A New Approach to Financial Regulation:
Executive Summary
1. The financial crisis was caused by the takeover of the regulators by the industry they regulate.
2. This consultation wants the industry to remain in control.
3. The regulation of banks should be separated from the regulation of the rest of the industry.
4. The emphasis on "consumers" and "consumer protection" is excessive. There should instead be an emphasis on protecting savings.
5. Financial regulators should be financed by a tax on savings, rather than by an industry fee.
6. Prudential supervision should not be separated from conduct of business regulation in separate organisations (PRA and CPMA).
7. The regulators should not have "statutory objectives", only "statutory duties".
8. These objectives or duties should not include the promotion of confidence in "the financial system" or "financial services and markets".
1. First impressions
1.1 "Those old ones are flawed."
The consultation is saying: "Those old ones are flawed."
.. the FSA’s approach to micro-prudential regulation was flawed.
But these "new" ones are "strong", "focused", "dedicated" etc. This happens repeatedly in this area. A search on "new regulatory" on the website of the FSA x produces a list of "approach", "architecture", "challenges", "environment", "framework" , "initiatives", "policy/ies", "reforms", "regime", "structure" and "system", such as:
Our new regulatory approach will be proactive and preventative, aiming to head off problems in advance. x
Our new regulatory reforms such as introducing realistic reporting and treating customers fairly will introduce transparency and will, I believe, provide a basis for restored consumer confidence. x
All these new regulatory "approaches", "architectures" etc, promise "fair": "benefits", "deals", "outcomes", "treatment" etc for "consumers" and/or "customers". A search on "change" produces an enormous list. There are calls for "cultural change" within the industry and "radical change" within the regulators. Lord Turner said in a speech recently:
We need radical change. Regulators must design radically changed regulations and supervisory approaches, but we also need to challenge our entire past philosophy of regulation. x
This is the way the industry operates.
"Those old products are flawed. But these new ones are low-cost, transparent etc."
On close inspection they turn out not to be "low-cost"
or "transparent". They say the old products are flawed and exaggerated the benefits of the new ones.
1.2 Exaggeration
The consultation document is very emphatic.
"Will be" is mentioned 138 times:
The new .. CPMA .. will be a strong consumer champion .. The FPC will be a transparent and accountable institution, ..
"ensure" 77 times:
The creation of a regulator with specific responsibility for consumer protection will ensure that the interests of consumers are not forgotten about or subordinated.
This depends on who is in charge. The CPMA "and markets" seems to be intended to get industry people onto the board of the CPMA, so the
industry is in charge. The CPMA does not have "specific responsibility for consumer protection", because it is also responsible for markets and has "a primary statutory
responsibility to promote confidence in financial
services and markets".
"Consumer protection" is a vague expression.
What is this protection from?
A search on "consumer protection from" returned nothing. Google most frequently returns "unfair trading".
The Future of Banking Commission says:
To date, the focus of consumer protection in UK financial services, and elsewhere around the world, has been to control the process by which products are sold. x
So "consumer protection" focuses on the sales process. But for example, the BBC Panorama programme Who took my pension x
x
has a focus on protecting savings rather than consumers,
since it discusses annual charges rather than the sales process.
"Consumer protection" is only a CPMA
"objective", which is another vague expression. They might say: "Sorry we did not achieve our objectives."
It is not even an objective on its own, but part of the "primary objective" (also referred to as the "primary statutory responsibility"):
The Government will legislate to provide the CPMA with a primary objective of ensuring confidence in financial services and markets, with particular focus on protecting consumers and ensuring market integrity.
The consultation has a considerable number of superlatives about the new approach, counting words: new 154,
important 36, effective 32, clear/ly 28, transparent 26, strong 21, focused 11,
credible 12, dedicated 6, consistent 5, stable 3, constructive 1, fair 1, prudent 1, specialised 1.
They sometimes go together:
transparent and accountable, fair and transparent, clear and transparent, focused and clear, focused and specialised, strong and credible,
credible and effective, consistently and effectively, consistent and complementary, stable and prudent, stable and credible,
constructive and independent.
1.3 Financial stability
The consultation starts: "The UK banking system", and is mostly about banks:
The objective is to reform the regulatory system for financial services to avoid a repeat of the financial crisis.
