8 The Financial Conduct Authority
Continuity
97. The Government is currently undertaking a
significant restructuring of the system of financial regulation
in the UK. This has culminated in the publication of a white paper
by the Treasury entitled A new approach to financial regulation:
the blueprint for reform.[137]
As part of those reforms, as we have noted earlier, the responsibilities
of the FSA will be divided, with those relating to the RDR being
moved to the proposed Financial Conduct Authority (FCA).
98. Several of those who wrote to us felt that
the implementation of the RDR should be halted while this reorganisation
was ongoing. For instance, the Financial Services Smaller Practitioner
Panel told us that:
The RDR is being implemented at a time when the objectives
of the regulation of retail conduct are to be changed with the
creation of the CPMA. We believe it would be much better if the
new CPMA [now renamed the FCA] objectives could be set and checked
with the RDR before the requirements of the RDR are finalised.[138]
Aviva was also concerned about how the change to
the new regulatory system would impact on the RDR. It noted that:
Finally, we are concerned at the two year gap before
the reviewing the RDR, given that the market is undergoing such
profound structural changes. It is essential that the Consumer
Protection and Markets Authority (CPMA) [now renamed the FCA]
which will replace the FSA in 2012 supports and actively engages
in this process. There is concern about whether the CPMA will
also be measured on its success in implementing the RDR. This
is necessary to ensure that accountability is maintained in the
new regulatory body, and that the RDR will not be subject to significant
changes once the CPMA is in charge.[139]
99. However, when we questioned the FSA on whether
the move to the FCA should stop implementation of the RDR, Mr
Sants seemed certain it should not. He told us that:
I think from our point of view we feel that this
is a thoughtfully constructed, vital reform to the market. We
don't believe there is any suggestion in the thrust of Government
policy that the FSA should be stepping back from continuing to
deliver needed reform and improvements to the financial market.
The FCA obviously will be a successor body to the FSA. I think
it is right and proper that it will carry forward those initiatives
that have been properly assessed and have been through a full
approval and consultation process. The RDR is one of those. We
have had some discussion with Martin Wheatley [Chief Executive
designate of the Financial Conduct Authority], who obviously is
not yet in post, but he is very content with that approach.[140]
100. We note the assurances
of Mr Sants that the Financial Conduct Authority will be content
with the RDR. However, the FCA will have different objectives
to the FSA, and we therefore recommend that the Treasury, in response
to this Report, state whether it is content that the RDR as currently
constituted would be consistent with the objectives of the FCA
as it currently sees them.
Accountability
101. The FSA was deliberately created as an independent
regulator. Some of those who provided written evidence, though,
were concerned about the accountability of the FSA. Professional
Investment Management Services told us that "We appreciate
that our industry is still far from perfect and that the FSA has
been successful, in part, in dealing with some of its worst excesses,
but it is not right that it should only be accountable to itself,
and not even to Parliament, although you can of course exert very
considerable influence behind the scenes".[141]
Paul Raseta noted that:
I find it quite unbelievable that the FSA is accountable
to no-one, not even Parliament. I watched the recent Back Bench
debate, and whilst lifted by the cross party support, I and thousands
more were amazed that unless the FSA listened (there was, and
is no indication of that ever happening), then little or nothing
would be done. I therefore welcome this opportunity to offer my
views, in the faint hope that common sense and reality might ultimately
prevail.[142]
102. When we raised these concerns over the accountability
of the FSA with Mr Sants, he did note that there were already
accountability mechanisms for the FSA:
I don't think we are immune from public accountability.
I am an extremely strong supporter of accountability. I hope I
have always given that impression and I, on a personal basis,
will always make maximum effort to make sure that any questions
and challenges put to us are answered in an open and transparent
way. I demonstrated that, I believe, in the post-crisis period
in a number of different ways. We clearly are accountable to Parliament
through a number of mechanisms, including this Committee, which,
as you know, I take extremely seriously.[143]
He also noted that "We can, of course, be judicially
reviewed" and he also pointed out the FSA has its "own
complaints commissioner process that is available for people who
feel the FSA's process has not delivered as it should. We have
a review process and we have an accountability process in Parliament".
