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Teething troubles

On the weekend, the FSA marked its first anniversary as the UK&#39s single financial regulator. It has certainly not been a dull year for the folks down at Canary Wharf. Between crises blowing up in their faces and seeing their mandate expand to unprecedented proportions, regulators have had their plates full.

So, how has the world&#39s biggest single financial regulator performed in its infancy? The general consensus appears to be fair to middling, but with plenty of room left to improve.

As its first birthday slides by, it is fair to say that the current image of the FSA is not one it is likely to cherish. In the last month, it has been accused of falling asleep on the job by Conservative MPs over failing to warn consumers earlier about the risks of split-cap investment trusts.

It has been lambasted by the Consumers&#39 Association over its decision not to launch a full-scale review of mortgage endowment sales and has seen a formal complaint from the CA handed to the Treasury over this contentious matter.

IFAs have rounded on it over its slow response to the burgeoning professional indemnity crisis, rejecting the limited and temporary steps the regulator has taken to reform the regime.

It has been criticised across the board for its performance over the Equitable Life debacle. Even if one accepts that it inherited much of what has happened from previous incarnations, there are many who say the FSA has simply dropped the ball and not sorted out the situation. Some say the Equitable is an example of where the FSA has failed in its risk-based approach to regulation.

ABI deputy director general Stephen Sklaroff says: “I would agree with the FSA that it is not trying to run a no-failure regime. But where the regulator has a role and perhaps has not done as well is in sniffing out problems of a systemic nature. Being able to nip problems in the bud is at least as important in having a good rulebook in place.”

But the regulator has received applause from some quarters for its decision to abandon the defined-payment system in favour of Aifa&#39s menu system for the remuneration of IFAs. While it has pushed through its plans for scrapping polarisation, the move to accept that consumers are unwilling to pay fees for advice has been welcomed by the industry.

Whitechurch Securities chairman Kean Seager says: “It was ludicrous that the proposals for the DPS were included in CP121 in the first place. It was so obvious that, if implemented, it would kill us all. It is seriously worrying it was put together at all. Looking to the future, it does not inspire me with a lot of confidence.”

On the whole, even its fiercest critics would give the FSA at worst a score of five out of 10 for its first year report card, although virtually everyone adds the proviso that there is much room for improvement.

Most would concede that the FSA has been faced with a massive task in bringing together nine regulatory bodies and recognise the job it has accomplished.

Putting together the rulebook, which is effectively the bible governing the industry, has also been a huge task.

Credit is also due for the design and implementation of its risk-based attitude towards regulation.

And finally, the rate at which it has seen its remit expanded by the Treasury and European directives has been staggering. When it adds on the regulation of mortgage lenders and mortgage and general insurance brokers, including all non-life protection intermediaries, estimates have been as high as an extra 90,000 firms coming under its umbrella.

But even while recognising these feats, the critics are vociferous. Labour MP and member of the Treasury select committee Jim Cousins says: “They have been quite robust in efforts to regulate and protect consumers but when they have been faced with an actual crisis in confidence they have tended to fumble.”

One of the loudest opposition voicesthroughout the last 12 months has been the Consumers&#39 Association. This is perhaps surprising, given that one of the FSA&#39s statutory objectives is to protect and educate consumers.

CA senior policy adviser Mick McAteer says: “They really lose their way when it comes to the big issues. They do not seem to have a clue when confronted with the big problems.”

The CA felt so outraged by what it viewed as the lack of action by the FSA over endowment sales that it formally complained to the Treasury over the matter.

McAteer says: “The reason that we formally complained to the Treasury is because it is very questionable whether they are satisfying their objective to promote public understanding and protection of the system.”

A common thread of complaints has been the sheer volume of consultations, discussion papers and general paperwork which has poured out of Canary Wharf over the last year. At the last count, there have been 156 formal consultations, all of which have required reading, analysing and responding to by firms.

Aifa director general Paul Smee says: “They are incredibly process-driven. The wheels of the FSA turn very slowly and there are too many initiatives and consultations. Delay is bad for business.”

IFAs&#39 complaints range from disputes over the way that the FSA has handled the growing professional indemnity insurance crisis to the way they are constantly blamed for any type of allegedly dodgy selling practices which the FSA thinks might be going on.

But there are some with lots of positive things to say about the FSA&#39s performance.

The Association of Investment Trust Companies says the FSA has actually done well over the split-cap crisis – an interpretation that many would be likely to disagree with.

AITC director general Daniel Godfrey says: “The FSA has done a good job in responding to the split-cap crisis, which is where we have the closest relationship with them.”

Not everyone is so glowing in their evaluation of the FSA&#39s job in protecting consumers over split caps. Many, and not just Tory MPs, point to split caps as a prime situation where the FSA has let consumers down and is now trying to pass the buck on to IFAs and others.

IFA Michael Philips proprietor Michael Both says: “If one of their targets was to build trust and confidence in the UK financial services industry they have failed miserably. I can&#39t see how they could have done a worse job.”

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