Introduction

The first duty of the regulator of the retail financial industry should be the protection of personal savings, from anything which it can influence which may be harmful for these savings, such as excessive charges and insolvency. In the Financial Services Act (2000) "the protection of consumers" is only the third "objective" of the FSA. It is not even a "duty", and is defined as follows:

which is a tautology.

The government encourages people to save: "The Government is committed to encouraging more people to save for their retirement." ^x But rather than savings and investments, the Act has an emphasis on "markets" and "consumers", like the "aims" of the FSA:

" Promoting efficient, orderly and fair markets;
* Helping retail consumers achieve a fair deal; ^x

The government should require savings to be properly protected. But instead the FSA helps the industry in various ways which are harmful for savings.

1. General background

1.1 "Consumer weakness"

Individuals are at a disadvantage doing deals with organisations and professionals. I agree with the Sandler Review. ^x

"The root cause of the problems in the retail savings industry is consumer weakness." (10.89)

What's best for savers and investors should be decided by savers and investors, rather than by the government and industry. Savers and investors have insufficiently powerful representative organisations.

The FSA takes advantage of consumer weakness. It claims to help consumers as discussed below, but is actually helping the industry.

1.2 Ropey products

The FSA permits the marketing of poor value or even "dangerous" products such as investment bonds ^{x x} and mortgage endowments. ^x Both Equitable Life and Northern Rock were brought down by dangerous products:

The securitised mortgages of Northern Rock were highly dangerous for the government and taxpayers. But: "The FSA is not a product regulator except in certain circumstances." ^x "The FSA is not a 'contract approval authority'." ^x Products should be regulated. There has been a succession of dangerous products, in particular: personal pensions, split-capital investment trusts, high-income bonds. ^x The first issue of the FSA's publication Consumer Research reports:

The Sandler Review recommended product regulation: "10.14 The heart of the solution lies in product regulation.". But only for a new suite of products. All products should be regulated. Some products are already regulated. The Sandler Review resulted in new "Sandler Products".

It may be possible to claim mis-selling.

"It is not products which are regulated but the sales process. That is why ELAS victims had to pursue the salemen for mis-selling rather than ELAS for mis-providing. This effectively made the Poor Bloody Infantryman responsible rather than the General. This resulted in the PBI having to defend claims , effectively against them personnally, when they actually had very substantial sympathy with the policyholder. In many cases those who had properly documented their sales, avoiding any specific promises that were not guaranteed, could defend their personal actions to the FoS and therefore the poor Policyholder was stuffed due to absence of regulation of the product." ^x

1.3 Flops

Stakeholder pensions flopped:

"Stakeholder pensions, which were launched in 2001, have been a flop. Despite predictions about a potential market of five million people without existing retirement schemes, just one million have been sold. Most of these were taken out by those who already had a pension." ^x

Sandler products flopped:

"Sandler products were designed to be low cost, simple products, which would encourage people to save. But as we report on page 14, only three companies are offering the medium-term investment product, and not a single bank or building society has signed up to offer a Sandler-style deposit account." ^x

Child Trust Funds flopped:

"Although 1.7m vouchers were sent out, only 499,000 have been cashed in." ^x

Equitable Life and Northern Rock flopped. ISA CAT Standards flopped. NIACE ^x has a campaign called FLOP - financial literacy for older people. There is an Financial Capability Steering Group and previously an Adult Financial Advisory Group which produced a report, which seems to have flopped:

"The Secretary of State for Education and Employment David Blunkett .. said 'I am asking the Department's new Adult Basic Skills Strategy Unit to take the lead in following through the lessons of the report'.

"Which has done precisely nothing since the publication of the report three years ago. And now John Tiner is going to undertake the exercise all over again and no doubt come to the same conclusions as Adflag - why would he come to different ones?" ^x

1.4 The Treasury

The Treasury says that regulation is needed because of markets:

How would such regulation have prevented the collapse of Northern Rock? But then it did not prevent it. The Treasury says the collapse was caused by "global financial turbulence", even though the FSA was set up to "meet the challenge of global markets". ^x

The Treasury does not like to regulate the industry itself, giving responsibility to the FSA. The FSA, FOS and PADA are outside the jurisdiction of the Parliamentary Ombudsman. The industry is outside the Sale of Goods Act. A contributor to a discussion said:

"The answer is for the Financial Services Industry to be brought within the Sale of Goods Act (goods fit for the purpose etc) and for the consumer to have recourse both through the courts and through the local council Trading Standards Officer. ^x

Before the formation of the FSA the Government Actuary Department was responsible for advising the Treasury about the accounts of life assurance companies.

