'We will be different to the FSA', says new regulator, the FCA, as regime changes today

Some may point to the launch day with irony given the failings from the previous regulator, the Financial Services Authority (FSA), which presided over the near collapse of the UK banking system and allowed the systemic mis-selling of payment protection insurance to go unchecked for years.

But in a frank interview below, the head of the Financial Conduct Authority (FCA), Martin Wheatley (right), has promised change, admitting the previous regime made many key errors.

He says the new order will be better equipped to tackle major problems much earlier. He has also promised to engage much closer with consumer groups such as MoneySavingExpert.com so it can make decisions with customers at the forefront.

The FCA will police firms' conduct, hence the name, to ensure consumers are protected. Unlike the previous system where the FSA oversaw the entire financial services industry, the responsibility to ensure banks are financially stable will reside with the new Prudential Regulation Authority.

Below are Wheatley's answers (in standard font) to our key questions. (in bold).

How are you going to be different to the FSA?

The key difference is in the name, so it's a conduct authority, so we're not focused on all aspects of financial services, we're predominantly focused on conduct and we're going to be focused more on consumers than the FSA has been.

One of the problems over the last five years has been the FSA had to worry about the safety and soundness of institutions as well as worrying about whether they were treating their customers correctly.

Since the crisis started, one of the predominant concerns has been which will be the next big institution to fail, so that became the core focus and there wasn't enough time given to how firms actually conduct themselves.

What sort of lessons can you learn from what happened with the FSA?

It wasn't perfect but it wasn't all bad either. The crisis was something that no regulator anywhere in the world saw coming . It came as a shock, both the impact and severity. But the main thing we'll do differently is to have much more of a forward looking agenda.

So rather than going into firms and looking over files and records, we'll be very much more engaging with CEOs asking where their areas of growth are, where they see the real opportunities and making sure that we're looking at those areas, not just looking backwards at things that happened three or four years ago.

Do you think some of the criticism of the FSA is unfair?

Yes, I think it's a bit over the top. The FSA has done a good job at lots of aspects of what it does, since the onset of the crisis it's much more focused on capital within firms and their overall soundness.

It's an organisation, and the individuals within it work extremely hard at trying to get the right outcomes. I think for a long time they operated within a broader environment where the watch word of the day was light touch regulation and that clearly failed.

In future, what powers do you have to take action quickly?

Under the new power we'll have the ability to ban products. Obviously we have to have due cause, but we can do that before going through a lengthy consultation process.

Instead we consult on the issue while the product isn't on sale and if we've got it right, we'll make those rules permanent at the end of a year. If we've got it wrong, then at the end of the year those rules will get annulled. But at least during that process the product won't carry on being sold.

Previously, under our normal processes, when we found a problem, we did a lot of analysis, wrote some rules, consulted on those rules and the whole thing took quite a long time before you got to a point when you've reached the decision it's not a good product and should be banned.

Did 'light touch regulation' cause problems? For example, with Northern Rock?

No, it's very difficult to isolate it. It was just an overconfidence in all aspects of the system. In many cases the directors have failed.

They didn't set out to crash the bank, they just set out in an environment where they thought it was reasonable to take the level of risk that they were taking. And they got it wrong.

Everybody has to take a risk somewhere, but you look at the business models of firms and you've got to try and get the right balance of risk.

Mortgage companies at the time were bending over backwards to lend as much as possible. When you're lending to people that clearly can't afford their repayments you have to ask yourself, is that a sensible thing to be doing?

If a PPI mis-selling type scandal happens again, is the FCA in a better position to stop it?

The FSA was too slow to realise the severity of PPI. It's fair to say we were dealing with it, but not in a way that was going to solve the problem, because the lawyers and the banks were arguing with us and they were saying you haven't proved your case, you haven't shown that there's detriment.

But in the new environment there are three things that'll be different.

Firstly, we're expecting all of our supervisors to be looking ahead as much as they're looking back to where product growth is for firms and so we'll have a signal early on where firms see the profitable areas.

Secondly, when we have an issue like this we won't be in trench warfare with the lawyers, I'll be talking straight to the CEOs saying you've got to get this on your radar screen.

We took action, we imposed a number of fines, but the one thing we didn't do was to go in, as I would do now, to the CEO and say you've got a problem and you've got to make sure that you fix it personally.

Thirdly, we have a legal power that allows us to step in. So we will have the power to ban a product if we feel that it is not or cannot be sold safely, and we didn't have that as the FSA.

Do you think the chairmen and CEOs back then realised the problem with PPI mis-selling?

Clearly in some people's minds there wasn't a problem and there was nothing wrong with it. I think the current management of the banks understand it and the penny has dropped, but those overseeing the banks in that period when it was at its height around 2004/05, even today are saying they don't see what the problem was.

It's a constant reminder to banks that they've got something badly wrong and operationally. It's a big embarrassment, it's a big cost.

