Effective, not more, regulation is paramount. Good regulation promotes consumer confidence and efficient markets. Ineffective regulation fails to protect consumers and undermines confidence, increases distribution costs and distorts competition.
To be fair to the financial services industry, part of the blame for short-termism that has hampered the capacity of the industry to provide long term sustainable solutions for consumers must be laid at the door of the regulators and the financial system itself. Regulators have tinkered with the retail distribution system and until now have been afraid to directly address the conflicts of interest caused by commission bias and aggressive remuneration.
Moreover, the financial system at the moment does not sufficiently reward firms that try to offer long term added value. The blame here lies with institutional shareholders, fund managers, and investment analysts who display an amazing lack of insight into how retail financial markets work. These powerful agents in the market have not undertaken due diligence in the past to understand the reputational damage caused by misselling and failed to understand that the current commission based system is undermining the long term financial viability of the industry as it simply results in churning rather than real growth in new business. The behaviour of investment analysts and institutional investors means that most insurers have not been able to move away from the self-defeating distribution models that still prevail today.
We are very pessimistic about the likelihood of the market ‘self-correcting’. Further interventions, not just by regulators, are needed to create the necessary conditions that reward consumer focused behaviour and penalise detrimental behaviour.
In terms of regulation, the FSA, therefore, needs to focus its efforts on two key objectives:
- changing the market dynamics along the entire supply chain, not just at the point of sale, to promote effective competition; and
- regulating more effectively the way the industry conducts business and the all important relationships and conflicts of interest between providers, distributors, and end-users, Critically, the FSA has to become a more effective enforcer of regulation.
We have developed a blueprint for better regulation consisting of:
- a small number of core, high level principles and targeted rules that set minimum standards and focus on the root causes of consumer detriment;
- tougher more transparent regulatory enforcement;
- a major streamlining of the regulatory rule book; plus
- the creation of standards boards to provide guidance on principles based regulation and some clarity of what treating customers fairly means in practice.
We are confident that our blueprint for regulation would lead to a more efficient regulatory regime, more competitive markets and better consumer protection standards.