2. Empowering the industry

2.1 Wrong projections

LAUTRO Prescribed Projection Rates resulted in excessively low estimates for charges. ^x Evidence to the Treasury Select Committee from an IFA says:

"1.3 From April 1988 until December 1994 insurance providers had to use standardised charges (LAUTRO) specified by the then regulator when producing policy illustrations and quotes. These standard charges were considerably lower than the provider's actual charges. Thus retail consumers were often being misled by the illustrations provided by the Life Insurance Companies. From January 1995 following the intervention of the Office of Fair Trading they were able to use to use their own charges again."

"5.1 ... FSA is consistently failing to provide many consumers with the appropriate protection from misrepresentation that they should reasonably expect.

5.3 The FSA consistently fails to recognise issues and actions that are extremely likely to cause consumers loss even though it might reasonably be expected to do so.

5.4 The FSA fails to take timely and appropriate action to protect consumers thereby creating both unnecessary losses and potential losses for consumers." ^x

An article in the Times reported:

"These insurers were taking as much as 0.75 per cent a year in charges from their funds. But they were luring customers by showing future payouts using a 0.3 per cent annual charge." ^x

2.2 The non-disclosure of dealing charges

The development of stakeholder pensions and NPSS is an attempt by the Government to decrease charges. The FSA is instead allowing charges to increase and even introducing new kinds of charges.

The disclosure of dealing charges is discussed on this website. ^{x x x} and in the 2003 Consultation Paper of the FSA Informing consumers: product disclosure at the point of sale (3.57-3.61) The FSA considered that portfolio turnover should not be disclosed :

This discussion with the heading "dealing costs" does not even mention stockbroker commission or stamp duty. ^{x x} The FSA discusses commission in:

"We believe that making the disclosure information publically available would improve the transparency of costs borne by investors. We believe that most investors would not benefit from such information, so it would not be proportionate to require firms to provide it to them automatically. In particular, it is questionable whether the costs inherent in disclosure to investors would be justifiable, given that consumers are unlikely to make effective use of the information disclosed." ^x

"Disclosure information" is total stockbroker commission and information about "bundled brokerage and soft commission agreements". What does "provide it to them automatically" mean? Total commission and whether or not there are such agreements should simply be put in the accounts.

2.3 Charges taken out of capital

Charging expenses to capital makes them less visible. The FSA had consultations on this topic:

"The eleven responses to CP 14 were overwhelmingly in favour of the proposal to allow fund managers to charge expenses to capital in whatever proportion they regard as appropriate." ^x

These responses were probably all from the industry. Carrying out the wishes of "most repondents" sounds very democratic, but the result is that the FSA is continually carrying out the wishes of the industry. A search on "most respondents" produced 257 results. The regulations were changed to permit charges to be taken out of capital rather than investment income:

"4.38 The scope of what charges may be allocated to the capital property of an authorised fund has been extended to permit the authorised fund manager to make such an allocation in the proportion it considers appropriate." ^x

2.4 Scrapping of maximum limits

Before 1979 there was a 0.5 per cent cap on the annual management charge of unit trusts. To be exact there was a maximum 13.5 per cent over 20 years. So there could be an initial 3.5 per cent and then 0.5 per cent per annum.

Now even funds own limits are being scrapped. ^x

3. "Helping consumers"

3.1 "Consumers"

Entering "consumer" in "Search this site" on the website of the FSA ^x produced 8186 references, "people": 1892, "protecting consumers": 610, "investors": 2289, "savers": 2024, "company": 4187, "provider": 6292, "market": 6620, "helping": 6535, "protecting": 1943, "regulating" 6321. "Consumer research" produced 412 references including the Consumer Research reports:

"Consumer research plays a fundamental role in our efforts to understand better the consumers we are working to help. .. This is why our Consumer Relations Division commissions and manages a substantial, ongoing, programme of consumer research." ^x

So much of this website is concerned with "consumers" that it almost seems as though the FSA is regulating consumers rather than companies or markets. "Consumer responsibility" produced 45 references. The Chairman, Sir Callum McCarthy asks:

"What is the meaning of consumer responsibilities? What should we expect of a responsible consumer? Does the consumer have responsibilities as well as rights? And if he or she fails to discharge those responsibilities, does he or she lose or weaken those rights?" ^x

Should the FSA be interested in consumers to this extent?

