Reflecting the Government’s planned reform of financial services regulation, the Financial Services Authority has already divided itself internally into a Conduct Business Unit and a Prudential Business Unit; and in April this year started the split supervision of dual regulated firms between these two Units. Last week the FSA’s director of supervision at the Conduct Business Unit set out in a speech how – alongside these structural changes – the future Financial Conduct Authority will approach it supervision of the firms it regulates.
A recap of the design of the new regulatory architecture:
“…the Government is proceeding with its plans to transfer prudential supervision for banks, insurers and major investment firms to a subsidiary of the Bank of England – to be called the Prudential Regulation Authority (PRA). A separate body – to be called the Financial Conduct Authority (FCA) – will have responsibility for conduct supervision for all firms, for prudential supervision for those firms not prudentially supervised by the PRA and for markets regulation. In addition, the Financial Policy Committee within the Bank will have the responsibility for ensuring financial stability. Although this new framework is subject to legislative approval, we expect it to be legally established in the early part of 2013.”
The statutory objectives of the FCA:
“These have gone through some change during Parliamentary scrutiny so that now the single strategic objective is in summary “Making markets work well”. The three operational objectives are in summary ensuring consumer protection, Market integrity and competition in the interests of consumers. Of these the newest for us in the FCA is the latter. As a primary statutory objective we will be under the obligation to consider the role of competition (or lack of it) as a driver of poor outcomes in markets and work out how address these problems.”
The five main elements of the FCA’s supervisory approach:
“• To be more forward-looking in assessment of potential problems – looking at how we can tackle issues before they start to go wrong. This will involve by necessity a high degree of judgement and is what we mean when we say we will be a judgement based regulator. What I am getting at here is that increasingly we will be challenging firms about whether their business model now and prospectively deliver good outcomes for consumers and where we disagree with management have the confidence in our judgement to require firms to change their business models.
• Intervene earlier when we see problems-the point I want to make here is that the FCA will have greater appetite for earlier intervention than the FSA has had. This intervention could take many forms but will include the use of product banning powers that the FCA will be given- this means that we will be undertaking more product supervision than the FSA has done.
• Address the underlying causes of problems that we see, not just the symptoms. It would be relatively easy for us to case individual examples of poor conduct behaviour but our experience is that these will continue to be manifested unless the underlying causes of these problems are satisfactorily dealt with. As a result we will be applying a particular focus to identifying and attacking these underlying problems.
• Secure redress for consumers if failures do occur – for example, what we saw with payment protection insurance – we are asking those firms that mistreat their customers to take measures to rectify things. In practice, this means a combination of appropriate redress for consumers, changes in their systems and controls and ensuring that post-sales processes deliver a fair outcome for their consumers.
• Take meaningful action against firms that fail to meet our standards, through levels of fines that have a credible deterrence. Where we do not see improvements in firms following our actions, we will consider taking tougher action, including stopping firms taking on new business. Let’s take insider dealing as an example – increasingly we are using our powers to prohibit individuals from the industry and continuing to focus on senior management responsibility.”
“Firstly, what we are seeking to achieve is that wholesale marketrs are efficient, orderly and fair and that retail consumers do not suffer undue detriment from wholesale activities
Secondly, we will generally continue to rely on the caveat emptor principle and not seek to introduce concepts of detriment and redress that we use in retail markets to wholesale markets
However, we may go beyond caveat emptor where we see potential damage to market integrity or market efficiency caused by poor behaviour of firms or weaknesses in market structure”
Two philosophical changes in the FCA’s approach to regulation:
“Embedded in the approach I have outlined above, are two important philosophical moves:
• Firstly, a move away from reliance in retail conduct primarily on transparency at the point of sale. We have seen that this principle has not worked sufficiently well over the years in preventing consumer detriment and has led us to using product intervention directly where we judge that a product cannot be sold safely.
• And secondly as I mentioned above, in the wholesale markets, going beyond relying on the caveat emptor principle in ensuring integrity of these markets.”
Implication for firms:
“• Adjust to level of intensity of conduct supervision nearer to the level of intensity experienced on prudential supervision;
• Adjust to two supervisory teams for the group (for dual regulated groups) and independent regulation from the FCA and PRA;
• Ensure business models are based on foundation of fair treatment of customers and prudential robustness from which strategies to generate adequate shareholder returns can be built; and
• Adopt more strategic approach to the conduct agenda.”
The challenge for compliance teams:
“Firms will have adapt to responding to two independent supervisory teams, in the case of dual regulated firms, as well as the additional levels of intensity of both conduct and prudential supervision. Beyond that though we are looking for a more strategic approach to how firms handle the conduct agenda and conduct risk – this means that we will go well beyond the traditional control structures in our work and compliance areas will need to adapt to this.”
For more on the Financial Conduct Authority, see here.