This was a banking crisis. The regulation of banks should be separated from the regulation of insurance companies and fund management
companies. I recommended this in a submission to the Treasury Select Committee at the time the FSA was proposed in 1997.
Other people also said that the FSA should be in two halves.
They are intrinsically different. Banks are concerned with the flow of cash,
insurance companies and fund management companies
with savings and investments.
If you have symptoms of an illness which are untreated for year after year they are likely to develop into a crisis.
The banking crisis is a manifestation of an underlying illness. That is regulators captive to the industry they regulate.
This results in regulators not challenging the industry.
The Lord Penrose report about Equitable Life said:
There was a general failure on the part of regulators and GAD to mount effective challenge of the management. x
The GAD was financed by a levy on the industry, like the FSA which did not challenge the takeover of ABN Amro by RBS, the Northern Rock business model and so on. Maintaining financial stability is concerned with the protection of the industry rather than consumers/investors. The FSA has a new objective:
financial stability - contributing to the protection and enhancement of the UK financial system
"The UK financial system" seems to be a euphemism for firms. Similarly, the consultation paper
is concerned with protecting the industry. Regulators should be concerned with
protecting the public from the industry, rather than with protecting the industry.
They should represent the interests of consumers/savers/investors.
1.4 The financial crisis
In his book The Financial Crisis Who was to blame?
Howard Davies gives examples of weak, hands-off regulation so that banks were not able to withstand the
credit crunch resulting in a crisis: 1) the approval of the Northern Rock
business model:
Its funding depended on a particular securitisation model, which meant that it was one of the first institutions to struggle to secure liquidity when the securitization market dried up the midsummer of 2007. (page 93)
2) the approval of the takeover of ABN Amro by RBS (page 98), 3) the approval of HBOS lending standards:
The losses at HBOS were dramatically large: lending standards were astonishinglt low. (page 192)
Howard Davies asks:
Because the regulators are protecting the industry rather than the public. In his article in the Financial Times We need new rules to keep bankers honest (8/12/10) Adair Turner said:
the FSA simply did not believe our remit included preventing the ABN Amro acquisition
But the FSA has a duty to protect consumers such as RBS depositors.
1.5 The investor perspective is (almost) missing.
The consultation mentions "long-term product payoffs" (4.24).
This is encouraging. I have been saying that the FSA should be
concerned with the long-term performance of products for years.
It should provide this as "consumer information".
This would "help retail consumers achieve a fair deal" which is, or at least was, one of the FSA's
"aims".
But otherwise the concerns of investors seem to be missing from the consultation. There is no mention of: unit trust, OEIC, investment trust, insurance fund, with-profits, saver,
investor, fund manager, dividend, yield etc. Investors are concerned about their savings, deposits and investments. The CPMA is a "conduct
regulator":
The CPMA will regulate:
• the conduct of all firms – .. – in their dealings with ordinary retail consumers,
What about the conduct of firms towards the savings which they hold? For example the recent BBC Panorama programme Who took my pension? x x and articles in the Telegraph:
£7billion a year skimmed off our savings x
Charges and fees cutting 50 per cent from British savers' pension pots x
The first rule of investing is: Don't be locked in. But pension saving is locked in to pension schemes. x You are trapped:
My State pension went into my bank account today and it now brings in TWICE per month what my ELAS WP annuity pays. .. but when I first drew my WP annuity it paid twice what I received each month from the State pension. x
I did take out my policy in June 1989- purchasing an income of £8487.68 .. By 2007 it had dropped to £4409.25. .. My pension is now down to £3470.00 x
So providers can charge what they like. The consultation does not discuss this topic at all. It does
not say whether fees/costs/charges are the responsibility of the PRA or of the CPMA.
It does not even mention the words "pension" or "charge".
Financial regulation should be concerned with the protection of finances, especially personal finances,
especially savings.
Irrespective of charges, personal pensions and
NEST are collective investment schemes, which perform less well than direct investment
because dealing in large blocks of stock effects the market price.
