Response to Treasury Consultation

From: - John Howard, as an individual at Consumer- Insights (www.consumer-insights.co.uk)

Contact: - johnhoward@consumer-insights.co.uk

I am a former Chairman of the FSA's Consumer Panel and a former non-executive director of the Financial Ombudsman Service. I was appointed by the Economic Secretary to the Treasury, Mark Hoban, to be a Commissioner with the Independent Commission on Equitable Life Payments. I also now provide advice to financial firms, trade associations and regulators on the consumer perspective of financial services and treating customers fairly. I am a non executive director of National Counties Building Society but these responses are not those of the society nor are they endorsed by it.

Since the beginning of the financial crisis the FSA has become more proactive, intrusive and judgement based. This approach has been successful and it is entirely right that the new regulators continue this approach.

The division of the FSA’s responsibilities between the PRA and the FCA must ensure no underlap or overlap and must not result in an increased administrative burden on firms. It must always be remembered that increased costs to the industry are inevitably passed through as a ‘cost of doing business’ to consumers.

My responses to the specific questions posed in the consultation document are as follows:-

Box 2.D:

1 What are your views on the likely effectiveness and impact of these instruments as macro-prudential tools?

2 Are there any other potential macro-prudential tools which you believe the interim FPC and the Government should consider?

The tools outlined are appropriate but will only be effective if the regulators have the will to use them. This is much easier in the bad times than the good. It has been proved in the past that when markets are rising it becomes increasingly difficult for regulators to dampen the enthusiasm. In fact market forces are likely to encourage some national regulators to relax their tough stance to give firms the opportunity to grab market share from overseas competitors. The effectiveness of the tools available will rely on the judgements of the FPC, the Bank of England and the PRA and their ability to resist calls for a more relaxed regime when markets in the UK and firms in other jurisdictions are racing ahead.

The regulators should also be able to introduce swiftly new tools to control over exuberance in the market place as the industry devises new products and techniques to exploit market conditions.

Box 2.F: Consultation question

3 Do you have any general comments on the proposed role, governance and accountability mechanisms of the FPC?

It would be desirable to have some informed representative of the consumer on this committee as the largest stakeholder group which will be affected by the deliberations of the FPC. It would therefore seem appropriate to have greater consumer representation and a vote for the Chief Executive of the FCA.

Box 2.G: Consultation question

4 Do you have any comments on the proposals for the regulation of systemically important infrastructure?

No comment

Box 3.B: Regulatory principles to be applied to both regulators

The regulatory principles applied to the PRA and FCA are:

1. The need to use the resources of each regulator in the most efficient and economic way;

Agreed

2. the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction;

Agreed

3. the general principle that consumers should take responsibility for their decision when fully informed;

Even if a consumer is fully informed it does not mean that they understand. This is a fundamental problem with trying to ascribe to consumers responsibility for their decisions. Consumers can only have responsibility for their decisions if they fully understand what they are buying and it is impossible to know if a person fully understands. They may think they understand when in fact they don't; they may partially understand and misunderstand the most important point; or they may understand at one moment and not some time later.

The financial services industry has used the provision of information as a proxy for understanding but it is not really adequate. For this reason it is not appropriate to have a general principle that fully informed consumers should take responsibility for their decisions because even if they have been given all the information they may still not understand what they have purchased and should not be made liable if they lack real understanding.

This is why the Financial Ombudsman Service is such an important part of the system. The Ombudsman is charged with deciding if in all the circumstances of the case the consumer understood sufficiently what they were purchasing. Please see later section on the FOS.

4. the responsibilities of the senior management of an authorised person in relation to compliance with requirements imposed by or under this Act

No Comment

5. the desirability in appropriate cases of each regulator making information relating to authorised persons or recognised investment exchanges available to the public, or requiring authorised persons to publish information, as a means of contributing to the advancement by each regulator of its strategic and operational objectives; and

Agreed

6. the principle that the regulators should exercise their functions as transparently as possible.

Agreed

Box 3.C: Consultation question

5 What are your views on the (i) strategic and operational objectives and (ii) the regulatory principles proposed for the PRA?

No Comment

Box 3.D: Consultation question

6 What are your views on the scope proposed for the PRA, including Lloyd’s, and the allocation mechanism and procedural safeguards for firms conducting the ‘dealing in investments as principal’ regulated activity?