Where do you stand on banks calling for an end date for consumers to claim PPI, as they have done?

There are deadlines already built into the system, if you haven't made a complaint from three years from the date of which you were notified that you may have a complaint, then you can't make a complaint.

And some banks wrote to their customers three years ago and so they're now turning round to the claims management companies and saying, “I wrote to the customer three years ago, they timed out.”

So it exists already, it's not that we have to somehow create something new. But what banks are asking for is they'd like it to be brought shorter than three years and they'd like it to be done as one sort of blanket exercise.

We've said we're happy to listen to a proposal if a proposal can meet the banks' needs of bringing a date forward, but meet consumers' needs of making sure that they know about the potential claim.

What else is currently on the radar that you're going to keep your eye on?

One of them is consumer credit, which we take responsibility for in a year. One of the worries is that there's no incentive for a firm to do any proper assessment of affordability or whether a client can pay back, because the business model works on an expected high rate of failures because they know it's this part of society they're lending to.

The business model is one that wants to lend as much as possible, as quickly as possible, to as many people as possible, and I would question whether that's an adequate management of risk, or whether actually the firm should be doing a better affordability assessment before they lend.

The firms also have the ability through continuous payment mechanisms to just take money from the customer's bank regardless of how affordable it is.

The end of the market that has attracted most attention is payday loans. Because the charges are high, the business model is profitable even if 30% of people who borrow can't afford to repay. So there are quite a lot of things in this area that would be a concern to us.

One of the big problems with payday loans is not necessarily the upfront charges, but if you're late paying or they encourage you to be late paying, isn't it?

That's right, and also the rollovers. If somebody is in distress or can't afford it, we expect a lender to work with them. But in the payday market, people might have the loan rolled over so the cost goes up and up and up and there's not really a great incentive to try to help people manage a bad debt situation.

I don't think it's fair the way a lot of these companies act, but it's an area that we have not got responsibility for today, we will have in a year's time and my expectation is it'll be one of the areas we want to look quite closely at.

What's your take on the on-going issues in the current mortgage market, with many unable to get funding?

I think the days pre-2008, of 125% mortgages, and there was no attempt whatsoever made by lenders to satisfy themselves about affordability and that was wrong. We don't want to get back to there.

So we don't want to get back to where we were, but we don't want to be so prescriptive that it strangles the market, because people want to be able to afford to borrow, they want a loan.

And in some cases an interest-only mortgage is the appropriate vehicle for that, which is fine, as long as it's well understood by both parties.

The balance in the rules is about right at the moment, what's difficult is that the lending environment has become difficult. Banks are finding the availability of credit is squeezed, they're being told by every regulator they need to hold more cash in reserve and so they're not lending as much, and people are finding it more difficult to get loans.

In some cases it's good that banks aren't lending as much, but in other cases, if they're not lending to people they would've otherwise lent to, we haven't got to that new normal yet.

Where do you stand on firms making key changes based on terms dug deep in the small print, as we've seen with Bank of Ireland putting up tracker rates, despite base rate not rising.

Banks have got to be much clearer about what the contract is they're expecting people to sign. Most of these mortgages, not all, but most of them do allow the banks to vary the rate and not just in relation to a base rate change.

Clearly when we see what could be abusive behaviour, we'll talk to the banks. Generally it's got to be communicated properly, banks shouldn't trap their captive customers to a higher rate, so they've got to offer people some choice.

They need to be clear with people upfront what the important terms are.

What about the rules on banks communicating savings rate drops to consumers, as they seem a bit vague, and we get a lot of complaints from people who are not told of a rate drop?

One of the things that concerns us is poor communication when rates drop. But we've been fairly clear with banks that they can't automatically drop rates on the basis they told people a year ago that it would fall, without reminding them.

One of our expectations is banks communicate more clearly and transparently with customers about either changing rates, or when their pre-announced rate goes to a much lower level.

Will the FCA be engaging more with consumer groups in future?

One of the things we've done is realised it would be arrogant of us to think we had the access to all the information we need to do our jobs, because publications such as MoneySavingExpert.com and Which?, and all of the consumer groups have a wealth of experience and knowledge that we could take value from if we're much more open to that.

So we have started and will continue to engage much more with not just the firms that we regulate, but anybody who has intelligence about those firms.

What's your measure of success for the FCA?

I'm hoping within the first year we can deal with the legacy issues. There's too much that we're still dealing with which are problems that go back to 2008 or earlier.

I hope confidence can be rebuilt in the financial sector, that people can trust their bank, insurance company, lender or financial advisor. That they can trust that they operate to a standard and they operate to a good standard.

And I hope people are able to afford the houses they want, or can save in products that make sense for them because they've got back to that trusted situation with their financial advisors. We have to get to that point. We all need to save, we all need to fund our old age or university education or house and you need financial services to do those things.