The post-FSA regime

On 16 June 2010 the Government announced that the FSA (Financial Services Authority) would be scrapped and its responsibilities transferred back to the Bank of England. The change arises from the Government’s concerns that under the previous regime no one body had power to tackle systemic stability issues, with the result that “steps must ... be taken to ensure that financial firms are never again allowed to take on risks that are so significant and so poorly understood, resulting in such severe economic consequences for businesses, households and individuals.”

Insurers are understandably concerned about how the new regime will affect them, but there are also implications from a claims perspective.

The new regime will consist of:

  • a new Financial Policy Committee within the Bank of England, which will look at wider economic and financial risks to the system;
  • a Prudential Regulation Authority which will have day-to-day supervision of individual financial institutions and their stability; and
  • the Financial Conduct Authority, which will regulate how firms conduct their business and secure consumer protection.

What does this mean in real terms for Insureds (such as IFAs) operating in this system?

The Government has repeatedly said that the new Financial Conduct Authority will have the ability to take tough action in regulating firms and give greater protection to consumers by “building on progress the FSA has made in recent months through more intensive, issuesbased supervision, earlier and more proactive intervention, and credible deterrence through enforcement.”

Although one of the new principles is that consumers of financial services are ultimately responsible for their own decisions, the Financial Conduct Authority will have a lower risk tolerance and wider powers to take decisive action, such as banning products and ordering past business reviews. It is hoped that earlier intervention will reduce the number of consumers who are harmed by products. If this operates as the Government envisages, it could potentially reduce the number of claims. Alternatively, if it simply sets the standards too high, this will feed through to higher numbers of successful claims through the FOS (Financial Ombudsman Service).

A formalised co-operation arrangement is being introduced with FOS, which will now be obliged to provide information to the Financial Conduct Authority. Although the FOS has alerted the FSA of multiple complaints in the past, this was discretionary. The new regime will make it mandatory for FOS to do so.

Likewise, from 1 January 2012 FOS's award limit will increase from £100,000 to £150,000.

We know that individuals currently employed by the FSA will transfer to the new bodies. What remains to be seen is how effectively the new system will change approaches that have been ingrained in staff for a number of years. This is not, however, without precedent: in 2000 and 2001 staff transferring from the Personal Investment Authority to the FSA were trained to adopt a less “tick box” approach towards regulatory supervision. The current convulsion of the regulatory regime is therefore not without precedent.

The Government intends to introduce the legislative framework during this Parliamentary session and says that the new regime should be operational by Autumn 2012.