Continuing self-regulation
1. "The Government looks to the new FSA"
In the March 1998 green paper A new Contract for Welfare there is a "contract" between the government and citizens (page 80):
| Duty of Government | Duty of individual | ||
| Regulate effectively so that people can be confident that pensions and private savings products are secure. | Save for retirement where possible. |
The government is not doing its duty to regulate effectively, since it has handed responsibity to the FSA:
"The regulatory process should provide reassurance and protection for customers,... The Government looks to the new FSA to meet this important responsibility for investments such as personal pensions." (page 41, paragraph 32)
When the Labour government came to power in 1997, the Chancellor, Gordon Brown, commissioned a report from the SIB, Reform of the Financial Regulatory System. This is a blueprint for the takeover of the proposed new regulator by the industry, starting with the appointment of the senior executives. The SIB was in charge of the previous self-regulating system. It was delighted to be given extended powers with a change of name to the FSA. It is mainly staffed by the same people as the previous system.
A previous Chancellor also went to the regulators in July 1992 to ask them "what needs to be done to improve regulatory performance", resulting in the report Making the Two Tier System Work, by Sir Andrew Large chairman of the SIB. Judging from these reports, with a system of self-regulation, the regulators should not be responsible for specifying how they can improve their own performance.
The FSA is of course a continuation of the self-regulation of the industry, so that history is repeating itself. It is financed by the industry. It is a quango. The new Food Standards Agency, and regulators such as OFSTED, OFTEL, OFWAT, describe themselves as government departments. Equivalent organisations to the FSA in other countries, such as the SEC in the United States are part of government. The SEC is a federal agency. The Swedish Swedish Financial Supervisory Authority has been described as a "trail blazer for the FSA" because it is a single integrated regulator. It is a division under the Ministry of Finance, that is part of government, rather than a quango like the FSA.
OPRA which regulates occupational pension schemes, is not a goverment department. However there is a big difference between OPRA and the FSA. Employers are largely paying for occupational pensions, whereas insurance companies do not pay for personal pensions.
The Financial Services and Markets Act (2000) has an emphasis on regulating markets, that is on inputs rather than outputs. The FSA regulates the Recognised Investment Exchanges, which includes markets in metals and gas. There should instead be an emphasis on regulating what happens to savings after products have been bought. Instead, as the Treasury select committee stated in its report The Mis-selling of Personal Pensions (12 November 1998, cmnd 712):
"Insurance companies hold large amounts of other people's money. We were concerned to learn that the regulation of this aspect of their business is ill-designed, little known and rarely exercised."
Our supervisory authorities of insurance companies have an arms-length approach. They have relied on internal actuaries and now are planning to appoint independent actuaries. The BAFin which regulates insurance companies in Germany states: "As often as possible, the companies are inspected on-site by inspectors who are staff members of the BAV."
The Insurance Division of the Treasury, formerly at the DTI has been moved to the FSA, which implies more control by the industry, and less by the government. .
2. Objectives of the FSA
Legislation in this area tends to be vague, containing terms such as "the protection of consumers" in the Financial Services and Markets Act, which are then interpreted by the industry. The protection of consumers is being interpreted by the FSA to be helping consumers choose products to suit their individual requirements, such as its Comparative Information Scheme, which will no doubt be good for sales.
"The protection of consumers" is a slightly confusing expression and should be replaced by "the protection of savings". It should be the duty of the FSA to protect the savings of the public within the institutions which it regulates, not from stock market fluctuations, but from various ills which can befall these savings resulting from for example: insolvency, crime, mis-selling, inefficiency, incompetence, excessive expense charges.
There has been a change from "the protection of investors" in the Financial Services Act 1986 to "the protection of consumers", which has become: "Securing the right degree of protection for consumers" on the website of the FSA. The Parliamentary Treasury select committee stated in its report The Regulation of Financial Services in the UK (23rd October 1995):
"The Committee believes that the public interest is best served by a regulatory community . . . which does not rely on the financial community it is supposed to be regulating to set the pace for defining behaviour in key areas of market practice."
The "objectives" for the FSA in the Act are so vague, it will be difficult to determine whether it is achieving them or not. They are the protection of consumers, the promotion of consumer awareness and market confidence, the prevention of crime. How do you measure "awareness" and "confidence" except by the extent of sales? This vagueness contrasts for example with the objectives of OFTEL: "Our goal is to make sure you receive the best quality, choice and value for money for all your telephone services." Do any regulators anywhere make such frequent references to caveat emptor as the FSA?
The Financial Institutions and Markets Department of the Swedish Ministry of Finance, states:
"The Department's objective is to create the basis for financial regulation that fosters efficiency in the financial system at the same time that society's need for stability and consumers' interest in being well protected are provided for."
Efficiency and stability are surely better objectives than awareness and confidence.
The BAFin has a legal obligations to take those actions which it thinks will benefit policyholders. It has always been concerned with protecting the interests of policyholders. "The Office was entrusted with safeguarding the interests of the insured and making sure that contractual liabilities could be met at any time."
Our regulators have been taken over by the industry. This is the well-known phenomenon of "regulatory-capture". They are now concerned with all sorts of issues, other than protecting policyholders, especially those which will help to promote sales.
Sir Howard Davies, chairman of the FSA, stated to the Treasury select committee in its report on the mis-selling of personal pensions, mentioned above:
"The whole learning experience of the last few years has taught us I think, that suitability is at the core of the problem which investors face, whether this is a suitable product for you." (paragraph 184)
The main problem faced by investors is getting a good return on their investments, rather than finding products to suit individual requirements. Savings need to be protected from excessive and hidden charges, which cause the poor average returns discussed for example in the February 2000 occasional paper of the FSA. They need to be protected from inefficiency. People are being asked to save for retirement in a market which is not properly regulated.