5. The ABI welcomes the opportunity to respond to the Financial Services Authority consultation Journey to the Financial Conduct Authority

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1 ABI response to the Journey to the Financial Conduct Authority The UK Insurance Industry 1. The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital part of the UK economy, managing investments amounting to 26% of the UK s total net worth and contributing 10.4 billion in taxes to the Government. Employing over 290,000 people in the UK alone, the insurance industry is also one of this country s major exporters, with 28% of its net premium income coming from overseas business. 2. Insurance helps individuals and businesses protect themselves against the everyday risks they face, enabling people to own homes, travel overseas, provide for a financially secure future and run businesses. Insurance underpins a healthy and prosperous society, enabling businesses and individuals to thrive, safe in the knowledge that problems can be handled and risks carefully managed. Every day, our members pay out 147 million in benefits to pensioners and long-term savers as well as 60 million in general insurance claims. The ABI 3. The ABI is the voice of insurance, representing the general insurance, protection, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK. 4. The ABI s role is to: Be the voice of the UK insurance industry, leading debate and speaking up for insurers. Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally, driving effective public policy and regulation. Advocate high standards of customer service within the industry and provide useful information to the public about insurance. Promote the benefits of insurance to the government, regulators, policy makers and the public. 5. The ABI welcomes the opportunity to respond to the Financial Services Authority consultation Journey to the Financial Conduct Authority Executive summary The ABI is broadly supportive of the high-level approach to regulation set out in the Journey to the FCA document. In a paper published in September 2012, the ABI set out six themes for the Way Ahead for Conduct Regulation to be taken forward by the FCA, the insurance industry, consumer groups and the Government: Making markets and regulation work to deliver public policy goals A regulator that is in touch with the consumer experience Regulation focused on markets delivering products that meet consumer needs Facilitating effective competition and innovation in financial services Actively shaping the FCA s wider regulatory programme within the EU and the UK Building mutual confidence and respect between the FCA and the industry We are pleased to see elements of these themes reflected in this document. We want to continue to work closely with the FCA to deliver well-functioning financial services markets which are good for both consumers and firms. We include the Executive Summary of the ABI s report in Annex A. 1

2 Although the high-level approach to regulation is becoming clearer, there is considerable industry concern regarding the very tight timeline for implementing the new regulatory structure. This FSA document, whilst welcome in providing some sense of direction, does not really provide practical guidance that would help firms prepare for changeover, in just a few months time. Meanwhile, the Financial Services Bill has only just completed its parliamentary stages and indeed some significant changes were made recently to the objectives and powers of the FCA. The FSA has issued a number of other consultations on implementation matters in recent weeks, to which the ABI is providing detailed responses. We are particularly concerned about the proposed requirement on firms to make changes to their regulatory status disclosures within six months of legal cutover. This timeline could generate considerable extra costs for firms, whilst offering no obvious consumer benefit. More generally, we believe the FSA needs to urgently provide a more detailed implementation plan for the period between now and legal cutover. We also wish to highlight our concern about the increased use of Skilled Person reports (s.166 powers) as part of the supervisory process. A consequence of this trend is to increase the total costs of regulation on firms. This power should be a backstop for the supervisory process, not a business as usual tool. In this response, we focus on the following key regulatory issues as areas requiring further development and discussion: Product intervention powers Promotion of competition The new supervisory framework Success measures for the FCA We address these issues in this response below alongside commentary on other key points from each chapter of the FSA paper. 2

3 General comments Chapter 1 The creation of the FCA: spotlight on some of our new powers Product intervention Product intervention is new territory for the regulator and the industry so the FCA should set out a clear policy framework to provide some clarity to the market and to ensure consistency in policy and supervision. Although the FSA recently launched a consultation on the use of temporary product intervention rules, it hasn t yet provided a statement of policy on its approach to product intervention as a whole, so we urge it to do so soon. This should take account of developments in Europe, as product intervention rules are being proposed and adopted in a number of current EU regulatory initiatives. We support the emphasis in this document on ensuring that firms have robust product governance processes in place. This is a better approach than an over reliance on blunt instruments such as product bans, which could restrict consumer choice and competition in the market. A total ban on a product type should be an exceptional rather than a regular event, and where it is shown to be necessary, we hope the FCA will usually develop rules in the normal way, rather than relying on its new temporary intervention powers. The FCA should develop appropriate checks and balances around the use of product intervention powers including consultation and rigorous cost benefit analysis, and reaffirm that product bans will be used sparingly. We are surprised that the document leaves open the possibility of introducing a product preapproval scheme in particular circumstances. It was our understanding that the regulator had rejected pre-approval. We believe that such a process would be bureaucratic and burdensome. It might also deter innovation in the market, discouraging firms from developing new products and from conducting their own robust product testing. The FCA should reaffirm that it will not be pre-authorising products or looking to unduly restrict consumer choice and competition. It should also make clear that it does not want to deter new products from being launched. Placing greater emphasis on product governance in the new approach to regulation is important. However, the FCA should also give more thought to the balance of responsibilities of intermediaries and providers and the nature of any intervention after a product comes on the market. Accordingly, we recommend the FCA should develop a framework for product interventions which combines product and distribution regulation in a targeted way. Whilst we recognise that a move towards product governance does not mean a complete reorientation of approach, there should also be future opportunities for the FCA to reduce the burden of prescriptive sales regulation. Financial promotions The ABI appreciates the rationale behind the new power in the Financial Services Bill for the FCA to ban financial promotions and publish details of the action taken. However, we urge the FCA to establish proper checks and balances around the use of this power which should be used sparingly. In particular, before a direction is issued to a firm to remove its financial promotion, the FCA should conduct a speedy internal, arms-length review of the direction to subject it to a fresh pair of eyes. The FCA should also usually discuss its concerns with the firm concerned before initiating the formal process. More generally, we suggest financial promotions is an area where the FCA will need to be in touch with changes in consumer behaviour. For example, we are concerned that the FSA has transferred its general requirements and supervisory approach from traditional media to 3

