'The FSA is dead (nearly), long live the FCA!...' blog discussion

Former_MSE_Helen

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "The FSA is dead (nearly), long live the FCA! Do you think it'll protect consumers?" Blog.

Please click 'post reply' to discuss below.

short_bird

I wonder how much this reorganisation will cost?
Or is it all being achieved with the pot of gold from the magic beans?

magpiecottage

Of course if you read the draft legislation you will realise that the Financial Services Authority is simply being renamed.

Do you remember the old Skoda jokes? Skoda was turned around by putting VW engineering on the inside, not by putting VW badges on the outside.

What evidence is there that the FSA/FCA will be any different?

jamesd

I'm generally supportive of the change, which moves the borders between responsibilities in a way that I think should be helpful.

A related topic is regulation of unregulated investments, like peer to peer lending. This apparently has investing consumers making 2% of all unsecured loans in the UK, with no investment regulation protecting the interests of those investors. They are solely reliant on the personal ethics and conduct of the middle men who run the schemes. 2% may still be too small to merit PRA involvement. Some "must be regulated" threshold test seems necessary to ensure that widely used unregulated investments don't remain unregulated by the CPMA. At present it seems to take specific enabling legislation rather than some usage or value threshold that could be triggered automatically.

Alpine_Star

I think the 2 most significant and promising aspects of the FCA will be their product intervention powers and the ability to regulate price.

The FCA's product intervention would have dealt with the PPI issue a lot quicker that the combined efforts of the FSA, OFT and Competition Commission.

As things stand the powers that the Government proposes to give FCA in relation to price regulation, where they relate to fairness, will be enough to tackle bank charges and by all accounts they will.

FSA Chairman Lord Turner told the Treasury Select Committee in November last year that ''''But the answer is, when and if all that is tidied up, yes, I do think the appropriate regulatory authority [FCA]should be directly looking at both the transparency and indeed the level of unauthorised overdraft charges. That should be part of our regulatory machinery.''

http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/612ii.pdf

And recently in an interview with the BBC FSA Chief Executive Hector Saints said that the FCA intend to use these powers ''particularly in the area of bank charges''.

http://news.bbc.co.uk/1/hi/business/9528770.stm

So it appears to me that the Coalition's pledge to 'end unfair bank charges' is intended to be achieved via the powers it bestows on the FCA.

seenitallbefore

there is no doubt that the FSA has failed, but so has the USA and most of Europe regimes.

The FSA (or whatever it is called) has to set sensible rules and be able to enforce them. Over the past 10 years the FSA has done nothing to enforce or develop the rules.

Change had to come. However, setting up different divisions is silly. Regulation in the USA, where they have the SEC, CFTC, NFA etc is complicated, contradictory and expensive. In the UK the FSA was created to reduce admin and confusion. It did achieve that.

Anther important change is the loss of independence by the FSA. It has always been able to use its 4 core values as a defence against political interference, that is now going to be eroded. This is probably the biggest issue of them all.

The problem with the FCA and the PRA is that the roadmap is not defined.

The Rule book has not even been started for the FCA. How are firms supposed to plan, so how can you asses the impact on individuals?

With so many new rules coming in across Europe, including the single european Rule Book which will be a law rather than a rule and so not open to interpretation by the FCA, the pathway and time lines are so unclear.

How does this impact the consumer.... in reality the FCA will make almost no difference to the consumer, as long as the FCA actually enforces the rules.

The other important issue that has been completely ignored relates to the currently unregulated markets. I just dont understand how there are rules relating to how you tie your shoes laces now but lending money at 2000% isnt considered to be an issue.

Good luck with your meeting....

magpiecottage

One thing I would like to see is firms protected from unnecessary expense.

I appreciate there is a common view that it is simply "their profits" but the reality is that this is passed on in the form of charges.

The FSA and the FOS are based in Canary Wharf - some of the most expensive property in the world. The Legal Ombudsman, by comparison is based in Birmingham and, with the greatest of respect, that is a lot less expensive.

We also need a system where genuine complaints are able to be made of course, but "try it ons" should be discouraged - we all pay more because of them.

And the regulator should be answerable to Parliament (as opposed to the government or, worse, Mark Hoban). It makes law and lawmakers should always be answerable, otherwise they have absolute power - and we all know what that does.

Rafter

Martin,

The key for me is that the Financial Conduct autority must be principles based and must have real teeth when it comes to fining companies who design products they know are not value for money or don't treat customers fairly. Too many detailed rules means too many opportunitites to game and circumvent them. Less is more! Some ideas....

