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CML responds to retail conduct risk outlook


Published: 15 March 2011 | Author: Bernard Clarke

The Financial Services Authority (FSA) has set out what it sees as potential risks for consumers arising from the economic backdrop, pressures on firms and changes to regulation. Its views are detailed in its first-ever Retail Conduct Risk Outlook, published at the end of last month. A similar document highlighting prudential risks for the coming year is due out shortly.

In our view, the conduct risk outlook is not as forward-looking at its title suggests. As far as lenders are concerned, the main focus is on potentially unfair terms in mortgage contracts. These are viewed by the FSA as examples of the failure of requirements to treat customers fairly.

The document is a clear signal to lenders that the regulator is still concerned about unfair contract terms. But many of the issues highlighted in the report are historic and most have already been addressed, with offending clauses either amended or struck out. Some of these amendments were made over two years ago.

Other broader risks highlighted by the FSA include pressures on firms to focus on profit maximisation above customer care through the bundling of products (for example, the sale of current accounts with other benefits, including insurance products), cross-selling to existing customers, or the replacement of payment protection insurance with other products.

While these are all examples of potential risks that may come to pass, in our view the regulator – and the industry – would have benefited from a more forward-looking review of issues facing the market, such as the impact of an ageing population or the current debate about first-time buyers.

Another area of interest for lenders is the FSA’s view of the potential for firms to modify their behaviour in response to impending regulatory change. Referring to the current mortgage market review (MMR), the report states that the risks are that:

  • in the absence of the MMR, firms may revert to the lending and selling behaviour of the past;
  • there could be a growth in unregulated buy-to-let and second charge lending to avoid new regulatory requirements and prohibitions (although not mentioned specifically in the paper, the FSA's concern is that buy-to-let will become a new source of self-certified lending);
  • there will be a rush of self-certified mortgages as new rules are implemented, with demand coming from a rising number of consumers in financial difficulty; and
  • that consumer will be exposed by the sale of mortgage books to unregulated bodies.

In our view, there are strong grounds for questioning each of these assumptions. The potential for reversion to past behaviour in the absence of the MMR, for example, does not take into account a large number of other major regulatory and market reforms, including new capital requirements, the building societies’ sourcebook, new approaches to supervision and enforcement, the lack of funding, and the pursuit of risk-averse strategies by lenders.

Clearly, the newly-published conduct risk outlook will be on the industry’s radar for some time to come. It is likely to be a flagship publication of the new Financial Conduct Authority.

We acknowledge that there are good reasons for the regulator to publish a considered, forward-looking and realistic assessment of retail conduct risks. In our view, the right sort of document would have the potential to be a genuinely valuable means of flagging up areas of potential conduct risk and communicating the regulator’s priorities.