Time is slipping past. The Financial Services Authority (FSA) is heading for abolition and with it the birth of the new regulatory system is approaching, with two separate authorities - the Prudential Regulation Authority (PRA), which will regulate the banking and investment markets, and the Financial Conduct Authority (FCA), which will monitor the distribution of financial products and services.
Already the FSA has separated internally into the two areas and is running a ‘Twin Peaks’ approach to financial regulation in preparation for the split, which will officially happen in 2013. Hints have been dropped in various speeches given by those personnel who are destined for the FCA of how their strategy will differ from the FSA approach. The temptation will be for the FCA to try to show they’ve arrived by announcing a raft of new proposals. It will be very hard for the new team to take over and say ‘everything’s fine – no need for change’. After all, if it had been, the FSA would not have been split in two. But a mountain of new regulation is the last thing that the consumer or the industry needs.
I hope that Martin Wheatley, the incoming Head of the FCA, has the strength to resist this temptation and to avoid trying to justify his budget, not to mention his salary, by producing lots of new regulations, which will just impose cost on consumers and will prevent the level of focus on innovation of new products that better suit the market; a market that will be expanding dramatically and changing due to the parallel introduction of auto-enrolment.
Wheatley should pause awhile and consider his strategy. While doing so, he could do worse than ponder the following wisdom attributed to Confucius:
‘If the people be led by laws and uniformity sought to be given them by punishments, they will try to avoid the punishment, but have no sense of shame. If they be led by virtue, and uniformity sought to be given them by the rule of propriety, they will have the sense of shame, and moreover will become good’.
The failure of the layers of detailed regulation that have been dumped on distributors and producers over the last decade and a half underlines the veracity of the first half of the quotation. The second part is patently true; people who have a sense of shame will try to make sure that they are decent and fair in all their dealings with others, automatically ensuring that they will treat the customer fairly.
I believe the industry would recover its reputation faster if it was made clear that both distributors and producers have a fiduciary duty to the consumer and that they would be monitored on this, rather than by rafts of rigid regulations that some parts of the industry will waste time and money trying to circumvent by ensuring that they meet the letter of the regulations while breaching their spirit.
It is generally more effective if you can inspire people to be honest rather than spend your time trying to catch them out being dishonest.
What do you think? Will the FCA act hastily? Let us know in the comments below!