February ended with a flurry of activity from the FSA, with the regulator releasing missives on both the conduct of retail firms and treating customers fairly (TCF). Both of these subjects were referenced in January’s Financial Risk Outlook, which serves to highlight increasing vigilance from the watchdog.
In a speech to the FSA Retail Firms Conference at the end of February, Hector Sants, chief executive of the FSA, made a point of noting that the present market problems will not cause the regulator to relent. He said: “I would like to make absolutely clear that our stated move toward a more principles and outcome-based regime has not changed. Although some external commentators have doubted whether now is the appropriate time to drive forward an approach based on fewer, less prescriptive rules, we believe these times of more turbulent markets demonstrate the need for both the regulator and the industry to focus on the outcomes and consequences of actions, including consideration of risks.”
This focus on risks is in danger of becoming a mantra at the regulator. Sants said: “Market conditions have deteriorated considerably and investors have reassessed the risks in their portfolios.”
As a result, Sants agreed that markets could be more vulnerable to external shock and the impact of shocks on firms could be more significant than in previous years.
He added: “Businesses should be preparing for this changed environment and they – and their customers – will need to recognise that there are both short and long-term risks, and think about the implications.”
Commenting, Ray Boulger, senior technical manager at John Charcol, says: “The reality is the market is tightening on risk anyway because there is less to lend. We have seen lenders cut out what they see as the higher risk business. The FSA has always made the point that it does not want to stifle innovation, and it generally recognises that innovation involves a degree of risk. Where there is risk, there might be failure. The key point is that any risk needs to be a sensible risk and properly assessed.”
Sants referred to the FSA’s Financial Risk Outlook, warning of the risks inherent in a less benign economic environment. It identifies five priority risks: business models of some financial institutions are under strain; increased financial pressures might lead to firms shifting efforts away from conduct of business requirements; market participants and consumers might lose confidence in financial institutions and the financial system; borrowing could cause a significant minority of consumers problems; economic conditions could increase incidence of financial crime or lead to resources being diverted away from tackling crime.
However, Callum McCarthy, chairman of the FSA, said that these are not predictions, but a prudent attempt to highlight the risks that could have an impact on consumers and firms in a less benign economy. He said: “Firms and consumers need to recognise there are both short and long-term risks and should think about the implications.”
The area of greatest concern to the FSA is the retail market, and it will not waver in its commitment to the treating customers fairly programme, the Retail Distribution Review and the financial capability programme. The regulator will intervene when there is evidence of market failure and where the market itself cannot provide the necessary solutions. Supporting material in these cases will be essential.
Sants said: “We will not apply hindsight when judging firms actions in an enforcement context, as it must be possible for you to predict at the time of an action whether it might constitute a breach.”
On the same day as the Retail Firms Conference, the FSA gave a clearer idea of what firms can expect in the way of TCF inspections. The regulator will normally ask firms to complete a questionnaire and submit the materials they use as evidence of treating customers fairly before the assessment. It will look at the high-level evidence on TCF across all the firms’ business, focusing on areas of the firm’s business where the risks to TCF are higher. The FSA will speak to those who use management information at all levels within the firm in order to understand how it is used.
Where possible, assessments will take place at the same time as ARROW risk assessments. For a large proportion of firms, this will not be possible and a separate assessment will be carried out. Where the visit identifies risks to TCF, risk mitigation programmes will be issued to include work to be undertaken on the specific potential or actual risks identified.
Small firms can expect a simplified assessment process, which will focus on the approach of a firm’s management and how this is affecting the firm’s progress on TCF. Small intermediary firms will be assessed on a rolling programme of visits, as part of the regulators overall commitment to increase contact with small firms.
These small firms can also expect invitations to interactive road shows, as the FSA rolls out its regional assessment programme during the next three years. Assessment by mini visits or telephone interviews will follow.
Richard Farr, director of the Association of Mortgage Intermediaries, said: “Medium to large firms have FSA account managers to talk to. Small firms have no continuity of contact, so the playing field is not level. You can look at the increase in visits either as more scrutiny or as a genuine attempt to converse with small firms. AMI hopes this is the latter and that the FSA lives up to its proposition.”
The regulator will publish an assessment of progress to the March deadline in the second quarter of 2008. n