It is harder to compound large sums of money. This is discussed
for example by Warren Buffett:
It's a huge structural advantage not to have a lot of money. x
Everyone should have a portfolio of shares. But how many people have the time to manage a portfolio? x
2. Terminology
2.1 Terminology creep
Some expressions are counted in Table 1, comparing the Treasury consultation with the
(original) Financial Services and Markets Act (2000) and
the Financial Services Act (1986). "Duty/ies",
"investor/s", "trust/ee" have strongly declined.
"Objective/s", "consumer/s", "confidence" have strongly increased. This is a trend towards increasing vagueness.
It seems that "duty/ies" have turned into "objectives", "investor/s" into "consumer/s",
"trust" into "confidence". "The protection of investors" has changed to "consumer protection".
Table 1
The number of times some words occur in the consultation and legislation
| words | 1986 Act | 2000 Act | consultation |
|---|---|---|---|
| new | 23 | 31 | 148 |
| consumer/s | 2 | 96 | 90 |
| objective/s | 0 | 20 | 77 |
| role x | 0 | 12 | 73 |
| important/key | 0/0 | 0/0 | 36/31 |
| consumer protection | 1 | 0 | 32 |
| confidence | 0 | 11 | 9 |
| duty/ies | 48 | 91 | 6 |
| the protection of consumers | 0 | 4 | 1 |
| investor/s | 56 | 14 | 0 |
| manager/s | 87 | 157 | 0 |
| the protection of investors | 14 | 0 | 0 |
| trust/ee | 211 | 189 | 0 |
The objectives of the proposed new regulators divide into "primary" and "secondary". If they conflict, the primary objective generally has priority over both secondary objectives, and also "secondary factors", "secondary considerations" and "'have regards'":
In cases of direct conflict between primary and secondary objectives, the Government would generally expect the primary objective to override any secondary considerations
The PRA primary objective always has priority:
In the event that these objectives conflict, however, the PRA will be required to defer to its primary objective.
Looking under “primary” there are: "primary objectives", "primary statutory responsibility", "primary statutory objective", "primary legislation", "primary market activities".
Under "secondary" there are: “secondary .. administrative measures”, “secondary factors”, "secondary considerations", "statutory secondary considerations",
"secondary statutory objectives", "secondary legislation", "secondary market conduct".
Regulators should not be required to "promote confidence" in industry.
People need to be sceptical about the claims of the industry rather than confident.
There are many examples such as mortgage endowments.
The Government will therefore create a dedicated consumer protection and markets authority (CPMA) with a primary statutory responsibility to promote confidence in financial services and markets. This objective will have two important components. First, the protection of consumers through a strong consumer division within the CPMA. And second, ..."
Rather than "two important components" why not say simply "two components"?
The terminology has changed from
"maintaining confidence in the financial system" - the first objective of the FSA - to "promote confidence in
financial services and markets". There is no mention of "confidence" in the 1986 Act, and no mention of "trust" in the consultation.
A contributor to a discussion
commented:
Confidence is based on reason, so if confidence is misplaced that's the 'customer's own fault. Trust on the other hand is unquestioning, so if trust is misplaced that is not the 'customer's fault. x
2.2 Prudential supervision
The consultation does not contain any formal definitions. What is "prudential supervision"?
.. to ensure that the depositors are protected by the institution in question being financially sound. x
So both the PRA and CPMA are concerned with "consumer protection",
which is mentioned 32 times in the consultation but not apparently in relation to the PRA.
The CPMA is a "conduct regulator". But the PRA is also interested in conduct,
that is prudential conduct. So that not only are
the PRA and CMA both concerned with protecting consumers, they are also both cogrennduct regulators.
The PRA-CPMA division seems at best misguided, because it splits this regulation.
Consumer Focus
point out that regulators such as Ofcom and Ofgem have the statutory duty to protect consumers:
The ideal regulatory structure would:
(a) put consumer interests first
(b) be transparent, open and accountable
(c) recognise its role in ensuring essential service provision and financial inclusion. x
The PRA protects deposits/policies by ensuring firms are financially sound. The CPMA should similarly be concerned with
protecting savings/investments.
