The FSA is doomed, but its principal officers are jumping ship rather than waiting to board the new Prudential Regulation Authority. Will those that remain be distracted from crucial issues like Solvency II, or will the wounded watchdog put personal pain into its bite?
The past month has seen the FSA plunged into turmoil. Just over three weeks ago, chancellor George Osborne announced that the regulator was, after all, due to be abolished.
At the same time, he revealed that he had persuaded FSA chief executive Hector Sants to stay on to oversee the transition to the new regulatory system. This move was meant to provide stability, but while Sants may be staying, his key lieutenants are queuing up to leave.
First to join the line was managing director of risk Sally Dewar, who announced in the run-up to Osborne’s Mansion House speech that she would leave in May next year.
Then Dewar’s opposite number on the supervision side of the FSA, Jon Pain, announced last Tuesday that he, too, would depart next year. Pain’s announcement followed the appointment of Bank of England official Andrew Bailey as Sants’ number two within the shadow Prudential Regulation Authority – a job the FSA man might have reasonably expected.
Two days later, the regulator’s chief operating officer, Mark Norris, said he was also on his way, with immediate effect.
Meanwhile, recent comments by both Sants and FSA chairman Lord Turner show that Osborne’s announcement has rankled the senior levels of the Canary Wharf-based regulator.
Law firm Beachcroft financial services partner Matthew Rutter says: “When George Osborne announced that Hector Sants would be staying to oversee the transition, there was relief that fears of the disruption that a transition would cause were misplaced.
“When Jon Pain announced that he was not staying, those concerns returned. People at the FSA feel there is a lot of uncertainty. If you have lots of senior people leaving, it makes it harder for the FSA to operate. There’s a snowball effect when people want to leave: it creates momentum and makes it harder to recruit.”
Pinsent Masons regulatory partner Bruno Geiringer points out that job opportunities are opening up again in financial services. “Anybody who has regulatory experience would be extremely valuable,” he says.
Director of public affairs consultancy Lansons Communications, Richard Hobbs, describes the mood inside the FSA’s Canary Wharf HQ as mixed.
“There are those who are a little crestfallen at the idea that they are employed by something that is perceived as a failing organisation, but the more rational have worked out that there will be more jobs and by implication more senior jobs.
“There will be many senior positions in the new organisations. Although the Prudential Regulation Authority’s top two jobs are booked, there are lots of others that are not, and the Consumer Protection and Markets Authority will be quite a big body.”
Even if people are staying, a focus on organisational upheaval rather than the job in hand inevitably causes problems.
Geiringer says: “The risk is that the senior management team is diverted to managing the transformation, while everyone else will be diverted to looking after their own career.
“People within the FSA will naturally and understandably be distracted from the task. Senior management will try to stop that happening, but the fact is that the senior management team has decided to leave.”
Rutter expresses concern that, on areas of vital concerns to the industry, like the Solvency II directive, the FSA will be distracted from high-level discussions in Europe. “There is a danger that things happen without proper engagement by the UK.”
Of course, in the light of the outrage over this year’s fee hikes, many in the insurance industry would welcome the FSA being distracted.
However, a wounded watchdog may not necessarily be an easier beast to deal with. Businesses should not assume that they will be treated any differently during the interregnum, counsels Geiringer. “[The FSA] should not be seen as a soft touch.”
Some insiders may want to capitalise on the anti-financial services zeitgeist. Geiringer adds: “There will be people who will want to make a name for themselves by taking on tasks.”
PricewaterhouseCoopers director David Kenmir, who was Norris’s predecessor as FSA chief operating officer, believes that the watchdog’s rules and regulations should guard against the risk of grandstanding by individuals. “[The FSA] has rules and procedures for all the decisions that it follows,” he says.
In spite of the recent upheavals, an FSA spokesman insists that it is business as usual, adding that areas like the preparations for Solvency II will continue to be big areas of focus for the regulator. He says: “We are going to continue to do what we set out in our business plan. We’re not going to stop.” IT
Brokers hit out at higher fees
The FSA may be set for the knacker’s yard, but many brokers still fear they are heading in the same direction, thanks to this year’s fees and levy hike from the embattled regulator.
Over the past week, Insurance Times has been inundated with letters from irate brokers who have just received their FSA demands.
The main complaint is changes to the Financial Services Compensation Scheme, as a result of which general insurance brokers will have to pay a total of £61.4m – an increase of nearly eight times on the £8.5m they were asked to pay in 2009/10. The increase is partly due to compensation payments to those mis-sold payment protection insurance.
The financial pain has been compounded for small brokers by a more than doubling of the minimum FSA fee from £450 to £1,000. The levy brokers must pay to the Financial Ombudsman Services is up too.
Geoff Hunt, partner at high street outfit David G Rickard & Co, reports that his Middlesex-based firm faces a demand for £1,730 – nearly three times the £601 it paid last year. “With increases like these, the UK won’t have small general brokers at all in the future,” he writes.
Manchester-based Peter Hattersley & Partners’ fees are up 93%, according to managing director Jullian Shawcross. He writes: “This is wholly unfair. The vast majority of the insurance broking community has never been involved in such products. The legacy has been fuelled by other vendors, such as banks and retailers, and we are picking up the bill for their actions. It is an absolute shambles. This firm is no more a bank than it is a grocer.”
All change for regulation
The Prudential Regulation Authority, a subsidiary of the Bank of England, will take over prudential regulation of financial services companies.
The Consumer Protection and Markets Authority will regulate the conduct of every financial service business. It will oversee the Financial Ombudsman Service, the Financial Services Compensation Scheme and the new Consumer Financial
Education Body. A new economic crimes unit will take over fighting white collar fraud.
The FSA says that the organisation is now looking at how it can reoganise itself in line with the proposed new structures.
A spokesman says: “We are starting to think how the split will work in practice. We have to think about the practical implications. By the autumn, we will have a better idea.”