We received the following 7 point list from a very senior and well respected compliance expert. They are by no means a maverick and constantly work to deliver outcomes that meet the requirements of the customer and, to be clear, those of the regulator.
This list points out what many in the industry felt (and feedback to the FSA) was going wrong with the approach to regulation taken by the FSA. Unfortunately these concerns were ignored. As time went on the FSA became worryingly omniscient always taking the view that it knew best. Time has undoubtedly proved them wrong. Let’s hope the two new regulators learn the lessons of their predecessor, otherwise we will all need to hold tight while we go on the same ride again.
So what happened at the FSA ? – See Below :
1. The FSA started out with rules. To that is added audit and reviews to check those rules were being followed. It gathered information about firms and from firms to help to direct its audits and reviews. When faults were found it applied enforcement and fines as a deterrent.
2. That only partly worked. You could follow all the rules but still not to the right thing ! It added a set of 11 principles upon which firms would be judged.
3. Principles were OK but they lacked specific customer application so the regulator added TCF (Treating Customers Fairly). This, together with web pages aimed at the consumer, saw the regulator trying to communicate with the man in the street. The regulator also started workshops to communicate with firms. This was the soft approach that covered the hard skeleton of enforcement and fines.
4. A year further on and the regulator added the need for firms to gather MI (management information) in order to test that TCF was not only being achieved but also being improved.
5. In order for this to work systems and controls needed to be more than just words. There needed to be a system. There needed to be a top down approach. To operate that system and to deliver TCF staff needed to be competent. So Training and competency increased and new qualifications were set and reviewed. So you now have trained staff, and ordered structure and a top down approach.
6. Applying systems, controls, monitoring and training is fine but where do you apply it ? Resources are finite. So the regulator has added risk management. Firms should use risk management to assess where TCF is being delivered or not delivered. Where TCF is exposed to risks and where systems, controls, competence and training all need to be increased. Gap analysis (an often used phrase) was required. Firms now have to demonstrate that systems are adequate and fit for purpose. Some systems need to be pressure tested.
7. But we have seen that all of this fell short in the recent financial crisis and bad practice problems still exist. So we are seeing this continuing process now develop towards product design, service design, business plans, KPI/SLA’s, bonuses, incentives and management philosophy. Where should risk assessment be done or business continuity plans drawn up ? Where should finance, financial reserves and provision should be reviewed and increased? Questions such as whether unbiased advice can operate when it is remunerated by commission paid from the chosen provider to the person making the advice decision remain unanswered. Which products need a health warning? What business plans are basically flawed? What practices place consumers under too much risk? What business opportunities place firms at an unacceptable financial risk of collapse and as a result place consumers or the market at risk? We can see this in some large firms being asked to have plans in force so that if they collapse consumers and the market are protected. We also see this in discussions of splitting retail banking from high investment banking.
Currently it looks like the new regulator is sticking to the process and tick box regime that so spectacularly failed its predecessor.
Our correspondent went on to point out that IF you are going to manage by the rules / principles / processes and standards above, then you need the calibre of employee who has a competent understanding of these objectives and then be able to apply them logically to business they met with. The experience is that a large majority of the FSA employees neither had the competence to discharge that role nor any practical experience of running a business, let alone a regulated one.
Based on evidence to hand, we can report that one FSA auditor when visiting a small sole trader business simply sat at the sole trader’s desk all day eating crisps, and pressing the print button on the PC loaned by the business every 30 seconds until the companies printer gave up the ghost. The FSA auditor seemed baffled at this outcome !
All of this proves the FSA focused far too much on form filling and process, and lacked the human, common sense touch. The FSA would have been far more successful if it had been an approachable, “how can we help” organisation with the teeth to tackle obvious wrongdoers, rather than it’s stated “be very afraid approach” which only served to cause mistrust and a complete lack of confidence in the FSA from the very organisations they were supposed to be regulating.
Rather than deliver satisfactory customer outcomes, the FSA’s approach delivered the exact opposite, with customer confidence in the financial services industry at one of its all-time low points.
TCF was a prime example of a regulator trying to impose a process on what was in effect an individual’s morals and ethics. If somebody is ripping customers off, they will do it irrespective of whether they have an action plan or not. Compulsion doesn’t mean conversion !!
These continually developing layers of red tape, lead to regulatory behaviour that varied from becoming intensely focused and wiping out good legitimate small businesses who became so bogged down in the FSA’s report filling, action planning and processes that they could no longer operate, – to ignoring the scandalous behaviour of larger institutions, who could afford to employ people to satisfy the FSA’s form filling, tick box regime, and who then went on to behave exactly how they wanted.
In the end the FSA became so confused by its own regime that in the eyes of many it fell foul of its own rules. If a regulated company claimed to offer “Advice” but didn’t actually advise customers, the FSA would have, quite rightly, claimed the company was misleading customers and would have taken action to ensure that the misleading “Advice” claim was removed. The FSA caused considerable concern and outrage among the financial services community by using some of the money they levied from financial advice businesses to launch a service that provided information to customers but was NOT ABLE TO PROVIDE ADVICE. So what did the FSA call this new service ? The Money ADVICE Service !!! When they were made aware by many of this paradox and the apparent breach of its own rules, rather than keep faith with customers and the industry, the FSA simply dug its heels in.
The FSA only had 4 Statutory objectives, the evidence would suggest they failed all of them.
The outcome : regulation fails, banks crash, LIBOR rate fixing, Bankers bonuses while the tax payer bails out the bank, consumer confidence at an all-time low, independent advisers out of the market, and average customers are forced to either pay hundreds of pounds for advice or being left to their own devices as the new regime introduced by the regulator means that advisers simply cannot afford to help the customer. As a reward the Chief Executive of the FSA received a knighthood !!
And this is progress ?