6 New powers
New Powers over conduct regulation
138. In the preface to the draft Bill the Government
states:
At the heart of the Government's proposals will
be a more proactive approach to conduct regulation, with a clear
focus on consumer outcomes. The Government welcomes the significant
progress recently made by the FSA towards a more pre-emptive and
intrusive model of conduct regulation, and looks forward to the
publication of the FSA's launch document for the FCA in June.[161]
139. The Bill goes on to set out specific powers
in relation to: product intervention, financial promotions powers
and the early publication of disciplinary action (early warning
notices). We consider these in more detail below.
Product intervention
140. It is proposed that the FCA have power "in
product intervention [and] to direct firms to withdraw or amend
mis-leading financial promotions with immediate effect".[162]
The FSA has said that the product intervention and financial promotion
powers are intended to "enable the FCA to act, and be seen
to act, more swiftly to prevent retail consumer detriment".[163]
141. We have received mixed evidence on this proposal.
Some industry representatives told us that for the FCA to take
a more interventionist approach was not appropriate. For example,
the Confederation of British Industry believed that such an approach
would result in reduced innovation, although they did concede
that:
There might in theory be circumstances in which
product regulation could be effective if used selectively, but
they would be extremely limited. [...]
Product regulation powers otherwise have the
potential to reduce the availability and variety of products for
consumers as firms become less likely to invest in developing
innovative products or believe they will be penalised or restricted
from developing products which do not align with criteria imposed
by the regulator.[164]
This was echoed by AXA, who told us that:
We are not in favour of the regulator being involved
in product design or stipulating mandatory minimum standards.
We think this should be reached through industry level agreement
and codes of practice. Regulatory involvement in product design
could also stifle innovation and the competitive market place.
We are also concerned this power may create an uneven playing
field where products are being sold in the UK by an EU entity
on a cross border basis.[165]
142. Other industry representatives, however, were
more supportive of intervention by the regulator. Philip Warland,
of Fidelity Worldwide, told us:
We in Fidelity do believe that strong intervention
is needed. I think that the litany that the Chairman of the FSA
talked about last week at the Mansion House dinner—£15
billion of redress over a period—just suggests that something
isn't working. What they have done up until now is largely looked
at how products are sold, how they are advised, and never really
got involved in the governance of the product, what the product
was aiming to do and was it aimed at the right target market.[166]
143. Consumer groups were generally supportive of
the proposed interventionist approach to regulation. Peter Vicary-Smith,
of Which?, told us the product intervention was necessary because
of market-failure in financial services. He said:
If we had a well-functioning market, we would
not need to intervene against products in this way, because we
don't recommend that kind of intervention in other marketplaces.
It is because products are often poorly designed and then poorly
marketed that we think these powers are necessary here.[167]
144. Consumer Focus largely agreed, but argued that
the proposals do not go far enough:
We strongly support extended powers to ban or
place conditions on products, ban misleading advertisements, and
publish warning notices. [...]
But we think the proposed powers could, and should,
be enhanced further still. [...]
The areas where we believe stronger or clearer
FCA powers could further reduce the chance of consumer detriment
[include]: [...]
- Stronger powers on disclosure of enforcement
action
The removal of the regulatory principle of consumer
responsibility which attempts to transfer responsibility from
firms to consumers
The powers to undertake market studies where
it does not believe markets are functioning in the consumer interest
or where effective competition could be improved. [...].[168]
145. It is crucial that the potential risks and
benefits of products are properly understood. The case has not
been made that the FCA will necessarily understand a new product
better than a firm. We are mindful of the risks that product intervention
can pose to competition and innovation. The FSA has been criticised
in the past for being too slow to intervene and we welcome the
FCA's willingness to respond quickly to issues of consumer detriment.
We support the need for judgement-led product intervention by
the regulator. We recommend that clear guidance be issued to firms
when such powers are used. Their use should be sparing and the
merits of each case very carefully considered before intervention.
We reiterate our recommendation about the need for greater communication
between the regulator and the firm concerned. This should reduce
the need for such intervention.
The need for more intervention?
146. The rationale for a stronger conduct regulator
has been made in response to a number of spectacular regulatory
failures over recent years, including the mis-selling of pensions
and mortgage endowment policies in the 1970s, '80s and '90s and
the recent scandal concerning PPI. The Government's intention
is to create a conduct regulator that will be more proactive and
have powers to take early action to stop consumer detriment.
