Effectiveness of the regulator

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Effectiveness of the regulator

Despite pundits exclaiming shock and awe across the airwaves when the scandal broke in 2011, for those familiar with the financial sector, the fact that the banks were capable of skinning customers to this extent was hardly surprising.

However, peek beneath the floorboards of some of these houses of finance and you uncover an equally rotten foundation; the regulators were obviously aware of issues with PPI before the scandal broke, and just as obviously did little to prevent it.

The question is: were they even able to? Are our regulators toothless when it comes to enforcing their own rules?

Key points

  • The PPI scandal was not surprising to some.
  • The then FSA took a long time to act.
  • The regulators need greater powers.

With the recent announcement by the government that the Financial Conduct Authority will not be allowed to set its own regulatory perimeter, it seems the government is reluctant to allow our regulator more rope with which to trip itself on its own inefficiencies.

None of the problems inherent in PPI – the cross-selling, the difficulties in claiming, even the aggressive sales tactics aimed at the self-employed who would never be eligible to make a claim – were unknown before the first premium PPI product was banned in 2009.

Five years earlier, in 2004, The Guardian reported that just 15 per cent of claimants actually received redress, almost a full year before the then Financial Services Authority started taking action.

By 2005, both The Daily Telegraph and Citizens Advice had added to the pile of reporting, and the FSA finally issued its first report on PPI, criticising poor selling practices and lack of compliance controls.

Little justice for consumers

The ball was finally rolling, albeit slowly – and even if the regulator can find an excuse for being ignorant of the issue until 2005, PPI should have died with this first scathing report.

Yet no fines were levied until 2007, and then only targeted smaller institutions such as Alliance & Leicester, which lost a desultory £7m in fines from an estimated PPI income of £135m.

Losing just over 5 per cent of your ill-gotten gains is hardly an effective fine, nor in any way a deterrent. The larger fines came later and were spurred by the motivating force we all love to hate – the claims companies.

For all the issues surrounding bothersome, sometimes predatory, claims companies, they undoubtedly prompted more consumers to seek redress.

They proved that the PPI scandal had momentum and, arguably, backed the regulator into a corner where larger fines were necessary to avoid falling foul of public opinion.

This wave of claims lasted up until the last minute before the deadline – since it started its redress scheme, Lloyds received 70,000 PPI claims a week.

More scandal

Although far smaller in scale, similar themes arise from the more recent London Capital & Finance scandal. In the first instance, issues of regulator ignorance reared their heads.

Despite regulation by the FCA, LCF practices went largely unnoticed as it sold unregulated mini-bonds.

‘Mini’ may be a misnomer here, as the combined losses from this activity totalled £237m by the time LCF went into administration in January 2019.

With 11,500 investors unlikely to ever reclaim more than 20 per cent of their money, the mini-bonds had a rather large effect.

By May 2019 HM Treasury announced a review into whether mini-bonds should be regulated, but it must be questioned why it took such a collapse to prompt this scrutiny.

Following close on the heels of regulator ignorance are the devils of inertia and hesitation.

In the case of LCF, this took the form of uncertainty in communications with investors – in April some bondholders accused the Financial Services Compensation Scheme of misleading them over their rights to compensation – and then a furore a month later over the predicted 12-month timeframe for the regulator’s investigation, which was lambasted by MPs in parliament.

It turns out, the answer to ‘who watches the watchmen?’, is the watchmen themselves. And they do not hurry, either.

Lack of options

The repeated failings of the regulator to act decisively and bare its teeth when dealing with financial predators, such as PPI mis-sellers and fraudulent companies such as LCF, leave consumers with few options.

Faith in a system that plods along due to its own inertia does not seem widespread, so perhaps the answer lies in personal litigation?

Just as claims companies prompted harsher action by the regulator against PPI-slinging banks, they also provided the most commonly used method by which consumers received redress, albeit without the company’s cut.

Regulatory effectiveness

In a similar fashion, when investment companies such as LCF collapse, are consumers better off jumping straight to the claim, rather than trusting the regulator to act?

Against a backdrop of regulatory inefficiency, quick action and the threat posed by litigation are strong points in favour of pursuing personal claims when aggrieved by fraudulent, misleading or mis-selling institutions.

In light of this, the questions surrounding the effectiveness of the regulators are more important than ever.

While the regulators are undoubtedly an essential tool in keeping markets consistent and preventing a runaway wild west economy, and are staffed by men and women doing a stellar job, they simply do not hold enough threat to act as a deterrent to mis-sellers.

Without the necessary teeth, do they really hold up their end of the bargain that sees them as arbiters of our financial ecosystem, especially when smaller private companies are more effective at achieving redress for consumers?

Open to negligence

The recent announcement by the government seems to follow along these lines: Allowing the FCA to set its own boundaries might allow them to react to the ‘grey areas’ of regulation more quickly, but it also gives them a larger territory to potentially leave almost as if it were unregulated.

In short, extra power to the regulators just means extra negligence.

You may be thinking, does personal litigation truly hold more of a bite for mis-selling companies? Ask the swarms of claims companies birthed from the aftermath of PPI – sharks do not frenzy unless there is blood in the water.

Philip Sinel is senior partner at Sinels