4 social/digital media, without establishing whether consumers engage with social/digital media in a different way from other forms of media. As discussed below, we are also concerned that FSA policy development in this area was apparently conveyed within a recent speech rather than through a formal consultation. Publicising enforcement action Disappointingly, this paper doesn t provide much information on the FCA s intended approach to using its new powers to publish warning notices. We urge the FCA to develop safeguards, particularly for circumstances where enforcement action is announced via a warning notice but is dropped after an investigation finds there is no case to answer. The firm in question is very likely to have suffered reputational damage so the FCA should commit to actively promoting its decision to drop the action in these circumstances. The paper notes that one of the purposes of disclosing enforcement action is to make clear to firms and the market what it considers to be unacceptable behaviour. However, the FCA could publish generic guidance of this nature without naming individual firms. We urge the FSA to set out its proposed approach to publicising enforcement actions before the FCA is established. Competition One of the most important and potentially welcome ways in which the FCA will differ from the FSA is in its role to promote competition. We are pleased to see some development of thinking around how the FCA will use its new competition mandate because it is a source of some industry uncertainty. The high level approach set out in the document to defining effective competition is helpful, and we particularly welcome the commitment made to investing in rigorous market analysis. The FCA should approach its reviews of markets (and general competition work) with the same discipline as the Office of Fair Trading (OFT). This will require the FCA to develop appropriate internal capability and processes to carry out high quality economic analysis. The FCA should first develop and then follow a transparent competition research and policy development framework. This framework should include the following: Policy and outcomes the FCA want to achieve from their competition remit. The process by which markets are identified and prioritised for potential investigation (e.g. complaints, FSA findings, intelligence gathering). How the FCA will assess whether a market should be reviewed (e.g. prioritisation principles, impact, strategic significance, risks, resources). Tools/process that the FCA will use in a market study (e.g. market definition, data gathering, interviews, consumer research). Stakeholder engagement process. Timescales, responsibilities and accountability for any studies. The range of potential outcomes (e.g. clean bill of health, supervisory/enforcement action, recommendations for rule changes etc.). While we urge the FCA to develop a new explicit framework for market studies to reflect its new role to promote competition, we suggest it could draw on positive aspects of the approach taken by the FSA to the Retail Distribution Review (RDR). The RDR looked holistically at the operation of the markets for retail investment products and advice. It identified significant problems with the way that competition was operating, with a focus on 4

