Martin Wheatley was previously the head of the SFC in Hong Kong and is now with the FSA and soon to be boss at the UK Financial Conduct Authority or FCA. In a speech to bankers on restoring confidence in the industry he had the following to say in part:
Both we – and you – need to act differently to address why this happens. And we have to move on from the past approach of many regulators, which reflected a belief that the most important thing needed to make financial services markets work well was transparency — fair disclosure of terms and fair sales processes.
We cannot just rely on firms and consumers to do the right thing all the time, when past experience has told us that this does not always happen, especially given the pressures both consumers and firms face.
Regulation — and especially product regulation — is therefore necessary to protect consumers and help them avoid mistakes.
And to create regulation that builds trust and confidence in financial firms, we need to not only understand how consumers make decisions and how problems arise, but also understand firms better, and make a judgement on whether they can deliver fair outcomes.
In the old days the question to firms would only be “Do you have a strategy?” Now it is about examining firms’ whole approach and following the money to understand what lies behind profitability and the implications of firms’ strategies.
This will be displayed in how we actually deal with your firm on a day-to-day basis in the FCA. We will replace our current way of assessing your firm’s risks with an approach focused on your business model and whether it can deliver good outcomes for consumers. Alongside this, we will have more of our staff specialising in wider, cross-industry issues or emerging risks rather than tied to specific firms.
We are looking at whether firms have product development and approval processes that are well-designed and can weed out harmful or inappropriately marketed products.
This is about us getting more closely involved at an earlier stage, to identify products with the potential for problems for consumers and to intervene to prevent their inappropriate sale — often this will be where the risks are likely to outweigh the benefits the products will bring. The FSA has already proposed a new and intrusive approach to the way firms bring financial services products to the retail market – the FCA will look to build on this.
The FCA will also intervene where the product may be well known and of use to consumers but the sales and distribution process of a firm does not meet regulatory standards and problems for consumers are occurring.
Product intervention does not necessarily mean a heavy-handed approach such as a ban, though sometimes it will be necessary when other options do not work or are not feasible. There are many other things we can do behind the scenes with firms.
In all of this, we accept that firms need to be able to generate acceptable returns for shareholders, and have to be financially robust. But this is about ‘good profits’ rather than profit at any cost — either to firms’ own stability or their customers’ best interests.
The key point is that in the FCA, we will be looking to firms to construct business models where fair treatment of customers is central. And we will expect those in executive management and on the boards of firms to step up their engagement with this side of the business and take this seriously.
It is interesting that Martin seems to be suggesting that this new regulator will spend a lot more time looking at the business models of firms rather than the specifics of product disclosure or transparency. Sounds fine in principal, but do regulators have this ability?
In this region we already see example of regulators trying to make decisions on the basis of how they think a business should be run and I must say that it rarely seems to be commerically wise. I admire the thinking behind Martin's comments, I don't necessarily share his optimism for execution.