147. During our inquiry the consumer groups have
emphasised the need for a more proactive and empowered conduct
regulator. The Citizens Advice Bureau said:
There is an explicit recognition in the draft
Bill and supporting documents that persistent and widespread consumer
problems in the financial services sector are rooted, at least
in part, in regulatory failure. This is illustrated in the FSA's
Approach to regulation document that starts by recognising the
low level of confidence in the financial services sector and how
"conduct issues since 1990 have been a major factor in this".
The FSA also reflects that it has not always been quick enough
or tough enough to prevent or control consumer detriment. For
instance, the regulator concludes on PPI mis-selling that "stronger
action sooner could have limited the growth of the problem."[169]
148. There is a clear need for a greater level of
proactive intervention by a consumer focused financial services
regulator. The ICAEW summarised the current situation as one where:
Trust in the sector needs to be improved given
the history of mis-selling and poor service standards. The volume
of complaints received by UK financial services firms amounted
to over 1.8 million in 2011, half of which were upheld. These
outcomes are profoundly disappointing after around 25 years of
formal regulation. They are bad for consumers, but also the many
firms in financial services which are run on sound lines yet become
grouped with those which are not.[170]
149. A number of submissions from industry groups
offered qualified support for the additional powers. The Financial
Services Practitioner Panel wrote:
We acknowledge that it will be useful for the
FCA to have tighter powers to control any product that can and
does do harm.[171]
Philip Warland, Head of Public Policy, Fidelity agreed
that:
We in Fidelity do believe that strong intervention
is needed. I think that the litany that the Chairman of the FSA
talked about last week at the Mansion House dinner—£15billion
of redress over a period—just suggests that something isn't
working.[172]
150. We recommend that the FSA place its more
detailed proposals in the public domain and facilitate proper
public scrutiny of its plans.
Early Warning Notices
151. The Government proposes to give the FCA the
power (but not the duty) to disclose the fact that a warning notice
has been issued to a firm—an early warning notice.
The draft Bill sets out amendments to FSMA section 391 and makes
is subject to a safeguard that the FCA can only publish a warning
notice "after consulting the persons to whom the notice is
given or copied" and stipulates that "The FCA may not
publish information under this section if, in its opinion, publication
would be [...] unfair to the person with respect to whom the action
was taken (or was proposed to be taken)". [173]
The FSA set out in its paper that:
The FCA will also intervene where the product
may be well known and of utility to consumers but the sales and
distribution process of a firm does not meet regulatory standards
and consumer detriment is occurring. Where the FSA has typically
allowed firms to continue to market and sell products alongside
programmes to remedy poor practices, the FCA may not. When the
firm is a major supplier of a product which is commonly sold to
consumers, the consequences of such action, which could disrupt
consumer choice or access, will be weighed against the benefits
of preventing further consumer detriment. [...]
If this provision is enacted, the FCA will need
to balance the advantages of openness with the need to respect
private rights and due process. In this context, the government
has indicated that there will be a requirement to consult the
person concerned before issuing any information about the warning
notice. This should ensure that account will be taken of, for
example, any reputational damage which could occur as a result
of publication of the information.[174]
152. When we asked the FSA about this Margaret Cole
indicated that the FSA view on this as:
A rather small move on what I will call the transparency
dial, if you like—the balance between fairness to individuals
and firms and the public policy considerations around protection
of consumers and putting as much information as possible into
the public domain.[175]
But she went on to tell us that the FSA would prefer
to remove the requirement to consult:
the proposal at the moment is that we should
consult with the party that we are bringing the case against in
every case where we might be going to publish a warning notice.