2.3 "Consumers"
The paper constantly refers to "consumers" and there are few
other kinds of people: adviser/s 2, banker/s 2, broker/s 0, broker-dealer/s 2, consumer/s 90, depositor/s 1,
director/s 9, investor/s 0, manager/s 0, saver/s 0, shareholder/s 2,
This habit of calling everyone "consumers" seems to have started with the 2000 Act which refers to "the protection of consumers". The
1986 Act refers to "the protection of investors".
The FSA is much concerned with "consumers". It even has a journal Consumer Research.
x
The chairman of the FSA, Callum McCarthy, mentioned both "consumer
responsibility" and "responsible consumer" in a speech:
What does caveat emptor mean in the retail market for financial services? x
Other adjectives are reversed with "consumer" on the website of the FSA, such as: "alert consumers" and "consumer alerts", "aware consumers" and "consumer awareness", "the conduct of consumers" and "consumer conduct":
A new supervisory approach to consumer conduct issues is long overdue. x
There is no reference to "investor/s" in the consultation. They seem to have become "consumers",
that is "consumers of retail products". The FSA refers to "consumers of financial products and services", such as
"consumers of investment products". "Providers" "provide products" which are "consumed" by "consumers".
"Consumers" has a more industry orientation
than "investors".
"The protection of consumers/investors" should be "the protection of savings/investments".
But I could not find any reference to "the protection of investments" on the website of the FSA,
x
and only one reference to "the protection of savings".
x
The constant repetition of "consumers" in the consultation paper is part of a strong industry orientation.
It follows closely the Conservative Party white paper From crisis to
confidence which is based on a report by Sir James Sassoon. George Osborne says in the Foreword:
Last autumn I commissioned Sir James Sassoon, formerly a Managing Director at the Treasury, to conduct a review of the tripartite structure.
He was a former Vice Chairman of
UBS Warburg, and industry champion, "the Treasury’s Special Representative for Promotion of the City".
x
This is listening to the wrong people.
3. Regulators (organisations)
3.1 "Regulated by the FSA"
The financial
crisis is not the only reason for a new approach to financial
regulation, x
including the Equitable Life saga,
x
and the FOS. x
x
There was an article about the FOS in The Times:
Wronged consumers demand a better deal from the ombudsman
(2/10/10 page 63).
x
Perhaps the most recent scandal at the time of writing is the Crown Currency Exchange. A comment following an article says:
I now realise we are not covered by the FSA despite the firm being registered - makes a nonsense of them being able to use this on their documents if it actually means nothing. x
The Crown Currency Exchange was "registered" but not "authorised" by the FSA.
A "Registered" firm is NOT authorised under the Act. x
The consultation refers to "authorised firms" and "regulated firms". But "register" and "registered" are not mentioned.
The CPMA will also be responsible for the regulation (including prudential regulation) of all firms not regulated by the PRA, including most investment firms, ..
"Regulated by the FSA" now becomes "regulated by the PRA" or "regulated by the CPMA", which is likely to increase public confusion.
A problem in this area seems to be regulated firms performng unregulated activities:
"Unregulated activities within regulated groups". x
Should this be permitted?
The concern with stability tends to increase the capture of the Government and regulators by
the financial industry, such as the "Brown's bankers" phenomenon. x
x
3.2 "In-built tension"
The reason for the division of the FSA into the PRA and CPMA is stated to be "in-built tension":
The previous model of a single integrated financial services regulator meant there was an in-built tension between:
• the need to focus on the prudential health of regulated firms on the one hand; and
• the need to devote sufficient attention to the conduct of firms in retail markets and participants in wholesale markets.
The consultation says the CPMA will have "no in-built tensions between different objectives". But there is an in-built tension between consumers and business. For example, it says the BIS Department is responsible for "consumer and business issues":
The Department for Business, Innovation and Skills (BIS) will have a strong interest in the new CPMA through its general responsibility for consumer and business issues. The Treasury and BIS will therefore jointly appoint a proportionate number of non-executives to the board to ensure that appropriate expertise in these areas is available to the board.
But this should be "business and consumer issues" because it is headed by Business Secretary, Vince Cable, who says it is a "business department", which implies it is more concerned with "business issues" than "consumer issues":
I see my role as the champion of business within the coalition. x
It seems likely that the PRA will have a business orientation. Then if the CPMA has a consumer orientation, this
will surely cause endless arguments.
3.3 Too many cooks x
Reckless conduct leads to insolvency, so conduct and solvency
cannot be separated. But the CPMA is a "conduct regulator" and solvency is the responsibility of the PRA.