3.2 "Helping"

"The protection of investors" in the Financial Services Act (1986) became "the protection of consumers" in the Financial Services and Markets Act (2000), which is vague. What does it mean? Where does the FSA say what it means? Without a definition it is just rhetoric. The Financial Services and Markets act (2000) says:

"5 The protection of consumers

(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers."

which is a tautology.

A search on "helping" on the website of the FSA brings up 6819 references. Whom is it helping? This is largely "retail consumers", since doing searches the number of references we obtain is: "helping retail consumers": 1031, "helping firms": 688, "helping consumers": 445, "helping companies": 22, "helping investors": 37, "helping savers": 8.

The Financial Services and Markets Act (2000) does not seems to mention the word "helping". Perhaps the nearest is promoting "public understanding of the financial system", and facilitating "competition" and "innovation".

"The Government is committed to encouraging more people to save for their retirement." ^x In which case the FSA should surely be helping savers, rather than "consumers". The FSA seems more interested in "deals" and "dealing" than saving. "Dealing" produced 4850 references, saving: 2056, investing: 1663. FSA terminology has an industry orientation. There are "providers" of services and "products" which are "consumed" by "consumers" who do "deals". The FSA rarely refers to "the financial industry" (56 times), but instead to "the financial services industry" (1775 times).

3.3 "Consumer disclosure"

There are numerous references to the importance of disclosure and good information on the website of the FSA, for example: "empowering consumers through education and disclosure of information on charges and other key features of financial products."; ^x "Disclosure and transparency are crucial to market integrity."; ^x "seeking to achieve better consumer understanding through improved disclosure"; ^x "disclosure is key"; ^x "Improved financial literacy is the key to consumer protection". ^x

But the FSA only believes in information up to a point:

"Just like buying other consumer products, you need to shop around. 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

3.4 "A fair deal"

The expression "help retail consumers achieve a fair deal" produced 1072 references on the website of the FSA. It did not extend to Equitable Life policyholders. ^{x x} To "achieve a fair deal" the FSA "helps consumers to shop around". ^x The report Helping retail consumers achieve a fair deal ^x starts:

"A key priority for us is to make retail markets for financial products and services work more effectively and thereby help retail consumers get a fair deal."

"Make retail markets for financial products and services work more effectively" seems the same as the first Aim: "Promoting efficient, orderly and fair markets". The FSA "helps consumers achieve a fair deal" by promoting "fair markets":

"A fair market is one which is free of unfair practices and abuse, and in which all investors have reasonable opportunity to trade at the best price available for their transaction size." ^x

"Trade at the best price" is more appropriate for stockbrokers than life assurance policies. Whether or not a policy is a fair deal is not known until it matures. In the case of a mortgage endowment, it depends on whether it repaids the mortgage. The government wants people to save. They are then handed onto the FSA where they become "consumers" who are "investors" "responsible for their own decisions" doing "deals" in "markets".

The FSA gives the impression that the "products" of the industry are splendid, or at least "a fair deal". If there are problems this is because "consumers" are not sufficiently "capable and confident". In evidence to the Treasury Select Committee, Sir Howard Davies said:

"The whole learning experience of the last few years has taught us I think, that suitability is at the core of the problem which investors face, whether this is a suitable product for you." ^x

The core of the problem which investors face is obtaining a good return on their investments.

3.5 "Fair outcomes"

The new "principles-based" regulation is "focusing on the outcomes that matter". ^x The FSA's Treating Customers Fairly initiative implies that the industry did not treat its customers fairly in the past:

"We have defined 6 consumer outcomes which explain what we want TCF to achieve for consumers." ^x

"Our aim has been to see a stepchange in the behaviour of the financial services sector and therefore to deliver improved outcomes for retail consumers. .. We aim to deliver these outcomes through changes in the activities of regulated firms operating in the retail market." ^x

A "stepchange in the behaviour of the financial services sector" seems optimistic, especially as the FSA set a March 2007 deadline:

"In some cases, a firm may have failed to meet the deadline, but this does not automatically mean that the firm is not treating its customers fairly." ^x

