The Future of Market Conduct Regulation

In a recent article in Moneyweb Today, Patrick Bracher, a director of Norton Rose Fulbright is quoted as saying:

“New financial advice regulation contained in the Retail Distribution Review (RDR) highlights the failure of the Financial Services Board (FSB) to implement existing regulation.”

Most of what RDR attempted to regulate was present in existing regulations, such as the Financial Advisory and Intermediary Services (FAIS) Act and outsourcing rules contained in Directive 159. “If these were properly applied, we wouldn’t need RDR” Bracher maintained.

In response, the FSB argued that this comment failed to recognise that RDR proposals spoke to a “paradigm shift” in the approach to conduct regulation. While FAIS had been successful in professionalising the financial advice industry, there remained far too many examples of mis-selling and poor outcomes for customers, according to Moneyweb.

FAIS also focused only on intermediaries and not product suppliers or the overall value chain. “RDR proposes structural reforms to address conflicts of interest that incentivise poor outcomes for customers”, the FSB said in email responses to Moneyweb.

In presentations to industry stakeholders last week, Jonathan Dixon, DEO: Insurance at the FSB pointed out certain problem areas for the Regulator in the present system, saying that it was, amongst others, backward-looking, compliance-based and a “one-size-fits-all” approach, rather than risk-based.

Despite all the rules, there were still far too many examples of poor customer outcomes as a result of a culture which was not customer-centric and where conduct and integrity risks were not proactively managed.

The key guiding principles, going forward, will entail a forward-looking, pre-emptive and proactive approach. Supervision will be outcomes focused, risk-based and proportionate.

Leanne Jackson, Head of Market Conduct Strategy at the FSB, outlined the basis for implementing these proposals.

Section 69 of the Financial Sector Regulation Bill requires the Executive of the Financial Services Conduct Authority (FSCA) to publish a supervisory strategy within 6 months after commencement of the Act which must –

  • be consistent with relevant international principles;
  • set out the regulatory and supervisory priorities for the next 3 years;
  • state the key outcomes of the strategy;
  • describe the principles which will guide the FSCA’s regulatory and supervisory functions, its approach to monitoring and supervision, its approach to enforcement and
  • describe how the FSCA will ensure transparency, openness to consultation and accountability.

Dixon provided some examples of what he saw as key themes for debate in establishing the new framework for regulating market conduct:

  • Culture and governance
  • Product regulation
  • Improved disclosure
  • Avoidance of conflicts of interest and miss-selling
  • Effective complaints handling and consumer redress
  • Technology (mobile finance, big data, high frequency trading, etc.) and
  • Market abuse (benchmark manipulation, dark pools, etc.)

At the Moonstone RDR workshops, feedback from delegates indicated a mixture of acceptance and rejection. This is nothing new, and reflects what happened in previous major changes in the industry e.g. the introduction of FAIS and the announcement of the regulatory exams.

It is quite clear that there will be no turning back on the path of addressing short-comings in the current system. In fairness, one has to recognise that the playing field was as untested ground for the Regulator, as it was for the industry.

By identifying areas that need to change, and consulting widely with the industry, it could be the beginning of a better future for all, including clients.

Participation in the consultation process is vital to ensure that our interests are best served under the new dispensation.

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