With depression set to cast as a dark shadow over 2009 expect the FSA to step-up its vigilance 2009 is likely to be dominated by the continuing fall-out of the credit crunch and economic crisis and the regulators’ reaction to it. Action groups are lining up to bring proceedings against firms who allegedly mis-sold bonds and investment products with banks that have become insolvent or that have suffered loss through failed counter-parties.
The concept of counter-party risk, low on most people’s agenda a year ago, has now moved to the forefront. The Financial Ombudsman Service will have to decide whether to accept jurisdiction in these cases or dismiss them on the grounds that they are more suitable to be dealt with through the courts. The FSA will have to decide whether to bring enforcement proceedings if firms have breached the conduct of business rules by selling unsuitable investments or using generic suitability letters which failed to identify significant risks.
Major banks have gone to the brink of insolvency and only been rescued by takeover or nationalisation. It has been suggested this is the result of failures in their business models. It could well be argued this must mean responsible directors have failed to act with due skill, care and diligence in breach of the statements of principle for Approved Persons. It remains to be seen whether enforcement action against the directors of any of the failed institutions will follow.
The FSA has described “credible deterrence” as the mission statement of its enforcement department. If the insolvency of your business does not deter misconduct, it is unlikely the threat of a fine from the FSA will, but that may not necessarily stop the FSA taking action. Significantly, the FSA has increased the number of cases when it brings enforcement proceedings against directors and senior management personally.
Whereas previously this was only done for serious misconduct, the FSA will now bring enforcement proceedings against Approved Persons whose conduct has shown a lack of competence. There have been a number of cases in 2008 of fines being levied on directors where their companies’ systems and controls for which they were responsible were not up to scratch, and this trend can be expected to continue in 2009.
The FSA, working hand in glove with the Treasury, will be continuing through 2009 to exert pressure on mortgage lenders to minimise the circumstances in which they bring repossession proceedings against borrowers. Firms have been warned that they must review their arrears policies and check that they are being correctly operated in practice.
Mortgage lenders and their senior managers are under threat of tough action from the FSA if their mortgage repossession policies or actions are perceived to be unfair to customers.
The FSA is increasing its reviews of firms’ standard terms and conditions to ensure their fairness under the unfair terms in consumer contracts regulations, and has in the last year outlawed the use of legal terminology which the FSA considered might not be clearly understood by customers. Firms are at risk even when they are acting strictly within their legal rights if what they are doing is considered unfair. Firms have also been warned that they may not be able to rely on their legal terms and conditions if these were not brought prominently to customers’ attention at the time of sale through key features documents.
Many firms will need urgently to review their contractual documents and all their supporting advertising material to ensure that all potentially onerous terms have been clearly and prominently explained. Firms also need to think whether risks or scenarios they would previously have ignored as unthinkable now need to be made the subject of prominent warnings. The FSA’s recent action challenging and preventing firms relying on the small print in standard terms and conditions indicates that although FSA has abandoned treating customers fairly as a separate initiative, the TCF agenda remains alive and well.
Looking further ahead, 2009 will see FSA developing detailed proposals to implement its retail distribution review. While the FSA’s high level objectives of improving access for consumers to financial services, encouraging saving and investment, reducing conflicts, improving advice standards and producing a comprehensible distinction between independent advice and the selling of products or services all look uncontroversial, the devil will be in the detail. Whatever the merits of the proposals, many will have an adverse impact on some businesses.
The initial proposals have already been strongly criticised by some leading lights in the IFA community. The first half of 2009 is likely to see significant lobbying while the FSA’s thinking is still at conceptual level. By the time (in the summer of 2009) the FSA publish their proposed handbook changes for consultation, their thoughts are likely to be so firm they will then be difficult to change.
Source: FT Adviser
Huntswood