The Financial Conduct Authority, the new financial regulator, will take over from the FSA in a couple of days. And it has an important new power that could spell the end for dodgy money products.
We are just a couple of days away from a very significant shake-up in the financial services industry.
The Financial Services Authority (FSA), the existing regulator, is being replaced by two new organisations on 1st April: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
This is part of the Government’s plan to improve financial supervision, given the major blunders that we’ve seen over the last few years, from the credit crunch to mis-selling scandals like payment protection insurance (PPI). The FCA is the consumer arm and will focus on "promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms".
The FCA’s business plan, and the risks it will be monitoring, have now been published. So let’s take a look at what we can expect.
The FCA’s priorities
The FCA has identified a number of main ‘risks’ it wants to tackle from day one, which gives us an idea of where to expect some changes. They are:
Financial firms not designing products and services that respond to real needs or are in our long-term interest
Within the FCA’s business plan, it picks out a couple of examples that it’s going to investigate this coming year. The first are the fee structures of investment funds. The FCA says that the increasing practice of charging ‘hidden’ fees, as well as the introduction of complex charging structures, are causes for concern.
Another area it wants to investigate properly is the treatment of struggling mortgage borrowers. It wants lenders to be able to explain clearly how their approach to this problem ensures borrowers are still treated fairly.
Distribution channels not promoting transparency on products and services
In plain English, this is the FCA’s plan to review the incentives offered to advisers to sell certain products, as well as the way products are advertised. Indeed the FCA has a team dedicated solely to misleading promotions, while it has a new power to ban financial promotions and publish details on why they have been banned.
Over-reliance on, and inadequate oversight of, payment and product technologies
This covers a few different areas, including the impact price comparison sites have had on the structure and price of various insurance products, as well as the risks of mobile banking and new payment methods.
There will also be a follow up to the RBS systems failures of last year in order to ensure people aren’t left unable to access their cash for such a long time in future.
Poor understanding of risk and return, combined with the search for yield or income, leads consumers to take on more risk than is appropriate
In other words, protecting people from themselves.
One area that gets an early mention here in the business plan is interest-only mortgages, where there is a considerable risk that existing borrowers will be unable to repay the capital they owe at the end of their mortgage term. That case hasn’t been helped by the fact that two more lenders have either pulled out entirely or severely restricted their interest-only mortgage lending.
“Temporary product intervention rules”
However, the most interesting thing about the new regulator (well, as interesting as regulation ever gets) is its new “temporary product intervention rules”.
[SPOTLIGHT]In the words of the FSA, these are “rules made before consultation, where the FCA identifies a significant risk to consumers which requires prompt action”. In other words, when the new regulator sees something seriously wrong is going on and feels the need to clamp down on it immediately, it can act, rather than going through the time and expense of setting up a consultation with the industry, and having to listen to all sorts of lengthy submissions on why it’s not actually all that terrible after all.
The ability to instantly ban some facet of a financial product is potentially a very significant tool in the FCA’s arsenal.
Here are some of the instances where we’ve been told the FCA may be inclined to impose temporary rules:
- Where a product is in serious danger of being sold to the wrong customers (for example a niche or complex product being sold to the mass market)
- Where a non-essential feature of a product is causing serious problems for customers
- Where a product is inherently flawed.
It’s not a popular move
Perhaps understandably many financial firms are very concerned about this, warning that rules may be made too hastily. There is a safeguard though, in that rules made in this way can last no longer than 12 months and cannot be renewed.
In the meantime, the FCA will be able to consult on a permanent solution or look to “resolve the problem another way”.
Personally, I’m really pleased that the regulator has the power to act so decisively. Obviously it is not something I want to see it do on a regular basis and unless it’s absolutely necessary. But if we want effective regulation – and the last few years have demonstrated that this is absolutely what we need – then we simply have to give the regulator the tools with which to do the job.
Of course, the proof will be in the pudding. It’s one thing to have these powers, it’s quite another to see them used properly.
What do you think? What do you want to see from the new regulator? Is more regulation what we need to clean up the financial industry? Let us know your thoughts in the Comment box below.