We think that effectively undermines the power, because in each
case there will be an argument and satellite litigation over whether
we can publish the warning notice—arguments being to do
with reputation.[176]
153. This position received support from the Financial
Services Consumer Panel who wrote to us that:
We support the new power to enable the FCA to
disclose the fact that a warning notice has been issued in relation
to proposed disciplinary action, but we believe the requirement
for the FCA to consult those involved—implying that the
subject's consent could be required for publication—should
be clarified to allow immediate publication without consultation
where it considers there is a risk of consumer detriment. Without
such a change the requirement to consult and allow representations
could slow the entire process and lead to consumers continuing
to make potentially irreversible decisions based on unsuitable
or incomplete information, depending on the nature of the disciplinary
issue.[177]
154. The consumer groups were clear in setting out
that it was important that the FCA could issue an early warning
notice in relation to an investigation which may take many years
to take through the later stages of enforcement when meanwhile
there may be considerable ongoing consumer detriment. Gillian
Guy, Chief Executive of the Citizens Advice Bureau, told us:
It is not seen as, "Well, let's wait and
see what happens." It is actually that there needs to be
a warning out there to stop the product going further.[178]
155. We received a considerable amount of written
evidence from industry expressing significant concerns. Objections
to the proposals were principally raised in respect of the potential
reputational impact of an early warning notice on the firm concerned
which could lead to lasting damage to a firm with no ability to
seek redress from the FSA. There were also worries about consistency
with natural justice. The Building Societies Association told
us:
Advance publication of proposed enforcement
action risks a new presumption of "guilty until proven innocent"
in respect of regulated firms, which is unlikely to improve confidence
in the regulatory system. The planned safeguards are inadequate;
the reputational damage having already been done. As we understand
it, the FSA often begins investigations that lead to no disciplinary
action.
Our concern is that, once information about proposed
enforcement action is published, reputational damage will be done
to the firm, irrespective of the outcome of the action and without
the firm having had recourse to an appeal process.[179]
156. The Financial Service Practitioner Panel told
us:
We also continue to be concerned about the Government's
proposals for early publication of disciplinary action. We acknowledge
that there will not be a duty on the regulator to publish, and
the power will be subject to certain safeguards. However, we are
nevertheless sceptical of how the safeguards will be operated,
and whether all the implications will be considered. It may be
that the publication of a warning notice may mislead consumers
and result in detriment if they decide to exit a firm's product
or service early, when in fact no issues are proved to exist.
There is also the possibility of legal hazards for the regulator
if the publication of a warning notice has led to losses for consumers,
shareholders and staff. One example is the publication in 2010
of the FSA investigation into the activities of Gartmore fund
manager Guillame Rambourg. There was a resultant outflow of assets
and reduction in the share price of Gartmore, following which
it was acquired at a lower price by the rival asset manager Henderson.
It will be essential that at the very least,
the safeguards on consultation and fairness on the publication
of warning notices are complied with fully by the regulators.
We would also like to see a commitment to a public review of the
use of this power by the regulator, after a number of cases have
been publicised.[180]
157. The example of the Gartmore case was raised
by a number of respondents. Margaret Cole told us "we did
not announce our investigation at all. It was the firm doing that".[181]
However, even if the FSA did not publicise the existence of the
investigation, the Gartmore episode illustrates the potentially
calamitous impact that an early warning notice might have on a
firm given the market response in this case once the existence
of an investigation had been made public. Margaret Cole told us
that they would not be seeking to publish notice that an investigation
had commenced but that this would be:
[...] quite some significant way down our process
for holding people accountable. It is a moment when we have looked
at the case in detail, taken it to an internal committee and reached
a conclusion that there is a case to answer.[182]
She argued further that:
By publishing brief information at that moment,
we are not doing anything more than putting that into alignment
with the criminal process or with the civil process or with the
process that other regulators employ, like the OFT and Ofgem.[183]
158. However we remain concerned that this analogy
does not take into account the sensitive nature of the finance
services market place and potential for an extreme reaction to
be triggered by the publication of an early warning notice. Angus
Eaton of Aviva, told us:
Our fear [...] would be that that could be a
tool that was used to publicise potential investigations and not
used in a measured way. That itself could undermine the overall
reputation of the industry as a whole [...] if this is a tool
that is used in an unfettered way then we do have a fear that
it is going to undermine the confidence in this industry that,
of course, is already very delicate.[184]
159. We note that many of the most egregious examples
of such detriment in the past have related not to firm-specific
issues but products. The issues around pensions mis-selling and
PPI were industry wide not firm specific. Asked about the FCA
being a regulator which would intervene on the basis of its judgement,
Martin Wheatley, CEO designate FCA, told the Joint Committee on
the Draft Financial Services Bill that "We will get it wrong
and the test will be whether [...] overall we are being seen as
delivering the objectives for the organisation".[185]
The inability for a firm to obtain redress against the regulator
further exacerbates the problem of limiting the incentives to
ensure that the regulator is fair to firms as well as consumers.
