Beware: Watchdog Unleashed

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Financial companies’ lawyers should brace themselves as the new regulator makes its mark.

Today (1 April) the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) come into existence, replacing the Financial Services Authority (FSA). Apart from the obvious point about the significance of the commencement date, what will be different about the FCA?

One of the main differences can be found in Section 1C of the Financial Services Act 2012, which amends the Financial Services Act 2000, to provide a new consumer protection objective for the FCA (“securing an appropriate degree of protection for consumers”). This is in contrast to the FSA, where such an objective did not feature. Many commentators have questioned how the FCA will be able to fulfil this objective, notably the Treasury Committee.

In ‘Journey to the FCA’, a consultation document published in October 2012, the FCA set out how it would approach its new objectives. In relation to the new focus on consumers, the FCA-designate stated: “We will have a clear mandate to ban products that pose unacceptable risks to consumers. In cases where we need to intervene quickly, products can be banned for up to 12 months without consultation.

“One of our new powers enables us to ban misleading financial promotions and remove them immediately from the market.

“Through our competition mandate we will want to bring about markets where there are: no inappropriate barriers to entry; consumers are empowered; no single firm dominates the market; firms are focused on meeting consumer’s genuine needs; and the regulatory framework minimises or limits other distortions to competition.”

These are ambitious statements of intent, and could lead to direct conflict with the financial services industry if the new powers are used aggressively.

While the FCA says it will not act as the equivalent of a consumer licensing agency by approving financial products in advance of their launch, the use of these powers is likely to mean that precedents will be set and this will occur de facto. How far the FCA will intervene will depend on its staff understanding the product and its target market; the potential for significant damage to a business by early intervention plainly exists.

The dangers are neatly illustrated in relation to traded life policy investments, where the Financial Ombudsman noted almost simultaneous complaints from consumers that the FSA had not intervened quickly enough and from a product provider that intervention had led to a liquidity crisis at the company as investors attempted to redeem their investment.

That the pressure is on the new authority to be a consumer champion is not in doubt. The chairman of the Treasury Committee Andrew Tyrie says of the FCA: “It’s taking over from a body that failed consumers badly. If the FCA simply picks up where the FSA left off, consumers will suffer again.”

Time will tell whether the FCA will make early use of its intervention powers, but regulated companies and their lawyers will need to be on their guard, as the FCA is being urged to take a “radically different” approach to its predecessor.

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