UK’s FSA lacks business know-how says finance industry

LONDON (Reuters): Britain’s financial watchdog does not fully understand some firms it supervises, imposing rules whose costs end up being passed on to customers, industry officials said on Tuesday.

Britain is scrapping the Financial Services Authority from early 2013, replacing it with a standalone Financial Conduct Authority (FCA) with powers to issue warnings and ban products. The aim is to end a string of mis-selling scandals over the past two decades that have forced financial firms to pay 15 billion pounds ($24 billion) in compensation to “ripped-off” consumers, FSA Chairman Adair Turner said last week.

Paul Killick, senior executive officer at broker Killick & Co, told the UK parliament’s treasury committee on Tuesday that the regulator was taking a high-level view without understanding business models of firms it supervises.

“We are all being shoe-horned into a one-size fits all regime,” Killick said. Philip Warland, head of public policy at Fidelity, one of the world’s biggest investment managers, said in a two-decade career he could only think of one person at the FSA who had business experience from the asset management industry.

“The biggest thing we suffer from is they do not understand our business model and throw a whole series of regulation at us which are irrelevant and add to cost,” Warland said.

Fidelity’s cost of capital has gone up 10 times in the past three years with internal compliance costs rocketing, helping to push down the savings ratio, he said.

The committee is holding hearings on the regulatory shake-up as parliament approves a draft law to implement the change. The FSA, which declined to comment on Tuesday’s proceedings, will appear at a future hearing.

A separate new prudential regulation authority (PRA) will be set up at Bank of England with powers to veto the FCA.

But Killick said the FCA should be clearly be more junior to the PRA to avoid an overlap in rules.

“There is going to be some turf war between what is prudential and what is conduct of business. There has to be some sense of having a superior regulator,” Killick said.

Requiring the non-executive directors of the FCA to appear before lawmakers would also “raise the anti a bit” in making it more accountable, Warland said.

Angus Eaton, operational and regulatory risk director at insurer Aviva , called for one set of compliance rules.

“Double regulation could drive costs to consumers... Ultimately it’s only the consumer who can pay,” Eaton said.

The FSA wants the FCA to have powers to intervene when products are being designed so that it can require changes.

It is already taking a tougher line and on Tuesday fined Swiss bank Credit Suisse $9.5 million for failing to control which type of customer could buy its complex structured capital at risk products.

The regulator wants to issue “health warnings” on products it is investigating and even require their withdrawal -- areas where the new authority does not have the skills, Warland said.

“They are beginning to understand that they don’t understand,” Warland added.

The product intervention moves by the UK regulator chime with broader plans in the European Union to better protect consumers so they are encouraged to save more for pensions.

But warnings could undermine the reputation of the broader financial industry if used in an unfettered way and should be approved by a tribunal before being issued, Eaton said.