Much has been made of the Financial Services Authority (FSA) regulating by speech. It seems much of the regulator’s thinking can be seen through the words of its directors and leaders at various conferences and seminars. Whether it is principles-based regulation, treating customers fairly or MCOB, you can tell a lot from what these men and women have to say at the lectern.
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One topic which has caught the eye of many within the broker market has been the conference on principles-based regulation and, within this, the issue of the FSA’s relationship with the Financial Ombudsman Service (FOS). For many people, this has brought serious worries over what effects the Ombudsman will have on the regulatory environment in a principles-led era.
A higher profile
Chris Cummings, director-general of the Association of Mortgage Intermediaries (AMI), believes this is the start of the Ombudsman taking a much higher profile when it comes to setting the regulatory agenda.
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“With John Tiner, chairman of the FSA, announcing the Ombudsman will be setting precedent going forward, that moves us into a very different position to principles-based regulation. What that is saying is even good firms, who think they are following the principles correctly, will still have to pay attention to Ombudsman judgements because they will set precedent.
“All of a sudden that reopens, for me, the whole can of worms over retrospective regulation because even if you think you are doing right, you won’t know until that’s tested in the courts.”
This puts a very different perspective of what a broker can and should expect the regulatory environment to look like in the coming months. In Cummings’ view, not only will brokers have to pay attention to what the FSA is saying to remain compliant, but also the decisions of the Ombudsman.
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Increasing workload
For Bill Warren, compliance director at Complete Mortgages and Loans Service, this will increase the workload placed on firms.
“I think this issue needs highlighting as if people don’t realise, it might creep up on them. The difficulty is that right now it could appear that you may have to look at every Ombudsman decision and if you comply with that view, which is time-consuming.”
For Warren, even though the regulator places the emphasis on senior management to help ensure best practice, he points out most will rely on the interpretations of the compliance officers to know what’s right and wrong. But for small firms, they may not have such dedicated staff and Warren believes they will now have to keep track of almost every case going through the Ombudsman as well as functioning as a business; a task which will be extremely hard work.
However, both the FSA and the FOS deny this will be the case and insist they will continue to be two separate bodies, with the FSA setting the rules.
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Emma Parker, press officer at the FOS, says: “The FSA is the regulator and sets the rules. The role of the Ombudsman is to look at individual cases. We get our law structure and the rules from the FSA and then we decide in the context what is fair and reasonable behaviour.”
This, according to Parker, means that the FSA will always be setting precedent over what is deemed to be compliant and non-compliant, with the Ombudsman there to settle questions of fairness. The FSA points out that only 5 per cent of the cases dealt with by the Ombudsman are brought for infringing regulatory guidelines and this will remain the case in a principles-led world.
Speaking at the FSA’s principles-based regulation conference on 23 April, Tiner said: “We know also that some firms are concerned about the interaction of our regime with the work of the FOS. They fear that they will be held accountable to separate standards by the two organisations and that the FOS’ interpretation of firms’ obligations will differ from ours. This would risk creating a separate and possibly different ‘shadow’ rule book, making it hard for firms to operate coherent, and well judged, compliance strategies. I think I have some, but limited, sympathy with these views.”
Unfounded fears
It therefore seems that the fears of Cummings and Warren are unfounded and firms will not have to deal with a second-tier regulator. However, in a world of principles rather than rules, where prescription is exchanged for interpretation, is a market being created where what right or wrong actually is can be turned on how one party perceives it to be? Therefore, could we find ourselves ending up in a world of retrospective regulation because one lawyer will look at an Ombudsman judgement and use an interpretation which fits their needs?
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According to regulator’s managing director, Clive Briault, the answer is no. “These risks are exaggerated as at the end of the day, firms that put in place a culture and a set of operating procedures that deliver the outcomes we are seeking are unlikely to find the FOS upholding cases against them on a regular basis.”