This division has apparently been a disaster in the Netherlands. The Conservative Party white paper says:
In their respective roles of micro-prudential and conduct of business regulators the DNB and AFM also have overlapping information requirements. The Dutch have developed a number of legal, contractual and operational mechanisms in order to minimise any burden for firms, and to increase co-operation between the two regulators.
Howard Davies in his book mentioned above says:
Had a consortium led by the Royal Bank of Scotland not bought ABN Amro just before the crisis erupted, almost the whole of the Dutch banking system would be on life support from the State. (page 98)
The PRA and CPMA introduce a too many cooks problem:
.. will require a significant degree of cooperation and coordination by the authorities to ensure that they avoid duplicating efforts, or cutting across each other’s work.
Coordination between the PRA and the CPMA is summarised in: "Box 3.B: Coordination between the authorities", and with the FPC in the section:
Links with the PRA and CPMA,
.. there will need to be close cooperation between the FPC and the two regulators – the PRA and the CPMA - ..
Savers are interested in their savings being protected, which conduct of business does not do. It permits the deduction of all sorts of expenses:
The consultation says:"Examples of expenses are:
(a) registration fees;
(b) safe custody fees
(c) trustees' fees;
(e) audit fees;
(f) regulators fees and subscriptions;
(g) costs of investment management but excluding dealing costs of the underlying portfolio, and costs associated with routine management and servicing of existing property investments;
(h) bid/offer spread in the pricing of units
(3) The spread in (h) should be on a basis that fairly represents the expected levy of such spread in a firm's experience of normal trading conditions.
(4) The expenses should include allowance for any value added tax which is not recoverable." (COB 6.6.67)
Perhaps the most obvious failing of the UK system, however, is the fact that no single institution has the responsibility, authority or powers to monitor the system as a whole, identify potentially destabilising trends, and respond to them with concerted action
Which is a too many cooks problem, or perhaps a regulatory gaps problem. That is problems falling between gaps. There is an example in the consultation:
a phenomenon whereby macro-prudential risk analysis and mitigation fell between the gaps in the UK regulatory system.
Having firms regulated by more than one regulator "can lead to confusion":
Currently the responsibility for regulating consumer finance is divided between the FSA and the Office of Fair Trading (OFT). .. This division across two regulatory bodies can lead to confusion, ..
The consultation says prudential and conduct of business regulation should be separated because:
Prudential and conduct of business regulation require different approaches and cultures, and combining them in the same organisation is difficult.
This is not convincing.
3.4 Fees for regulation
The consultation proposes that the new system should be financed by fees on the industry.
It is proposed that the CPMA is responsible for:
the raising of levies to fund the activities of the PRA and CPMA and the collection of fees on behalf of the Financial Ombudsman Service (FOS), Financial Services Compensation Scheme (FSCS) and the Consumer Financial Education Body (CFEB).
These fees are passed on to savers. The regulator should be financed by a tax on savings because: "He who pays the piper calls the tune."
3.5 Fading away
The FSA's "aims" seem at first sight to have disappeared from its website.
There are
"Aims and objectives" on "About the FSA". x But where are the "Aims"? Until recently the
"aims" were separate from the "objectives". Clicking on "Aims" brought up a list of three aims. They have not been lost entirely:
The aims of the FSA are to promote efficient, orderly and fair markets; to help retail consumers achieve a fair deal and to improve our own business capability and effectiveness. x
The FSA's "principles" are also fading away because:
a principles-based approach does not work with individuals who have no principles x
Rather than lists of abstract "objectives", "aims", "principles","secondary considerations" and so on;
he key question of a regulatory system is: Who's in charge?
The consultation says that the CPMA will have "focused and clear statutory objectives". But its board will
be appointed mainly by the Treasury, who have a track record appointing people from the industry.
4. Helping consumers
4.1 "Consumer champion"
The CPMA is described as a "consumer champion". But then so is the FSA. It has a "protection of consumers objective": "securing the
appropriate degree of protection for consumers".
It says on its website: "Watchdog gets into its stride as consumers champion".
x
The Conservative Party white paper From crisis to confidence
says that the proposed CPA will be more of a consumer champion than the FSA:
The CPA will take a much tougher approach to consumer protection and will be given a mandate to act as a consumer champion. It will be a far more consumer-orientated, transparent and focused body than the FSA.