5 distributors rather than end consumers, which was creating the potential for consumer detriment. The FSA concluded that a package of major changes was needed, including a ban on commission payments for advice, which will start on 31 December These proposals were developed over a long period of time and were shaped by research and close consultation with the industry and consumer groups. The resulting significant changes to the conduct of the market commanded significant (though not unanimous) support. While other financial services markets are of course very different, we suggest there are useful lessons to learn from this approach to market analysis and policy development. As the FSA itself has stated, the FCA will not be an economic regulator (unlike, for example, the water regulator Ofwat) so we would not expect it to set price caps in the way that Ofwat does when faced with the very different context of a natural monopoly. We have been somewhat concerned by occasional generalised references made by the FSA to poor value for money or unfair pricing. Any interventions in a market should be grounded in clear evidence of that the market is not working in the interests of consumers. The FCA s new competition responsibility will require it to ensure it has the right skills and resources in house to conduct robust economic analysis. We welcome the stated intention to strengthen the relationship between the FCA and the OFT. However, there is still a risk of significant overlap between the two bodies. We would welcome clarity on the extent of the OFT s (and its successor body the Competition and Markets Authority) ongoing involvement in competition matters for the financial services markets. We suggest that the FCA should normally take the lead on competition matters in financial services markets while the OFT should only undertake market studies in relation to these markets in exceptional circumstances. As the specialist sectoral regulator, the FCA will be best placed to conduct analysis of financial services markets and pursue any necessary regulatory changes. The planned MoU between the FCA and the OFT should seek to ensure the risk of duplication and/or lack of coordination between the two bodies is minimised. It should clearly set out the lead role for the FCA and the conditions in which it may be appropriate for the OFT to lead an investigation. We suggest this should be restricted to the rare occasions where there is a Competition Act investigation (such as cartels or an abuse of dominance) or where the financial services market under review is part of a wider review of a non-financial services market (e.g. the current Competition Commission investigation of the private health market). We would welcome further engagement with the FSA/FCA as their competition approach develops, including the opportunity to comment on a draft MoU. Chapter 2 Protecting the perimeter We endorse the general commitment to ensuring that non-authorised firms do not provide, or advise on, financial services to consumers. We urge the FCA to prioritise claims management companies (CMCs) as part of its work to police the perimeter. We understand that there have been some cases of unregulated CMCs straying into providing financial advice (e.g. advising consumers to sell an investment) so the FCA should work closely with the Claims Management Regulator to protect consumers from this problem. The FSA has recently published a consultation paper which seeks views on threshold conditions, including the new proposed Business Model Threshold Condition, which ABI will be responding to. It is important to get the right balance between protecting the consumer from unsustainable business models that give rise to significant risks to consumers, and not stifling innovation or deterring new entrants from entering the marketplace. 5

6 The ABI has also responded separately to CP12/26 which relates to the Approved Persons Regime for dual-regulated firms. In short, we support the FSA s intention to grandfather existing approved persons into the new regime, but the proposed approach to the split of controlled functions is complex and will impose unnecessary administrative burdens on firms. Chapter 3 Ensuring firms continue to meet our standards The ABI welcomes the FCA s ongoing commitment to the FSA s Treating Customers Fairly (TCF) principles. ABI member firms have invested heavily in implementing changes to their systems and processes in line with these principles, which are now well embedded with firms from the boardroom to customer service teams. We recognise that the TCF model will evolve within a new regulatory environment, and we are keen to work closely with the FCA on priority areas such as firm culture and sales incentives. Insurers appreciate that TCF is about more than monitoring management information it needs to be focused on consumer outcomes, and firms will be expected to make changes where risks are identified. New supervisory model This document helpfully sets out the new supervisory approach of the FCA and we can see the logic behind the planned conduct supervision categories. We note that the majority of intermediaries will be placed in the C4 category. Whilst we recognise the FCA s strategy of focusing resources where the impact on consumers may be greatest, it is important to recognise that many insurance products are sold via intermediaries, so consumer protection risks will often still need to be addressed at the distributor level, as well as through the provider firm. We welcome the setting up of specialist sector-specific teams and we appreciate the constructive dialogue which has been established between the insurance sector team and the ABI. It is important to be clear about the respective responsibilities of policy teams and supervisory teams for example, policy staff should not be making decisions which have substantial cost implications in isolation from an understanding of its impact upon firms. We are also concerned about the potential for overlaps or poor coordination between the thematic work looking at products and issues across a sector or market and the FCA s developing agenda on competition from within the new Policy, Risk and Research area of the FCA. Where the FCA takes a view about market practices in the course of its thematic reviews, or broader supervisory work, it is important that this is clearly communicated across the market rather than on an ad hoc basis to individual firms. This is critical in ensuring a level playing field for all firms in the market and is also an important strand of regulatory accountability. We note and support the FCA s intention of dealing with thematic work in a swift fashion. The FSA s mobile phone insurance thematic review has so far taken over a year, so there is room for improvement in this regard. Section 166 powers We are disappointed that the FSA appears intent on further extending its use of s.166 Skilled Person reports, as we made clear on our response to the FSA s recent consultation on this topic. The ABI recognises the role of s.166 powers, and the case for the regulator occasionally commissioning external resource to audit a firm s compliance with regulatory requirements. However, we are very concerned about the increased use of these powers in recent years both officially, and also by way of regulatory interventions similar to a s.166s, 6

