Financial Services Authority - Criticisms

Criticisms

The FSA rarely takes on wider implication cases. For example, thousands of consumers have complained to the Financial Ombudsman Service about payment protection insurance (PPI) and bank charges. However, despite determining that there was a problem in the selling of PPI, the FSA has taken effective action against very few firms in the case of PPI and it was the Office of Fair Trading (OFT) that finally took on the wider implications role in the case of bank charges. The FSA and the FOS have staff placed within their co-organisation in order to advise on wider implication issues. It is surprising, therefore, that so little action has taken place.

The FSA in an internal report into the handling of the collapse in confidence of customers of the Northern Rock Plc describe themselves as inadequate. It is reported that in order to prevent such a situation occurring again, the FSA is considering allowing a bank to delay revealing to the public when it gets into financial difficulties.

The FSA was criticised in the final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society. It is widely reported that the long awaited Parliamentary Ombudsman's investigation into the government's handling of Equitable Life is equally scathing of the FSA's handling of this case

The FSA ignored warning signals from Northern Rock building society and continued to allow the bank to operate without a risk mitigation programme for months before the bank's collapse.

The FSA has been criticised by some within the IFA community for increasing fees charged to firms and for the perceived retroactive application of current standards to historic business practices.

The perceived lack of action by the FSA in many cases, and allegations of regulatory capture has led to it being nicknamed the Fundamentally Supine Authority by Private Eye magazine.

The FSA is not legally able to circumvent statute yet hides behind secret legal opinion regarding its summary removal of practitioners legal rights in respect of their ability to use a longstop defence against stale claims.

FSA regulation is also often regarded as reactive rather than proactive. In 2004-05 the FSA was actively involved in crackdowns against financial advice firms who were involved in the selling of split-cap investment trusts and precipice bonds, with some success in restoring public confidence.. However, despite heavily criticising split-cap investment trusts, in 2007 it suddenly abandoned its investigation. Where it has been rather poorer in its remit is in actively identifying and investigating possible future issues of concern, and addressing them accordingly.

There have also been some questions raised about the competence of FSA staff.

The composition of the FSA board appears to consist mainly of representatives of the financial services industry and career civil servants. There are no representatives of consumer groups. As the FSA was created as a result of criticism of the self-regulating nature of the financial services industry, having an independent authority staffed mainly by members of the same industry could be perceived as not providing any further advantage to consumers.

Although one of the prime responsibilities of the FSA is to protect consumers, The FSA has been active in trying to ensure companies' anonymity when they have been involved in misselling activity, preferring to side with the companies that have been found guilty rather than consumers.

This is most obviously seen in the case known as the LAUTRO 19, where the FSA identified 19 insurers which had breached their contractual warranties by using incorrect charges to calculate the premiums for mortgage endowment policies. This miscalculation led to massive consumer detriment as well as vast and unquantifiable costs for the advisers who unwittingly sold these products. The FSA has steadfastly refused to publicly name the miscreant companies and has spent £100,000s on legal fees to baulk the efforts of the Information Commissioner who had concluded that naming the companies would be in the public interest.

It was announced in November 2008, that despite self-acknowledged failures by the FSA in effectively regulating the financial services industry, FSA staff would receive bonuses. On 31 May 2008, The Times confirmed that FSA staff had received £20m in bonuses for 2008/09, a 40% increase on the previous year.

On 11 February 2009, FSA deputy chairman, Sir James Crosby resigned after it was revealed that he had fired a whistleblower, Paul Moore, who had warned of dangerous lending practices at HBOS when he had been in charge of risk regulation.

Lord Adair Turner, current FSA chairman defended the actions of the regulator on the BBC's Andrew Marr show on 13 February 2009. His comments were that other regulatory bodies throughout the world, which had a variety of different structures and which are perceived either as heavy touch or light touch also failed to predict the economic collapse. In line with the other regulators, the FSA had failed intellectually by focusing too much on processes and procedures rather than looking at the bigger economic picture. In response as to why Sir James Crosby had been appointed deputy chairman when his bank HBOS had been highlighted by the FSA as using risky lending practises, Lord Turner said that they had files on almost every financial institution indicating a degree of risk.

Turner faced further criticism from the Treasury Select Committee on 25 February 2009, especially over failures to spot or act on reckless lending by banks before the crisis of 2008 occurred. He attributed much of the blame on the politicians at the time for pressuring the FSA into "light touch" regulation.

On 17 April 2009, a whistleblower (former FSA employee) alleged that the FSA had turned a blind eye to the explosion in purchases of whole sale loans taken on by various UK building societies from 2005 onwards. The FSA has denied the claims - "This is not whistleblowing, it is green ink" a spokesman said. "The allegations are a farrago of lies, distortions and half truths made by an obviously disgruntled former employee who clearly has an axe to grind. It does not paint a realistic picture of our supervision of building societies."

On 18 August 2012, the Treasury Select Committee criticised the FSA for its poor enforcement of the LIBOR rate setting rules.