This reads like the SIB's 1997 Report to the Chancellor on the Reform of the Financial Regulatory System.
In 2001 the FSA had a public exchange of letters with the Consumers Association,
which unfortunately have been
censored. At least they are no longer available.
From the consultation paper it seems unlikely that the CPMA will be any more a consumer champion than the FSA.
The PRA board (3.23) and CPMA board (4.32) will have a majority of non-executive members largely appointed by the Treasury.
This does not seem "independent", moreover:
.. to complement the board of the CPMA, the Government will legislate to create an executive committee of the board, which will have responsibility for taking significant supervisory and regulatory decisions. The Government expects the CPMA’s non-executive directors to participate in this executive committee where they do not have a conflict of interest.
The FSA says on its website:
The FSA is governed by a Board appointed by the Treasury. .. The Treasury appoints the Directors of the Authority following the principles for public appointments issued by the Commissioner for Public Appointments (‘Nolan Principles’).
The Treasury has a long track record of appointing people from the industry to the
board of the FSA. It should therefore not be responsible for appointing people
to the boards of the CPMA and PRA. This presents the problem how these boards should be
appointed. There is too much to say about this to be included with this response.
4.2 The same people
The consultation paper blames the problems of regulation on the
"tripartite model" and regulatory
"architecture",
"framework", "structure", "system". For example:
the system .. failed:
• to identify the problems that were building up in the financial system
One problem was Equitable Life. The FSA was told about it and failed to act:
The insurance directorate gave a clear signal of the danger of insolvency, and the need for urgent and major action. We must ask why the FSA did not act. It took action to strengthen reserves, but why did it not act commensurately with the scale of the problem that had already been identified? x
It also apparently ignored warnings from the Bank of England about the forthcoming credit crunch. The Conservative Party white paper has a heading:
The Bank’s written warnings about imbalances were ignored
The problem with the system of regulation is the people in the first instance, rather than the structure. But the people such as Hector Sants and other FSA staff are staying the same and there is going to be a new structure, dividing the FSA staff between the CPMA and PRA:
allocate FSA staff and responsibilities in anticipation of the formal creation of the CPMA and the PRA
There is no consumer representation on the existing FSA Board. Ten of the twelve members are currently, or have previously been employed in the financial services industries. This may have diminished the regulator’s understanding of consumers and willingness to challenge the industry.
There is no reference to "consumer representation" in the consultation paper. There is a reference to "institutional representation" and "external representation":
The FPC (like the MPC) will have strong, credible external representation.
Regulators captive to the industry they regulate is of course also a problem in the US, as discussed by Harry Markolopos.
x
This consultation seems to want this situation to
continue. The people the Treasury appoints to the PRA and CPMA boards, are likely to be from the industry
with "experience of banking, but also other financial sectors such as insurance and investment
banking".
"Experience" should mean experience as a customer and investor, rather than experience working at a senior level in the industry. Otherwise
people from the industry regulate their friends,
which is "revolving door politics":
the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation x
a form of "crony capitalism":
success in business depends on close relationships between businesspeople and government x
For example Sir James Crosby
Chief Executive of HBOS
was Deputy Chairman of the FSA x
and Chairman of the Remuneration Committee from 11 December 2007. Christopher
Rodrigues, chief executive of Bradford & Bingley, was on the board of the FSA and on the Remuneration Committee.
This is self-regulation. Gordon Brown said: "We ended self-regulation." But then he also said:
"We ended boom and bust."
At least James Crosby was not Chairman of the FSA. Barry Sherlock was the first Chairman of LAUTRO. He was simultaneously
Chief Executive of Equitable Life. He was Chief Executive and first appointed actuary from 1974 until 1982.
This led to the personal pension mis-selling and Equitable Life scandals.
This is the origin of the financial crisis. Crony capitalism caused the recent Irish crisis,
x
Russian oligarchs, Nigerian oil industry problems, the AIG bailout in the US, defence procurement problems discussed in The
Silent State (2010) by Heather Brooke:
Just to hammer home the point that DESO was working for the arms industry and not the public, a reminder was printed on the cover of new directories stating that it was for government and industry use only. (page 101)
It results in failure to challenge the industry.