7 such as independent assurances or root-cause analyses particularly given that this coincides with steep increases in regulatory fees. This issue is exacerbated by limited accountability around the use of these powers and lack of control over the costs. Wholesale conduct supervision The paper highlights the importance of ensuring that wholesale markets are working well, and indicates that the FCA will be more interventionist in its approach to these markets. As the paper notes, wholesale conduct covers a wide range of activities and relationships in banking, insurance and securities markets, and we are keen to work with the FCA in developing a common framework of understanding on how these markets operate. Having clearly signalled concerns about potential misconduct in wholesale markets at a general level, we urge the FCA to provide more clarity soon about specific markets which it considers to be a priority. It will remain important for the regulator to take a risk-based approach, and in markets where the consumer is a financial services firm it is less likely (though not impossible) that there will be a market failure justifying a regulatory intervention. The European dimension to FCA regulation is particularly important for wholesale markets, and with key Directives such as MiFID currently being revised we hope the FCA s approach will be closely aligned to the EU framework. It would be helpful if the FCA could make it easier for firms to understand how the FCA Handbook links to the developing rulebook emerging from each of the European Supervisory Authorities. Finally, we note that the Journey to the FCA paper includes a separate section on the work of the Markets Division of the FCA, and we urge the development of thinking on wholesale conduct in securities markets to be properly aligned with its agenda. PRA and FCA The Journey to the FCA document rightly identifies good supervisory coordination and cooperation between the FCA and the PRA as a key issue for dual-regulated firms. This is a critical ongoing challenge, and the early experience of insurers during the transitional period is mixed. Both bodies will need to ensure they have appropriate incentives in place to ensure a collaborative culture right between the supervisory teams and indeed all parts of the organisations. As the paper states, close cooperation will be particularly important in relation to supervision of with-profits business, and we are separately providing input to the FSA on the draft MoU in this area. Firms have a variety of business models which will result in a number of different interactions with the regulators. Within groups there may be more than one set of supervisors from each regulator depending on the legal entities within the group. Certain legal entities will be solely regulated by the FCA whilst others will have dual regulation. It is vital that the FCA and the PRA work together in this area to minimise the complexity and administrative burden on financial services providers. The two authorities will also need to establish processes to ensure a consistent and coherent approach to rule-making and to consulting with the industry as new rules are being developed. Chapter 4 Taking action against firms that do not meet our standards Regulatory decisions framework We are pleased the paper confirms that the Regulatory Decisions Committee (RDC) will be maintained under the FCA. There was some unease that the FCA may dispense with the committee. The RDC performs a vital part of due process, separating out investigation from 7

8 decision making and allowing practitioner input into the enforcement process. As we move into a more judgement based, interventionist regulatory environment it is even more important that such checks and balances on the regulator s actions are retained. Financial crime Although tackling financial crime is not explicitly identified as a statutory or operational objective for the FCA, it is important that work to counter financial crime does not lose its focus or profile. Mitigation of financial crime should continue to be a regulatory priority for the FCA. We are reassured that one of the FCA s objectives will be protecting and enhancing the integrity of the UK financial system and this will include addressing the extent to which the UK financial system may be used for the purposes of financial crime. We agree that the FCA s financial crime priorities should be risk-driven. We understand that a key question that the FCA will be asking itself is how good is a sector at tackling financial crime risk through collective action? Reducing and deterring fraud remains a key priority for the insurance industry. The ABI views combatting fraud as a non-competitive issue and we look to work collaboratively wherever possible. We recognise that if we do not adopt such an approach, fraud will simply shift around the market as fraudsters look for chinks in the industry s armour. The launch during 2012 of both the Insurance Fraud Enforcement Department and the Insurance Fraud Register, both of which complement the work of the Insurance Fraud Bureau established in 2006, will help the insurance industry to maintain its focus to protect its genuine customers and ensure that the consequences for those who commit fraud will be severe. We note that, given its consumer protection mandate, the FCA will be particularly concerned about frauds that hit identifiable groups of consumers. The ABI is implementing a strategy taking forward work to counter illegal insurance activity, often colloquially referred to as ghost broking. We are keen to work with the FCA and other agencies to ensure a joined-up approach. Aside from raising awareness amongst vulnerable consumers, the FCA can play a key role in taking enforcement action against illegal insurance advisers. Chapter 5 Building our understanding of the markets We welcome the strong commitment in this chapter to enhancing the quality of market analysis both in terms of better understanding of consumer behaviour and risks associated with individual firms or markets. For example, we would welcome increased use of behavioural economics, and we are keen to work closely with the FCA in this area The ABI is committed to using consumer research to inform our policy-making and we have recently commissioned consumer-testing to explore alternative ways to present the potential risks and returns of investing, to see if we can improve on the current projections regime. The paper says the FCA will develop a strategic risk framework, which will shape the organisation s activities and allocation of resources. As we stressed in our Way Ahead document, the ABI is keen to establish a shared, senior level understanding of the key risks with the FCA. It will then require discipline to ensure these priorities are reflected within supervisory and policy teams, so that industry and FCA resources are not tied up in relatively peripheral issues. Markets Division The paper only briefly addresses the role of the Markets Division and the proposed regulatory approach to the investment markets. However, we noted the additional coverage of this subject in a subsequent speech by Martin Wheatley (at the recent FSA Markets and 8

