Splitting up the UK’s Financial Services Authority, and an intensifying focus on financial stability, doesn’t mean that regulators are forgetting about consumer protection, says the FSA’s chair, Lord Adair Turner.

Speaking to the British Bankers’ Association conference on Tuesday, Turner noted that the scrapping of the FSA and the division of its prudential and conduct regulatory responsibilities represents a big operational challenge.

“But once the new structure is in place, one of its benefits will be that we will then have people focused on firms’ conduct, even when the rest of the world cares only about financial stability, and people focused on prudential regulation, even when the rest of the world thinks that banks can never go bankrupt,” he said.

Indeed, the planned creation of the Consumer Protection and Markets Authority doesn’t mean that the plan to scrap retail commissions in the UK will be falling by the wayside either. He reiterated that the FSA’s plan to scrap sales commissions by 2013 means, “consumers will know that an independent adviser is not being paid by producer commissions, and therefore not incentivised to recommend a particular product or provider, and will have to meet higher standards of training and product knowledge.”

Additionally, the FSA today announced new consumer protection measures for the UK mortgage market, which Turner says amounts “to a major shift in our willingness to intervene in the free market relationships”.

This shift also reflects a wider shift in the regulator’s overall philosophy, he said, which was foreshadowed in the introduction of a new consumer protection strategy earlier this year.

“We signalled there that we were not happy with the pattern of the past — with the FSA responding after the fact to waves of large scale customer detriment — but that we now plan instead to get more closely involved at an earlier stage, to identify products with the potential for customer detriment before the complaints start to flood through to the [ombudservice], and to intervene to prevent their inappropriate sale.”

This new approach involves a more pre-emptive and intrusive approach to supervision, Turner stressed. The new approach will include: greater effort at analyzing market trends to identify potential consumer risks; examining firms’ business models to understand the drivers of profitability and the impact of reward structures to assess whether sales incentives are well-designed; and looking at firms’ product development and approval processes.

“Where we find incentives, structures or products that are likely to lead to poor customer outcomes, we will take tough action, including using our enforcement powers, to ensure that customers are protected,” he said.

Turner allowed that this major shift in philosophy carries risks of its own, including inappropriately restricting consumer choice, and imposing disproportionate regulatory costs. “We need to strike a balance, and to get that balance right, we need to debate it openly and explicitly,” he said. “We need to debate the balance between at least four factors: the regulation and supervision of firms, consumer responsibility, consumer capability, and the role of the state.”

He stressed that while regulation can make markets fairer for consumers, it can’t ensure perfect customer results, and it must remember that intense supervision imposes costs which consumers themselves ultimately bear.

“The very words ‘consumer protection’ indeed raise issues about what precisely we mean; they cannot mean that consumers will be protected from everything which might go wrong. But they clearly mean more than fair disclosure of terms. Should they, however, imply bans on specific products as inherently undesirable, or interventions driven solely by identification of apparently excessive profit margins, even if no other indicators of poor practice are present?” he asked.

“The establishment of the CPMA focused on consumer protection gives us a major opportunity to debate these choices,” Turner concluded. “And once the CPMA is established, there will be a continued need to strike a trade-off between different desirable objectives – between consumer responsibility and choice versus customer protection.”

http://www.fsa.gov.uk/