No Comment

Box 3.E: Consultation question

7 What are your views on the mechanisms proposed to make the regulator judgement-led, particularly regarding: rule-making; authorisation; approved persons; and enforcement (including hearing appeals against some decisions on a more limited grounds for appeal)?

The purposive approach appears novel and could be very valuable but is untested and it remains to be seen whether short statements of purpose in relation to the rules will be sufficient to take successful enforcement action.

Box 3.F: Consultation question

8 What are your views on the proposed governance framework for the PRA and its relationship with the Bank of England?

No Comment

Box 3.G: Consultation question

9 What are your views on the accountability mechanisms proposed for the PRA?

I do not think it is appropriate that a non executive director of the Court of the Bank of England should be the independent person who hears complaints about the PRA. Such a person would already be too closely involved with the oversight of the PRA and may have been involved in the appointment of executives at the PRA whose judgement is being challenged in the complaint.

Box 3.H: Consultation question

10 What are your views on the Government’s proposed mechanisms for the PRA’s engagement with industry and the wider public? Where the PRA believes that its decisions will have a material impact on consumers, it will be required to consult the FCA to take advantage of its expertise, as set out in Chapter 5.

The Consumer Panel which will be set up under the FCA should not have its remit restricted to the matters covered by the FCA but must be entitled to comment upon and make representations to all bodies within the regulatory architecture including the PRA, the FPA and the Bank of England. It should be for the Consumer Panel to decide what issues are of importance to consumers. The Consumer Panel should be entitled to ask for and receive information and advice from the PRA and should be entitled to meet with the Chief Executive and the Chairman of the PRA at least once per year each.

Box 4.B: Consultation Question

11 What are your views on the (i) strategic and operational objectives and (ii) the regulatory principles proposed for the FCA?

These are appropriate and I support the notion that “different consumers require different degrees of protection, depending on their capability and personal circumstances, the product they are buying, and the channel through which they are buying it.” But I would refer to my earlier comment on consumer responsibility and point out again that consumers should not be held responsible if it is reasonable to say that, despite the information provided, they did not understand the product or service they were purchasing. The only exception to this being in execution only transactions when the consumer accepts that they are taking responsibility for understanding the product or service. This will align the FCA’s view more closely to the Financial Ombudsman Service view of what is fair and help to avoid future conflicts of view about what is fair. (see comments later re FOS)

Box 4.D: Consultation question

12 What are your views on the Government’s proposed arrangements for governance and accountability of the FCA?

These are appropriate

Box 4.F: Consultation question

13 What are your views on the proposed new FCA product intervention power?

This will be an important and valuable power which should enable the new regulator to intervene early to remove products from the marketplace which could cause consumer harm. It is appropriate that this power should be set out in more detail to provide some certainty to firms.

Bringing a new product to market can be a costly exercise in terms of development, marketing and advertising and I believe the FCA should consider providing qualified approval (not pre-approval) for products to provide firms with some certainty and encourage innovation.

Box 4.G: Consultation question

14 The Government would welcome specific comments on:

· the proposed approach to the FCA using transparency and disclosure as a regulatory tool;

· the proposed new power in relation to financial promotions; and

· the proposed new power in relation to warning notices.

These are all very valuable measures

Box 4.H: Consultation question

15 Which, if any, of the additional new powers in relation to general competition law outlined above would be appropriate for the FCA? Are there any other powers the Government should consider?

No Comment

Box 4.I: Consultation question

16 The Government would welcomes specific comments on:

· he proposals for RIEs and Part XVIII of FSMA; and

· the proposals in relation to listing and primary market regulation.

No Comment

Box 5.A: Consultation question

17 What are your views on the mechanisms and processes proposed to support effective coordination between the PRA and the FCA?

This is one of the areas which could pose the most problems for the new structure. There is potential conflict between what is best prudentially and what is best for consumers. For example the prudential regulator may impose tough requirements on lenders which limit or restrict their ability to lend which may have the effect of reducing the number of people able to purchase a property. It is difficult to see how disagreements between the two regulators can be avoided. Firms will also suffer the risk of increased regulatory burden resulting from information and supervisory requirements of the FCA and the PRA.

Box 5.B: Consultation question

18 What are your views on the Government’s proposal that the PRA should be able to veto an FCA taking actions that would be likely to lead to the disorderly failure of a firm or wider financial instability?

Box 5.C: Consultation questions

19 What are your views on the proposed models for the authorisation process – which do you prefer, and why?

20 What are your views on the proposals on variation and removal of permissions?

Box 5.D: Consultation question

21 What are your views on the Government’s proposals for the approved persons regime under the new regulatory architecture?