.. by putting in statute the requirement that each authority will have regard to the objectives of the other, the legal framework will ensure that the authorities will have each other’s interests in mind when making regulatory or supervisory decisions or considering new policy;
It will on the contrary not ensure this at all. The new regulators will have various statutory objectives. But how they actually behave depends on who they are, who is in charge. For example, consumers are not protected by the regulators just because consumer protection is a statutory objective:
If ELAS had not invented the WPA, and the Regulators not allowed ELAS to market them without the reserves to do so, all these Annuitants would have bought Conventional Guaranteed Annuities and have rock solid, safe incomes TWO & a HALF times higher than the 41-43% that they have today. If that is Investor protection by prudent Regulators I am a kipper. x
I agree with an article in the FT advisor Osborne's panel to break-up FSA under fire from IFAs,
x
this "new" approach to financial regulation is more of the same in the name of consumers.
4.3 "Capable and confident consumers"
The consultation discusses The Consumer Financial Education Body.
The FSA says that people should not study products very deeply. It says (or said) on its website:
Like buying a car or a washing machine, you don't have to get to grips with the detailed workings under the bonnet or inside the case, x
It wants "capable and confident consumers" x who are "alert", "aware", "beware", "educated", "informed", "responsible" and above all "shop around", which it compares with Chistmas shopping:
Shopping plays a big role in most peoples lives around this time of year, as millions of Britons hunt around for last minute Christmas bargains. Now you can get advice on how to shop around for the best deal in financial products as well, with the help of the FSAs new Shop Around web pages. x
As people become older there may be more a question of what they have forgotten, rather than what they know.
A problem I have come across is elderly people who start investing in unit trusts on the
advice of an adviser which they refer to as their "funds". But over the years some of these "funds" become insurance funds, and they do not know the difference.
Some people are not capable and confident investors and never will
be. This is the reason for the Madoff scandal.
Some people become capable and confident investors
only when they retire and have time to study the stock market. People should be introduced to stocks and shares at school
to have some familiarity, or they may have a lifetime of being scared of the stock market. Financial
education should be more than just distributing the FSA's "advice on how to shop around".
5. Conclusion
The financial crisis and bank bailouts is only the most spectacular result of capture
of the regulators by the industry they
regulate. There are more subtle effects. It results in lack of reform and delays.
For example, the problem of firms competing for outlets by paying commission
to "advisers" which is the subject of the Retail Distribution Review goes back
many years. It was discussed in the Gower Report which
preceded the Financial Services Act (1986).
This consultation is written from the point of view of the financial industry.
This can be seen in various ways: the constant reference to "consumers" and to
"consumer responsibility", making promises, the appointment of people "with
experience" to the FPC, PRA and CPMA boards meaning
people from the industry, no mention of "product regulation". So that the regulators will continue to be controlled by the industry.
6. Consultation responses
Information provided in response to this consultation, including personal information, may be published or disclosed ..
"Personal information" is vague. x In my opinion
responses should not be published anonymously.
x
The responses to Government consultations are
usually not published. This results in much valuable information not being easily available.
It is possible to obtain them by making a Freedom of
Information request (which may be heavy going x).
But this does not facilitate "a frank and open
debate":
The establishment of a new, focused body presents a key opportunity for a frank and open debate about achieving the appropriate balance between the regulation and supervision of firms, consumer responsibilities, consumer financial capability and the role of the state. These issues will be addressed as the CPMA is established
There are other issues which need to be debated and addressed, such as: "Who took my pension?" The Treasury says:
This consultation is aimed at financial services firms, including banks, building societies, insurance firms, Independent Financial Advisors, exchanges, brokers and related trade associations, as well as consumer representatives. x
These are firms and representative organisations. Which "consumer representatives"? The Consumers Association (Which?) were uncritically enthusiastic about the FSA when it was set up, mortgage endowments, stakeholder pensions, and so on. What has happened to "power to the people"? If the government wants public support for its new approach the consultation should be aimed at the public. But we are being excluded. The responses from individuals may not be published:
Responses from individuals are not normally published in order to protect their privacy. (email from the Treasury acknowledging this response)
Rather than requiring privacy, I like to be contacted with comments about my response.