9 Client Assets conference) including the emphasis given to fostering confidence in markets in which participants act with integrity. This is helpful. We note the commitment to adopting higher than minimum EU requirements where appropriate in the investment markets. This is particularly relevant in the case of the UK Listing Authority s work which, of course, is concerned not just with company floatations and standards on admission to listing but also, through the Listing Rules, with continuing obligations. The ABI values the FSA s continuing efforts to ensure that premium listing gives confidence to investors in UK equities. Chapter 6 Maintaining effective relationships EU and international dimension The ABI has previously highlighted the importance of the EU and international dimension to the future development of the FCA, so we are pleased this is recognised in this paper. The FCA will often be the implementer and supervisor of rules that have been made at the EU level. But it is important for the FCA to proactively influence the EU regulatory framework to the benefit of UK consumers and firms, so we are encouraged that the paper states the FCA will provide thought leadership in this regard. We urge the FCA to set out a plan for delivering on this commitment, which might start by setting out, and consulting on, its strategy for the future of EU level conduct regulation. In some circumstances, where the EU is starting to develop a conduct policy initiative, the FCA should seek to influence the development of that proposal, rather than independently proposing new regulations in the same area. The ABI is keen to work in partnership with FCA on EU regulatory initiatives wherever possible, and we are encouraged by recent information-sharing with FSA on the European Commission s proposal to revise the Insurance Mediation Directive. We also urge the FCA to be alert to cross-cutting EU regulation initiatives which impact on the financial services sector the proposed EU Data Protection Regulation will have a significant impact on insurers, for example. Financial Ombudsman Service The ABI supports the retention of an independent and accessible alternative dispute resolution body within the new regulatory framework. We do, however, wish to highlight the importance of an effective working relationship between the FCA and the Financial Ombudsman Service (FOS). The creation of the FCA provides an excellent opportunity for the boards of both bodies to take a fresh look at how they can work together in a complementary and consistent way. For example, there should be a mechanism in place to ensure that, where the FCA has rules and guidance relating to a particular area (such as unfair contract terms or expectations on products) FOS judgements appropriately reflect those rules. This area could be addressed in the development of the MoU between the two bodies. As part of this process, it would be helpful to get input from stakeholders, who have sometimes experienced differences in approach (for example, the content of some FOS technical notes has been inconsistent with FSA rules and expectations). Money Advice Service It is important to get the working relationship between the FCA and the Money Advice Service (MAS) right, starting with a good MoU making clear the distinct roles of the two bodies and the governance arrangements for the MAS. The FCA and the MAS should work closely to deliver commonly agreed, consumer focused initiatives. These might include a 9

10 major campaign promoting good financial habits and solutions and actively promoting personal financial education in schools. Consultation The ABI is enthusiastic about the FCA adopting new approaches to engaging with firms and consumers, including informal meetings, e-communications and regional roadshows. We are also keen to engage constructively and positively as the FCA develops new pieces of thematic work. However, we stress that these different engagement mechanisms should usually complement rather than substitute formal written consultations, which are an integral strand of the accountability of a regulator. Over the last couple of years we have noticed an increased trend towards FSA issuing guidance consultations which are sometimes characterised by short deadlines and unclear questions or objectives. We urge the FCA to avoid the over-use of this mechanism for developing the broader rulebook. There are also recent examples of apparent FSA policymaking through speeches (e.g. financial promotions in digital media). We don t think this is a transparent or efficient approach, and urge the FCA to make sure that changes in policy, rules or guidance are clearly communicated and subject to open consultation. When proposing different sets of rule changes that impact upon the same parts of the industry the FCA should seek to ensure that the implementation timelines are aligned (in April for example) to avoid a whole series of poorly co-ordinated and costly changes to IT systems, customer documentation etc. Chapter 7 Accountability, transparency and measuring our success Accountability The paper provides limited insight into the important future role of the FCA Board in providing governance and oversight of the FCA. For example, we would welcome more information about the mechanisms the Board will use to hold the executives to account and how it will set the strategic direction of the FCA. The first FCA Board offers an opportunity to show that a new approach to conduct regulation extends to the governance of the organisation. The membership should include individuals with knowledge and experience of all parts of the sector, including product providers and intermediaries, and understanding of the consumer experience. The Board should also look for ways to increase the visibility of its work and enhance its engagement with key stakeholders. For example, the FCA should look for ways to make Board meetings more accessible to the public, perhaps learning from the Food Standards Agency which podcasts its Board meetings (although of course aspects of Board discussions which relate to specific firms or individuals will need to remain confidential). Transparency We would welcome further engagement with the FCA on the area of transparency. We hope the forthcoming discussion paper will explore scope to improve the openness and transparency of FCA, particularly in areas such as the visibility of the Board, how the success of the FCA is measured and how the efficiency of the organisation is enhanced. The FCA will need to be in touch with developments around transparency in other areas which may affect regulated firms. For example, the Department of Business, Innovation and Skills (BIS) proposals on Midata could give consumers access to data about their previous consumption/transactions, and thus an insight into their behaviour. The ABI believes that if 10

