The new regulators:
Champion for the consumers

Shayla Walmsley highlights the potential challenges facing the Financial Conduct Authority to meet its remit of securing consumer protection and fostering competition.

Carved from the remaining rib fragments of the Financial Services Authority, the Financial Conduct Authority (FCA) is designed to deal with what the government sees as one of the failures of the previous regulatory regime – to protect consumers and ensure that markets work effectively.

Following industry consultation, Chancellor George Osborne augmented its remit with the responsibility to promote competition – that is to “consider whether structural barriers or other features of the market are creating competitive inefficiencies in specific markets”.

The FCA will regulate more than 18,000 companies. It will have the power to ban retail products and flag upcoming enforcement actions to investors.

In a note following the announcement of its remit, law firm Simmons & Simmons described the stated goal of facilitating efficiency and choice in the market as “the first indication of a new recognition of the importance of a competitive marketplace in delivering better outcomes for consumers” .

Up to now, the FSA has effectively focused on minimising the adverse effects its activities could have on competition. The FCA, in contrast, will be responsible for actively promoting competition through its activities. The note describes the proposal as “a significant shift in the government’s acceptance of the role of positive competition in delivering benefits for consumers.”

Working out workloads

Yet some worry that there’s an apparent contradiction between promoting competition and pre-empting potentially competing products. The new body will oversee the design of financial products, including mandating minimum standards and specific features. Not only could this stifle innovation – since when were regulators better financial product designers than bankers? – but it also threatens to approximate product approval.

Under former Hong Kong financial regulator Martin Wheatley, cases of widespread market abuse – the mis-selling of payment protection insurance is an example – could be fast-tracked because of their potential to cause “serious consumer detriment”. The offending firms will be required to put in place accelerated compensation schemes.

For some of the new body’s critics, there is a tension between speedy redress and due process, especially since the Treasury announced it would have a lower risk threshold than the other two regulatory agencies. In theory, the pro-competition focus will allow the FCA to intervene where it believes competition could be endangered. Yet its powers threaten to overlap with those of the Competition Commission and the Office of Fair Trading, signalling the possibility of transfer of their powers – such as the power to investigate – to the FCA and an even more significant shake-up of the regulatory system than the one currently underway.

Conducting business

In the meantime, how the new body will operate is still moot. Concerned with how they will work in practice, CFA UK, a fund management body, has been critical of the emphasis on regulators at the expense of supervisors and enforcement. In its submission to the government during the consultation period, the CFA warned that the FCA might be reluctant to issue warning notices unless it was certain that enforcement would follow. In practice, it could mean some firms would effectively get off the hook.

Some elements of the new body’s powers, as currently understood, have been controversial. Notably, critics have pointed to the regulators’ ability pre-emptively to name and shame as threatening firms’ reputations, and potentially landing the regulator with a hefty legal bill. Bank investors, they claim, would be unimpressed.

“Everyone – banks, regulators, shareholders – is responsible for managing risk. We used to talk about moral persuasion, looking at how you conduct a business in the broader context and at all levels. This new regulator could encourage some banks to think about it,” says Richard Reid, a former Citigroup economist and now research director at the International Centre for Financial Regulation.

“There is undoubtedly short-termism within the investment community. It is all very well to say institutions are too willing to sell shares but investors have a number of things to think about. There are pensions involved, for example. But investors will give a premium to banks that manage their brands.”

Banks’ reputations are one potential casualty. Another, ironically, could be consumer confidence. Industry representatives told parliamentary hearings on the new regulation that pre-emptive disclosure could disengage consumers from financial services altogether.

In particular, pre-emptive strikes are the key issue. Even before investigations have concluded, the FCA will be able temporarily to ban products for a year.

The government intends the FCA to use its existing regulatory tools to the full in pursuing the promotion of competition. Thus, the FCA will be able to devise and implement rules, within the scope of the pure regulatory framework, that promote pro-competition outcomes. This should allow it to take more targeted action to intervene swiftly in the market for the purposes of dealing with any competition concerns identified.

Beyond official statements and submissions, banks themselves have been singularly silent on the regulators and their powers – at least until the dust settles. None are willing to speak on the record, but a source at one UK high street bank says: “We feel as though we’re in a state of flux. We’re being bombarded with regulation from all angles.”

The source added: “We don’t want to be seen fighting the regulators. We’re almost in a situation where we like it or lump it. But we have an in-house public policy team working constantly on the new regulations. It’s a full-time job, which gives you an idea of how much regulation there is.”

As for the FCA, for all its as yet unanswered questions, Jake Green, financial regulation partner at Ashurst, at least, is relatively sanguine. “It’s easy to knock the FCA, to spot overlaps and problems,” he says, “but it will all come out in the wash.”

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