Julian Knight: New watchdog must rebuild consumers' trust
The end of the FSA will not be mourned but its replacement needs to avoid its many mistakes
Sunday 15 January 2012
'Box tickers" who occupy an "ivory tower" is the final damning verdict from the Treasury Select Committee on the sorry history of the soon-to-be-replaced Financial Services Authority.
I have sat in the palatial surroundings of the FSA on many occasions, and thought that there was something intrinsically rotten at the core of the City watchdog. It's like men and their cars: the bigger and more thrusting, the more insecure the driver. The FSA was riddled with self-doubt over whether it should be supporting the City or protecting consumers, choosing to content itself with producing endless, but impenetrable help guides and key facts documents that no one cared about, let alone read.
On nearly every area of its regulatory responsibility, from preventing widespread and obvious mortgage fraud to ensuring that the banks didn't go pop, it failed monumentally. It didn't fiddle when the City burned so much as sit and had a meeting about a meeting.
I'm reminded of The Life of Brian, where the hero is being taken to be crucified and all his fellow freedom fighters in the Peoples' Front of Judea do is pass endless motions of support instead of staging a rescue.
But that was the FSA circa 2008. Since the start of the financial crash it has markedly upped its game, realising it was to lose its prudential role and focusing more on simple consumer protection.
But as the FSA morphs into the Financial Conduct Authority (I wonder if they will simply Tippex over the "S" on FSA-headed notepaper and replace it with the letter "C") the Treasury Select Committee rightly warns that in its pared-down role as consumer protector it could be pushed to the margins. This is particularly worrying when we have a Conservative-led government which is so in with the City and has an ideological blind spot when it comes to an interventionist regulator.
The Treasury Select Committee, chaired by Andrew Tyrie, rightly notes that the provision in the current Financial Services Bill for a government veto on FCA powers is disturbing as it could mean an undermining of the regulator, with the banks potentially bringing pressure to bear on politicians, who will in effect be higher up the chain of command.
The committee is correct to call – as I have done on occasions – for the FCA to potentially have the power to pre-approve or block new financial products, rather than simply monitor their sale and step in only when the damage is done.
Consumers are so distrustful of financial services that confidence needs to be rebuilt. This will damage "innovation", as the financial services industry states, but to dip back into Life of Brian again, "what has innovation ever done for consumers?" Payment protection insurance, split capital investment trusts and life settlements – that's innovation that we could well have done without.
But reading the MPs' report more closely, it's full of contradictions. They want greater protection, but say the current regulators are overly bureaucratic. They are, of course, but my complaint is that they have been overly bureaucratic over the wrong things. Pre-crash, they tended to focus on areas which wouldn't upset the City while letting the really big stuff go. What's more, the MPs say that it's aloof and not pally enough with the financial services industry. I'd say that the regulator was for a long time in thrall to the financial institutions; it feared them and accusations that it was being heavy-handed.
Reading the committee's report, it seems to fall into the same trap as past governments: they want a regulator which they can say is strong and protecting consumers, but they don't want to scare the horses too much. They rightly condemn the past, but are a little muddled about the future.
The new FCA needs to engage with the industry for sure, but it must be from a position of real strength.
Wonga's 'cynical' advice for students pulled
Why bother with inflation-linked student loans when you can borrow from a payday lender at up to 4,000 per cent? Bright idea? No, I thought not. But that's what Wonga was telling students to do on its website, until it withdrew the advice after strong criticism.
In its advice, Wonga used carefully pitched mateyness as if sitting on a stool in the student bar giving out worldly advice.
Pearls of wisdom offered include: "Only take out a student loan for exactly what you need, and then use Wonga for those odd times when you've got too much month at the end of your money." And "When your mates tell you about a deal on plane tickets, you've got options. Maybe you don't have the money to pay for the whole thing now, but you will when you get your wages at the end of the week. Enter, Wonga!"
Errol Damelin, Wonga's founder, right, has told me he is trying to act in the "most responsible and transparent way possible", but "predatory" and "cynical" was how the Consumer Credit Counselling Service describe the advice. I'd add a few more choice words to this list.
Consign this product to history
You'd be hard pressed to find a better example of what makes millions disillusioned with financial services than with-profit funds. Expensive, complex, lacking in transparency and clogged full of small-print get-out clauses and penalties, but such policies are, due to commission selling, owned by millions.
This week the with-profits bonus season starts when providers reveal the percentage return policyholders can expect this year. It was once a matter for excitement, but now disappointment beckons. For yet another year, a combination of stock market falls and record low returns on fixed-interest securities should put paid to a substantial bonus. Things aren't as desperate as they were a decade ago when a major stock market correction led to some funds imposing huge penalties on those looking to surrender their policies.
Gradually, the number of with-profits policies is declining as they mature and new ones aren't sold. The sooner this product disappears into history the better.
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