By Jonathan Eida, researcher
The role and conduct of the Financial Conduct Authority (FCA) and other financial regulators is, quite rightly, under intense scrutiny, with its work being looked at today by the Financial Services Regulation committee. Too often these quangos, and in particular regulators, are treated as untouchable institutions, standing high and mighty in their ivory towers. But organisations like the FCA are liable to cause significant amounts of damage to the UK’s economy and must be held accountable. And while they’re not directly taxpayer-funded in many cases, the fees they charge for those they regulate act as an effective tax, as do the regulations they impose.
This week the all-party parliamentary group on investment fraud and fairer financial services branded the FCA “incompetent at best, dishonest at worst” and said that the regulator had caused “enormous financial and emotional distress”.
The fact of the matter is that the FCA has, like many quangos, too broad a scope and contains far too much power.
Simultaneously, the FCA is laser focused on a singular goal which is the protection of consumers, but yet, in chasing this goal they have expanded their remit without accountability or restraint. The result is that the UK’s largest sector is being tossed around like a ragdoll.
The role of the FCA, at maximum, should be restricted to fraud prevention in a limited set of scenarios. This does not mean that the FCA has a right to review every decision in every firm across the country. The role of the FCA must be reactive and not proactive the result of which would be stifling to business.
The FCA states their purpose is to reduce and prevent “serious harm, setting higher standards and promoting competition and positive change”. This is ludicrously vague and it ignores the broader economic consequences of their actions.
Financial regulators are taking their toll. Take for example the ongoing car loan mis-selling scandal. Financial institutions were providing discretionary commission arrangements (DCAs) on car loans, which allowed the financial institution to set the commission rates with the broker on the loan. In 2021, the FCA banned this practice and now the customer must be fully informed of the commission being paid to the broker, with the suggestion that redress could be available retrospectively. However, before the FCA determined the mechanism for redress, the Financial Ombudsman Services (FOS) and the Court of Appeal (CA) have superseded this to demand imminent compensation for actions taken before the ruling by the FCA had even been completed. Just to be clear there was nothing in place at the time to outlaw the practice and firms acted in line with the regulations at that time. However, the CA’s recent decision on the fiduciary responsibilities that a firm has to its customers mean that the law as it now currently stands, requires firms to pay compensation. The lack of co-ordination between all three, as well as the "lawmaking" of both the CA and the FOS, combined with the lack of clarity from the FCA, will cost billions to the UK’s financial sector.
Herein lies the problem. Try investing in a country where you could be penalised retrospectively for actions that at the time were perfectly within the rules. But this is the result of regulators which act with impunity.
Bim Afolami, former economic secretary to the Treasury, appeared in front of the Financial Services Regulation Committee this week to discuss the role of the FCA and the Prudential Regulation Authority (PRA). He quite rightly highlighted the issues caused by the regulators and the impact they have on growth.
However, the position of Mr Afolami and the previous government, was that the regulators should follow secondary objectives which means that the impact of each regulation on growth would be taken into account before issuing edicts and thereby incentivising growth policies.
This is fanciful. The role of a regulator is to regulate. If a crisis emerges and it is deemed that the regulator did not introduce adequate regulation, the regulator would come under insurmountable pressure. The incentive to regulate and protect their own backside, therefore, is far stronger than any incentive to take economic growth into consideration.
If the remit of these financial regulators is not more clearly defined and adhered to, the case for the abolition and reformation of the regulators will become stronger. The UK cannot be governed by organisations which hamper growth to protect their own posteriors and continually mission creep in order to justify their existence.
The financial regulator must be brought to heel to ensure the growth of the UK’s largest sector is not drowned via regulation, the consequences of which will be felt by taxpayers across the country.