When the FSA uses the term "fair" we can see what it has in mind from the number of references found when we do a search: fair bonuses: 0 (zero), fair benefits: 0 (zero), fair deal: 1291, fair return: 0 (zero), fair outcomes: 104, fair payouts 0 (zero), fair terms 52, fair treatment: 468. Savers are interested in benefits. "Outcomes" are secondary. But for example the FSA report Treating customers fairly - towards fair outcomes for consumers ^x mentions "benefits" only twice. The first TCF "consumer outcome" is:

"Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;" ^x

What happens if people are in fact not treated fairly, such as recent Equitable Life policyholders? But then in the case of Equitable Life the FSA is itself partly responsible. ^x

"Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect;"

Although "they have been led to expect", "consumers can be disappointed":

"After all, consumers can be disappointed with their experience of a service or product, but this is very likely to be the result of risk inherent in financial markets, such as movements in market prices." ^x

It is more likely to be caused by excessively high charges such as: "Pensions - The worst investment of "; ^x "You have to laugh.". ^x

The website of the FSA shows a lack of interest in investment performance in general. In particular the Comparative Tables do not show investment performance. It says this is because: "Past investment performance provides no guide to future performance." ^x This is referring to funds. It is false for shares. ^x Someone may be interested in past investment performance for reasons other than wishing to assess future performance. A contributor to a discussion said:

"Investment performance is no business of the FSA; its not a fund manager or IFA. Its role is to promote the efficent allocation of capital by making sure that markets are competitive and transparent." ^x

But the FSA is not just regulating markets, it also regulates in particular banks and insurance companies. This is a problem with having so many duties under one roof in the FSA. It becomes difficult to understand exactly what it does.

The TCF initiative is in keeping with the aims for a new regulator which became the FSA, in the SIB's report to the Chancellor Reform of the Financial Regulatory System published in 1997, that is ten years ago:

"set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence for those it regulates, in order to protect and secure fair treatment for investors, depositors and policyholders; .. " ^x

3.6 "Developing capable and confident consumers"

There is frequent reference to the word "confidence" on the website of the FSA, which occurs 2921 times. "Maintaining confidence in the financial system" is one of the FSA's statutory objectives. "The financial system" includes life assurance companies. The FSA has extended "confidence" from "the financial system" to "consumers". It says in its Business Plan:

"Our concern is to make the market for retail financial products and services operate more effectively by developing capable and confident consumers;" ^x

"Capable consumers" produced 24 references, "confident consumers": 89, "capable and confident consumers": 64, For example the Business Plan 2005/06 mentions "consumers" 51 times:

"Helping retail consumers achieve a fair deal

Our concern is to make the market for retail financial products and services operate more effectively by developing capable and confident consumers;" ^x

"Make the market for retail financial products and services operate more effectively" seems to be a euphemism for sales promotion.

Rather than "developing confidence", the FSA seems to be more concerned with "restoring confidence", since the number of references found on a search is: developing confidence: 3, building confidence: 18, restoring confidence: 38.

On the BBC Radio 4 Today programme recently someone was interviewed about her difficulty buying a house as a first time buyer. Someone else was talking about the benefits of the buy-to-let market. He suggested that she needed to be more "capable and confident". Her problem was caused by her financial skills rather than the shortage of housing, which is of course nonsense. But the same argument is used extensively elsewhere. If people cannot find jobs, it is not because of the shortage of jobs, it is because they do not have suitable skills. This has resulted in "the skill shortage" myth.

The FSA provides "consumer information". ^x A search on "consumer information" produced 4062 references. The NAO says that "The FSA is a world leader in financial capability." It is "building financial capability" ^x so that people can choose "products" to suit their individual requirements, because otherwise: "They struggle to choose products that truly meet their needs." ^x A search on "meet their needs" on the website of the FSA brings up 127 references. The phrase "helping consumers" is applied by the FSA to everything it does, and especially helping "consumers" "choose products that truly meet their needs".