11 these proposals are extended to the financial services sector the FCA should take the lead in developing any framework. Funding We welcome the stated intention to clearly show the link between the fees charged and the work of the regulator, and the commitment to demonstrating cost control and value for money for firms. There needs to be a stronger commitment by the regulatory authorities to efficiency, as there has been a marked increase in regulatory fees in recent years. FSA fees for insurers have risen from 59.9m in 2007/08 to 127.1m for 2012/13. In general, we are seeking more scrutiny of the FCA (and the PRA) funding requirements. Under the current arrangements there is, despite consultations, no significant check on whether proposals are reasonable or represent value for money. The amount of information provided is not sufficient to enable external observers to judge whether the level of fees and resources that the FSA is devoting to particular sectors are justified. Greater transparency and more meaningful engagement with stakeholders will aid the FCA in achieving its objectives for delivering value for money. It would also be helpful to understand in more detail how the FCA will work with the PRA to ensure that the new regulatory structure operates in an efficient and effective manner. Staff We welcome the commitment made to bring about a new kind of culture at the FCA particularly in light of the increased pressures that will be placed on supervisors in a judgement-based regulatory environment. We agree that the FCA should recruit more staff with experience of working within the financial services industry. This will help increase its understanding of the firms and markets that it will be regulating and to maintain a strong degree of credibility across the industry. Measuring success We are pleased that the FCA is developing its thinking on how best to measure its performance. This is a very important initiative which we are keen to continue to feed into. The initial success criteria identified are a positive start, and we welcome the spirit of some of the measures, such as active involvement of stakeholders and influencing international policy. However, these measures do not relate sufficiently to the broad outcomes set out in Martin Wheatley s introduction to the paper, particularly consumers get financial services and products that meet their needs, from firms they can trust. We believe that the success measures for the FCA should include positive outcomes, such as progress on public policy challenges (e.g. long-term care); availability/take-up of key products and trust/confidence in the financial services industry and the FCA itself. This is particularly relevant in light of the recent inclusion in the Financial Services Bill of a new requirement on the FCA to have regard to the ease with which consumers can access financial services. The FCA also needs to be alert to the danger that some success measures may create perverse incentives if interpreted in a narrow, quantitative way. For example, the proposed requirement to have successfully intervened earlier to the benefit of consumers could create a risk of incentivising multiple hasty interventions such as product bans, with limited regard to the loss of the potential benefits that new product innovation can offer some consumers. 11

12 Specific questions for consultation Competition Q. In which financial services markets do you think competition is working well in the interests of consumers and in which ones is it working poorly? What do you think the reasons are for this? We are somewhat surprised by this question. As outlined above, we believe an assessment of whether or not a market is working well for consumers requires rigorous economic analysis and we hope the FCA will establish appropriate processes to reflect its new remit to promote competition. Gathering and receiving information Q. How can the FCA make it easier for firms, consumers and organisations to provide information on what is going on in financial services and markets? What can the FCA do to make you more likely to provide such information to us? We are not clear which types of additional information that the FCA may need to access about financial services markets, but we would of course endeavour to work positively with the FCA in this regard. In general, we suggest it is helpful for the regulator to be clear what its purpose is when making data requests sometimes the FSA has requested information in short timescales and there has been no feedback on how it is used, leaving firms to conclude that the information has not been used at all. Wherever possible, the FCA and the PRA should try to ensure that they do not duplicate requests for information, and they should give firms a reasonable time to respond to requests for information. 12

13 Annex A: ABI paper: The way ahead for conduct regulation: A positive partnership to deliver for consumers Executive summary With the advent of the Financial Conduct Authority (FCA) and the beginning of twin peaks regulation of financial services, we are entering a new phase in conduct regulation. From being arguably the poor relation in a single regulator, the establishment of the FCA gives conduct regulation a heightened status and public profile, as well as the scope to develop a strategy significantly different from its prudential counterpart. As the largest insurance industry in Europe and the third largest in the world, the UK insurance industry has a significant interest in this reform being a positive development for regulated companies and their customers. The UK insurance industry has demonstrated considerable resilience in the banking crisis which has enveloped financial services since 2007 and has continued to offer savings solutions and protection against risk to millions of customers. In particular, insurers have embraced and continued to run their businesses according to the Financial Services Authority s Treating Customers Fairly (TCF) initiative. This ground-breaking programme shapes the way insurers treat their customers and all major UK insurers have embedded it in their operations. It offers a good example of the way in which the new FCA should build on the best it inherits as well as taking stock of new challenges. This paper argues that the new FCA and the financial services industry can and should work together effectively in partnership to deliver good outcomes to more confident and informed consumers. This requires mutual commitment to working constructively together, recognising the progress that has already been made and avoiding unnecessary public confrontation, particularly when it damages consumer confidence. It is worthwhile for both regulator and regulated to seek to develop and maintain a shared agreement on the key risks and priority areas for improving standards. The UK insurance industry also believes conduct regulation must be firmly placed in its public policy context. Public policy objectives and conduct regulation rules should not be developed in isolation from each other but should be aligned, where possible, with clarity for the benefit of the public whose interests Government, the regulator and the industry ultimately serve. Well regulated markets can play a greater role in meeting Government objectives, for example, encouraging people to save for retirement and allowing businesses to invest in the face of uncertainty, but only if the conduct regulator is part of the process. Effective and proportionate regulation, aligned to Government policy, creates a viable market, attracting providers and capital to the UK and a financial services industry which can provide substantial benefits to the wider economy. The FCA should not operate in isolation from this broader framework, so the Government should amend the Financial Services Bill to require the regulator to play its part in delivering positive outcomes to consumers, society and the economy. This paper sets out six themes for the way ahead in conduct regulation to be taken forward by the FCA, the insurance industry, consumer groups and the Government: Making markets and regulation work to deliver public policy goals A regulator that is in touch with the consumer experience Regulation focused on markets delivering products that meet consumer needs Facilitating effective competition and innovation in financial services Actively shaping the FCA s wider regulatory programme within the EU and the UK Building mutual confidence and respect between the FCA and the industry 13

