New model needed to protect consumers, says top UK regulator

The regulatory model has failed, not just in the UK but globally, he said. “The standard orthodoxy — from J.M. Keynes through to Alan Greenspan and others — was that people make rational decisions when given sufficient information; that markets are self-correcting organisms; and, from a regulatory rather than an economist’s perspective, that if you oversee the distribution channels — banks in many cases — the right products get to the right people. All three orthodoxies failed,” he said.

Instead, Wheatley noted, the financial crisis showed that people often do not make rational decisions, “They bought products they did not understand (structured products); assumed the future would always be like the past (house prices); and allowed others to do the homework, which they blindly followed (credit ratings).”

“We have to realize that consumers aren’t always in a position to take responsibility, because of their lack of financial knowledge and because we have to take a reasonable approach to what a normal person can understand about complicated products and risks,”he said.

Also, markets did not self-correct, and regulation “was not able to overcome the inherent conflict of interest that arises in financial transactions”. As a result, Wheatley said, “We need to develop a new orthodoxy and a new regulatory approach.”

That new approach includes a more active, interventionist regulator. He said, the regulator, the new FCA, will need to ask tougher questions, and make better, bolder, faster decisions. It must also be much more open, engaging and clear, he added.

Clients, he said, want firms to be honest and fair, to have no hidden charges, and to take complaints seriously. “The old way of looking at this would have been for the FSA to speak to your bank’s management and to talk through your systems and controls. The FCA’s approach will be to go a step further, so we can join the dots – is what your senior management commit to consistent with the customer experience in reality,” he said.

It will also use specialist teams to look at what firms are doing in detail, including talking to front line staff, mystery shopping, and in-depth reviews.

“Our culture will be to ask the difficult question, the ones that sometimes regulators have shied away from, of you, of ourselves, of consumers’ behaviour,” he said. “We’ll be looking to see if the basic rights for all consumers… are being fulfilled in reality.”

And, whereas in the past, the FSA wouldn’t intervene until an investment product went wrong and was subsequently found to have been clearly mis-sold, the FCA will aim “to head off problems early”. Wheatley said a new power will give it the ability to make temporary product intervention rules if there’s an urgent need to protect consumers.

And that it won’t simply rely on disclosure to protect consumers. “The past few years have shown that that alone doesn’t work. The global world of regulation has moved on from a belief that providing information to people combined with some conduct rules over the people selling products will lead to good outcomes. That was the broad philosophy that was adopted everywhere and we have seen the poor outcomes for consumers time and again,” he said.

“Rather than going in after something has gone wrong, the FCA will take an earlier judgment as to which products are unsuitable in which circumstances. The new approach will complement good disclosure, and will work alongside a strong sales process,” he said.

Wheatley also said that the industry must change to reflect the new reality. “I want the culture in your firms, from your product governance to your sales, to be aligned with the best interests of your customers. I don’t want to see many of the failings the FSA has had to deal with in the last few years,” he stressed.