Principle 1 - Major banks must offer basic banking services at no cost to the consumer
Banks are profit making organisations but they also serve a social purpose. Allowing us to receive salaries and benefits, pay for goods and services. A basic account giving access to these services (ATM/Debit card, online or telephone servicing) should be free and given automatically (no excluding former bankrupts), with the cost of operating paid for through charges for direct debits and debit card interchange fees and no interest on credit balances.

Principle 2 - Free debt advice
Companies offering unsecured credit (Overdrafts, Credit cards, payday loans) must pay for and advertise free money advice services for customers as part of their license to operate. When customers get more than 1 payment into arrears, the lender should contact the borrower proactively, by phone or in writing, telling them where they can get this free help.

Principle 3 - Pareto
The pareto principle (or 80/20 rule) says that 20% of the customers generate 80% of the profits and that 20% of the customers generate 80% of the losses. Financial services shouldn't operate like this. For example, those customers who paid big PPI premiums or who incurred lots of penalty charges subsidised those who made £'000s out of 0% balance transfer offers. If banks realise that in a certain business line (current accounts, loans, credit cards) more than 40% of customers are making 80% of losses making and subsidised by the rest or less than 40% of customers make 80% of the profit they should be forced to adjust pricing and terms to make their products fairer for all. PPI and bank charges scandals could not have happened with this principle in place. Firms should be able to whistleblow about their own or other businesses to make sure this happens and to give the FCA warning that a problem is developing in a particular market that is not in the interests of consumers.

Principle 4 - Charges versus interest
Banks should be able to compete by charging different interest rates for different types of products and also charge monthly fees for certain products (eg premium current accounts). However, all other fees must be proportional to the cost (with a profit/ overhead/administration markup of no more than 5%). This would allow products/ accounts to be compared and avoid hidden costs and subsidies. These fee restrictions would apply to Penalty fees, Chaps and other transaction charges, valuation fees, foreign exchange fees and would also apply to the fees charged to retailers for processing cash, debit card and credit card transactions. In turn the retailer would only be able to pass on these costs and no more BUT must build the cost of accepting cash or debit cards into their product pricing. Any bank (or Visa/Mastercard) that processes UK issued debit cards on behalf of a retailer that is levying debit card fees would be breaking the law offering the retailer access to the debit card payments system and jointly liable to refund customers. (Take that low cost airlines!)

Principle 5 - Avoiding debt poverty
Minimum payments for debt and the maximum amount of unsecured debt should be capped to eradicate avoidable debt poverty in the UK. While it is right that secured loans, mortgages or car loans should be paid off over many years (because the asset is worth more than the loan generally), unsecured loans to pay for clothing, nights out, supermarket shopping or holidays (all short term in their useful life and value) should have a maximum repayment period of 3 years. As a further protection mechanism, the amount of unsecured debt anyone should have should be 50% of their income when their loan is taken out with a minimum of £10k (to cover students and other special groups). A lender who fails to do proper credit checks and who lends more than this (including by way of compounded fees) would have 100% of the debt written off. This would prevent the majority of bankruptcy and debt poverty and, coupled with free debt advice, give the 20% of people who are unable to budget and control their spending effectively protection from getting so far into debt they have no realistic prospect of repaying and are trapped.

Sorry - long response - and the detail may not be relevant to the hearing at this stage, but hope this gives you some ideas about what I believe the FCA should be about and how principles based regulation might be better than pretending that a detailed rule book can be thick enough to prevent poor financial conduct for consumers in the future.

R.

wozearly

Rafter wrote: »

Martin,

The key for me is that the Financial Conduct autority must be principles based and must have real teeth when it comes to fining companies who design products they know are not value for money or don't treat customers fairly. Too many detailed rules means too many opportunitites to game and circumvent them. Less is more! Some ideas....

Principle 1 - Major banks must offer basic banking services at no cost to the consumer
Banks are profit making organisations but they also serve a social purpose. Allowing us to receive salaries and benefits, pay for goods and services. A basic account giving access to these services (ATM/Debit card, online or telephone servicing) should be free and given automatically (no excluding former bankrupts), with the cost of operating paid for through charges for direct debits and debit card interchange fees and no interest on credit balances.

Principle 2 - Free debt advice
Companies offering unsecured credit (Overdrafts, Credit cards, payday loans) must pay for and advertise free money advice services for customers as part of their license to operate. When customers get more than 1 payment into arrears, the lender should contact the borrower proactively, by phone or in writing, telling them where they can get this free help.

