Regulation 

Monitoring ‘would have stopped PPI’

In his recent speech at the British Bankers’ Association Annual International Conference, in London, the chief executive of the FCA said: “It is important to probe sources of revenue for a firm to provide an early warning for possible misdemeanours”.

He said that had this been done, alarm bells would have rung over the high margins in PPI versus the product’s low claims ratio – around 16 per cent of gross written premiums.

In his speech, he stated that he saw the broad future strategy of the FCA and the PRA as being “instrumental” in promoting economic growth through the implementation of the highest professional standards in the finance industry.

Unsurprisingly, in the wake of ongoing criticism of the FCA’s failure to adequately address the swathe of recent financial scandals in the UK – including Libor manipulation, payment protection insurance mis-selling, card protection products, and interest rate swaps – Mr Wheatley highlighted that the first key element of regulatory architecture in the future is to anticipate issues before they become multi-billion pound problems.

He noted recent efforts by BBA members in the areas of competition work on cash savings – for example, investigating issues susch as ‘teaser’ rates and consumer inertia – and the ongoing review into mobile banking as being an example of this proactive approach.

He added: “The FCA will also pay increasing attention to how the business model delivers against the expectations of consumers”, citing interest-only mortgages as a recent example.

Three Key Themes

In his speech, Mr Wheatley said there were three main issues that created “a perfect storm”. These are:

* Problems associated with mis-selling around the world. In Asia, the mini-bond crisis; in the US, mortgages; in Spain, preference shares. And in the UK, PPI, credit cards and interest rate swaps.

* Problems on the demand side, “the ‘hopeless mirage”, as behavioural economist Daniel Kahneman put it, “of the logical consistencies of human preferences”.

* Problems with a regulatory framework that was too retrospective, with an excessive reliance on rules versus culture.

Adviser View:

Jason Witcombe, director at London-based Evolve Financial Planning, said: “The forward-looking approach that he stressed would be very welcome, as perhaps this has not been as it should have been in the past, and the monitoring of unusual revenue patterns would also be a good thing. From a practical perspective, of course, it is often difficult to ascertain what a financial institution is doing from reports only, so to implement this properly would involve the FCA sitting down with senior managers of banks, in taped interviews, and going through the numbers for the individual business liens on a very regular basis.”

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