160. We support giving to the FCA the existing
ability of the FSA to issue public warning notices about specific
products. However we are concerned that a general rule permitting
the FCA to publish early warning notices in respect of specific
firms, which in some cases could subsequently prove to be unfounded,
risks unreasonable reputational damage to which there may be inadequate
redress. We are also mindful of the risk to natural justice, given
that in such a case the regulator may be investigator, judge and
jury. We therefore recommend that the Government continue to consult
on its proposed power for the FCA to issue early warning notices
in respect of investigations into specific firms.
Pre-approval of simple products
161. The pre-approval of some products was discussed
during this inquiry. Brewin Dolphin plc, Cazenove Capital Management
Limited and Rathbone Brothers plc have told the FSA that:
We would like to see enhanced protection for
retail consumers in a simplified product range of the key building
blocks which should make up the core, or in many cases all, of
the savings of the vast majority of savers.
[...] The product range could include simple
cash products, personal pension plans, index linked and other
savings bonds, gilts and ISAs holding some very basic equity funds.
We suggest that National Savings can be used
as a benchmark for these products, in terms of performance, price
and the issuers' willingness to stand behind their products should
they fail to do "what they say on the tin" or lose value
below prescribed benchmarks. This will reduce chances of mis-selling
or inappropriate product engineering for an audience which is
likely to be lacking in financial education and financial resources.
All such products would be developed to a prescribed
formula and require pre approval from the FCA. The organisations
providing such products will all have the financial strength to
stand behind their products. They will not have hidden risks or
hidden charges and where possible should be tax advantaged.
[...] The more sophisticated requirements of
private investors will principally be catered for by wealth managers,
stockbrokers, and private banks, larger IFAs and fund managers,
most of whom will be members of APCIMS, BBA [(British Bankers'
Association)] and/or IMA [(Investment Management Association)].
[...] The companies providing product or services
to this group of investors should be vetted and approved by a
joint body of FCA and practitioners (not unlike the old Stock
Exchange membership) to limit the chances of failure or rogue
operators.[186]
162. We asked Martin Wheatley why the FCA had not
adopted a system of pre-approving safe financial products. He
told us that it was a question of resources:
Pre-approval would place a large burden, so we
would need a larger number of staff to do it, and a process between
us and the market. I had experience of pre-approval of products
in Hong Kong and the effect is that products get brought to you
half-baked, because the industry wants to rush the products out.
The regulator ends as up as the spellcheck for the industry, because
they bring such poorly thought through products in the hope that
they will have a place in the window. I think pre-approval is
quite a difficult process and has many more negatives.[187]
163. The Financial Secretary told us that he was
not in favour of pre-approving financial products because it would
stifle innovation. He also told us that it would risk creating
consumer detriment as a result:
Because you would end up in a situation where
you have some huge organisation based in the FCA that would have
to vet every single product that came on to the market. In the
heyday of mortgage markets, I think there were something like
6,000 different products. Each one of those would have to be approved,
and there would be a process of approving them, so that would
potentially act to the detriment of consumers who want to shop
around for a good fixed-rate mortgage or a tracker mortgage. I
think the bureaucracy that would impose would be quite significant
and there would be some consumer detriment to that.[188]
164. Despite this, the British Bankers Association
argued that "when considered in the round with the FCA's
other more proactive intervention powers, the lack of any 'kite-marking'
or similar may lead to very risk-averse behaviours which in themselves
can under-serve consumers generally".[189]
Christine Farnish, of Consumer Focus agreed, telling us that there
would be a definite benefit to certain consumers of a pre-approval
scheme:
For mass market consumers we think it would be
well worth exploring some sort of new arrangement. [...] We would
very much like to see an attempt to try and produce some standard
terms and conditions—minimum standards—for a suite
of mass market products that most ordinary families and consumers
need during their working lives, that could then be identified
through some sort of mark or trusted brand, and that people could
buy cheaply, easily, safely.[190]
165. It has been reported that the FSA was considering
the pre-approval of simple financial products as recently as September
2011 and has decided not to pursue it as a policy because of resource
constraints.[191] We
have seen no evidence to justify this decision. Given the evidence
cited above from consumers and producers alike we would expect
a much fuller explanation of any decision together with supporting
data.
