Will the new Financial Conduct Authority lay the ghosts of misselling past to rest?

29th March 2013

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The Financial Services Authority’s life is drawing to a close as the signs go up for the new Financial Conduct Authority from April 1st.

The FSA came into being officially in November 2001 under the leadership of Sir Howard Davies, though the smaller regulators of which it was made up had already started to combine their operations.

Importantly for investors, the Financial Services and Markets Act also merged together various ombudsman services and the financial services compensation scheme as well.

The FSA had an extremely mixed record during its dozen or so years of life as each couple of years brought a new scandal.

The organisation had to cope with issues such as pensions misselling, explained here by the Pensions Advisory Service, the legacy of the endowment scandal, recounted here by the BBC and the ongoing problems for investors due to the near collapse of Equitable. The final tranche of investors have only just received compensation in the last budget as the Telegraph reports. Equitable did lead to changes governing insurance company assets and liabilities which has at least brought some stability to the sector.

However, the FSA was supposedly fully in charge when problems emerged with split capital investment trusts, precipice bonds, the failure of fund firm Arch Cru and the collapse of Key Data due to millions going missing at Luxembourg based firm SLS. All these cases have led to claims against advisers for unsuitable advice and to accusations of mismarketing. Also on the FSA watch, we have seen a constant stream of misselling by bank based financial advisers. Banks have largely retreated from offering advice with Santander just the latest as Citywire reports.

The missale of payment protection insurance, with policies that were usually inappropriate and certainly exceptionally expensive has seen the rise of claims chasers, a very mixed blessing. It has also put another barrier in the way of retail banks seeking to return to normality as they cope with fines and repay huge amounts of money to customers.

Finally and perhaps most significant, the FSA failed to anticipate just about anything concerning the financial crisis. Given that the FSA was set up to regulate banks in terms of both their conduct and their prudential position, this has to rate as the FSA’s biggest and widest failure. RBS and HBoS represented two huge supervisory failures. But the list also includes Northern Rock and Bradford & Bingley which have contributed assets to Britain’s often forgotten bad bank – UK Financial Investments. The problems were as varied as they were wide. Northern Rock was too reliant on short term funding, but also loaned out at huge loans to value – well above 100 per cent which should have rung many alarm bells at FSA HQ in Canary Wharf. RBS had massive investments in esoteric mortgage backed securities. HBoS was making huge business loans to firms whose fortunes were tied to the property market, which was almost a triple bet on property. Fast track loans were being handed to people who were self certifying their income. There was a huge amounts of mortgage fraud. The FSA has produced a number of self flagellating reports though there are also suggestions that it didn’t have the full power to intervene against Master of the Universe chief executives. The Libor fixing scandal simply proves that things can still go fundamentally wrong.

The impact of all these problems

First, many tens of thousand of people have suffered from unnecessary worry at best and sometimes financial hardship at worst. Of course, in some situations the FSA has ordered redress, sometimes the Financial Ombudsman Service has offered compensation on a case by case basis, or if the firms involved are no longer in business, the Financial Compensation has offered help too. The system may have worked within its own terms but it would have been better if the stable door had been shut first – a phrase repeated time and time again over the last few years.

Second, many people have lost faith in financial services and in advisers. Generally that has been a bad thing. People are usually better off when they are insured, invested and are saving. Good advice from a good adviser is a highly effective way of managing your finances. But bad advice has put many people off seeking professional advice. But the blow to confidence has helped no-one.

Third, the financial crisis has led to one of the worst periods of economic uncertainty we have ever experienced. The FSA cannot be blamed for it all. But London along with Wall Street was one of the two biggest centres of the crisis. Asleep at the wheel is almost too kind a description.

The FCA’s challenge

Well the financial crisis that was the last straw for the Government – that and the fact that the FSA was the creation of Gordon Brown. Conduct regulation has now been split from prudential regulation. The former is covered by the Financial Conduct Authority and could loosely be described as making sure firms treat you their customers better and not missell or mislead.

In layman’s terms, the Prudential Regulatory Authority will make sure firms don’t take risks to the extent that they go bust or threaten the whole financial system. The Bank of England’s Financial Policy Committee is also there to head off problems before they happen. Whether this division of labour works remains to be seen.

The FCA, which is probably the body you are most likely to come in contact with, inherits a bookshelf of rules governing advice, suitability and marketing. Some things the FSA did have stood the test of time. Following Equitable Life’s near demise, new rules for insurance companies probably have helped avoid a repeat. There is even a ban on paying commission to advisers – a dramatic market intervention which has seen many advisers decide to retire or sell up though this has had the effect of cutting access to advice. During the FSA, FCA transition the new management has spent many months asking the market for more intelligence about what might be going wrong, so it can prevent things before they happen. It has just published its Risk Outlook following on from the work of the FSA and it shows considerably more awareness of the pressure points than the FSA ever did.

The FCA has also made it clear it will intervene to ban products from the mainstream retail market such as viaticals funds, while it has clamped down on advice on Unregulated Collective Investment Schemes.

The new FCA chief executive Martin Wheatley has made some very shrewd speeches demonstrating more awareness of market issues. Here is one of his latest interviews on Moneysavingexpert.

But even as he stops being chief executive designate and just becomes chief executive, he has encountered some problems already being criticised by MPs over Bank of Ireland’s rate hike reported in the Telegraph. The FCA says it is beyond their remit – a constant issue with regulation.

It shows just how difficult it may be to live up to this statement from the FCA in that recent risk outlook.

“People need a financial industry they can trust –  success for the FCA will be when both consumers and firms rebuild that bond of trust.”

At Mindful Money we could agree more. But there is a lot of work to be done before the ghosts of misselling past are laid to rest. It won’t be difficult to do better than the FSA. But to succeed it will have to do a lot better.

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