4. Accentuating the negative

The literature of the FSA is not at all cheerful. Insolvency is inevitable because we live in: "a non-zero failure world":

A firm looking after saving can fail. But it is unacceptable for it to take the saving with it when it does. Unit trusts seem to be more secure than oeics in this respect. "Non-zero" can be large because firms vary greatly in size. In the case of Northern Rock we are up to £30 billion (at the time of writing). ^x

The FSA mentions all sorts of difficulties for "consumers". They are advised for example to be: "alert", "beware", "cautious", "informed", "read the literature", "And always read the small print carefully, even online."; ^x because the FSA cannot prevent "wrong choices in financial contracts" (even if it wanted to):

4.32 .. There needs to be a recognition (including by consumers): of the limitations of regulation . . . falls short of eliminating all possibility of consumers making wrong choices in financial contracts." ^x

"The costs of making a wrong decision are potentially very high." ^x But nevertheless if people make wrong decisions, they have only themselves to blame, because everyone is legally responsible for their own decisions:

"FSMA directs that in assessing what protection is appropriate, the FSA must have regard to 'the general principle that consumers should take responsibility for their decisions'. ^x

The Sandler review trying to be positive, recommended "substituting product regulation for the current regulation of advice". ^x But the FSA says:

"The FSA is not a product regulator except in certain circumstances." ^x
"The FSA is not an enforcement-led regulator." ^x
"The FSA is not an economic regulator." ^x
"The FSA is not an investment manager." ^x
"The FSA is not a statutory prosecutor." ^x
"The FSA is not a guarantee of the safety of a firm or product." ^x
"The FSA is not a 'contract approval authority'." ^x
"The FSA is not a competition authority." ^x
"The FSA is not a government body." ^x
"The FSA is not a law enforcement agency." ^x

5. "Light-touch regulation"

Not only have ministers such as Patricia Hewitt ^x been advocating "light-touch regulation", but it is also written into the legislation. The FSA is outside the scope of the Financial Ombudsman Service and cannot be sued. It has vague statutory "objectives", "hedged around by a series of general duties". ^x In 1999 it promised a "flexible future", "waiving rules": ^x

Perhaps less rule waiving would have prevented the Northern Rock disaster, discussed below. In keeping with "light-touch regulation", solvency requirements for banks were reduced by the 1998 Bank of England Act, ^x which contributed to this disaster. The Treasury says:

"To revert to more heavy-handed, detailed or mechanistic regulation which put process before substance would divert us from proper risk-assessment and stifle innovation. We do not intend to fall into that trap." ^x

This is apparently referring to the regulation of "recognised investment exchanges and clearing houses", ^x rather than the whole industry.

6. A business orientation ^x

The FSA has resulted from a takeover of the regulators by industry, with the result as discussed in Section 1 above, that it is continually helping the industry at the expense of the public. It is staffed by the industry:

"During the year, the majority of staff recruited by the FSA joined from regulated firms. In addition, the regulator continues to hire senior practitioners from the industry as 'grey panthers' to share their knowledge and expertise with regulatory staff. At any one time there are around 100 staff either on secondment to the FSA from firms, or vice-versa." ^x

The board members of the FSA have been largely from the industry over the years. There have been a proportion of people with other backgounds, but not anyone representative of savers or investors such as from: Which?, the Equitable Members Action Group, the United Kingdom Shareholders' Association, the Investors' Association.

The government says it is "an intelligent sponsor of the industry". ^x The Labour Party describes itself as "the natural party of business". ^x This business orientation can be seen in other areas such as the expansion of the Work Permit Scheme and various similar schemes, ^x which the government describes as "employer-driven" and "good for the economy". The Prime Minister, Gordon Brown, is now referring to "jobs for the British", ^x which seems like a U-turn. Industry influence on planning regulations can be seen with the introduction of Rural Exception Sites, which permit building on the Green Belt.

The National Audit Office report on the FSA ^x says that the main role of the FSA is to oversee a legal environment in which the financial industry can prosper "permit the development and discharge of legitimate financial business". It starts:

"Financial services make up a significant part of the UK economy, in terms of employment, taxation revenue and economic production. The British Bankers’ Association has estimated the sector’s contribution in 2006 to be over one million jobs, and 25 per cent of total corporation tax. ...

The task of the FSA is to permit the development and discharge of legitimate financial business within a framework of systematic oversight that engenders trust in and compliance the law among market participants and consumers."

The Executive Summary starts:

"London is one of the world’s leading financial centres and financial services are a major source of wealth creation for the UK economy."

