FCA criticised for failure to understand cost of compliance

NAO report says regulation harms innovation

clock
FCA criticised for failure to understand cost of compliance

The regulator has come under fire for its lack of understanding of the effect compliance cost has on firms, in a report by the National Audit Office (NAO) out today.

The NAO said the regulator did not know the extent to which its actions incurred costs for financial services firms, particularly smaller ones, which could be affected more heavily.

It also said the Financial Conduct Authority's (FCA) actions could hamper innovation by firms, as any new product brought to market could "subsequently be regarded as mis-sold" if they prove to be unsuitable for some consumers.

It concluded the regulator had "further to go to show it is achieving value for money".

The NAO published a report on 24 February in which it examined the effect of current regulation on mis-selling and consumer redress and how the cost of regulation impacted firms.

It concluded the FCA "cannot know whether its activities are reducing the overall scale of financial services mis-selling to consumers" because it "lacked good evidence" in the field.

Mis-selling is "a failure to deliver fair outcomes for consumers", and can include providing misleading information or recommending they purchase unsuitable products.

In 2014, mis-selling accounted for 59% (2.7 million) of customer complaints to financial services firms compared with 25% (0.9 million) in 2010. PPI alone accounted for 51% of all complaints.

Latest Ombudsman figures for advisers indicated complaints against them were declining.

Wrong data

The NAO said the regulator's way of collecting information on complaints to firms means it does not draw together data which would show whether its actions are in fact reducing mis-selling.

For instance, the FCA does not identify when the alleged mis-selling that prompted complaints took place, NAO said.

It warned these gaps create a risk that its interventions may not be well coordinated, and means the FCA cannot be sure that it has chosen the most cost-effective way of intervening.

It detected similar gaps in the regulator's monitoring of compliance costs for firms.

While for proposed new rules the FCA estimates benefits and costs in advance, including compliance costs, it does not routinely undertake post-implementation reviews, which could improve its understanding of the actual impacts of regulatory interventions, including their effects on smaller firms, the NAO said.

Such information could inform regulatory decisions, such as whether the costs of regulatory action justify the benefits, it said.

Disproportionate cost

The NAO had asked 15 firms and was told by nine their costs of complying with FCA conduct regulations were now 'much more' than in 2008.

Six firms provided estimates which showed their compliance costs were higher than the costs of their levy payments for the FCA, the Ombudsman and the FSCS.

The NAO suggested smaller firms may face a proportionately higher burden to comply with FCA rules because they are less able to develop in-house regulatory expertise to explain and develop appropriate controls and assurance.

The NAO also recognised regulation aimed at preventing the sale of unsuitable products could have unintended consequences, such as discouraging innovations that could benefit consumers.

However, the FCA launched an innovation hub in late 2014 to allow firms to develop new services and products with regulatory support, advice and challenge.

It overhauled the hub last year and now plans to introduce a regulatory sandbox, allowing firms to test new products without the fear of a regulatory backlash, details of which are still being developed.

NAO head Amyas Morse said: "Mis-selling of financial products remains a major problem for Britain's consumers.

"The information my staff could see, such as customer complaints, does not show any clear reduction in the extent of mis-selling.

"The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money."

He added: "Legislative restrictions limit my access to information that the FCA holds on firms making it impossible to draw definitive conclusions on its approach."

 

 

More on Underwriting

Women In Protection & Health Awards 2022: Full list of nominees revealed

Women In Protection & Health Awards 2022: Full list of nominees revealed

Championing Diversity & Inclusion

COVER
clock 16 November 2021 • 7 min read
AIG Life makes mental health-focused changes to protection underwriting

AIG Life makes mental health-focused changes to protection underwriting

To reflect individual experiences and situations

John Brazier
clock 08 November 2021 • 2 min read
Credit: Roksana Helscher

Zurich removes Covid-19 underwriting rules

Return to standard terms

John Brazier
clock 20 October 2021 • 1 min read

Highlights

COVER Excellence Awards 2021: All the winners revealed!

COVER Excellence Awards 2021: All the winners revealed!

Leading With Distinction

COVER
clock 03 November 2021 • 2 min read
COVER Excellence Awards 2021: The Night in Pictures

COVER Excellence Awards 2021: The Night in Pictures

A photo gallery from COVER Excellence Awards 2021, held at The Brewery, London, on 2 November.

COVER
clock 03 November 2021 • 1 min read
Gosia Bowling: The role of behavioural science in creating a menopause-friendly workplace

Gosia Bowling: The role of behavioural science in creating a menopause-friendly workplace

'The key to supporting menopausal women is creating a culture in which conversations are welcomed and expected'

Gosia Bowling
clock 02 November 2021 • 6 min read