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Powers of redress put FSA in the consumer’s corner

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

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Is regulation supposed to prevent this from happening in the first place rather than act as some sort of after the event insurance which costs an arm and a leg?

    Point, fine, ban isn’t my idea of effective regulation.

  2. Julian Stevens 6th May 2011 at 2:06 pm

    I quite agree with Evan. The FSA conducts regular visits to the networks, effectively regulating their member firms by proxy (with no levy discounts for the members, who have to pay the network fees as well as full FSA levies). Why can it not do the same with regard to the banks and building societies instead of waiting or something like the mis-selling of PPI to reach epidemic proportions and then effectively detonating a nuclear bomb over the heads of the institutions responsible?

    It all points to the fact that, despite the FSA’s repeated denials, it has for years been targetting IFA’s quite disproportionately relative to the degree of risk they pose. At last, though, the tide may be turning.

  3. Simon Mansell 6th May 2011 at 6:00 pm

    And where might I add does all the money go? A large organisation will always pass it costs onto the consumer so the consumers ends up paying the fine so who benefits. Remember how the Prudential with-profits used its inherited estate to pay missselling claims?

    Well for sure the regulators benefit because thats where the money goes. Would it not be better if the regulator actually regulated rather that prosecuted?

    Also, one needs to be very careful about celebrating powers granted to an unaccountable quango without appropriate judicial review.

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