The Financial Conduct Authority has been criticised for having gaps in its understanding of the compliance costs on firms and its lack of coordination with the Financial Ombudsman Service.
The National Audit Office report, published today (24 February), examined the processes the regulator uses to address mis-selling in the financial services industry.
One of the key findings from the National Audit Office report was that the costs of regulatory responses to mis-selling and arranging redress for consumers are “substantial”.
It said there are “some gaps in the FCA’s understanding of [how] the costs of its activities could hamper its decision-making”.
According to the report, these costs are met by financial services firms in the first instance, but ultimately consumers pay too through firms’ fees and charges.
“Firms also incur the costs of independent reviewers appointed by themselves or by the FCA, which can be substantial,” the report reads, pointing to nine firms which have paid £300m to independent reviewers for work on the interest rate hedging products redress scheme.
It also said smaller firms may face proportionately higher costs, since they are less able to have an in-house compliance team, and suggested the FCA should routinely review the impacts of regulatory interventions to understand the impact on smaller firms.
The NAO said nine out of 15 firms said the costs of complying with FCA conduct regulations were now “much more” than in 2008.
Another key point was that many firms consulted in the report said they were not convinced the FCA and the ombudsman were doing enough to coordinate their activities, resulting in the duplication of activities and extra costs to firms.
The organisation made a number of recommendations to help the FCA improve its redress procress, including having a stronger understanding of the total costs and benefits of its work.
It also said the financial watchdog should communicate its expectations about mis-selling cases clearly and consistently to firms, and work with the ombudsman to assess regularly how it is affecting firms.
In a statement, the FCA said it welcomes the NAO report and the recommendation that it should take action.
Despite saying it is unlikely that mis-selling could ever be eliminated completely, the regulator highlighted that it’s aim is to minimise mis-selling cases as much as possible and to create the right incentives and culture in firms.
Simon Morris, financial services partner from law firm CMS, described retail mis-selling as the “running sore” of the UK financial services industry.
“This report emphasises the ongoing mismatch between one year’s sale and the standard applied during the next year’s FCA examination.
Mr Morris said part of the problem is many firms evidently don’t understand the regulator’s requirements, which are not always clearly articulated.