In short the NAO says that the FSA is "good for the economy". The Treasury Select Committee was also complementary about the FSA, saying it is "an improvement". ^x But it now seems to be doing a U-turn following the Northern Rock crisis:

"Mr McFall said that what had once been seen as a 'Rolls-Royce' structure turned out be 'an old banger' when put to the test." ^x

Financial "services" are a major source of wealth destruction for individuals. The wealth of the industry comes from various: adjustments, charges, costs, deductions, expenses, fees, levies, reductions, on personal saving. Various different kinds of charges are listed on this website. ^x The FSA helps the industry make charges in various ways, discussed in Section 1 above.

This problem of excessive charges led to the development of stakeholder pensions. When these flopped, as discussed on this website, the government did a U-turn and developed NPSS. Though in my opinion NPSS does not go far enough. Nor do the U-turns. A further U-turn is needed, that is the reform of the FSA.

The FSA was set up by the Financial Services and Markets Act (2000) which is especially concerned with "services" and "markets" - that is with business. Problems in this area result for long term saving being looked after as a business rather than by trustees.

7. The Financial Ombudsman Service

The industry does not seem to be willing to finance an adequate ombudsman scheme. A major problem are the excessive delays in settling cases. This is discussed in the Hunt Review:

"3.32 .. I therefore recommend that, to reduce delays within the system, the FOS should ensure that staffing levels are constantly re-evaluated in the light of looming changes in demand, as recommended in the Kempson Report." ^x

But the Kempson Report was four years ago. So why was the problem not fixed? It seems to be getting worse. The satisfaction survey reported in the FOS Annual Review 2006/7 asked: "Do we settle disputes within an acceptable length of time?": agreed 47%, no opinion 18%, disagreed 35%. Therefore 43% of those who expressed an opinion disagreed. Perhaps this 43% are all the more difficult cases In the Annual Review 2003/4, 75% agreed and 25% disagreed.

Having won a case, there is sometimes a problem obtaining compensation:

"On 20 October 2004 the FSA wrote to us revealing that the Ombudsman's formula for calculating redress was 'not viable' and advised us to take legal action. After issuing the Final Decision the Principle Ombudsman ignored our requests for an explanation of the formula.

The firm was unable to implement the formula. My husband then received a letter from the Principle Ombudsman irrationally blaming my husband for her own incompetence and imposing a new formula. That formula was mathematically inoperable.

We later discovered that the Principle Ombudsman had had unilateral discussions with the firm before issuing her unlawful, inoperable, irrational, revised formula for our redress." ^x

The FOS has an industry orientation - like the FSA, judging from submisions to the Neill report ^x and the Hunt Review:

"I have the impression that when a claimant tells the firm that they will take the matter to the FOS, the firm breathes a sigh of relief .. 'We've made it !' The know that the FOS will delay further ( thus delaying redress payments), not make a rigorous examination of the case, probably not check any calculations, not criticise the firm, not publicise any mistakes, however disgraceful. They know the award will not exceed £100,000 and that the claimant can’t afford to go to court. Many firms would settle for that." ^x

The FOS needs to be more independent of the FSA. The EQUI report said:

"The committee believes that the Equitable Life case has revealed a number of serious shortcomings in its operation. The committee therefore urges the UK Government to address these shortcomings, strengthen the FOS's capacities and ensure that it is truly independent from the FSA and from the government itself."

8. "Doing the bidding of their paymasters"

There was a discussion on the web:

"Is this a modern trend for Government to create agencies answerable to no-one, pretending to do one thing but in reality doing the bidding of their paymasters?

Good question, and one I think that goes to the heart of the problem." ^x

A correspondent gave the following opinion of the FSA:

a) it is there primarily to protect the Govt from whatever might go wrong with investments and
b) it does what it is told by the people who appoint its directors - the Treaury
c) its second prioirty is to protect the industry that provides its income
d) investors & policyholders come a very poor third
e) because it is a political organisation, with no accountability to its 'customers' it has totally lost touch with their needs
f) as a monopoly supplier of regulation services without any avenue for customers to complain about those services, its effectiveness is awful (Northern Rock and the ELAS/Prudential deal are the latest examples)
g) lack of competence and accountability and a willlingness to spin like Tony Blair has destroyed confidence (Northern Rock).