[144] The FSA
also noted that in formulating the RDR, a significant amount of
consultation had been undertaken. They highlighted that:
We have held an open debate about industry-led solutions,
wherever possible, in what has been the FSA's most extensive and
far-reaching consultation process to date. This involved some
two and a half years of discussion and a further two years of
formal consultation, during which we have received nearly 2,000
formal responses and proactively contacted around 2,500 firms,
in addition to considerable additional correspondence and discussion.
We used industry working groups, as well as considering
the views of individuals, consumer representatives, a wide range
of firms, and their representatives, to develop our proposals.
Often debate has arisen around detailed points of the proposals.
We have listened to the arguments and evidence presented, amending
several proposals in response to this debate, where appropriate.
For instance, we have amended our professionalism proposals to
allow alternative assessment methodologies to be used in light
of concerns about written exam-only qualifications, and we have
also allowed for an additional transitional year for our capital
requirements proposals, to take account of difficult trading conditions.
[...]
This extensive consultation has enabled us to listen
and respond to market participants concerns and so develop, with
industry, a package of reforms that we believe is necessary to
address the problems in the market, improve consumer outcomes
and confidence, as well as support the long-term viability of
the retail investment market.[145]
However, Mr Sants was keen to emphasise potential
reforms for the future, and seemed receptive to further suggestions.
He told us that:
As I say, I am supportive of an additional layer
of accountability when major regulatory failures occur. I am also
supportive of the NAO being a review authority for the FSA. If
you have other accountability mechanisms you would like to suggest,
I am sure you will do so during the Bill period and we are certainly
are happy to take them into account.[146]
103. The creation of the FCA
provides an opportunity to examine the accountability mechanisms
that will apply under the new system of financial regulation.
We will therefore instigate an inquiry into this including the
mechanisms proposed by the Government, as well as the concerns
raised within the evidence attached to this Report, to decide
whether they are adequate.
The long-stop
104. Many of those who wrote to us were concerned
about the lack of a limitation on the amount of time an adviser
may be liable for mis-selling a product. The Association of Independent
Financial Advisers outlined the problem faced by the industry
owing to a lack of a long-stop as follows:
If RDR is about making the industry work better,
and enabling better outcomes for consumers, then the introduction
of a 15 year long stop is an issue that needs to be addressed.
The lack of a long stop means that businesses have the burden
of making provision within their accounts for the increasing risk
of complaints, the cost of maintaining records over a long period,
as well as the proposed increases to capital-adequacy provisions.
Furthermore, the uncertainty generated by open-ended liabilities
makes it difficult for firms to be sold and also hinders their
ability to attract new sources of capital. [147]
In line with many other submissions, they suggested
that "Introducing a 15 year long stop would address these
issues while bringing financial services into line with the Statute
of Limitations". [148]
They noted that consumers were not averse to this change. AIFA
told us that "research we carried out with YouGov showed
that the majority of consumers were actually in favour of a time
limit for responsibility, with 75% of clients questioned agreeing
there should be some time limit for IFAs to be legally responsible
for advice given".[149]
105. Which? however was "strongly opposed"
to the implementation of a 15 year 'long stop'.[150]
It noted that "there are already time limits in place covering
when consumers are allowed to refer complaints to the FOS"
and that "these rules require consumers to complain within
six years after the event complained about occurred or (if later)
within three years from the date on which the consumer became
aware (or ought reasonably to have become aware) that he or she
had cause for complaint".[151]
It made the following points in defence of the current lack of
a long-stop in financial services:
Many financial services products are long-term in
nature and it can be many years before problems arise. Their complex
nature, combined with poor information from companies can make
it difficult for consumers to know when they have made a loss
and if they have grounds for complaint. A key example would be
endowment mortgages. As a result a long-stop could restrict access
to justice for many consumers.
