Sights firmly set
MORTGAGE SOLUTIONS - 17TH DECEMBER 2007
The FSA is beginning to target individuals in breach of payment protection insurance rules – Simon Burgess hopes it increases this practice.
Establishing clear lines of responsibility and accountability has been one of the ways in which the FSA has sought to regulate the financial markets it oversees. However, it is not only at a corporate level that this responsibility bites, but also at a personal level. In the UK, one need only look at the case against the directors of the collapsed Independent Insurance to see how important it is for corporate management to get things right.
It is no longer possible for senior executives to insulate themselves against personal reprisals for mis-guided or non-compliant management, and increasingly the regulator is holding individuals to account.
In the mortgage-related markets, the FSA took the unprecedented step in September of fining the chief executive of Hadenglen Home Finance for the firm’s inadequate systems and controls when recommending remortgages and payment protection insurance to its clients.
Chief executive Richard Hayes was handed a fine of £49,000, while the firm itself was left with a bill for £133,000. the fine received by Mr Hayes will have to be met out of his own pocket, as professional indemnity insurance will not cover such regulatory penalties.
The move represents a shift in the way the FSA has so far chosen to deal with problems in this area of the market. It is now clear that approved persons and those heading up organisations can no longer duck out when things get tricky.
Despite the results of numerous investigations into payment protection insurance, there has been little significant change when it comes to selling practices and product design. Of course, there are a number of firms who have improved the way they are doing business and the product they offer clients, but many have simply sat back and continued to spin gold out of the tired straw of their poor value insurance and badly managed practices.
This is not hugely surprising, seeing how tightly stretched the FSA’s resources are. Monitoring every firm in the market is a difficult if not impossible job, and even the very largest underwriters and distributors have been slow to clamp down and really push their focus towards best advice and good value for clients.
Because it is so difficult for the FSA to oversee each and every one of the firms under its remit, finding the right way to motivate and drive them towards compliance is therefore imperative. This is why the move to hold executives personally responsibly is so important. It may be the case that the first two or three who are fined can deal with the penalty without it causing too many problems. However, this will change.
The FSA has clearly stated its intention to put a much bigger sting in the tail of forthcoming fines as it becomes tired of firms ignoring its guidelines, principles and authority. Once individuals start getting hit to the boundary for hundreds of thousands of pounds, all of a sudden, the senior management of other poorly performing companies are going to get a little hot under the collar.
Thematic review
The key to success for the regulator is to ensure it takes swift and strict action against a number of firms in the coming months. If it fails to hand down increasingly severe punishments to others in this area, we will unfortunately be back to square one. Certainly, the FSA cannot say there is no-one deserving of such action, given the number of enforcement actions it has already said are waiting in the pipeline.
In fact, the latest thematic review of the payment protection insurance market found that somewhere in the region of two-thirds of payment protection insurance sellers were not ICOB compliant, and so there are clearly plenty of targets against whom the FSA can turn its attention.
Like a puppeteer, the FSA is beginning to better understand which strings generate the improvements it wants to see from market practitioners. It is also beginning to get a better understanding of the mortgage and payment protection insurance markets and their nuances, and as such a better understanding of how the rules it has can be used to best effect. Combining these two factors should create a much more effective regulatory environment. However, not only should the FSA look to take on executives at a personal level, but it should also be looking to put its treating customers fairly (TCF) principles to best use.
These principles have a very important role to play when it comes to making sure consumer get the right sort of protection during the sales process, but they can also be sued to ensure the products sold in the first place match what the buyers, rather than sellers, need.
Ensuring firms treat customers fairly is all part and parcel of making them take responsibility for their actions and front up to their obligations. The wider the net can be spread when it comes to TCF, the better the outcome for consumers, and so pushing it into the area of product design is another positive step from the regulator.
There can now be no excuse for non-compliance. Time, advice, guidance and patience have been forthcoming. It is unlikely there will be any sort of dramatic improvement immediately, but when in two or three years we look back to this moment it will hopefully be clear to see this was the starting point of a genuinely better performing market.
Only by consistently punishing poor performance at a corporate and personal level are we likely to get the result we want and so desperately need.
Simon Burgess is managing director of British Insurance.