Industry-led regulation results in "light touch" regulation. The Government Actuary said:

"The regulatory approach is to have extensive rule books, audit and inspections, public 'hangings' or reprimands. Unfortunately, this sort of approach does not always lead to an improvement in general welfare." ^x

Equitable Life should have had more audit and inspections by the GAD. But then it is hard to see from the evidence of the Government Actuary to EQUI, that there were any problems at Equitable Life, ^x since he said there was: a) "no deficit", b) "solvency" with a "solvency margin", c) "reserved in full for the guarantees". For example:

"There was no deficit in terms of regulatory requirements. The regulatory requirements were always met and the reserves required under the directives and under the UK transposition of those directives were always satisfactorily met." ^x

A BBC article observes:

"'It is clear that Equitable's returns were not understood by GAD actuaries throughout the 1990s,' Lord Penrose writes (p 744 para 75)." ^x

The industry does not want to be regulated. It therefore wants the FSA to be a weak regulator. One way this is achieved is by distractions or red herrings, that is topics other than what should be the role of the regulator, that is looking after saving in the institutions which it regulates. The emphasis on "consumers" is a distraction.

9. The report of the Europen Parliament into Equitable Life (EQUI) ^{x x}

This report discusses claims that regulation is industry-led. It has headings: "1c) Claims of Regulators' industry bias", "17. Effective control in the hands of the life assurance industry", "18. FSA not industry-led". But it does not say whether or not it agrees that there is industry bias. I would have liked the EQUI report to agree that there is industry bias and then recommend how this can be corrected. But I cannot find "industry bias" or "industry-led" in Conclusions PART III - REGULATORY SYSTEM. The EU itself seems to be excessively influenced by the industry, judging from a consultation it conducted on UCITS. I submitted evidence. ^x But without even an acknowledgement. It seems to me that responses without an industry orientation were ignored.

The report says that there was "failure to implement Community law". The reason for the Northern Rock crisis may be that the Capital Requirements Directive was not implemented properly. The FSA says this is "to ensure that the financial resources held by a firm are commensurate with the risks associated with the business profile and the control environment within the firm". ^x It has not yet been fully implemented. "We are nearing the end of the process of implementing the Capital Requirements Directive." ^x The EQUI report says:

"The main purpose of insurance supervisory legislation is to protect the public from loss through the insolvency, dishonesty or incompetence of an insurer."

But the FSA says firms should fail from time-to-time:

"We have as a guiding principle the explicit objective of a non zero failure approach – that is, we do not try to prevent the failure of all financial institutions we regulate, but believe it both unavoidable and indeed desirable that some should fail. ^x

The EQUI report does not address the problem of regulators being industry-led, because the report is judicial. It is concerned with the implementation of EU legislation in the UK. But the problem is political. Of course the difference between judicial and political occurs in other areas. For example the Human Rights Act seems to be trying to do the impossible, that is turn political problems into judicial problems.

The government has not yet (23rd January 2006) responded to the EQUI report. ^x

10. Not a reformer

10.1 Commissions

The FSA allows problems to go on for year after year without being fixed, such as wrong advice resulting from commissions to advisers:

"A businessman who spent 30 years saving for his retirement saw a quarter of a million pounds of his pension wiped out after falling victim to a rogue financial adviser." ^x

Provider commissions to "advisers" are like bribes to give the wrong advice. They should be abolished, as recommended by the Sandler Review:

"The Review believes that for independent advisers, remuneration should be the subject of negotiation purely between the adviser and the consumer, with no provider involvement. .. The definition of an 'independent adviser' should be that he is an adviser who is not paid by a provider; and the use of the word 'adviser' should be restricted to those who meet the 'independence' criterion. While 'advise' covers a wide range of relationships, it principally carries the connotation of 'acting solely in the interest of the client'. A term such as 'financial product distributor' more accurately describes an adviser whose remuneration arrangements are decided with product providers. Restricting the use of 'adviser' in this way would enhance the value of 'independent' status." ^x

This problem was made worse by abolishing the Maximum Commission Agreement.

The FSA proposes to replace commissions with "payments". This is discussed in the Interim Report (2008) of the Retail Distribution Review:

"3.16 .. We could go so far as to consider no longer permitting any payments to pass from manufacturers to distributors, but we recognise that this is not practicable at the present time." ^x

10.2 The FOS

The FSA was asked about the Lord Neill Review of the FOS at 2007 Annual Public Meeting. ^x

"I have talked to several hundred complainants to the FOS over the course of the past five years, every one of whom has had sound reasons for doubting the procedures and the fairness of that body. ..