14 For each theme, we set out an ABI commitment to a positive partnership, to complement the recommendations made to the FCA and the Government. By focusing on these themes, we can together deliver well-functioning financial services markets which are good for both consumers and firms. 1. Making markets and regulation work to deliver public policy goals Consumers are likely to judge financial markets to be working well for them if they can access products and services that serve their needs at key points in their lives. Government will often have an interest in the effective operation of financial markets, so it should provide a strategic steer, to ensure regulation of the sector supports broader public policy objectives. For example, FCA support could help secure the success of important Government initiatives on simple products, workplace pensions reform and the future funding of long-term care, by encouraging firms to invest in developing products and enter the market. We recommend: The Government and the FCA should ensure the regulation of financial markets works with the grain of public policy and with a focus on the interests of consumers and society as a whole. This should include encouraging wider consumer access to, and coverage of, financial products that meet consumer needs. The development of a joint understanding with Government and FCA on the role the financial services industry should play in coming decades to ease burdens that would otherwise be placed on the state in particular in the areas of protection, retirement income, social care and how people can protect themselves and their homes. All parties should take a collaborative approach to delivering good outcomes for consumers. The FCA in consultation with the Government, the industry and consumer groups should develop a set of measurable positive outcomes for consumers and society as a whole, against which the success of the regulatory regime will be held accountable on an annual basis. These should include availability and take-up of key products, competition in key markets, consumer satisfaction, and trust and confidence in the industry and its regulation. Insurers will share market intelligence with FCA to better understand and prioritise consumer need, and address any issues developing that may cause barriers to access or consumer detriment. 2. A regulator that is in touch with the consumer experience The Financial Services Authority (FSA) was remote from mass market consumers, who may only have become aware of it when something went wrong and the regulator was involved in resolving the problem. This is likely to result in consumers having a low level of confidence in regulation new ABI research found that only 7% of people think that the FSA is doing a good job. The FCA will be a better regulator if it has more positive interaction with consumers and develops services that increase their confidence and financial capability. Techniques used by other regulators in the UK and overseas could be adopted by the FCA to better engage consumers. We recommend: 14

15 FCA regulation needs to reflect and understand the diversity of need within the whole society that it serves. It should invest in innovative research, involvement and outreach activities to ensure that it has a rounded understanding of the expectations, behaviour and experience of different groups of consumers. The FCA and the Money Advice Service (MAS) should work closely to deliver commonly agreed, consumer focused initiatives. These might include a major campaign promoting good financial habits and solutions and actively promoting personal financial education in schools. The FCA and firms should explore mechanisms that make it easy for consumers to feedback on financial products and services and to share their experiences with other consumers. The MAS in partnership with the FSA, the industry and consumer groups should consider further development of the MAS financial health check service to allow customers to self-assess whether they are confident consumers, in a good position to make decisions about financial products. Building from the simple products initiative, insurers will assess whether the language and key documents used to describe insurance products are easy for consumers to understand and compare. 3. Regulation focused on markets delivering products that meet consumer needs Financial services regulation in the UK has centred around the sales process with prescriptive rules and redress payments for those who were mis-sold products. Unfortunately, this hasn t stopped products being sold to the wrong people in some parts of the industry. Different consumers will have different needs from simple or starter products through to complex investment products involving multiple options but whatever the level of sophistication, it is vital that financial products are well targeted and meet consumer expectations. Insurers have already strengthened their product governance processes in responding to the FSA s TCF initiative and are developing this further. The ABI sees the logic of the FCA shifting focus some way towards the products themselves, provided that draconian interventions such as product bans or price regulation are avoided. Advisers, brokers and other intermediaries should continue to play a key role in matching the right products with the right people. The ultimate goal should be fostering markets that meet consumer needs. We recommend: The FCA should develop a framework for product interventions which combines product and distribution regulation in a targeted and decisive way. The approach should be flexible enough to accommodate different and changing types of firms, distribution channels, products and consumers. This is important to ensure that insurance markets are flexible and inclusive whilst maintaining consumer protection. The FCA should reaffirm that it is not a price regulator and will not be pre-authorising products or seeking to restrict the choice available on the market. This new approach to conduct regulation should explicitly aim towards developing competitive markets and confident consumers, that will in time provide an opportunity to scale back on prescriptive regulation 15

