The new FCA – "tougher and bolder", but also costlier
The FSA has asserted that the new Financial Conduct Authority (FCA) will be "tougher and bolder" than the FSA has been. In its new paper on the proposed regulatory approach of the FCA, the FSA declares that recent failures in the financial services sector, "demonstrate that a new approach to conduct regulation is essential", and sets out ambitious plans for a more interventionist approach at an earlier stage.
Under the UK's new model of regulation to be implemented under the Financial Services Bill, the responsibilities of the FSA will be split between the Prudential Regulation Authority (PRA) which will supervise deposit takers, insurers and significant investment firms, and the FCA. By the end of 2012, the FCA will be responsible for regulating conduct in the retail and wholesale market and its fundamental objective will be to protect and enhance confidence in the UK financial system. It will have three operational objectives, namely, securing an appropriate degree of protection for consumers; promoting efficiency and choice in the financial services' market and ensuring the integrity of the UK financial system.
In its paper, the FSA sets out its initial views on the delivery of these objectives and identifies the main changes in approach that will be fundamental to enabling the FCA to achieve its aims, clearly in response to lessons learned. The key themes running through the paper are:
- Prevention is better than cure – there will be an increased focus on the early identification of relevant risks and promoting competition, with more effective communication to both markets and consumers. Although the FSA has intervened robustly to secure redress for consumers in response to PPI mis-selling, for example, the FCA will be seeking to ensure that fewer such problems develop in the first place, by undertaking relevant market analysis, identifying features of industry economics that may create incentives to act contrary to consumer interests or result in detriment to the market;
- There will be earlier intervention to tackle potential risks in the retail markets before they crystallise, avoiding knock-on effects in the retail related wholesale markets and improving standards in specific firms or more widely;
- A tougher and bolder stance is envisaged, building on and enhancing the FSA's credible deterrence strategy, using its new powers of intervention and enforcement and taking steps to secure consumer redress wherever appropriate. The government intends that the FCA will have new powers in product intervention e.g. to direct firms to withdraw or amend misleading financial promotions with immediate effect and to publish warning notices in relation to disciplinary matters.
Comment
It is anticipated that the publication of the paper will provide input for the parliamentary debate on the Financial Services Bill, with comments sought on the paper by 1st September 2011. In particular, the paper is designed to stimulate debate on key questions, such as the balance between early intervention and the resulting costs. It is clear, for example, that delivery of high-quality information gathering and business analysis will form the basis of the FCA's decisions as to when to intervene. Central to the FCA's decision making process, therefore, will be a senior level, business and market analysis team. Arguably, the paper provides an advance warning that this will cost, however. Similarly, with regard to credible deterrence, it is acknowledged that a more interventionist stance and greater cross-firm supervision is likely to result in more enforcement cases but also a need for greater resources.
Clearly, the FSA anticipates that greater resources will enable the FCA to deliver on its proposals, although it is questionable whether more a more interventionist approach will be effective without a commensurate increase in powers to those akin to the SEC, such as wire-tapping and genuine freedom to strike "plea-bargain" deals in criminal cases. In its press release regarding the paper, Hector Sants, comments that although society favours more intervention, the question which now needs to be answered is whether it is "happy to accept the resultant costs and potential reduction in individual freedom". The reality, of course, is that the industry would fund these costs, and may not be keen to do so.
Finally, a significant concern of the industry will be the FCA's ability to distinguish appropriately between retail and wholesale markets. At present the proposals appear to treat all buyers of products and services as "consumers". The FSA has been keen to dispel fears of wholesale regulation "through the retail lens", but it remains to be seen how effectively that will be achieved in practice.
Lawyers Tim Strong, Julie Simpson Day