Principle 3 - Pareto
The pareto principle (or 80/20 rule) says that 20% of the customers generate 80% of the profits and that 20% of the customers generate 80% of the losses. Financial services shouldn't operate like this. For example, those customers who paid big PPI premiums or who incurred lots of penalty charges subsidised those who made £'000s out of 0% balance transfer offers. If banks realise that in a certain business line (current accounts, loans, credit cards) more than 40% of customers are making 80% of losses making and subsidised by the rest or less than 40% of customers make 80% of the profit they should be forced to adjust pricing and terms to make their products fairer for all. PPI and bank charges scandals could not have happened with this principle in place. Firms should be able to whistleblow about their own or other businesses to make sure this happens and to give the FCA warning that a problem is developing in a particular market that is not in the interests of consumers.

Principle 4 - Charges versus interest
Banks should be able to compete by charging different interest rates for different types of products and also charge monthly fees for certain products (eg premium current accounts). However, all other fees must be proportional to the cost (with a profit/ overhead/administration markup of no more than 5%). This would allow products/ accounts to be compared and avoid hidden costs and subsidies. These fee restrictions would apply to Penalty fees, Chaps and other transaction charges, valuation fees, foreign exchange fees and would also apply to the fees charged to retailers for processing cash, debit card and credit card transactions. In turn the retailer would only be able to pass on these costs and no more BUT must build the cost of accepting cash or debit cards into their product pricing. Any bank (or Visa/Mastercard) that processes UK issued debit cards on behalf of a retailer that is levying debit card fees would be breaking the law offering the retailer access to the debit card payments system and jointly liable to refund customers. (Take that low cost airlines!)

Principle 5 - Avoiding debt poverty
Minimum payments for debt and the maximum amount of unsecured debt should be capped to eradicate avoidable debt poverty in the UK. While it is right that secured loans, mortgages or car loans should be paid off over many years (because the asset is worth more than the loan generally), unsecured loans to pay for clothing, nights out, supermarket shopping or holidays (all short term in their useful life and value) should have a maximum repayment period of 3 years. As a further protection mechanism, the amount of unsecured debt anyone should have should be 50% of their income when their loan is taken out with a minimum of £10k (to cover students and other special groups). A lender who fails to do proper credit checks and who lends more than this (including by way of compounded fees) would have 100% of the debt written off. This would prevent the majority of bankruptcy and debt poverty and, coupled with free debt advice, give the 20% of people who are unable to budget and control their spending effectively protection from getting so far into debt they have no realistic prospect of repaying and are trapped.

Sorry - long response - and the detail may not be relevant to the hearing at this stage, but hope this gives you some ideas about what I believe the FCA should be about and how principles based regulation might be better than pretending that a detailed rule book can be thick enough to prevent poor financial conduct for consumers in the future.

R.

1 and 3 would be in strong opposition to each other, at least from a 'natural' perspective. Free in-credit banking is essentially subsidised via forgoing of interest, cross-sales of more lucrative products and via fees charged for unauthorised overdrafts. If you remove any of those planks, it makes it harder for banks to justify running free current accounts because they move closer to generating a loss overall - hence the big push to get people to the "pay x per month for your current account and we'll give you y benefits".

Actually, 3 is the only one I have any beef with in your 5 suggestions. If a company wants to subsidise one element of its customer base using another within the same product, that's their call - what you'd expect, if competition is working correctly, is that another provider could make a more attractive offer to the currently overcharged group which would make all providers have to move closer to a "price based on the actual cost to us" basis and gradually erode subsidy. That this hasn't happened suggests competition isn't working - and we know that many people are reluctant to switch bank accounts at present.

Rafter

wozearly,

Thanks for your feedback.

1. What I am suggesting is that if a bank can't run an interest free basic bank account without making a loss, it isn't charging retailers enough for processing a direct debit or a debit card. This 'social' aspect of banking should not rely on cross sell or overdraft income. In retailing it would be called loss leading. Selling milk below cost for example lands the supermarkets with a big fine, even if they make more profit on other products. The same principle should apply to banking in line with the pareto principal outlined above.

3. I'm trying to suggest that banking is a special case and it will always be harder to switch current account than say energy supplier or supermarket. Therefore there has to be something else to make competition effective.

The problem is that banks make the most profit from customers when they don't manage their affairs tightly and where 100% of their discretionary spend each month is being spent on interest and charges for their debts.

That isn't a happy place for customers to be or for society. However, by limiting the amount and duration of debt that banks are allowed to offer, and ensuring that they have to compete on interest rate and not the inginuity of their overpaid staff to come up with new hidden fees or costs, that has to be a good thing?

R.