A quiet, but seismic, shift in regulation

One of the consistent themes of our articles has been that cutting corners in compliance is rarely cost-effective (and the other extreme, gold-plating, is just as bad). Applying experience and intelligence to real-world problems is far more effective than mindless ticking and bashing that purports to demonstrate compliance but benefits no-one (least of all the customer).

This theme has reared its head in two recent events. The first is the news that 36 firms have to conduct past business reviews of transfers out of the British Steel Pension Scheme. Over and above this, the FCA are contacting BSPS members directly to advise them that they might have received poor advice, and telling them what they can do to rectify this.

This is one clear indication of a change in what the FCA will accept in future, which has wider implications than just the specifics of BSPS. PI Insurers who have been burned by BSPS will be forced to take a more critical view of the whole market. At best, premiums will be assessed on whether compliance processes are simply window-dressing, or are truly fit for purpose. At worst, many more PI firms will withdraw from the market, leaving advice firms struggling to get any cover at all. A nasty double-whammy is on the horizon: PI companies insist on gold-plated compliance procedures to provide cover at all, while still raising premiums.

The other significant event is the publication of the FCA consultation on Consumer Duty. This proposes a major shift in responsibility away from the regulator in enforcing detailed rules and towards firms taking ownership for the outcomes delivered to customers. It’s a sensible move that we welcome: profits should be generated by helping customers, not by thwarting them. It’s entirely consistent with the approach to BSPS and has massive implications for financial services firms.

For years, firms have hidden behind the convention that ‘everyone is doing it, so it must be OK’. The direct sale forces of the 1970’s started a commissions space race that ultimately pervaded the whole sector, culminating in its most exquisite variant: PPI, where up to 90% of all premiums were paid to the sales firm. Even the Co-Op, which at the time prided itself on its ethical approach to business, felt everyone was doing it, put its snout in the trough.

We see a parallel breakdown of trust in other systems. MPs were supposed to be honourable people, but many fell into the ‘everyone is doing it’ trap by getting too creative about the level of expenses they could charge. Lying and cheating are increasingly treated as normal activities rather than causes for resignation. No wonder that the public regard for MPs has sunk to an all-time low - possibly even below that of life assurance salesmen.

The FCA have long held a concern about the impact of culture (a posher name for 'what everyone is doing') on behaviour that negatively impacts the market. We have already written about their attempts to get Lloyds of London to reduce sexist behaviour with little effect. FCA has clearly decided that if writing letters doesn't change culture, they will have to raise their game and legally oblige firms to act properly.

There are two clear implications for financial services firms. We’ve mentioned the first already in the context of BSPS: neither lowest-cost ticking-and-bashing nor hiding behind ‘normal industry practice’ will form a defence in future. When combined with the Senior Managers Certification Regime (SMCR), the Consumer Duty principle will give the regulator far more power to take action to protect the public. The only way to cope with this is to implement the intelligence and experience based approach to compliance we have consistently promoted.

Firms who view culture change as a frippery to be ‘implemented’ by HR while the rest of the business ignores it are likely to get a rude awakening. Consumer Duty can’t be delegated to HR or compliance: it can only be adopted as a core part of a firm’s culture.

So if the FCA is on the case for financial services, who is on the case for parliament? Sadly, we don’t have a clue.