Here we go again! Yet another regulatory crossroad

Another chance to enjoy our featured topic from last month.

We seem to have arrived at another major crossroad in the way financial services are to be regulated in the United Kingdom. Will the proposed reduction in rule-based regulation bring about a much needed improvement in the take up of financial products, or will it just bring about a meteoric rise in mis-selling??

Financial Services regulation, as we know it today, began with the Financial Services Act 1986 passed by the government of Margaet Thatcher and which came into force in 1988.?The Act used a mixture of governmental regulation and self-regulation and created a Securities and Investments Board (SIB) presiding over various new self-regulating organisations (SROs).

It’s fair to say that it was not a success and the self-regulatory aspect, in particular, was deemed to have failed. The Act was repealed on 1 December 2001?and was superseded by the Financial Services and Markets Act 2000. The SIB and SROs were merged to form the Financial Services Authority (FSA), and self-regulation took a back seat.

Did the removal of self-regulation help? Well, not really, as by 2007 the shocking conduct of a number of household name banks was central to the UK’s Financial Crisis, and a significant part of the global financial “meltdown”. These events led to two separate regulators being formed, the PRA and the FCA, on a presumption that thousands more regulators, volumes of new Rules, tougher holding to account of Senior Managers and huge fines and compliance implementation costs was the answer. So, did this approach work? Well, in my view, the Regulators will say that it did, financial services firms will say partly, and now, most importantly, Government seems to be saying no it hasn’t.

It has become crystal clear that Government thinks regulation has gone too far and now inhibits economic growth, inward investment to the UK and potentially may lead to major financial service firms exiting the UK for less stringent regulatory regimes.? Many Regulators have been forced, over recent weeks, to come up with ideas for the Treasury in how they can develop less onerous regulation and generate ideas to stimulate economic growth. The Government seems to be intent on getting their way – as shown by the sharp removal of the Head of the Competition and Markets Authority.

It’s early days but here is an example of how financial services firms may be affected in the near future. In 2018 firms providing certain types of investment products found they would have to explain the product and its risks to investors in a Key Information Document, limited to 3 pages and constructed to a strict set of regulatory rules.? Implementation of this approach and its ongoing management has been an immense expense burden for the industry and now, surprise surprise, regulators believe it has been a failed approach and has not enabled consumers to understand the product and easily compare it to alternatives. This restricts growth and investment activity.

So now it’s a “u turn” moment and FCA Consultation Paper CP24/30 “A new product information framework for Consumer Composite Investments” announces that the KID is to go and be replaced by a new “Product Summary”. This will contain some compulsory information but will now largely be free format with firms able to write as much or as little as they wish to promote the product and encourage consumer understanding, thereby increasing purchases. Product manufacturers design the document in the first place but additionally, product distributors will then be able to make further changes to reflect the work they do. In other words, more self-regulation as to content and the depth of explanation. It all sounds rather like the Key Features Documents and Key Illustration Documents that existed pre-KID!

Many will welcome the growth potential, but of course the sting in the tale will be the expense to implement and the burden of “policing” what is being provided to consumers. The FCA recognise that the workload, and therefore the cost, to product providers of this change will be very high. Concern is such that after the changed Rules come in there will be an unusually long transitional period of 18 months for all product manufacturers and distributors to comply.

If, at this latest crossroads moment, regulators are able to stimulate growth and innovation by streamlining and simplifying their rules, then the Government, firms and their professional advisers will be pleased. However, if greater self-regulation and the freedom to market products is abused then the only people likely to be pleased are Claims Management Companies as more large mis-selling events are generated! Nikhil Rathi CEO of the FCA, is right to say in his responses to Government that Parliament, and the regulators, need to align their risk appetite for problems arising from softer regulation facilitating economic growth.

We can help to navigate you through these changes, including supporting your creation of the new Product Summary Documents. Please get in touch for a free initial consultation if your team needs support.