The head of Britain’s Financial Services Authority says that regulators must be more proactive to truly protect consumers.

Speaking at the annual Lubbock Lecture at Oxford University’s Saïd Business School, the FSA’s chief executive, Hector Sants, set out to launch the FSA’s new approach to conduct regulation. “Now that the prudential reform agenda is well under way, we are turning our attention to reforming our approach to conduct,” he said.

As with its approach to prudential regulation, historically, the FSA’s approach to conduct was “essentially reactive,” Sants said. “Too often, it focused on high-level systems and controls analysis merely reacting to crystallised risk and consumer detriment. It also focused… on disclosure, sales processes and suitability. Both elements thus avoiding product and price regulation.”

“There are significant limitations to this approach,” he said. “Critical among these was the inability to spot and prevent major risks from crystallising, resulting in damage to consumer and market confidence and ultimately consumer harm.”

And, he noted that regulatory interventions have not been enough to deter firms. “Even though in these situations we have delivered redress, firms have continued to make substantial profits from exploiting market failures. Fines and past business reviews are proven not to be a sufficient deterrent,” he observed. “Essentially, our focus has been too late in the product lifecycle to ensure that we identify potential issues early enough to prevent consumer detriment.”

Over the past few years the FSA has made efforts to beef up consumer protection, but Sants conceded that these have yet to deliver substantial benefits to consumers.

“Our new conduct model seeks to take a dramatically different approach,” he stressed. “We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs.”

“A regulator must be willing to place themselves between consumers and harm. We will only achieve this by taking a proactive stance,” he said.

To do this, the FSA will try to identify sources of risk earlier; intervene earlier when it finds an issue; and to scrutinize products at the design stage. It will also intervene, if necessary, to change incentives throughout the market, he said.

These changes tie in with the FSA’s announcement on Thursday of the creation of a new consumer protection committee in co-operation with other U.K. authorities. Sants also promised more efforts, such as mystery shopping, to identify possible problems.

Finally, Sants said that the FSA will also improve redress to consumers, including a review of the complaint-handling standards of all the major banking groups, and tougher enforcement.

IE