Lenders call for clarity on new regulatory powers
Published: 5 February 2013 | Author: Bernard Clarke
The Financial Services Authority (FSA) is currently consulting on wide-ranging new rules that will enable regulators such as the Financial Conduct Authority (FCA) to intervene in the markets it regulates to protect customers and address instances where it is believed that competition is not working to produce the right outcomes for consumers. This article considers the implications for the mortgage market.
Product intervention will be an important new tool for the FCA in regulating financial services in the future. In its consultation paper on the use of the proposed new rules, the FSA reminds all financial services providers that the FCA intends to intervene earlier in future and to have a lower risk tolerance than the regulators of the past.
The FSA’s proposals
The new proposals relate to powers to make temporary rules, which will remain in place for up to 12 months, without consultation if it is believed that urgent measures are needed to protect consumers, competition or the integrity of the market.
The FSA’s paper does not seek to set out all the circumstances in which the regulator may intervene. Instead, it proposes wide-ranging powers to issue warnings, introduce rules that sales must be advised, amend promotional materials and/or charging structures, ban product features and “in rare cases” ban the sale of some products altogether.
The proposed rules will make firms responsible for ensuring that financial products are suitable for their customers, and are only bought by those consumers for whom they are intended.
How will it work in practice?
All well and good in theory. We accept the rationale for swift intervention in financial services markets to prevent consumer detriment. But what about the practice? We would hope and expect that the use of these powers will be truly exceptional. The regulator should be capable of transmitting messages to the market - and the market should be capable of acting on them - without the need for regular, unpredictable and sudden intervention. We would be concerned that any evidence that the FCA’s use of the proposed powers was a sign of problems in the relationship between firms and the regulator and, in particular, of a failure of communication between the regulator and the firms it supervises.
We welcome the assurance that the FCA does not intend to use its powers regularly, and its commitment to consider carefully before intervening.
The regulator should be able to give messages to the market without the need for sudden, unpredictable interventionBut there is much that needs to be clarified about how the powers will be exercised. Firms can be challenged over the "value for money" provided by their products. How will that be measured, defined and assessed?
We need transparency over how and when regulatory powers of this nature could be used and what evidence can be expected to back up the judgement calls. Is it to be applied only in rare and egregious cases? Or will it be a routine form of price supervision? And will the communications about the introduction of temporary rules explain clearly to firms exactly why they are being imposed, so that others can learn and adapt before their products are affected?
Where is the real consumer detriment?
Consumer detriment is not just about inappropriate financial products, or inappropriate means of promoting, selling or charging for them – important as these considerations are. There are other possible sources of consumer detriment - some of them stemming from the way in which the new rules may be applied.
Unintended consequences of regulatory intervention need to be assessed and addressed. This is acknowledged in the statement that the regulator will consider whether temporary rules, or the timing of them, would "create undue risk of further consumer detriment". However, we would like more details about how the regulator proposes to deliver this important safeguard.
One way in which the proposed powers could themselves be a source of unintended consumer detriment (but one that would be difficult to detect) would be if they were to create barriers either to entry, discouraging new operators from entering the market because they feared that their product might fall foul of the regulator, or to innovation that would benefit customers. We believe there is a real risk that uncertainty about the rules could lead lenders to take a more cautious approach to innovation, particularly given the lack of clear understanding about how and when the FCA could use its powers.
Consumer detriment is not just about inappropriate financial products…there are other possible sources – some stemming from the way new rules may be appliedAnother concern is that any proposals clearly would not allow for intervention in cases falling outside the jurisdiction proposed for the FCA, even where there may be potential consumer detriment.
Would, for example, the proposed powers have permitted the FCA to intervene in the sale-and-rent-back market in the two years during which we were calling for it to be regulated, before the belated intervention of the Treasury and the FSA? And would they permit the FCA to take action on lease options - on which there have already been a number of warnings to consumers, including from the FSA itself? We would not expect the FCA to have powers to intervene in markets outside its remit, but wonder whether this leaves a gap in consumer protection which others would expect to be filled.
What lenders want
Like firms operating in any market, lenders need clarity about the scope of proposed powers and the products to which they relate.
We are concerned that the grounds on which the FCA could intervene are not as clear as they should be - and that this is unhelpful for firms and consumers. Clarity would enable firms to plan product development in a more certain environment, and with a better understanding of regulatory expectations. That would help avoid unnecessary costs and potential market disruption.
We urge the regulator to use the final policy statement it will publish following its consultation to provide more information and greater clarity about the risks it is seeking to address, how and when it proposes to intervene, and the evidence it will require before deciding to use its powers. It would be helpful if the regulator could give examples of circumstances in which it would use its powers, and how it would intervene. Such guidance would help lenders, who will want, if possible, to avoid intervention - and the costs and disruption it would add to their businesses.
In the past, the FSA has published examples to illustrate how and when it proposes to use new rules, and we would welcome an indication that it will do so before introducing these measures.
Another major concern is the lack of requirement for the regulator to assess the potential negative effects of intervention on consumers, firms and markets. We would welcome more information about how the regulator proposes to assess this. In particular, we are concerned about the potential "domino effect" should consumer confidence in a product type or market sector be undermined by temporary intervention. There could be unforeseen knock-on effects for legitimate products and firms.
Communication between firms and the regulator
If rules permitting temporary intervention are introduced, much will depend on how announcements are made by the regulator when using its powers and how information is communicated to firms and consumers. We would therefore like to see more clarity from the regulator on these aspects of its proposals. It is essential that regulatory powers along the lines proposed are used in a predictable manner. The regulator could consider publishing anonymous case studies helping to illustrate their view of the market, which lenders could factor into product design.
One source of detriment could be if the rules created barriers to entry or discouraged innovationOne suggestion we would make for communicating to firms would be for the regulator to explain its reasons for intervention in a detailed open letter to chief executives, making clear which types of firms are affected and why. That would enable any lenders targeted for intervention to assess the impact on themselves and their customers, as well as any legal ramifications.
It would, of course, help firms if the regulator were to intervene at product design stage rather than later when customers are able to acquire products that the authorities believe to be flawed. However, this would require the FCA to seek to build and develop an open and constructive relationship with firms, with discussion on product design at an early stage so that a firm is able to understand what is acceptable, particularly if it is trying to develop an innovative product. The benefit of this would be a better understanding of markets for the regulator, and of regulatory requirements for firms. This type of understanding should reduce the likelihood that consumers could end up with the wrong sorts of products.
At this stage, lenders still do not know what kind of relationship they will have with the FCA when it assumes its role as a conduct regulator later this year. But they hope it will be constructive and fruitful. Firms understand the regulator’s desire to enhance consumer protection - but want proposed new rules to work well for everyone.