Old bill, new bill: how to protect yourself if regulators let you down

The government is changing the way financial services are policed. No one knows if the reforms are going to work, so it is down to you to protect yourself.

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by Gavin Lumsden on Jul 26, 2010 at 15:44

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The government is changing the way financial services are policed. No one knows if the reforms are going to work, so it is down to you to protect yourself.

Please join our forum debate: 'will a new regulator prevent another Equitable or Keydata?' when you have read this article.

What has happened?

The government has revealed more details of how it intends to improve the regulation of financial services in the wake of the credit crunch and the banking crisis.

There are some good ideas in the proposals from Mark Hoban (above), financial secretary to the Treasury, but there are doubts as to whether it will really work.

As previously announced by the chancellor George Osborne (below) the government is abolishing the existing regulator, the Financial Services Authority, and replacing it with two new bodies:

the Consumer Protection and Markets Authority;
the Prudential Regulatory Authority.

Both will report to a powerful new Financial Policy Committee at the Bank of England. This will meet quarterly and produce a bi-annual report highlighting issues and dangers.

Why is it doing this?

The government believes the Bank of England is the right body to oversee the new organisations and ensure nothing is missed.

The previous 'tripartite' arrangement between the Treasury, the Bank and the FSA failed because it left too many things falling through the gaps between the three institutions. For example, the FSA was too busy ensuring firms under its watch complied with thousands of small rules and did not see - or was not informed by the Bank - of the huge risks building up in the banking sector as they over lent to consumers and businesses and bought up toxic, sub-prime loans.

Will it work?

That is the million dollar question. Ironically, the FSA has become far more effective since the financial crisis - no doubt in a desperate bid to salvage its reputation and avoid abolition. It has prosecuted more individuals and fined more firms for wrongdoings than ever before.

However, ultimately, as Hoban acknowledged, the new system will only work better if the crooks are chased and bad managements challenged more than they were in the past.

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4 comments so far. Why not have your say?

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The principle of caveat emptor still applies - to the extent that consumers must take responsibility for their own informed decisions.

The point about the regulation is to ensure their decisions ARE informed, not that somebody else should bail them out if they prove, with hindsight, to be wrong.

That means you are unlikely to recover any losses resulting from a risk the adviser told you about - or you were given details of in a document you didn't bother to read.

So make sure you do read and ask questions before deciding to invest.

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The irony is that the more small print ,ass covering information put in by the industry to meet bureaucratic demand by the regulator to tick the box, so the average under 30 somethings felt more and more that they didn't need to read it! The Nanny State is doing the same thing for every walk of life.

The FSA, like any social support function when it does make a decision, it invariably backgires with unintended consequences and its the small shareholders who suffer yet have no control; over the 'misdemeanour' behind the fine.

When the FSA did stick its nose in to beat the providers over endowments, the arbitrary deadline of April 88 before which the FSA offered no recompense meant that more 'smoothed' profits were used up to compensate post April investors and less money was available to pre April investors who as a result were hung out to dry!

Long live caveat emptor and the only regulation really needed is a good education system. Fat chance!

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George Tomlinson

Jul 29, 2010 at 16:39

At the time we became clients of Equitable Life that firm stood at the peak of the industry. The problem that any future government faces is how to prevent rogue executives from ruining their firms in their reckless pursuit of profit. Until some form of penalty can be devised which cost these high flying idiots their own and their families money nothing will change.Do not tell me that ELs actuaries advised that company bosses to do what they did.I am sure that professionals of their calibre warned clearly of the dangers only to be told to shut up as they were only employees and the directors are there to make the mistakes.

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