No Comment

Box 5.E: Consultation question

22 What are your views on the Government’s proposals on passporting?

No Comment

Box 5.F: Consultation question

23 What are your views on the Government’s proposals on the treatment of mutual organisations in the new regulatory architecture?

No Comment

Box 5.G: Consultation question

24 What are your views on the process and powers proposed for making and waiving rules?

No Comment

Box 5.H: Consultation question

25 The Government would welcome specific comments on

· proposals to support effective group supervision by the new authorities – including the new power of direction; and

· proposals to introduce a new power of direction over unregulated parent entities in certain circumstances?

No Comment

Box 5.I: Consultation questions

26 What are your views on proposals for the new authorities’ powers and coordination requirements attached to change of control applications and Part VII transfers?

No Comment

Box 5.J: Consultation question

27 What are your views on the Government’s proposals for the new regulatory authorities’ powers and roles in insolvency proceedings?

No Comment

Box 5.K: Consultation question

28 What are your views on the Government’s proposals for the new authorities’ powers in respect of fees and levies?

No Comment

Box 6.A: Consultation question

29 What are your views on the proposed operating model, coordination arrangements and governance for the FSCS?

No Comment

Box 6.B: Consultation questions

30 What are your views on the proposals relating to the FOS, particularly in relation to transparency?

The duty placed upon the FOS is to decide cases referred to it on the basis of what is fair “in all the circumstances of the case”. Most consumer complaints are based on asymmetry of information between the financial firm and the consumer, and more importantly on the level of understanding the consumer has about what they have bought. A firm may follow to the letter the regulations for the sale of a particular product and judge that it has done all that is reasonable to enable a particular consumer to understand what they are buying. However it cannot be certain that a particular consumer in their specific circumstances has understood what they have bought. It is in this situation that the FOS has the power to ignore the law and the regulations and come to a decision that, in the particular circumstances of that case, and in that case alone, it was not reasonable to assume that the consumer had sufficient knowledge of what they were buying to make the transaction fair. This is a fundamental principle that must be preserved.

If a transaction is deemed unfair because of the nature or capability of the consumer then the FOS is entitled to ignore the existing rules and regulations to find in favour of the consumer. If the FOS decides that the unfairness lay in the product or the process then that is a systemic issue which it is the responsibility of the regulator to address.

If the FOS is making decisions about a significant number of cases with the same facts, it will usually have identified a problem with a particular product or sales process. There should be a trigger number of cases with identical facts which requires the FOS to involve the regulator as set out below.

If the FOS finds that a product or process is not fulfilling the regulators requirements it must notify the regulator and the regulator should be required to take up those cases and, using its enforcement powers, order compensation for the affected consumers and approve changes to the product or process before their continued sale.

If the product or process is fulfilling the regulators requirements but the Ombudsman is still of the opinion that in the majority of cases an unfair outcome is being produced it must again hand those cases to the regulator who must address the issue and make a ruling. The Ombudsman should not rule on those cases because it will in effect be acting as a regulator.

This could however create a point of conflict between the regulator and the ombudsman, which has occurred in the past with PPI. The FOS may decide that a systemic issue is creating unfair outcomes for consumers and refer it to the regulator. The regulator may in turn decide that, on balance, the systemic issue is not producing unfair outcomes for consumers. However as presently constituted the FOS could continue to find the practice unfair.

Any MOU between the FCA and the FOS must therefore contain a mechanism whereby a decision on fairness about a systemic issue identified by the ombudsman is agreed between the regulator and the ombudsman and the ombudsman must sign up to that interpretation.

It is entirely appropriate that the FOS publishes details of its determinations. These should not carry any details which might identify the consumer who has made the complaint. The FOS should also explain whether it regards the decision as turning on the particular facts of that individual case or whether there are likely to be many similar cases. As described above, if the ombudsman believes there could be many similar cases the FCA should be obliged to take regulatory action to deal with these cases.

Box 6.C: Consultation question

31 What are your views on the proposed arrangements for strengthened accountability for the FSCS, FOS and CFEB?

It is appropriate for all three bodies to be regularly reviewed by the NAO. To counter the effect of too many complaints being referred to the FOS the NAO should specifically undertake, in its regular review, an assessment as to whether firms should be settling far more of these complaints and whether the FCA should be doing more to ensure that they do.