April 1st was not only April fools’day but also saw the split of the tarnished Financial Services Authority into the Prudential Regulation Authority (PRA), now part of the Bank of England, and the Financial Conduct Authority (FCA) an independent regulatory body. Will the new regime prove any more effective than the old?
Having played a small part in the design of the FCA I hope to help answer the question – so what’s different?
Both new regulators will continue to operate under the same statutory remit, FSMA 2000, as amended by the Financial Services Act 2012. There are some new powers, but the real change is clarity of focus and a far more proactive and risk based regulatory approach.
The PRA under Andrew Bailey (he used to sign bank notes for a living), is focused on two key areas:
- the financial integrity of systemically important financial services firms, (estimated to number around 1,700) and
- the overall stability of the UK financial services market.
These firms are effectively dual-regulated by both the PRA and FCA, each acting independently, but co-ordinating their activities where appropriate. The balance of firms that are not dual‑regulated, estimated to number around 23,000, are now solo-regulated by the FCA alone in respect of both financial stability and conduct.
The FCA, under its CEO Martin Wheatley, has a clear focus on consumer protection with the key aim “to ensure financial markets work well so consumers get a fair deal”. To do this, the FCA must
- protect consumers
- enhance the integrity of the UK financial system and
- help maintain competitive markets and promote effective competition in the interests of consumers
A different approach
The change is intended to get away from what was perceived as a box-ticking regulatory approach to one that is more proactive with the consumer and integrity of the financial services market at its heart. It should be borne in mind that the definition of consumers is very broad, encompassing not only the likes of you and me who have bank accounts and insurance policies, but also the likes of Goldman Sachs and J.P. Morgan
Let’s not forget that the “C” in the FCA is about “conduct”. The FCA has the clear intent to change the “customer is there to be ripped-off” culture. This culture is not just about what happens at the point of sale, but about behaviours that extend from the boardroom to the point of sale and beyond. Being proactive means taking action at an early stage to stop potential problems such as PPI, before they cause material consumer loss. For example, the new product intervention powers may be very rarely used if the views of the FCA are taken on-board at an early stage in the product design or marketing.
Will it work?
To a large extent it is up to individual firms to change their conduct as a matter of good business and reputational sense, rather than because of the policing activities of the regulators. If they do not fully develop and engage with their conduct strategies to change behaviours, the risk of further PPIs cannot be discounted. However, it may be some time before cultural change is so pervasive that the right balance is struck between realistic and sustainable shareholder returns, the customer and employees.
All this is likely to take some time, so be prepared for more turbulence before we reach the calmer waters of a trusted and profitable financial services industry that is good for consumers.