Ex-regulators warn of FSA restructure risks

Former regulators are warning that the restructure of the Financial Services Authority (FSA) will bring about a new set of risks, with one ex-regulator calling the move “a waste of time and money”.

David Kenmir
David Kenmir

In June 2010, Chancellor George Osborne set out plans for the FSA to be scrapped and replaced by the Prudential Regulation Authority (PRA), part of the Bank of England, and the Consumer Protection and Markets Authority, which was later rebranded the Financial Conduct Authority.

Tim Dolan, head of the financial services regulatory team at law firm Pinsent Masons, who worked in the FSA’s enforcement division, says: “It is a complete waste of time and money. I am all for changing the focus of the regulator and I am all for taking a step back and reviewing whether the regulator’s rules, objectives and staff are appropriate, but splitting up the regulator is an unnecessary distraction. It is change for change’s sake and entirely motivated by politics.”

David Kenmir, former chief operating officer at the FSA, who is now regulatory practice partner at PricewaterhouseCoopers, says: “The regulator has been perceived as one of the causes of the financial crisis, so it was hardly surprising it would be a target for this Government but structural change alone does not sort problems out.”

Kenmir says the restructure reflects the fundamental change in regulatory approach that has been driven by FSA senior management. (article continues below)

He says: “I believe Hector Sants, Sally Dewar, Jon Pain, Margaret Cole, myself and others have done a really good job in changing the regulator to make it more intrusive and less trusting. The FSA has fundamentally changed already, so the structural change is just further implementation of that.”

“It is change for change’s sake and entirely motivated by politics”

Tim Dolan

Fiona Fry, head of regulatory risk consulting at KPMG, is a former head of investigations at the FSA and one of the FSA’s predecessor bodies, the Investment Management Regulatory Organisation. Fry says: “What we do not want to see is a lot of internal focus on structure and process at a time when there are still a lot of regulatory challenges to be dealt with.”

She notes that the uncertainty internally at the FSA over the restructure has led to an increase in staff leaving.

Fry says: “There are a lot of firms to supervise and the regulator has to have a lot of people to do that and they will not all be experienced. That is a challenge. We see firms constantly frustrated with conversations they have had with their supervisor where the supervisor has not got the experience to deal with a particular issue.”

But Richard Scrivener, consultant at Bovill, who worked in the FSA’s conduct risk team, believes the restructure is beneficial for regulation as supervisors can concentrate on purely conduct or prudential issues.

He says: “Historically, the supervision teams have had to look at both the prudential and conduct of business issues. They have spent a lot of time on the prudential side and that has been at the expense of where the tyres hit the ground, that is, in the sale of products and the customer point of contact.

“By having a regulator that is dedicated to conduct, then there is an opportunity to dive deeper and get more involved.”

Consultant David Severn, a former FSA head of retail policy, believes splitting the regulator into the FCA and the PRA presents a risk that the two bodies will fail to coordinate and cooperate with each other, and may increase regulatory costs.

But he says: “What is more important is what powers the new regulators are given and how they are going to exercise those powers.”

Even before Osborne announced the new regulatory structure, the FSA was moving to adopt a more intrusive style of regulation. In shaping the new regulators, the FSA has pushed for product intervention powers which will allow the FCA to take action at an earlier stage, such as the design of products where it sees risk of consumer detriment.

“The task is incredibly complex and the regulator has made a start in creating a strategy”

David Kenmir

Kenmir says: “FCA chief executive Martin Wheatley has been given an incredibly hard job. Every time the FCA intervenes in a product, there will be people who come out of the wood-work who will say ’this is a good product in certain circumstances,’ and they will probably be right and the FCA will be blamed for intervening.

“And when there is a problem with a product the FCA has not intervened in, it will be blamed for that too. The task is incredibly complex and the regulator has made a start in creating a strategy to address that task but there is still a long way to go.”

Dolan says: “There is a massive difficulty the FCA is going to have in actually understanding the products and propositions that are being offered. Products offered in the retail marketplace are not always straightforward. The FSA may say ’products should be straightforward, otherwise they should not be marketed,’ but it is not always that simple.”

Fry says the success of the new regulators will depend not on the underlying structure but on whether the right people are in place and the focus and the objectives of the regulator are clear.

She says: “I understand why this is being done but the big risk is there will be too much focus on the restructure achieving the change that is needed, when it will always be down to people, leadership and clarity of objectives. If they do not get that right, they can reorganise as many times as they like but they will not get the right result.”