The "Financial Services Authority" is due to be removed. Don't worry about the landlord, however, as the building will overnight transmute itself in the home of replacement regulators Prudential Regulatory Authority and Financial Conduct Authority.
The PRA will supervise banking and wholesale money markets under the auspices of the Bank of England. It is the FCA that is of more direct interest to investors. It will do the "consumer" stuff – protecting the likes of savers, borrowers, insurance buyers and individual investors.
And even before the new brass plates are screwed to that Canary Wharf façade, the two organisations will start in a semi-official form as the existing FSA staff is split into the two new regulatory bodies. This will happen in April.
As far as both consumers and the "heavier" end of finance are concerned, the FSA was not a success. Lampooned in Private Eye as the Fundamentally Supine Authority, it failed to prevent the banking meltdown as it admitted in the FSA report on Royal Bank of Scotland (which, it now transpires, redacted criticism of RBS former boss Sir Fred Goodwin following complaints from his lawyers). And, of course, it ultimately failed to prevent publication of the lengthy report – it had originally hoped to get away with a short press release.On the consumer side, there was a long litany of stable door shutting from mis-sold payment protection insurance to mis-sold structured bonds via regulated "boiler rooms" which pushed overpriced shares in companies with little substance traded on fringe markets. In the case of PPI, it took the best part of a decade between the first media criticism of the high cost and often inapplicable plans and the eventual shut-down of the product and billions in compensation.
The FSA flip-flopped from "light touch" regulation to a post financial crisis heavy attitude – including the odd dawn raid on dodgy dealers and more prosecutions of insider traders.
Now, with just weeks before the FSA makes its de facto split, the FCA charm offensive is under way. New FCA head, Martin Wheatley, in an interview with The Financial Times promises "we will be looking at things from a consumer perspective." He will have "expanded powers" to deal with firms.
What's on the agenda?
- Assuming customers for financial products are "irrational". Previous regulatory regimes assumed that because someone signed to say they understood the risks, then they were fully conscious of the plus points and drawbacks. Leaving aside salesperson pressure, this has never been true. Customers rarely read the long documents they are sent – and only specialist lawyers are likely to appreciate their meaning. Faced with complex or too much information, consumers tend to sign up if they are convinced by marketing.
- Sell the right products to the right people. Many of the "toxic" and mis-sold products may have been good advice for some. But they were bad when sold to a mass market – for instance, structured bonds were pushed over bank counters to customers who had current account balances which triggered a tag for the counter staff. These bonds promised high and safe returns – the downside risk was hidden in small print. An increasing focus on non-commission based and non commission-biased recommendations after the January 2013 Retail Distribution Review will help.
- Ensure products go through a "real testing process". The idea is to ensure a product serves a greater purpose than to enrich sellers. Testing, which critics say will push up costs, could identify target audiences and those for whom the product is toxic. But investors will have to accept that testing will never be able to cope with the unforeseeable.
- Intervene much earlier than in the past. This should not be difficult as many past interventions occurred only after substantial consumer detriment. But intervention will still be seen as a last resort.
- More intensive supervision from a consumer, rather than financial services industry, perspective. The FSA bent over backwards to stress to complaining consumers that products were compliant with its rules. The challenge now will be to recruit enough staff from consumer championing backgrounds and to prevent existing staff "going native". Some present FSA employees have long standing relationships with those they are supposed to supervise, seeing matters more from the industry point of view. Additionally, some FSA staff were hired from the financial services industry.
- More enforcement. The level and frequency of fines has risen to general acclaim. But the amounts are still on a par with a top banker's January bonus. There needs to be more naming and shaming, with individuals more in the dock. The FCA will need to differentiate between mis-selling which harms and errors in box-ticking exercises where no detriment is shown – fines for the two have been remarkably similar.
What's still to be clarified or not on the agenda?
- The cost of regulation. Product providers and financial advisers often state the new system will push up costs. It remains to be seen how the FCA will police these claims and how it will control rising costs to consumers. Until now, product purchasers have shouldered the bill for past regulatory increases.
- Products beyond the regulatory scope. This is the elephant in the regulatory room. The FCA, like the FSA, can only regulate certain investment products. There are many which are outside its scope including a
reas where consumers have suffered detriment such as landbanking and carbon-credit trading (both subjects of FSA website warnings), alternatives such as gold bullion, wine, art, property and even bamboo plantations. Until laws are changed, it is still a case of caveat emptor (let the buyer beware) for those persuaded into these investments.
Whatley told an industry audience earlier this week.
"The FCA will need to ask tougher questions, and they need to be the right ones, if we are really going to discover what lies at the heart of your firms' successes and failures. The FCA then needs to make better, bolder, faster decisions. We all have to walk in the footsteps of your customers to understand their perspective and to be able to deliver the new approach.