It would be difficult to apply a 15 year long-stop
if the magnitude of the loss was unknown and there was no way
for the consumer to crystallise the loss—for example in
the case of contracting out of the State Second Pension, if a
consumer was mis-sold there is currently no way for them to crystallise
the loss until retirement as the Government does not allow people
to buy back into the State scheme.
The introduction of a long-stop could weaken the
incentive for financial services companies to prompt valid complaints
and inform consumers of the magnitude of their loss. Under the
current rules, the company has to inform the consumer that they
have cause for complaint for the clock to start. If a long-stop
was in place there would be a strong incentive for the company
to take no action and wait for the consumer to run out of time.
This is likely to further damage consumer confidence in financial
services. [152]
106. In its written evidence, the FSA provided
the following description of the previous work it had undertaken
looking at whether a long-stop would be useful or not:
Some advisers express frustration at the absence
of a long-stop time limit on the period within which complaints
must be brought or the application of the statute of limitations
because they want to limit their liabilities. This strength of
feeling, particularly amongst IFAs, was made clear to us when
we first consulted on long-stop in 2007. To justify the introduction
of a long-stop we need to identify benefits to firms or consumers
beyond the savings for firms in compensation payments. These benefits
would need to exceed the consumer detriment from time-barred complaints.
Responses to our consultation focused on "fairness"
arguments around the statute of limitations and concerns about
handling "stale" claims—particularly into retirement.
We were unable to convert these arguments into a persuasive analysis
that it would be reasonable to impose responsibility on consumers
to identify any and all issues with advice within a given period.
Other respondents highlighted the consumer detriment
and reputational damage that a long-stop could cause. Due to the
strength of feeling on the issue we made a further call for evidence
in 2008 but only three firms responded with further evidence.
This prompted us to seek further evidence to see if we could build
a persuasive argument. We could not and we had to conclude that
we should not introduce a long-stop because we were unable to
demonstrate that it would bring additional benefits to consumers
and firms (for example from greater investment in the sector).[153]
107. When we then questioned the FSA on whether
or not there should be a long-stop, Mr Sants seemed open to the
FSA looking at this issue again:
This was looked at in 2007 and at that time there
was not compelling evidence to change the situation—that
is, to bring in a longstop. But I have to say that I have some
sympathy with the argument that says if people are still concerned,
2007 now is a number of years away, and possibly if this Committee
was to recommend to us that we should take another look at it,
I think that is something we might usefully do.[154]
He then suggested an alternative way of looking at
the issue that may merit further investigation by those considering
the forthcoming legislation in this area:
It is a little bit of a question of what is the framework
that you use to reach the determination, to be fair, in the sense
that the way that it was looked at in 2007 was: what is the consumer
benefit that would be brought by bringing in a longstop? There
was no particularly compelling evidence presented; that was the
backdrop. But you could be asking the question the other way round,
which is there are other industries that do have a longstop, so
why wouldn't this one have one? So, it depends on the framework,
and I must admit when I looked at the question I thought there
is an argument that says perhaps we should look at it again.[155]
108. We note the FSA's acceptance
that there may be a need to look at whether a long-stop on potential
liabilities should be instituted within financial services. We
recommend that the Committee on the Draft Financial Services Bill,
which would create the Financial Conduct Authority, consider whether
there is a compelling case for a long-stop. Our view is that any
long-stop would need to be shown to be clearly in the interest
of consumers.
137 HM Treasury, A new approach to financial regulation:
the blueprint for reform, June 2011, Cm8083 Back
138
Ev w292 Back
139
Ev w317 Back
140
Q 3 Back
141
Ev w38 Back
142
Ev w309 Back
143
Q 34 Back
144
Qq 34-35 Back
145
Ev 26 Back
146
Q 35 Back
147
Ev w230 Back
148
Ibid. Back
149
Ibid. Back
150
Ev w350 Back
151
Ibid. Back
152
Ev w350 Back
153
Ev 29 Back
154
Q 103 Back
155
Ibid. Back
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