In a report entitled "Financial services mis-selling: regulation and redress," the British National Audit Office has assessed the efficacy of financial regulators in the fight against the mis-selling of products. The results are not particularly inspiring.

The important news is that the FCA lacks good evidence that its actions are reducing mis-selling in toto. Paragraphs 3.10 and 3.11 of the report state: "Complaints data provide an imperfect indicator of current mis-selling levels because complaints may reflect past mis-selling rather than continued problems, and the FCA’s information on complaints to firms does not identify when alleged mis-selling took place. The FCA does not yet draw together information that could show whether its actions are reducing mis-selling. In 2014, mis-selling accounted for 59% (2.7 million) of customer complaints to financial services firms. This compared with 25% (0.9 million) in 2010. Payment protection insurance alone accounted for 2.3 million complaints in 2014 – 51% of all complaints. There has been no clear trend in complaints about mis-selling of products other than payment protection insurance."

The FCA is, however, taking a more active approach than its predecessor, the old Financial Services Authority which it replaced in April 2013, to identifying and responding to risks related to mis-selling, especially for new products. This is just as well; on the whole, the auditors have found that banks have been handling complaints of mis-selling poorly, requiring the FCA to step in. The regulator has tried to improve complaints handling by introducing new rules, conducting thematic reviews and taking enforcement action (fining Lloyds Banking Group £117 million) and it does think that firms handle complaints better than in the past. Seven out of 15 firms that responded to the NAO's information request reported changes in their approaches to it.

The report contains many interesting titbits of information that readers might not know. For instance, the Financial Conduct Authority oversees the budget of the Financial Ombudsman Service. The fines that the FCA has issued for mis-selling activity since its inception in April 2013 come to a total of £298 million. In 2014-15 the total operating costs of the Financial Conduct Authority (£523 million), Financial Ombudsman Service (£240 million) and Financial Services Compensation Scheme (£71 million) came to a total of £834 million - a staggering sum when compared with years past. The FOS has upheld nearly two-thirds of all complaints since the regime change of 2013. It has a massive backlogue of 39,300 payment protection insurance (PPI) cases that have been waiting for more than two years - 17% of the total. Domestic and EU legislation prohibits the FCA from providing the Comptroller and Auditor General (Sir Amyas Morse, who leads the NAO) with certain confidential information that it holds about firms.

In December 2014, the FCA embarked on a new strategy in this area. It is trying to bring together data and intelligence in a way that helps it to analyse what is happening in all regulated sectors and to determine the right ways to intervene. This should help it make its decisions and improve its appreciation of various risks. The FCA sets objectives for each intervention but it is not yet systematic in looking at its aims and criteria for success in areas where its actions are related to one another. Nor does it link the outcomes of interventions to their costs. This, according to the report, might stop it from co-ordinating its activities well, and "means that the FCA cannot be sure that it has chosen the most cost-effective way of intervening." The FCA’s strategic approach to intervening in markets when mis-selling comes to light is still evolving.

Although it is straightforward and free to complain directly to the FOS, many consumers who have been mis-sold financial products fail to receive full compensation because they are not fully aware of the process and/or rely on claims management companies. Sometimes they do not know that they were mis-sold a product, or that redress is available. The FOS has found that many consumers do not pursue a complaint because they believe that it will achieve nothing, or that it will be too stressful. The ombudsman and the FCA have tried to encourage consumers to complain directly if they have problems, with little apparent impact so far; around 80% of payment protection insurance complaints to the FOS come through claims management companies.

The report has also discovered that the FCA and the FOS work hard to co-ordinate their activities, but they have yet to convince firms that they are doing this successfully. The NAO fully expects the Senior Managers' Regime, due to be introduced soon, to cut down mis-selling even more because it makes individuals more accountable for their actions. Several firms have told the auditors that they have devoted more senior management time to the risks of mis-selling and misconduct and done other things to alleviate those risks.

Sometimes the NAO drops a 'clanger' that suggests that it hardly has the first idea about the gritty realities of regulation. One classic of understatement is: "Smaller firms may face proportionately higher costs, since they are less able to develop in-house regulatory expertise." Everyone in the regulated community knows that the most fundamental result of regulation is that it sets up a barrier to entry for small firms because large firms are disproportionately favoured when it comes to compliance costs, and to a massive degree.