Recently there has been an ‘end of term’ feel to what the FSA has been writing and saying about itself, caused by the publication of its last annual report (as the FSA) and by the fact that it expects to become the FCA within the next 12 months.
The topics it has been writing and speaking about have included an assessment of its performance and how it plans to develop in the future. This raises the questions: What is a good regulator? How has the FSA done recently? And what does the FCA intend to do to do better?
In his statement in this year’s annual report, Lord Turner reflected on the three and a half years of his chairmanship. He said that those years were dominated by the aftermath of the financial crisis, which “revealed major flaws in the regulatory approach in place in the UK and across the world, and in the intellectual assumptions which underpinned that approach. Putting right those deficiencies has been a key priority, in the UK and globally”.
One of the necessary responses in the UK was to fix the deficiencies in the FSA’s regulatory approach. He said: “As we clearly indentified in our internal audit report into Northern Rock, and as we described again in detail in the RBS report, our pre-crisis approach to prudential regulation was flawed. Over the last four years, the FSA has radically changed its prudential supervisory approach.”
But it was not just its prudential supervisory approach that was flawed. Lord Turner then went on to discuss the conduct of business challenges to be faced by the FCA when it takes over from the FSA. As we all know, the misselling of PPI is one of the most serious chapters in the history of regulation in the UK. Lord Turner acknowledged that it was an illustration of “the ineffectiveness of the FSA’s past approach to conduct regulation, which failed to intervene early enough or far enough up the product development and marketing chain, to address problems before they produced major customer detriment”.
Lord Turner is reassuringly frank about the regulator’s disappointing record during his period as chairman. But if he had gone further back to the time when the FSA was acting as the Treasury’s agent as regulator, he would have had to include the Equitable Life debacle as a chapter in the chronicle of regulatory failures. There can be little doubt that when the report on the collapse of HBOS is published, there will be section that deals with the FSA’s shortcomings. The list of failures is a depressing one.
So far, much has been said about structure and process, but what about people?
The annual report noted: “We provided training and support on the new supervisory approach and processes during March 2012, including communicating the new supervisory behaviours to all staff being more forward-looking, proactive and judgement-based, with a focus on more material risks.” Apart from wondering how one month’s training can possibly be enough to bring about a substantial change in attitude and behaviour, only time will tell how successful all this has been.
On 2 July, FCA designate Martin Wheatley gave a speech to the FSA’s Enforcement Conference in London about the work taking place to prepare for the new regulatory structure.
He said the “FCA’s core purpose is to make sure markets work well so consumers get a fair deal – to do that we will have not only new powers but a new supervisory approach and a new culture”.
Second, he said that the “key to the success of this approach is ensuring that good consumer outcomes are built into the business models of the firms we regulate”.
Third, while much is changing, the FSA’s “enforcement approach and credible deterrence agenda is here to stay”.
Wheatley went on to say more about the new powers conferred by the legislation, which will enable the FCA to act faster to prevent bad outcomes for consumers. In other words, he will have the appropriate powers for the tasks to be accomplished. He described the new supervision model as being one that will enable the FCA “to make forward-looking judgements about the problems that drive poor consumer outcomes”. Everything will be judged with good consumer outcomes in mind.
Getting the culture of the FCA right is the key challenge. Wheatley 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.”
That surely is the crucial requirement – good people working for the regulator.
Trying to distil what Turner and Wheatley have been saying – the FSA has not covered itself in glory over the last 10- plus years but they are trying to secure change for the better. It comes to this, does it not:
To be a good regulator, it must:
Have a deep and intimate understanding of the financial services market and all the firms it regulates
Deal with all firms quickly and efficiently, avoiding bureaucratic and time-wasting procedures
Know what is good and bad in the marketplace and be supportive of the good firms and practices
Set out the necessary rules in as simple and accessible a way as possible
Enforce its rules in an even-handed and consistent manner, so that no one is treated unfairly. After all, the FSA requires all regulated firms to treat their customers fairly and so it should do the same when dealing with the regulated community.
It is relatively simple to get the rules roughly right. They will never be perfect. It is also relatively but somewhat less easy to get the right regulatory tools and weapons in place. Here balance is necessary. Safeguards to protect the innocent and firms doing a proper job from unwarranted interference but enough power to act quickly and decisively to stop, and deal with, crooks and charlatans.
Above all, what is needed is a sufficient number of experienced, knowledgeable and thinking individuals with self-confidence and the ability to make good, balanced decisions.
With those characteristics would naturally come a proper sense of knowing when to back off, to know when all is well. We are talking about that balanced sense of knowing what is right and wrong and having the self-assurance to back it up.
Of course, people like that are few and far between. That is the real and fundamental problem – will there ever be enough of the right people working for the regulator? And that suggests the problem will never be solved.
The good regulator is a mirage or only exists in a place well down the mathematical route to infinity. The reality is different.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk