director of retail policy and conduct risk at the UK’s Financial
Services Authority, about the seismic shift in regulation being
demanded in the wake of the global financial crisis – a crisis that
has significantly affected the UK consumer banking
industry.
Regulation, regulation,
regulation – the baying chant of consumers and a mass media left
confused and angry by the overwhelming size and depth of the
financial crisis. Where was the oversight, the understanding, the
control? Why didn’t the regulators step in earlier? Why don’t the
regulators do more to help consumers? And what will now change
given the collapse of the old system and old business
models?
Go deeper with GlobalData
Dan Waters, director of retail policy and conduct risk at the
UK’s Financial Services Authority, says in response: “I think we
recognise there are some things we need to up our game around, and
we said that quite publicly. We intend to increase and enhance the
depth of our supervision and be more proactive and more challenging
for firms. There will be a change in that regard.”
The UK has suffered more than almost any other major market over
the past 12 months – seven of the top nine UK banks servicing the
local market have been affected in some significant way by the
crisis. The collapse of Northern Rock in August last year was
swift; since then, Bradford & Bingley, Alliance & Leicester
and HBOS have all been subsumed into more stable rivals, while
Lloyds TSB and Royal Bank of Scotland edge towards partial
nationalisation (see News Digest) and Barclays is now 35
percent owned by Middle East investors. (Only HSBC and Nationwide
Building Society remain largely unchanged.)
Very far from over
And it is all very far from over. Mervyn King, governor of the
Bank of England, has raised the prospect that UK banks will need
yet more capital and government support while Alistair Darling, the
UK’s finance minister, has warned that banks risk full
nationalisation unless they reopen credit lines to SMEs. The OECD
says, among others, the UK economic slump has only just begun, set
to last through 2009 and perhaps into 2010.
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By GlobalDataIn among all of the chaos sits the Financial Services Authority
(FSA), the UK’s financial regulator. It was jolted into the
spotlight earlier this year in the wake of the Northern Rock
fiasco, severely criticised over its (lack of) oversight of the
UK’s then fifth-largest mortgage lender (see RBI 589).
Now, 10 months after the UK government nationalised Northern
Rock back in February – and with a radically changed banking
environment to deal with – the FSA says it is evolving. It has just
announced wholly significant changes to the way investment products
and insurance can be sold in the UK by financial advisers or banks
(see box right), while on 4 November it published details
of a consultation paper proposing a more robust framework to
regulate retail banks (see RBI 602).
Waters describes this as the “centrepiece” of [the FSA’s]
current agenda. The Banking Code Standards Board monitors and
enforces the voluntary Banking Codes governing current accounts,
personal loans and overdrafts, savings, card services and ATMs, and
next year the FSA will become responsible for this under the
Payment Services Directive (PSD).
Waters told RBI: “We have got a 10-year history with
the Banking Codes Standard board and they have done a reasonable
job with what they were asked to do. But with the world we have
now, there are good questions to ask as to whether the industry can
continue with self regulation. One of the things we learnt with
Northern Rock was that it is very important for the FSA to
understand the business models of banks, and the reliability and
sustainability of their business models in respect of our statutory
objectives.
“The other thing to say is that, equally important, from the
point of view of consumers, it seems to us increasingly anomalous
that we don’t regulate that core relationship consumers have with
financial institutions. One of the most profound relationships [a
person has] got is a bank account, and it seems to us anomalous
that FSA is not in that space.”
A lot of discussion still to be had
What is clear, in talking to Waters, is that there is still a
lot of discussion and debate to be had about the exact role the FSA
will play in the UK – the specifics, the details – and the degree
of information and communication it will demand from banks. It will
certainly be a lot more than previously. The FSA, he warns, will be
a good deal more aggressive in its oversight.
On the suggestion that the UK consumer is demanding a sea-change
in the scope of the regulatory environment and that this will
entail much more comprehensive dialogue between the FSA and the
banking industry, Waters says: “That’s what we are
anticipating.
“If you’d followed our response to Northern Rock we did a very
substantial piece of work called the Supervisory Enhancement
Programme which looked at the work we do in terms of supervising
those institutions; the work we do in terms of the training and
competency of our supervisors; and also a deep look at the sector
teams we have at the FSA, all of which is designed to raise the
quality of supervision and the depth of supervision in respect of
our banks,” he explained.
“And that’s what’s happening and that is a very significant
change. More resources and higher standards. We are raising our
game right across the board.”
Pushed on whether this meant a ‘profound’ shift in the
regulatory environment in the UK, Waters said: “I would agree,
consistent with our fundamental risk-based approach to regulation
which we think is still sound. We also think our principles-based
approach to regulation is still sound.It’s quite interesting to see
how some of the resolutions have been reached in some of the
discussions around banks who have been in difficulties and dealing
with the crises from day to day.
“The principles-based approach is actually extremely helpful
because it is very flexible and it focuses on outcomes rather than
obsessing about killer processes and ticking boxes. We think it
remains robust but one of the things we wanted to do was increase
the depth of understanding of our providers and the depth of their
engagement with these firms. And that’s what we are doing within
this broader philosophical context.”
Who will draw the line?
For RBI, the key question is one of pronouncement. As
the FSA gets more involved in the UK banking industry, understands
the workings of individual banks and the markets to an ever greater
degree, it will necessarily have to make more decisions at certain
key points – who will draw that line, who will say ‘that is not
good enough, that is wrong’?
Will these decisions become public statements on named banks, or
private correspondence between the FSA and individuals? Waters
replies that the FSA is prepared to be “more demanding and if needs
be more directive in particular circumstances than we have been in
the past”.
Even, he adds, if that means publicly criticising particular
banks – “it would depend, obviously – an enforcement is clearly a
public step”.
“We will be more proactive. To get a better view of the whole
business of the firm, from the top down to the ground, and what the
retail banking business side of the business actually looks like,”
he added.
“To understand the relationship with clients, the products and
services that are on offer, how cross-subsidisation maybe working,
and how all of those things add up together to form the
profitability and sustainability of the business model.”
The FSA has been criticised in the past for under-representing
the UK consumer and being too friendly towards the economically
important UK financial services industry. Principles-based
initiatives like Treating Customer Fairly, which puts the moral
onus on banks and financial services companies to provide correct
advice and customer service, has been criticised as ineffectual,
for instance, in dealing with the competitive demands of
profit-hungry banks.
Waters counters that one area it has strived to improve is what
he refers to as ‘consumer capability’ and ‘consumer responsibility’
– increasing the amount of accessible information the UK public has
on financial services so that it is better aware of industry
practice.
Striking a sensible balance
He is certainly adamant that it is not the job of the FSA to
ally with banks or consumers: “It is our job to strike a sensible
balance between the responsibilities and obligations we impose on
firms that we regulate and understand the impact of this, and the
needs of consumer who we do not directly regulate.
“We have done a tremendous amount to raise consumer
responsibility and capability and there is an endless amount more
to be done there. Because there is still a huge gap and information
asymmetry between consumer and the financial institutions right
across the board. This is not a way to get financial institutions
off the hook in their responsibility but it’s a way for consumers
to maximise their outcome… The idea that they can just sit there
and be spoon-fed answers is wrong! And I think many consumers
already know that but many can be reminded of it.”
One of the thorniest aspects of the financial crisis in the UK
came about with the collapse of Iceland’s banking system.
Landesbanki and Kaupthing had significant UK businesses, and mild
panic ensued in the wake of their abrupt downfall.
There remain a number of deposit-taking non-UK institutions in
the country, such as India’s ICICI and its direct banking service,
and regulatory oversight of these have started to be
questioned.
“In terms of authorisation we are guided by European
requirements. I think there have been some disturbing issues
arising recently that we need to get to grips with, and that will
require us to think again with our European colleagues to get the
agreements correct…
“I think whenever a consumer is dealing with an offshore
institution, one has to be very careful about understanding the
limits of one’s rights and recourse.
“If there are silver linings, recently, there has been a huge
increase in awareness in the UK about the importance of
compensation arrangements and how they worked, and people have
certainly made efforts to learn more.”
Distribution: The end of upfront commissions?
On 25 November, the FSA published the conclusions of its Retail
Distribution Review, a comprehensive assessment of the sales models
used to distribute products such as insurance, investments and
pensions in the UK.
In a damning indictment of the commonplace upfront commissions
model, where financial advisers, banks and other intermediaries
earn a commission for every product or policy sold, the FSA said
that under the proposals, which it plans to implement by the end of
2012, independent advisers will be required to agree a charge for
their services with customers beforehand.
The regulator’s statement outlined four key proposals:
• Providing greater clarity for consumers about the advice
service being offered by making a distinction between independent
advice and sales advice;
• Raising professional standards of all advisers by setting
minimum qualifications for different types of advice and
establishing a Professional Standards Board to boost consumers’
confidence in the industry;
• Modernising the way advice is paid for by requiring
independent advisers to agree the cost of financial advice with
customers up-front, removing the possibility of commission-bias and
ensuring the cost of all advice is clear to consumers whenever it
is given; and
• Introducing a new standard for independent advice by ensuring
advice is unbiased, unrestricted and extends to all types of
investments.
