One of the most important regulatory events this year was the announcement by Ruth Kelly MP, financial secretary to the Treasury, of the detail of the N2+2 review. N2, the date on which the FSA received its formal powers, fell on November 30, 2001. Two years on, I believe it is appropriate for the government to examine how this environment-changing piece of legislation is working.
I welcome the proposed investigation by the Office of Fair Trading into the impact of the Financial Services and Markets Act. I hope it looks at the impact of regulations made under the FSMA on smaller institutions. Often it is smaller institutions like local and regional building societies that add vitality and innovation to a market while remaining more in touch with their customers than some large organisations. It would be a tragedy if regulation designed to protect customers destroyed some of the choice they currently enjoy.
The BSA is pleased that the financial secretary has included the FOS in the review. We believe an effective Ombudsman is an essential tool. We support the points made by Kelly – that she would not favour changes which undermined the independence of the Ombudsman and that she would not support any change which meant the Ombudsman was no longer free to consumers, nor would she support any change that required the Ombudsman to determine cases other than on their merits.
We are pleased, however, that she is suggesting the operation of the Ombudsman service be examined in two areas. Firstly she says there should a review of the circumstances in which the FSA takes regulatory action instead of individual cases being determined by the FOS. Secondly Kelly considers it appropriate to examine whether Ombudsman decisions should be subject to some form of appeal in specific circumstances.
When the FSA introduces regulation it is obliged to consult, to consider the results of the consultation, to publish feedback and to undertake a cost benefit analysis. If the FSA finds a firm guilty of breeching its rules there is a mechanism by which firms can appeal – the Financial Services and Markets Tribunal – entirely independent of the FSA.
The position with the FOS is different. Through its decisions on individual cases it is able to create case law which has, in areas such as interest rate setting on both the savings and the mortgage sides of building society business, the same impact as FSA regulation. Yet for the FOS there is no consultation on the principles used to reach these decisions, there is no feedback, there is no cost benefit analysis and no right of appeal. In the parliamentary debates which led to the creation of the FSA there was concern about the accountability of the regulator. Ministers were keen to create a series of checks and balances to prevent overbearing power being concentrated in too few hands. That has been achieved with the FSA but not with the FOS and we need to take advantage of the review to put this right. We must move to a situation in which we have the same consultation and accountability mechanisms for what has become an alternative regulatory mechanism which can have the same impact on financial firms' operations as can the main regulator.
I would not object if, after the review, we ended up in the same position we are in now. If, following proper consultation, feedback and analysis, the same outcome is reached on, for example, dual mortgage rates or Tessa and ISA savings rates as does now, so be it. But at least we will have had the opportunity to talk about the framing of the rules and have our concerns listened to.
I would also like to say a word about the appeals mechanism the BSA has in mind. Firstly, this would be a limited mechanism. An FOS decision on a simple case of maladministration where a firm had made a mess of things would not be appealable. Major decisions which have huge potential regulatory impact would be. Having said that, the BSA envisages a system in which any decision on an individual complaint would stand. There would be no question of the consumer having to go through an appeals process. Rather it would be open to a firm to contest the point of principle created by the individual case so that the wider implications of the decision could be examined outside the context of the case itself.
We all need to think through these issues carefully and the BSA is happy to consider other approaches to achieve the right outcome. We will therefore be energetic participants in the debate started by the financial secretary.