Why The Public Needs Protection

When you buy a car, do you buy it from a reputable dealer or a dodgy looking bloke wearing a sheepskin overcoat smoking a big cigar? Presumably you supply the same logic to having your car MOT'd - you don't go to the bloke who has a garage at the bottom of his garden and who hand writes the certificates, you go to your local MOT station where the certificate is computer generated and a copy is automatically sent to the DVLA at Swansea.

The same kind of logic applies when you buy a financial product, you look on the Internet or in the Yellow Pages and look for somebody who displays the FSA logo next to their name in the directory or on their site. You do this because you believe, and there's no reason why you shouldn't, that the FSA logo is a badge of competence, a sort of big thumbs up, saying come to us, we're authorised by the FSA, we must be good.

Well actually no, it doesn't work like that. You don't become registered under FSA rules because you are good, you become registered because it is a mandatory requirement because of the services you supply. The intentions of the establishment I'm sure were quite noble, indeed the outgoing PIA stated in 1997 that, "the establishment of the FSA will be good both for consumer confidence and for the consumer." But the FSA is a huge beast that can't function properly because firstly it is overburdened by bureaucracy and secondly because it is master of its own domain - it is self servicing. It is supposed to serve and protect, to borrow the motto of the LAPD, but it can't possibly given its own remit. If you buy a product from an FSA monitored firm you probably assume that it must be good because, your logic dictates, the firm couldn't possibly be selling products that didn't actually have any intrinsic financial benefit to you.

This is how it carries out its monitoring of medium to large firms:

In relation to medium and high-impact firms, we coordinate our work through a relationship manager, who carries out a regular risk assessment (on a cycle of one to four years) and determines a risk mitigation programme proportionate to the risks identified. The precise volume and type of work we undertake will depend on the size and riskiness of the firm concerned.

For smaller ('low impact') firms it says:

If a firm is assessed as low impact, it does not have a specific risk assessment or risk mitigation programme. These firms are monitored by a combination of baseline monitoring, action in response to risks identified by this information, thematic exercises to monitor compliance standards in a sector and work as part of sector-wide reviews. We believe most small firms pose a low risk to our objectives individually. As a result, small firms have a lighter-touch supervisory relationship with us. In practice this means, unlike the larger firms we regulate, they do not have regular visits and are usually required to send regulatory reports only twice a year. However, we believe small firms do pose a risk to our objectives collectively. To regulate over 20,000 small firms we have adapted our risk-based supervisory approach to meet these specific sets of circumstances. We collect information from a variety of sources (e.g. RMAR regulatory returns); analyse the data to identify collective risks; where necessary we investigate the matter further (e.g. questionnaires or targeted firm visits); and we then communicate the results of the research to the industry (e.g. on our website and through the media and national events such as roadshows).

Isn't it reassuring to know that once you have handed over all your savings to an FSA registered business for them to invest that if anything goes wrong it will at least give somebody something to discuss at a roadshow event!

On 17th October 2001 the FSA wrote to Ruth Kelly in response to the Baird Report on the 'collapse' of Equitable Life. It set out, among the responses the following points:

An examination of the role in insurance regulation of professional advisers and skilled persons, including auditors, the Appointed Actuary and actuarial Quality Assurance;

An overhaul of conduct of business and other requirements designed to ensure the fair treatment of customers (including the governance of insurance companies); and

But how could it hope to fulfill those promises when, for the 20,000 or so smaller firms, regulation is not only complex and burdensome from the point of view of the practitioners but completely retrospective and therefore pointless from the point of the investor. It's no good having a system of checks in place at smaller firm levels if the completion of returns and subsequent visits is so random. It is self regulation at its worse, if isn't so much self-regulation as much as self-serving bureaucracy, we must be seen to be protecting the investor therefore we will complete dozens of forms so it looks good.

If you want to know how to commit fraud and get away with it you ask an accountant, if you want to know how to pull the wool over the eyes of the FSA you appoint a former FSA officer as your internal compliance officer. People use the phrase 'why couldn't the FSA spot this, why didn't the FSA regulate that?' as if they were discussing the placement of speed cameras on Hammersmith Flyover. The FSA is a politically motivated behemoth, a triumph of bureaucracy over reality. It does not exist to protect the interests of the public, whether as customers or as investors, it exists to support that notion that if you tick enough boxes twice a year on an official form then business practices must be fine. The products on offer must be good because the FSA approves them, well that's what the public must believe because the FSA isn't standing on the street corner in a sheepskin coat handing out buy one get one free insurance policies.

I am not saying that all those good people out there who are selling financial services are rogues, they aren't in most cases, the point is that when you regulate a business by putting in charge an organisation in whose best interest it is for those financial products to be successful, exactly what level of self-regulation are you getting? It's like putting Dracula in charge of the blood bank. There is only one body that should be responsible for the overseeing of all financial institutions in the U.K, they have the history, the experience and the independence and there's a picture clue at the bottom of this post.

It's not just the Financial Services industry that suffers from this delusion either, I have to spend an average of seven hours at the end of each audit recording my thoughts on how the job was concluded. Not the nature of my work, not the thoroughness of the testing, the competence of the client to maintain suitable accounting records, but an exercise in ticking boxes and noting conclusions. It adds no value to the job, costs the client money and I have to do it because if I don't we could lose our authorisation to carry out an audit - there is no benefit to anybody except the rather nattily named Department for Business Enterprise and Regulatory Reform (BERR) which used to be the easier to remember Dti. I personally think the new title says it all really.