You will be aware that Lord Neill, a distinguished legal representative, conducted a survey of the FOS’s procedures in a number of cases. His conclusions were that the FOS failed on grounds of natural justice, lack of independence, and its inability to convince anyone of its impartiality. It was delayed and not prompt in its delivery of judgements. It was obscure in the way that it explained awards. Unfair conditions were attached to the judgements that it made. There was an uneven playing field between the judgements made by the FOS in terms of the company’s representation and the complainant’s representation. There was inequality of arms, that is to say of the weapons that could be brought to bear in the disagreements between consumers and the FOS." ^x

"I am always struck by the in general very high customer satisfaction scores that the FOS receives from its own consumer surveys."

But "customer satisfaction scores" are based on all cases most of which are easy, rather than the 1/6 more serious cases which reach an adjudicator (and then possibly an ombudsman).

He said that this concern about the FOS should be discussed with the FOS itself rather than the FSA because it is "operationally independent":

"With all due respect, I think that is the body with which it should be discussed because of its operational independence from us."

This implies that the FOS is completely unaccountable, when it is in fact the responsibility of the FSA.

11. "Systematically failed"

The fundamental problem with Northern Rock is the public duty of looking after deposits, being combined in the same organisation with a large business of raising funds using securitised mortgages. They should have been separated.

Parallels between the Northern Rock and Equitable Life collapses are listed in discussions:

"The relationship between the FSA and Northern Rock is so reminiscent of Penrose's description of the ineffectual relationship of regulators with Equitable Life. ... Northern Rock and Equitable Life are two sides of the same coin, namely that the business models were equally unsound and known to be so by supposed expert regulators." ^x

"The parallels between NR and ELAS - some already mentioned on this board - grow closer and closer by the hour. Thus:

- both organisations were controlled by an autocratic chief executive

- both had a wonderful new (but, alas, flawed) business plan that took them to the top of their sector

- both claimed a moral superiority over their competitors: one gave no commission to greedy intermediaries, the other ran an internal charitable foundation

- when each hit the buffers, there were cries of We are solvent! Don’t panic!!

- in order to create the impression that all was well, a dividend/bonus was then proposed to be paid out of money that did not exist (the fact that the NR dividend was withdrawn was a difference)

- both were then put up for sale

- several suitors came forward. Share/policyholders demanded the right to choose which of the offers should be accepted.

- a hedge fund investor/Stuart Bayliss then emerged who threatened to veto any proposal they did not like

- the FSA/Gordon Brown in reply to Vincent Cable at PMQ on Dec 5 said all would be well because the business is up for sale and was almost certain to be sold (with FSA this was explicit, with GB it was implicit)

- one by one, the suitors withdrew from the negotiating table, which is where we are now." ^x

The Treasury Select Committee says in its report The run on the Rock:

"The FSA did not supervise Northern Rock properly. .. the FSA appears to have systematically failed in its duty as a regulator .. " ^{x x}

It failed not because of incompetence, but because it acts for the financial industry - which does not want to be regulated.

A Department for Transport spokesman described Metronet as "a riddle of contracts". ^x In this respect it is similar to Northern Rock and especially to Equitable Life. But there is apparently not going to be an inquiry, which is a considerable contrast. ^x Paul Braithwaite, secretary of EMAG, commented:

"The British single regulator clearly doesn't work." ^x

In this respect it is similar to Northern Rock, Equitable Life and Metronet. The recommendations of the recent internal audit of the FSA such as:

"The principal high level recommendations in the report are:

* FSA senior management to have increased engagement with high impact firms;
* FSA to increase the rigour of its day to day supervision; .. " ^x

do not get to the root of the problem. The FSA has the wrong ethos. "It doesn't matter WHAT regulatory regime you operate if its ethos is wanting." ^x It is not enough to say:

"The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000." ^x

It needs to be specified on whose behalf the FSA is acting. It is not acting on behalf of the Crown. "Independent" is fictitious. The present situation seems duplicitous. Regulators of the industry should be acting on behalf of savers/investors to protect their savings/investments. ^x

A problem with bringing regulators under one roof in the FSA, is that different parts of the industry require different objectives, and different kinds of people on the board. There need to be expert or professional investors on the board, who invest their own money, and do not work for the industry. But the board of the FSA always consists of: a) people from the industry, b) the Great and the Good, c) sometimes a member of the National Consumer Council.

September 2007