Britain's financial regulator has clear objectives set by Parliament, principally to ensure that relevant markets function well, but because they are so broad its CEO has decided to interpret these clearly by means of a mission document.

The FCA has more tools at its disposal than many financial conduct regulators around the world and the second half of the mission document (to which CEO Andrew Bailey refers, rather portentously, as 'the Mission') is devoted to these.

The paper asks the public what characteristics a well-functioning market should have; whether the FCA has been approaching 'consumer loss' from the right angle; whether it has struck a good balance between "individual consumer due diligence" and market discipline; if its distinction between wholesale and retail markets is right; and whether it measures its own performance in a meaningful way with the right criteria.

There is a section on regulatory intervention, which the FCA always undertakes by first identifying the issues (using intelligence and complaints supervision), then by a diagnosis of 'cause' and the extent of harm (using market studies, thematic reviews, investigations etc.), the "identification of a tool" (shaping/designing markets, ensuring that firms enter and leave markets in an orderly way, focusing on this-or-that firm, and criminal or civil or administrative discipline), and the aim to publish analyses whenever possible at the end. It asks the regulated public whether this is the right way to go about things.

The paper goes on to ask people where they believe the boundary between broader policy and the FCA’s regulatory responsibility should lie; whether the regulator's understanding of the benefits and risks of price discrimination and cross-subsidy is correct; whether its increasing emphasis on individual responsibility also increases the need for more (and more innovative) regulation; and whether a 'duty of care' would help the markets to function better.

The Duty of Care

On this last subject, the Financial Services Consumer Panel (housed at the same address as the FCA but referred to in the mission document, rather disingenuously, as 'independent') believes that the culture in financial services could improve if the FCA had a legal duty to make rules that delineate a "reasonable duty of care" that financial service providers should exercise when dealing with their retail customers, including high-net-worth individuals. In their view, ‘consumers can only reasonably be expected to take responsibility for their decisions where firms have exercised a duty of care.’ The FCA, as many regulators would, dislikes the idea of a fresh statutory burden but is nevertheless allowing practitioners to comment on the proposal.

On the subject of the protection of consumers from loss and sharp practice, the FCA asks people whether they think its approach to offering consumers greater protection for more complex products is the right one; whether its distinction between consumers with greater or lesser 'capability' (i.e. the ability to judge markets and products) is appropriate; whether its approach to redress schemes for issues outside its regulatory perimeter is the right one and whether more specific criteria would help; and what more it can do to make consumers who use redress schemes feel that they are receiving enough attention. The memory of the Arch cru scheme (which related to unsuitable advice given to investors in Arch cru funds) obviously still rankles, as it receives a mention here.

Compulsory disclosures to consumers

Public policymakers have long assumed that the more information people have, the more likely they are to make appropriate choices. This is illusory and it is surprising that regulators ever thought this at all in view of the fact that the politicians who give them their marching orders well know that voters do not make rational choices. Nevertheless, Bailey in his paper admits that "it is now clear that, in real life, consumers do not always respond to disclosure in the way that
many policymakers and regulators have assumed." He therefore asks practitioners whether the FCA's approach to the effectiveness of disclosure has, so far, been based on the right assumptions and whether the FCA should take a more ‘interventionist’ approach (fixing prices and banning products) when conventional disclosure proves ineffective.

British regulators have traditionally been far more reluctant than their continental counterparts to stand in the way of new products and innovation, dictating price ceilings and banning willy-nilly. They have, instead, attempted to push HNW consumers and others in the right direction by means of public information and disclosures that firms make to clients. Nevertheless, they are aware that the more distasteful path, that of firm intervention, is sometimes necessary. Their angst is evident in this paragraph: "Where we judge that even nudges do not prevent consumers from making poor choices, we will consider intervening more significantly, such as restricting some products or imposing constraints on price. Yet these types of measures can negatively affect consumers who do choose well and they can also harm innovations in the market. So we will only use them cautiously, when we are clear that other measures will not work. In doing so, we will seek to strike the appropriate balance between the risks inherent in more and less complex markets." The paper goes on to ask practitioners whether they agree. It also asks them when and how the FCA should 'intervene.'

A seal of approval?

Andrew Tyrie MP, the chairman of the influential Parliamentary Treasury Committee, told Compliance Matters: “Andrew Bailey’s consultation document will be raised with him when he comes before the  ommittee next month. At a quick read, it looks like a robust attempt to give the FCA a much clearer sense of direction. It also attempts to identify what the FCA cannot reasonably be expected to do. Both are certainly needed. So is the greater transparency about its decisions and choice of priorities, promised in the FCA’s consultation document.  

“The FCA now has a responsibility to do much better than its predecessor, the Financial Services Authority, and Parliament has a responsibility not to make the regulator’s job impossible by imposing unreasonably heavy demands on it. Andrew Bailey has many challenges ahead of him, including the publication of the FCA’s report on its review of RBS’ treatment of small businesses, the need to strengthen the resilience of IT systems in banks, and reforming the FSCS levy.”

Comments should reach the FCA by by 26 January 2017.