In a regulation round-up last August, the FCA asked firms and their representatives to send any examples of where they believed it or its predecessor the Financial Services Authority had applied rules retrospectively.
Of the 36 responses - 16 individuals, eight intermediaries, four product providers, seven trade association and one ‘other’ - none contained examples of the rules being applied retrospectively, but a number of other issues emerged.
“The most important of which was a feeling that we had changed our mind in some instances, having turned our attention to an issue that we had not previously been focused on,” read the report.
“Our hope is that our more forward-looking approach, including an increased commitment to early intervention, as well as clearer communications, will help to avoid the perception of retrospection in the future.”
The regulator’s conclusion was that the issue is one of perception – principally created by the fact that it continues to work on several legacy issues – although it did find examples where firms felt the FSA/FCA had intervened late as a result of risk crystallising and there were general concerns about decisions made by the financial ombudsman.
Genuine issues were raised during the call for input, related to the way it regulates firms, which suggest there is scope to improve practices and include the following:
• the desirability of improving firm communication and clarifying the way guidance is given;
• the need to recognise that fast-paced technological change may mean that rules become inappropriate and that there may be a need to consider using waivers in these circumstances; and
• the need to intervene at an earlier stage to avoid the development of problems over a long period, particularly where firms draw a conclusion that the regulator does not perceive there to be a problem.
The FCA stated that it has already begun work on all these issues, but reiterated the need to be forward looking, in order to reduce the perception of retrospection in the market.
During the feedback period for this work, the issue most frequently mentioned was the treatment of traded life policy investments, in particular the FSA branding them as ‘toxic’ and the consequent fall in their value.
The FCA said it believed that the FSA’s intervention in this market was justified, adding that a stronger, clearer warning to the industry and retail consumers was warranted.
The second most-frequently mentioned issue was the Financial Ombudsman Service and its decisions, with one respondent stating: “The main threat of retrospection emerges from the interplay of regulatory activity in which rules laid by one body can be reinterpreted by another, notwithstanding the change in approach that it might contain.”
The FCA said that while there were no significant examples of retrospection, there were general statements of concern with the perceived approach of the ombudsman.
“Additionally, we do recommend firms ensure that lessons learned as a result of determinations by the ombudsman are effectively applied in future complaint handling and firms are required to put in place reasonable steps to ensure that in handling complaints it identifies and remedies any systemic or recurring problems.”
It added that in many cases, the response covered not only retrospection, but other broad issues of how the regulator has operated in the past, or operates now.
In most of the cases, respondents had concerns that the regulator had been aware of market practice at the time and had, at some point, decided to review past business and decided that mis-selling had occurred. There was no suggestion, however, that the regulator had applied standards or rules not in place at the time of sale.
“This criticism presents a challenge for the FCA. Sometimes, the fact that there has been a problem with advice or selling practices may not become clear until some time after the event and it is only at that point that action can be taken; that may require a review of past business,” the paper read.
While we do not believe that this is an example of retrospection, as we have defined it, we do appreciate the concerns of industry and the challenge that past business reviews pose for them.”
peter.walker@ft.com
