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Out-Law News 2 min. read

FSA abandons 'light touch' regulation


Financial services firms can expect much more proactive supervision over the coming year, according to the business plan published by the Financial Services Authority (FSA) this week.

The plan builds on a radical change in the regulator's philosophy, from 'light-touch' principles-based regulation to an outcomes-based strategy which will see the FSA stepping in earlier to identify and prevent potential problems.

In his introduction to the FSA's 2010/11 business plan, outgoing chief executive Hector Sants described the regulator's historical approach as retrospective regulation. "The underlying principle of the 'old-style' FSA was that it would not intervene until something went wrong," he said.

"The new outcomes-based approach recognises that we will now intervene in a proactive way when we believe the results of a firm's actions will pose a risk to our statutory objectives."

Whereas under its old operating model the regulator sought to mitigate risk by focusing on management responsibility and accountability, the new approach will require it to reach its own conclusions about the likely consequences of a firm's future actions.

"Moving into making judgments is undoubtedly more difficult," Sants acknowledged recently in the annual Lubbock lecture to the Said Business School. "The FSA will now 'take a view'. That may well be disputed by firms and require greater engagement. In some cases we may prove to be wrong and accept that we are. But in others we will be right and make real improvements."

The new philosophy also recognises that fines and reviews of past business have been an insufficient deterrent. Even where consumers have been compensated, firms have continued to make profits from substantial market failures.

"Essentially, our focus has been too late in the product lifecycle to ensure that we identify potential issues early enough to prevent consumer detriment," said Sants.

"Our new conduct model seeks to take a dramatically different approach. We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs. We will also use sector-wide intervention where necessary, for example to change incentives in a market."

The FSA also intends to improve the way in which consumers are treated when things have gone wrong, including carrying out a review of the complaint handling standards of all the major banking groups.

The regulator's powers to order firms to set up consumer redress schemes will be enhanced if provisions in the Financial Services Bill are passed by Parliament before the general election. Earlier this month, the FSA published revised proposals for the assessment and redress of complaints about payment protection insurance but postponed introducing a rule requiring firms to review rejected PPI complaints until its powers are clarified by the Bill.

More intensive supervision will, however, increase costs. The FSA plans to recruit 460 new employees by the end of the year. The knock-on effect is a 9.9% increase in the regulator's funding requirement to £454.7 million.

"This proactive approach to supervision requires significantly more people than the old reactive model and those individuals must be of a higher quality and supported by more sophisticated systems" said Sants.

"If society wants a more proactive approach it must accept that it will have a larger and more expensive regulator."

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