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  • Regulators aren’t perfect, better get used to it Posted on 23 March 2018

    “The never-ending growth of red tape in America has come to a sudden, screeching and beautiful halt”. As if you needed to know, that’s Donald Trump speaking, in December.  Even allowing for the usual gap between rhetoric and reality, it’s clear that decades of regulation of financial services, everything from payday loans to the balance sheets of the largest Wall Street banks, are at risk.

    In recent days and weeks, it’s beginning to feel like the UK could be heading in the same direction.

    - Following a Channel 4 Dispatches investigation of the Financial Ombudsman Service, the Consumer Credit Trade Association called for an investigation into “massive inconsistencies” in FOS judgments.

    - Greg Clarke, the business secretary, announced a review of the Financial Reporting Council, following allegations it is too close to the accounting firms and bodies it is supposed to regulate and oversee.

    - The Financial Conduct Authority continues to have to face pressure from the Treasury Select Committee over its handling of the Royal Bank of Scotland’s Global Restructuring Group, together with almost daily national and local media coverage of the story.  

    For regulated firms, often with frustrating experience of one or more aspects of dealing with the regulator, it can be tempting to see the positive side of this situation. Perhaps somehow the regulators will change for the better, so we get clearer and better designed-rules, more consistent decisions, and consistently helpful people to deal with?

    Of course, that’s never going to happen. We need the regulators and we need their regulation, for all its many faults. Most of the time, it makes markets work better than they would otherwise, to the benefit of both finance companies and their customers.

    What is needed, and common to the FOS, FRC and FCA, is far greater clarity over what the regulators can and cannot do. Taking each of the cases above:

    - In 2016/17, the FOS received around 1.4 million enquiries, leading to 320,000 new complaints. With those sorts of numbers, of course it can’t look in any great depth at the files, it can only run a process by which finance companies review their own files, and then audit a sample of these.

    - The FRC has no ability to regulate the audit industry in a way that will either prevent corporate collapses or guarantee that auditors will correctly warn investors about companies that are about to collapse without at the same time causing massive harm to companies that could survive.

    - The FCA has a mandate to secure an appropriate degree of protection for consumers (including relevant small businesses). One factor the FCA must consider is the general principle that consumers should take responsibility for their decisions. This results in an ongoing need for the FCA to strike a reasonable balance between over and under-regulation, and then make clear what protections the regulation offers and what it doesn’t.

    To help avoid further stories about problems with our regulators, I propose a new regulation for regulators. Each regulator must publish a table on the front page of its website with key examples of:

    1. WHAT WE DO

    2. WHAT WE CAN’T DO

    It’s only when regulators are clear about the limits of what they can do (whether it’s due to their legal powers, or just down to the reality of how the sectors they regulate work) that more headlines detailing regulatory failures - and calls for regulation to be halted -  will be minimised. It may not always feel like it, but that’s probably in everyone’s interests.

     

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