In my last column I wrote about the issue of regulating the regulator and which organisation is actually charged with this responsibility. Ultimately, of course, the regulator must answer to the Treasury and parliament, both the House of Commons and the House of Lords. It is important therefore to ensure that those who sit within these ‘democratic regulators’ are made aware of how our members view the Financial Services Authority (FSA) and its work.
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Ensuring awareness
Part of the democratic process involves the taking of soundings by the Lords and the Commons from various stakeholders within and around the industry to ensure it has a rounded view of the FSA’s work. To this end, I was invited to give oral evidence to the House of Lords Committee on Regulators this month following the submission of written evidence to the Committee in February this year. The Committee is currently running an inquiry into UK Economic Regulators and the Association of Independent Financial Advisers (AIFA) and the Association of Mortgage Intermediaries (AMI) believe it is important to provide such evidence to ensure the Committee is aware of the regulatory issues our members are tackling at the ‘coal face’.
In our evidence to the Committee we wanted to raise a number of issues on behalf of members. Firstly, and it is something we have increasingly talked about lately, is the delivery of a ‘regulatory dividend’ to the industry for its commitment to the FSA’s move towards a more principles-based regulatory regime. Plus, we would like to see the regulator undertake a cost-benefit analysis of regulation and, in particular, its move to principles-based regulation.
We believe that both AIFA and AMI members value the current regulatory regime and the process of evolution that has led to today’s structure of regulator in the FSA, Ombudsman in the Financial Ombudsman Service (FOS) and the final safety net for consumers in the Financial Services Compensation Scheme. We accept that regulation has helped drive up standards in retail financial services and improved customer outcomes. However, it is fair to say we would like to see improvements.
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Outcomes and principles
The FSA believes the way to improve the regime is to move away from prescribed rules to focus more on outcomes and its principles. The cost of this move to principles has been widely publicised as approximately £50 million – a substantial amount in anyone’s books. Yet, even with this considerable amount to be spent on the move, there is no commitment from the regulator to a cost-benefit analysis of its introduction. With this, we must ask the question: how can the FSA determine whether the benefits the new regime will bring will outweigh the costs of its introduction?
Last year’s OXERA report on the benefits of financial regulation shed some light on this area. We believe the same level of scrutiny should be applied to the costs involved in moving to principles, especially as it will be AMI and AIFA members who will be funding this move.
We have long campaigned for real practical substance and examples of how the FSA is providing a ‘regulatory dividend’ for the industry. This seems absolutely necessary given the ongoing work towards a principles-based regime. We would like to see what shape the ’dividend’ will take and when it will be delivered, as it is our belief that it has so far failed to materialise. Regulatory change costs money and those firms who show complete ‘buy-in’ to the regulatory regime and have embraced regulation must now start to see the benefits of their commitment. This is vital to ensure firm’s ongoing confidence that compliance is rewarded.
Constant review
Another issue focused on the need for a constant review of the FSA’s practices. The recent National Audit Office (NAO) review highlighted the need for the FSA to have a surer grasp of the costings for each of its projects and the benefits they would bring. We welcome the NAO’s evaluation as it is important that regulators publicly demonstrate their accountability. It is our belief that this type of review should be conducted every two years and that the NAO itself is given wider scope for investigations in the future. This will ensure the FSA continues to perform effectively and give the industry confidence in the regulator.
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With the vast majority of mortgage broker firms classed as ‘smaller firms’ we wanted to inform the House of Lords of the importance of a regulator which communicated effectively with these firms. Under Stephen Bland’s leadership, the small firms division at the FSA has improved the way it interacts with small firms. That said, there is further work to do, something recognised by the FSA’s Sarah Wilson following the publication of the ‘Treating Customers Fairly’ review. Initiatives such as tailored handbooks have been steps in the right direction and we would like to see increased focus from the FSA on the smaller firm ‘community’ to ensure they do not feel they’re are somehow under the regulatory radar. We also believe that the FOS could learn from the FSA’s experience in this regard and there is a need for FOS to establish its own small firms division.
We would like to see competition become a fifth pillar of the regulator’s objectives. It is important that regulation is not a barrier to competition.
These recommendations are designed to give our members the regulator they deserve and ensure the FSA is able to prove its own effectiveness to those firms who ultimately pay for it.
Chris Cummings is director-general of the Association of Mortgage Intermediaries
