In a speech today at the British Bankers’ Association, Martin Wheatley – the CEO designate of the new Financial Conduct Authority (FCA) and presently a managing director of the Financial Services Authority – set out his and the FCA’s new approach to financial conduct regulation. The FCA will be one of the successor bodies to the Financial Services Authority and will be the new regulatory body that will be of most interest to Corporate lawyers.
In his speech, Mr Wheatley uses the timeline of a fictional customer moving through the stages of opening a bank account, taking out a mortgage and buying investment products to illustrate the approach that the FCA will take to product regulation, and the interaction between authorised firms and customers, at each stage in that timeline.
On the FCA’s future powers of product intervention, Mr Wheatley confirmed that:
“A key new power will give [the FCA] the ability to make temporary product intervention rules if there’s an urgent need to protect consumers and we don’t have the time to wait for the outcome of the normal consultation process.
But a greater emphasis by firms on improving the way they design and sell products to ensure they end up in the hands of the appropriate customer should mean that such bans are relatively rare. Intervention should be the last tool that we reach for, and only when others have failed.”
And set out examples of where product intervention rules may be made:
“Firstly, it may be when we find inherently flawed products. This could be products that offer such poor value or have such disadvantageous features that most consumers, or certain types of consumers, are unlikely to benefit.
Secondly, it could be when there is widespread promotion or selling to customer groups for whom the product is unlikely to be suitable. An example here might be products where the customer can easily lose all of their money being purchased by people who are unable or unwilling to accept that risk.
And a third example could be products where there is a strong incentive for a mis-sale. Here we are talking about instances where profitability is so great that the product is just being sold to everyone, regardless of whether it is appropriate for them, and the usual regulatory measures won’t put a stop to it. We can look here at what the FSA experienced with PPI, where several fines and other interventions did not have the intended affect.”
And how that product intervention might take place:
“Intervention could be a ban on the sale of a particular type of product to all customers, or to certain categories of customer.
It could be mandating the inclusion or exclusion of specific product features.
Or sales could only be allowed in certain specified situations. For example, only selling the product if it includes or excludes specified features, and if sales are limited to particular categories of customer, or through particular distribution channels…
…And when we find an issue where we need to take enforcement action we will also have new powers to issue a warning notice. This will let the public know what we’re investigating earlier than we can at the moment, where people only find out after the fine or ban has been issued.”
Failures of the past regulatory model
Mr Wheatley was emphatic about the failures of regulation and of regulatory philosophy in the past decades:
“The regulatory model had failed – not just in the UK but globally. The standard orthodoxy – from J.M. Keynes through to Alan Greenspan and others – was that people make rational decisions when given sufficient information; that markets are self-correcting organisms; and, from a regulatory rather than an economist’s perspective, that if you oversee the distribution channels – banks in many cases – the right products get to the right people.
All three orthodoxies failed.
First, people did not make rational decisions. They bought products they did not understand (structured products); assumed the future would always be like the past (house prices); and allowed others to do the homework, which they blindly followed (credit ratings). Did you know that, at the beginning of 2007, only 14 corporates carried a triple-A rating yet over 60,000 structured products did so?
Second, markets did not self-correct – or at least not in the short enough time frame to prevent substantial losses. Risk and credit were significantly underpriced, and the housing bubble was falsely elevated by the weight of securitisation money searching for high credit ratings.
Third, the regulation of firms was not able to overcome the inherent conflict of interest that arises in financial transactions. PPI is a clear example of this – hugely profitable to firms; of limited value (most of the time) to individuals.
So for all three reasons – we need to develop a new orthodoxy and a new regulatory approach.”
The FCA is expected to start work in 2013.
See also: The FCA’s supervision of firms – Director of Supervision, Conduct Business Unit, FSA
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