16 ABI will lead a quarterly review with FCA of progress in addressing risks identified in the Retail Conduct Risk Outlook and identify any other emerging conduct issues. 4. Facilitating effective competition and innovation in financial services The FCA will have a new objective to promote competition, which should lead it to scrutinise how markets work rather than looking at problems only at firm level. This includes analysis of key competition issues, such as consumer information, barriers to switching, innovation and the changing nature of markets. The clear focus should be on making competitive forces work in the consumer interest. We recommend: The FCA should develop a rigorous framework for market analysis and will need to appoint staff with relevant skills and expertise in competition policy. It should then take on the lead role in the pursuit of competition in financial services, which will require a new relationship with the Office of Fair Trading (OFT) and its successor body, the Competition and Markets Authority. The FCA monitors the impact of major changes in market dynamics and consumer behaviour, such as the role of comparison websites and the expansion of social media, upon competition in insurance markets. The FCA should work with the industry and consumer groups to agree common principles on types of innovation which add value for consumers and ensure that its regulatory framework is fostering positive innovation. Insurers will work with FCA to develop shared understanding of trends in consumer behaviour and market dynamics including the impact of insurance on the economy and society. 5. Actively shaping the FCA s wider regulatory programme within the EU and the UK The EU is taking on a much larger and more strategic role in conduct regulation. The FCA will need to anticipate and address challenges that might arise from different EU approaches, for example, on the appropriate balance between product intervention and regulating the sales process. The FCA will also need to establish positive, productive and transparent working relationships with EU regulators and other key bodies in the UK. We recommend: The FCA should set out its strategy for the future of EU retail conduct regulation, including seeking to maintain regulations that work well for UK consumers and the industry (e.g. the Retail Distribution Review) while ensuring that UK and EU initiatives are well aligned. High priority and additional resource should be given by the FCA to shaping EU regulatory policy and approaches, working constructively with the Government, the industry and consumer groups. For example, we urge the new Joint Committee, which has been established to coordinate the international activities of Government and financial services regulators, to actively involve industry and consumer groups in its work. All levels of the FCA should pursue effective and efficient coordination between each of the decision-makers shaping the financial services sector (including the Prudential 16

17 Regulation Authority, the Financial Ombudsman Service (FOS), the OFT and The Pensions Regulator) to ensure coherent regulation in the consumer interest. The industry, the FOS and the FSA should work together better, including working to the common goal of avoiding future mass volume complaints episodes such as PPI. Insurers will proactively share knowledge/experience of EU and international markets and regulation with FCA. 6. Building mutual confidence and respect between the FCA and the industry Good conduct regulation requires regular, senior level dialogue between the FCA and the industry to ensure that markets are functioning well and consumers are treated fairly. The shift to judgement-based regulation will require high quality supervision and proper checks and balances. The FCA should see its role as challenging the industry to increase public trust and customer confidence but also constructively supporting firms which have made progress and are taking further steps in the right direction. The industry will need to adapt too, with senior executives giving higher priority to managing conduct risks and working proactively with the regulator to address problems before they become systemic. We recommend: Keeping a clear focus on the long-term interests of consumers, all parts of the industry should make and deliver on commitments to a more proactive style of engagement with the regulator. The ABI Board has made six commitments to a positive partnership with the FCA. Senior executives of firms and trade associations should be willing and able to have regular open communications with the senior management of FCA about emerging market and conduct issues. Attentions need to be focused on the strategic, so the FCA senior management should set clear risk-based priorities and ensure its supervisory and policy teams do not tie up industry and FCA resources in relatively minor issues. Clarity is also need on the supervisory strategy, to establish the right balance between firm specific, relationship based supervision and the role and use of thematic tools. The FCA should build on the early work of its supervisory teams to develop understanding of the industry; how it works, what it can offer and how it can serve consumers needs. This will complement its efforts to improve its understanding of consumer expectations and experiences. The FCA should establish transparent processes to allow firms to challenge the judgements of supervisors and to ensure a consistent approach across all firms within the market and over time. The industry, the FCA and consumer groups should adopt a can do attitude in seeking improvements in products and practices. For example, they should work together to agree standardised and engaging key information for consumers about retail investments, covering both the risks and benefits of investing. Insurers will maintain commitment to the strengths of the current regulatory regime including TCF and further develop it to address the FCA s new conduct agenda with a clear focus on consumer outcomes. 17