Regulation - Life after the FSA: New beginnings

After Conservative leader David Cameron and Liberal Democrat chief Nick Clegg agreed the terms of their historic coalition government earlier this year, one pre-election pledge rang in the ears of the broking community — the abolition of the Financial Services Authority.

The FSA's stance on intermediaries had long irked many in the broking community. Both the British Insurance Brokers' Association and the Institute of Insurance Brokers have lobbied for intermediaries to be considered separately from other financial services firms due to their unique nature.

Sir James Sassoon's plans to scrap the FSA outlined in the 2009 white paper From crisis to confidence: plan for sound banking, were thrown into disarray when the Conservatives failed to win a clear majority but a further post-election consultation paper, published in July this year, clarified the situation.

Worst case scenario
Consultation on the second paper closed earlier last week but, if recommendations remain unchanged, two bodies will run rule over the financial services market, the Prudential Regulation Authority and the Consumer Protection and Markets Authority — where brokers are likely to be regulated separately from insurers and banks.

However, with the future still not entirely clear intermediaries remain concerned about their regulatory destiny.

Barbara Bradshaw, chief executive of the IIB, claims there is a chance that the principles of the old regime could remain but under a different guise. "The worst case scenario could be the FSA as it is now under a new title," she explains. "It is an opportunity for the broking sector and we shouldn't let it go. We can have more meaningful, considered regulation."

Ms Bradshaw's concerns are shared by Compliance Management Services managing director Norman Hughes. "Intermediaries think that the new CPMA is the most appropriate body to regulate them," he explains. "However, we don't sense much enthusiasm for a new regulator. Brokers are generally negative about their experience with the FSA since 2005.

"They see the new CPMA largely as a re-badging exercise, so are not greatly enthused by the prospect of the new body."

Although the coalition government has stressed that brokers are unlikely to pose a prudential risk, there are still fears that intermediaries could fall under the auspices of both the PRA and the CPMA.

"One of the worst possible outcomes would be having two bodies to regulate intermediaries," says Mathew Rutter, financial services partner at Beachcroft.

A major problem for brokers that find themselves regulated by both bodies is that they could be lost in communication issues, an excess of red tape and ultimately fall into a regulatory crack. Mr Rutter continues: "Bigger brokers could be regulated by both as could a number of insurers . There is a danger that the two parts of the regulatory system are not talking to each other or are demanding the same information."

Carol Richmond, chief risk officer of Aon, explains — that in the event large brokers are also under PRA rule — that efficient co-ordination between the two bodies is essential to make the situation workable.

"Clearly it would be simpler to have one body and one team," she says. "If you have two teams from two separate authorities keeping them updated is the issue. Even meetings will take a lot of time out of the business. It depends on how the two agencies are staffed, how they co-ordinate between each other and whether the boundaries of their responsibilities are clear."

However, some brokers believe that these particular fears are unfounded and that the coalition government will not renege on its promises. Biba head of compliance and training Steve White maintains that only insurance companies and banks will be regulated by the PRA. "Overlapping regulation was the original concern but the consultation makes it clear that the PRA is only looking after the prudential risks of the banks, building societies and insurers," he says. "It is not looking after intermediaries in any sector. It is all being done by the CPMA."

He adds: "Our preference for a single regulator looks like it will be delivered but now we have to make sure that the body that does that delivers a proportionate and appropriate method of overseeing the sector."

Day-to-day running
Whichever form the regulatory landscape takes, brokers are still cautious that the new authority, or even authorities, ensures intermediaries are treated in a way which is — as Mr White says — "proportionate and appropriate".

Quoting the government consultation, he continues: "The CPMA will 'build on the progress recently made by the FSA towards a more interventionist and pre-emptive approach to retail conduct litigation'. We are not asking for a lighter touch, we are asking for the right touch."

The issue of regulatory expense is one that is close to the heart of many brokers, especially after having to bear the financial burden for the failures of the payment protection insurance market under the Financial Services Compensation Scheme.

Ms Richmond claims that issue of expense is not just about the amount of fees charged but the effect the cost of regulation could have on the way brokers operate.

"The authorities have a responsibility for market confidence and that involves orderly markets and strong competition," she explains. "Too much cost could drive businesses away and that will not be good for the market or consumers because it will limit choice.

