make, whilst delivering significant benefits to low risk and compliant businesses through better-focused inspection activity, increased use of advice for businesses, and lower compliance costs.

    How much of THAT ever happened in practice?

  4. Good luck for the future Peter, I have enjoyed and valued your articles and insight over the years.

  5. All we see are the failures which are many and apparently increasing in size. They tell me the incoming intelligence is a constant stream that is difficult to sort. We hardly ever see results and if we do it often doesn’t appear until years later. Personally I can’t see much change since 1987, apart from the quantum.

  6. Good luck in whatever you do in the future, Peter; I too have found your articles useful over the years.

  7. When you have an entity like the FSA/FCA where the top tier is full of lawyers, bureaucrats, and self promoters with no accountability, they will never look in the right direction.

    They don’t have to really!!! They are to busy slapping each other on the back for a job well done, how invaluable they have been, they will be sorely missed blah de blah de blah

    I am not convinced of the successes Rory talks about, but they do do some good work, with the emphasis on “some” however this falls very short and is swamped by its failures.

    And sorry but its these failures that cost the consumer dear, its these failures that tarnish the industry not theirs, and its these failures why we will never become a profession.

    With a salary bill running at some £101,000 per head, running costs morph into many millions, deniability and accountability to suit the direction of the wind…

    Peter is bang on the money with his assumptions

    • Thank you to all those who have read my column over the years.

      As far as this last piece is concerned, those who have commented have proved my point!

      Best wishes to you all.

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