Osborne’s FSA reforms will cost consumers
DURING the last few months, we have seen George Osborne outlining various plans for the future of UK regulation and a commission established to look into splitting up the banks. This has left some areas of the industry uncertain as to who is going to be supervising them and concerned that if we do not have a strong regulatory leadership, Europe could take over.
This has resulted in the Financial Services Authority (FSA) becoming a political pawn – for all its protestations to the contrary. After its establishment by Gordon Brown, the new government is looking to blame the authority – and, by extension, Brown – for the banking crisis. The timing of this is far from ideal, at a period when we need a strong regulator for UK firms and strong UK-led negations on the various European regulatory initiatives, such as the Alternative Investment Fund Management Directive or plans to move towards a single European regulator.
In response, the FSA has levied a stream of new fines and prosecutions to try to demonstrate that it remains “a leading regulator”, with a massive increase in the number of criminal insider dealing arrests, for example, as well as prosecutions for market abuse, PPI failings, insurance fraud and mortgage controls failings. The authority is already up to £55,576,997 in fines so far this year. This compares with just over £35m for the whole of 2009, £22.7m in 2008 and £5m in 2007.
Given how long it has taken for the FSA to prosecute anyone for anything in the past, this change in attitude shows that the regulator has finally worked out how to use its teeth – just as it is about to be cut up, with the “successful” enforcement team transplanted to a different, new white-collar crime prosecution agency.
The greater concern, however, is how this will affect regulated and supervised firms. Given that most prosecutions come directly from the firms themselves either owning up to breaches or reporting the behaviour of an employee, the question is how the new regulatory bodies will handle this. Is it possible we will see a return to lower levels of fines? Will the regulators get new tools to use against firms or will we see increased use of the current tools?
What appears likely at this stage is that the replacement regulatory bodies, be they the Bank of England, the Consumer Protection Agency or whoever else, will have to work just as closely with the new prosecution agency as the FSA’s various supervision and markets divisions did with the enforcement division – or the new body will be left rather toothless. One outcome could be that regulated firms will see a significant increase in regulators’ use of Section 166 of the Financial Services and Markets Act 2000 (Reports by Skilled Persons) when breaches or inadequacies in systems and controls are identified. In such cases, the skilled person undertakes an in-depth review and analysis of the firm before reporting back to the FSA on their findings, with the possibility of further remedial action to follow. The costs of this investigation and of third-party advice – potentially very high – are borne by the firm itself in what could be seen as a quasi-punitive fine.
This seems likely for two reasons: First, Section 166 will be one of the few tools left that the new body will be able to use in-house. Second, in the last 18 months, there has already been a significant increase in the number of skilled person or similar reports required by the FSA from an independent party into the activities or policies of a firm.
In some ways, the very fear of this may be the trigger for firms to increase their compliance headcount to try to reduce costs in the long-term. But increased headcount does not always guarantee a desired outcome as the quality of compliance workers can be mixed.
The overall likelihood is that regulated firms are going to face a certain amount of continued confusion at this difficult time. They will have to foot a huge bill to pay for the changes in this regulatory structure, whether that is in beefing up the headcount in compliance teams, paying consultants or just paying the increased costs of paying for the new regulatory bodies through increased regulators’ fees. This is at a time when they are also having to increase their capital resources.
As a result, it may be that in the end, customers will end up suffering, which is exactly what the regulator is supposed to stop. In this case, however, it is well out of their hands.
Philip Chapman is an associate director at Complyport Limited. Complyport is a compliance and regulatory consultancy providing bespoke, practical compliance solutions for regulated financial services firms.