Arguably the financial services industry as we know it is approaching a crisis. Financial advice, certainly in respect of pension transfers from defined benefit schemes, is not only unaffordable for most people, it is increasingly inaccessible. More than ten years on from the financial crash of 2008 the industry as a whole, and banking practice in particular, seems weighed down by scandal after scandal.
Some of these have been exacerbated by – if not the actual result of – regulatory failures. Occasionally yes, the origins might lie in an earlier era, even before the Financial Conduct Authority replaced the discredited Financial Services Authority in April 2013. And yet, how much has the culture really changed?
For all the doubt about the effectiveness of regulators, one realisation that has permeated the sector is that operating in silos is no longer a sustainable strategy (if indeed it ever was). Joint memoranda of understanding, joint discussion papers and joint protocols are not uncommon among UK pensions regulators (The Pensions Regulator has eight in place). However, calls for more concerted cooperation and joined-up thinking are just as often heard.
It is welcome news then that several organisations described as ‘members of the regulatory family’ will work together under the 'Wider Implications Framework'.
The framework provides a process for structured collaboration between the organisations involved, namely:
- The Financial Ombudsman Service (FOS)
- The Financial Conduct Authority (FCA)
- The Financial Services Compensation Service (FSCS)
- The Pensions Regulator (TPR)
- The Money and Pensions Service (MaPS)
It's not a completely closed shop: where an issue may also be relevant for other regulatory bodies, for example the Prudential Regulation Authority (PRA), the Bank of England (BoE), The Pensions Ombudsman (TPO) and the Payment Services Regulator (PSR), the members may invite the relevant body to engage with them on the issue in question.
Here’s how the FOS put the objective:
“An issue with potential wider implications is one that could have a wider impact across the financial services industry, and there is a need to work together to determine the optimal way to deal with the issue. For example, it could be because a large number of consumers are potentially affected, or because of the amount of redress at stake, or because there is a risk of business failure. The issue might be identified, for example, through the Financial Ombudsman Service’s casework, or through FCA supervision.”
This hints at another possible driver: the escalating cost of compensation, surely a concern for the FOS and the FSCS, two organisations not usually considered to be regulators. The growing cost burden on the advisory sector in particular, with levies rising to unsustainable levels and PI cover becoming increasingly hard to find, have made action of this kind imperative.
In tax year 2022/23 the FOS alone is expecting to receive about 177,000 complaints, 70% of them about banking (even though the era of mass claims involving mis-sold PPI is almost over); while recognising the need to make significant changes to remain financially sustainable. The FOS has said its expected cost base for 2022/23 will be £293.8m, an increase of 18 per cent on the £249.4m levied for the current year. The FSCS is expecting the industry to cough up £900m in levies next tax year – an increase of over 25%.
Case study examples in the launch publicity from the FOS include the British Steel Pension Scheme fiasco, but curiously do not mention the London Capital and Finance pc (LCF) catastrophe, which has left taxpayers funding compensation via the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021.
LCF was an FCA-authorised firm which issued non-transferable debt securities (known as "minibonds"). The firm went into administration in January 2019, at which point they had over 11,000 investors who had invested £237m in total. The majority of these investors were ineligible for compensation from the FSCS as the issuance of LCF’s minibonds was not a regulated activity.
This egregious case resulted in a 480-page report by Dame Elizabeth Gloster who concluded that the FCA did not discharge its functions, in respect of LCF, in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period.
We can’t take much more of this. We desperately need a healthier financial services industry. How much effect will this new collaboration have in reducing claims and making the FCA a more effective regulator?
Ian Neale, Co-Founder, Aries Insight