166. We recommend that the FCA conduct a review
of the merits and costs of a pre-approval scheme for financial
products, and publish its findings. We also recommend that the
FCA reconsider the scope for distinguishing in regulation between
simple products which can be pre-approved for basic needs and
more complex products, generally but not always more suited to
sophisticated investors, which cannot.
Price
Intervention
167. Measures in the Government's draft Bill will
grant product regulation powers to the FCA as we considered above.
One area that is not explicitly covered in the Policy Overview
published with the draft Bill is the question of price intervention
or regulation. Currently this would be a competition issue and
so fall within the ambit of the Office of Fair Trading as the
competent competition authority. The FSA set out in its paper
regarding the FCA that:
Where competition is impaired, price intervention
by the FCA may be one of a number of tools necessary to protect
consumers. This would involve the FCA making judgements about
the value for money of products.[192]
168. The Financial Secretary to the Treasury told
us that:
The Government has been clear that the FCA will
not prescribe prices in the manner of some utilities regulators.
In the financial services industry, in the absence of natural
or granted monopolies, such an approach would not be proportionate
or consistent with the FCA's competition remit. However, the FCA
should be looking at comparative prices and other possible indicators
of where competition is flawed.[193]
169. The lack of clarity as to whether the FCA is
intended to be a price regulator or indeed whether the legislation
as proposed in the draft Bill grants it this power was highlighted
to us by Which? who quoted their barrister, John Odgers, as follows:
It is not clear whether, by not including in
the Bill any specific provisions relating to price intervention,
the Government intends the regulators to enjoy no such powers
or whether it considers that price intervention is permissible
under these rule-making powers.
It seems to me to be desirable that a power of
price intervention should be spelled out, if it is intended. Financial
services regulators have not in this jurisdiction previously exercised
that type of power, and might in future be loath to do so without
a specific statutory authority, as the use of such a power would
be particularly likely to attract a challenge.
We would therefore welcome clarification from
the Government on this matter.[194]
170. There remains confusion about the role of
the FCA in price regulation. We recommend that the Government
clarifies whether it intends the FCA to play a role as a price
regulator, the case for which has yet to be made. There should
be adequate public consultation prior to any legislation on the
role of the FCA as a price regulator.
Consumer education
171. There is great concern that consumers are not
able to make informed decisions. Consumer focus told us:
Consumers in the UK are among those most likely
to describe themselves as 'knowledgeable' in theoretical market
research polls but research show that they are among those least
likely to know their rights across a range of markets. Meanwhile
empirically levels of financial capability, functional literacy
and numeracy remain extremely poor. [...]
Compounding this lack of basic understanding
is the complex nature of many financial product contracts despite
years of effort by regulators to improve disclosure. [...]
- the consumer documentation from a major high
street bank for a personal loan requires degree level education
to understand
the standard text describing a PPI product requires
PhD level education to comprehend
it takes 55 minutes to read a standard consumer
credit agreement, let alone understand it.[195]
172. Some industry representatives told us of the
benefits to firms of having a financially capable consumer base.
The Institute of Chartered Accountants in England and Wales told
us that this would become more important in the future as the
financial requirements of consumers change:
Demographic developments, together with the fiscal
implications of the possibility of growth remaining low in the
West for some years to come, suggest that Governments are likely
increasingly to look to individuals to make greater personal provision
for retirement and possibly other requirements, such as aspects
of health care. That implies a need to raise the financial capability
of the general population. Financial education will be an important
part of this.[196]
The Share Centre Ltd said that consumer education
should focus on young people:
If we have better educated consumers we will
need less regulation. In this respect it is unfortunate that the
resources available for financial education for young people have
been so severely cut. It is in the interest of the financial services
industry to see a small mandatory levy—probably totalling
no more than £10m p.a., so that caveat emptor can
reasonably resume its place in our industry.
173. The role of financial education in schools and
the national curriculum was the topic for a recent debate in the
House of Commons. During this the Minister of State, Department
for Education, Mr Nick Gibb said that "Young people need
to be confident and competent consumers":
We all agree about the importance of good-quality
personal finance education and the critical role played by a sound
grasp of basic mathematical skills. Support from the finance industry
and a range of good resources play their part in supporting schools
to teach pupils how to manage their money well.[197]
174. Mr Gibb told the House that "the Government
are currently conducting two reviews—that of the national
curriculum [...] and that of personal, social, health and economic
education, which includes financial capability".[198]
We look forward to the results of these reviews.