"One of the things the regulators need to try to achieve is to not increase costs. The cost of regulation has been increasing substantially over the past for few years."

Besides escalating fees some intermediaries are concerned about the outlined brief of the CPMA. Touted as a consumer champion — and with a seemingly customer centric focus — the body could favour its role to the public over other regulatory issues.

Mr Rutter claims that the CPMA must be much more than an authority created with the purpose of treating customers fairly. "One of the things that is concerning some brokers is the way that the CPMA has been described as a consumer champion," he explains. "It needs to balance what it does. It implies that consumer issues come first. The CPMA will be regulating a whole range of businesses including some insurance brokers that do not deal with consumers."

Mr Rutter adds: "Even if it is a consumer champion it has to deal with more than that. Regulation is not one-sided, the regulator has to work with the industry, the best regulators do this well."

However, as Ms Richmond suggests, with the body enshrining the concept of markets in its title, it is likely to have a broader remit in reality: "Many people are reading this as a purely consumer protection body but it also has 'markets' in its name. When you look at what is mentioned in the CPMA remit it is not just consumer protection. It needs to be recognised that markets are there and their needs are accounted for. The consumer-only focus is less appropriate for the pure intermediary."

But above all, what brokers seek in a new regulator is improvement. Weary of not being recognised under the previous regime, intermediaries are hoping that the CPMA will bring better regulatory standards.

Ms Richmond continues: "The reason that these two bodies are being created is because the FSA is perceived to have failed due to the current state of financial markets and the banking crisis.

"The FSA is claiming that it has significantly increased standards and expectations so by the time these two bodies are developed further down the line the landscape should have improved."

Others have argued that a refinement of the principles of broker regulation are what is needed, rather than regulatory "tinkering".

Pointing to the FSA's treating customers fairly initiative as an example, Ms Bradshaw explains: "I'm hoping that we can hone in and refine the simple rules which will be a lot more suitable to brokers. I don't envisage that it will change day-to-day business dramatically, but I hope it might result in a little less time spent by brokers in complying.

"The main requirements will remain but I don't think there will be as much tinkering at the edges. The treating customers fairly initiative took a lot of effort and a lot of cost to establish that it was effectively what brokers were doing already."

Although brokers seem to have had their wish to be treated distinctly granted, when it comes to having simpler, more efficient and less costly supervision, that battle is still to be won.

Ms Bradshaw continues: "This is a once in a lifetime opportunity which we never thought we would get. We thought that were stuck with the FSA and it wasn't until last year when the Conservatives said they would abolish it that it became a possibility."

"We are all working very hard on lobbying before the consultation document comes out because you really need to get your thoughts in to people's minds before the document is written."

Despite the fact many of the changes are aimed at the banking sector, Ms Richmond argues that there has never been a better opportunity for brokers to be recognised. "It is up to brokers to make sure that they get their voice heard," she says. "If they are not satisfied with what the trade bodies are doing they need to make that clear. Particularly the smaller brokers, it tends to be the bigger brokers that air their views.

"Brokers cannot be victims in this so they must have a voice — the broker trade bodies have the ear of the key influences and a route in. If brokers are not happy, they need to go along to meetings and they need to tell them."

However, with the devil still in the detail, Mr White warns brokers that despite the intentions of the new coalition government — of making a change for the better — improved regulation must still be taken one step at a time.

He concludes: "There is still a little bit of expectation management required for some firms. This is not a blank piece of paper we are building a new regulator on."

The new regulatory landscape
The Consumer Protection and Markets Authority and Prudential Regulatory Authority will each set the fees and make the rules in respect of the activities under their remit - with the CPMA setting fees for PRA-regulated firms only by reference to their conduct of business activity. This would imply the existence of separate compensation schemes which could mean ending the current cross subsidy between different classes of levy payers (under investment firms or insurers have to contribute to the failure of banks, and vice versa),

Based on preliminary estimates from the bodies concerned, the cost of the new regulatory regime is expected to be of the order of £50m spread over about three years. The ongoing costs of the reforms will be mainly resource costs incurred by the PRA and CPMA.

The main implementing measure will be primary legislation, which is expected to be enacted in 2012. Secondary legislation and administrative measures (including action by the Bank of England and the Financial Services Authority) will be needed to complete implementation, which is assumed to be essentially completed by January 2013.