In this FSA-regulated industry that we all now operate in firms are constantly under scrutiny and must always have compliance at the forefront of any activity.
In recent weeks we have seen more than ever the results for those firms who are judged to have broken the mortgage rules by the regulator – enforcement action has been followed with fines, past business reviews and some firms having to cease business altogether.
Importance of transparency
The phrase ‘clear, fair and transparent’ has entered the lexicon of financial services language and intermediaries must attempt to conduct all their business matters in this way.
However, the issue of transparency is also a major concern for the regulator itself, particularly when it is dealing with the results of its investigations and any follow-up procedures.
There are many who believe that the Financial Services Authority (FSA) must be completely transparent with regard to issuing information on firms who have potentially breached the rules as this would give confidence to consumers and the industry that the regulator is carrying out its job.
Plus, it may send out a message to firms that it is actively seeking and punishing those firms that are not playing by the rules – they may get their houses in order prior to the FSA visiting, which would mean a cleaner industry.
Going public
The problem lies with the stage at which the FSA goes public with its work in this area. For instance, in the recent results of its review into self-certification, affordability, training and competence and senior management responsibilities, the regulator announced that seven firms had been referred to enforcement because of failings that had been uncovered.
Given that the FSA has felt that its failings were serious enough for enforcement, some argue that the firms should be ‘named and shamed’ allowing customers of that firm to find out about their activities and take any action.
It also sends the message outlined above to the rest of the industry – essentially, you’ve had enough time to get your house in order. Break the rules and you will be punished.
However, what about the firm concerned? Is it right that they should be publicly named when the full process has yet to be worked through?
The FSA must be firm in its thinking before putting a firm in enforcement and a proportionate response is essential. The final decision made by the FSA can depend on a number of factors – the seriousness of the breach, its duration, was it reckless or deliberate, how quickly was it remedied, how co-operative has the firm been with the FSA, has the firm got a previous disciplinary record, etc.
Taking all this into account, it is not beyond the realms of possibility that the outcome will not be as severe as some would believe. There is a danger of deeming a firm ‘guilty’ before the actual verdict has been given.
The damage to a firm’s reputation and business would be substantial and therefore the FSA must be completely clear on the case if it is to make the firm’s name public.
A tricky position
There is no doubting that the FSA is in a somewhat tricky position, however, it would be fair to say that it has not always made life easy for itself. It could even be accused of sending out mixed messages with regards to ‘naming and shaming’.
The FSA’s official stance with firms under investigation is that the name remains private until the full process has been completed and the final notice has been published.
However, in the past it has created an atmosphere of uncertainty in its provision of information prior to this point in proceedings.
For instance, in the Summer of 2006 the FSA made public the results of a network review it had carried out. In a press release it outlined how it had stopped four mortgage and general insurance networks from recruiting any further appointed representatives (AR) until they could prove that sufficient checks and balances were in place to ensure customers would be treated fairly.
In this case the FSA’s attempt to be somewhat transparent was a huge mistake. While it had revealed that four networks were no longer allowed to recruit, it would not make public the names of the actual networks concerned.
This led to widespread problems as ARs of all networks were understandably worried about their own principals even though the chances were that they were not one of the four.
There was also an issue in consumer confidence as the FSA felt that the four networks had not been practicing business in line with TCF.
The release of this partial information led to a media ‘bun fight’ in which rumour and gossip took the place of hard facts. The FSA had in effect placed itself in a corner – by wanting to draw attention to its work in this area and the seriousness with which it took the firm’s problems it, inadvertently, precipitated a lack of confidence in the entire mortgage and general insurance network sector from both ARs and their customers.
This is why the whole issue of ‘naming and shaming’ is a balancing act for the regulator. Consumer champions continually call for firms who are being investigated to be named so that consumers are aware of those in the frame and yet this could do more damage than good.
Finding a balance
There is no doubting that other firms in the industry can benefit from the information the FSA releases with regards to enforcement action.
We have seen recently a number of firms fined and censured for failings with their non-conforming advice practices and it is possible for other firms to find out the areas that the FSA is focused on and where perhaps they can improve.
In effect, they are learning from other’s mistakes but the FSA must be careful with regard to providing too much information, too soon.
The fact of the matter is that all firms have access to the rules already and should therefore be running compliant businesses. Enforcement action by the FSA shows it is doing its job and that bad practice will not be tolerated.
However, ‘naming and shaming’ should really only take place when the full process has been completed. To reveal too soon runs the risk of destroying confidence when it is attempting to deliver the exact opposite.