175. Outside the school system, the Money Advice
Service (MAS) is an independent body, set up by the Government
and funded by fees raised from financial services firms regulated
by the FSA. It has two core strategic objectives:
- To enhance the understanding
and knowledge of members of the public of financial matters (including
the UK financial system);
- To enhance the ability of members of the public
to manage their own affairs. [199]
176. The FSA told us that the work of the MAS is
valuable to consumers, firms and the regulator:
We support measures included in the draft Bill
that require the FCA to agree and publish a MoU with the Money
Advice Service, replacing the current voluntary arrangement. We
believe the Service will be a further useful source of intelligence
and early warnings for the FCA on potential problems in retail
markets.[200]
177. However, we received evidence outlining concerns
that about the funding, expenditure and strategy of the MAS. Smaller
industry practitioners in particular were keen to avoid duplicating
costs. The smaller business practitioner panel told us:
The industry is already funding the Money Advice
Service (MAS), so it seems that the FCA should be doing less than
the FSA has done to engage directly with consumers, as much of
the role should now be undertaken by MAS. As it is, we are also
concerned about the lack of cost control and accountability of
MAS.[201]
178. The Financial Secretary said that he supported
the MAS as the organisation to educate consumers on financial
matters:
I think there is a challenge here about how we
make sure we equip consumers to buy products and services, and
that is why I am a very big supporter of the Money Advice Service,
which helps there.[202]
179. We support the aims and objectives of the Money
Advice Service to provide generic advice. Wider understanding
of financial services will benefit the economy as well as consumers.
As with all public bodies, it is important that the MAS is seen
to be providing value for money. This is especially important
as the MAS is funded by industry levy, the burden of which is
likely to be ultimately passed to consumers. It is important
that the work of the MAS is not duplicated but complemented by
any work of the FCA in the area of consumer responsibility. We
recommend that the MoU between the FCA and MAS be published in
time for the introduction of the Financial Services Bill. The
FCA and the MAS should work with the Department for Education
to help ensure that young people receive at school the basic learning
tools and skills required to make sense of financial advice later
in life.
161 HM Treasury, A new approach to financial regulation:
the blueprint for reform, June 2011, p 30 Back
162
Financial Services Authority, The Financial conduct Authority:
approach to regulation, June 2011, para 1.9 Back
163
Ibid., para 4.1 Back
164
Ev w43 Back
165
Ev w33 Back
166
Q 1 Back
167
Q 178 Back
168
Ev 74 Back
169
Ev 49 Back
170
Ev w63 Back
171
Ev w7 Back
172
Q 1 Back
173
Draft Financial Services Bill - Schedule 8, Part 6, Paragraph
24 Back
174
Financial Services Authority, The Financial conduct Authority:
approach to regulation, June 2011,paras 4.15 & 4.5 Back
175
Q 136 Back
176
Q 136 Back
177
Ev w15 Back
178
Q 179 Back
179
Ev w84 Back
180
Ev w7 Back
181
Q 136 Back
182
Q 136 Back
183
Ibid. Back
184
Q 46 Back
185
Oral evidence taken before the Joint Committee on the Draft Financial
Services Bill on 10 November 2011, HC 1447-xiii, Q 999 [Baroness
Wheatcroft] Back
186
Ev w135 Back
187
Q 134 Back
188
Q 257 Back
189
Ev w74 Back
190
Q 181 Back
191
Chris Pond, Speech to Social Market Foundation, September 2011 Back
192
Financial Services Authority, The Financial conduct Authority:
approach to regulation, June 2011, box 2 Back
193
Ev 87 Back
194
Ev 64 Back
195
Ev 72 Back
196
Ev w63 Back
197
HC Deb, 15 December 2011, col 995 Back
198
Ibid., col 992 Back
199
Further information about the Money Advice Service may be found
at: http://www.moneyadviceservice.org.uk/about/corporateinformation/default.aspx Back
200
Ev 61 Back
201
Ev w27 Back
202
Q 232 Back
|
