On April 18, the FSA fined Norwich & Peterborough Building Society £1.4m and agreed a £51m redress package for customers. This signals a shift in the FSA’s philosophy from firm supervisor to consumer champion.
Combining a fine with consumer redress illustrates the FSA’s growing willingness to address the consequences and causes of non-compliant behaviour. The FSA also recently used new powers under section 404 of the Financial Services and Markets Act, introduced by the Financial Services Act 2010 to provide consumer redress if it appears there has been widespread or regular failure by relevant firms to comply with FSA requirements.
There will undoubtedly be more such packages in the pipeline. In the FSA’s view, limiting censure to fines and public naming and shaming is not a credible deterrent where consumers remain affected. Dealing with both issues as part of the enforcement process helps deter misselling.
Packages of consumer redress are costly to firms and have significant adverse consequences in terms of the operational resources required to identify those customers with a right to redress and in calculating and commun-icating the ex-gratia payments due to them.
The FSA says firms cannot treat customers fairly unless they pay attention to their financial circumstances and ability to bear losses when investment recommendations are made. It believes this is the only way to prevent widespread misselling, although pressures on Financial Services Compensation Scheme funding levies make it unclear who will pick up the tab in circumstances where firms do not have the money to compensate customers in the way Norwich & Peterborough Building Society has agreed to.
Norwich & Peterborough has also agreed to commission an independent review of sales by its financial advice service and will pay redress where appropriate. This signals the FSA’s change of philosophy from a supervision-driven regulator to one that controls all aspects of a firm’s conduct, including how it treats customers when things go wrong. In light of the Norwich & Peterborough announce-ment, firms should review their products and sales processes and, in some cases, consider whether a product is suitable for their customer base at all or whether it should be limited to a specific type of customer.
This is a sign for the industry to get its house in order. It is unclear how willing the FSA will be to use its formal powers under section 404, due to the time pressures involved.
Where problems are identified and require reporting to the FSA, firms would be well advised to consider the nature, scale and impact of the problems and, if necessary, what consumer redress package the FSA might accept.
The consumer redress packages seen this year, together with the FSA’s proposed policy on product intervention, indicates a change of behaviour away from firm supervisor and regulator to consumer champion. Quite how this change might affect the proposed operational principle of the new Financial Policy Committee/Prudential Regulation Authority – that “consumers of financial services are ultimately responsible for their own decisions” – remains to be seen.
Suzanne Macdonald is partner and head of financial services regulation at TLT