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Enforcement Conference Credible deterrence: Here to stay

Enforcement Conference Credible deterrence: Here to stay. Monday 2 July 2012. Welcome and introduction Zitah McMillan Communications Director Financial Services Authority.

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Enforcement Conference Credible deterrence: Here to stay

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  1. Enforcement Conference Credible deterrence: Here to stay Monday 2 July 2012

  2. Welcome and introductionZitah McMillanCommunications DirectorFinancial Services Authority

  3. Keynote speech:The FCA – our vision for EnforcementMartin WheatleyChief Executive DesignateFinancial Conduct Authority

  4. Credible deterrence: Here to stayTracey McDermottActing Director, Enforcement and Financial CrimeFinancial Services Authority

  5. Panel session: Early interventionClive Adamson, Director, Supervision, FSATom Spender, Head of Department (Retail), Enforcement, FSADaniel Thornton, Head of Department (Legal), Enforcement, FSA

  6. Our supervisory approach and early intervention strategyClive AdamsonDirector, SupervisionFinancial Services Authority

  7. Tools for early interventionDaniel ThorntonHead of Department (Legal), EnforcementFinancial Services Authority

  8. Variation of Permission & Requirements • Variation or cancellation of permission on initiative of regulator (e.g. removal of a regulated activity) • Imposition of requirements on initiative of regulator • Powers exercisable when: • Firm failing or likely to fail to satisfy the threshold conditions • Desirable in order to advance FCA operational objectives (protection of consumers, integrity or competition) or PRA objectives

  9. Variation of Permission & Requirements • FCA operational objectives: • securing an appropriate degree of protection for consumers • promoting and enhancing the integrity of the UK financial system • Promoting effective competition in the interests of consumers in the markets for regulated financial services

  10. Variation of Permission & Requirements • Requirements may require specified action, refraining from taking specified action • Requirements may extend to activities which are not regulated activities • A requirement may refer to past conduct (eg by requiring review or take remedial action in respect of past conduct) • Requirement can have immediate effect • Matter may be referred to the Tribunal and/or representations made to the regulator

  11. Financial Promotions direction power • Power exercisable when an authorised person has made or proposes to make a communication or has approved or proposes to approve another person’s communication; and • FCA considers that there has been or is likely to be a contravention of financial promotion rules in respect of the communication or approval • A direction may require the authorised person: • To withdraw the communication or approval • Retrain from making the communication or giving the approval • To publish the direction • To do anything else specified in the direction in relation to the communication or approval

  12. Financial Promotions direction power • Power has immediate effect apart from publication of direction (which follows representations) • FCA must publish such details as it considers appropriate following representations (even if direction revoked) • Right to refer to Tribunal only following representations to FCA

  13. Product Intervention rules • A rule making power, not an enforcement power as such • Rules may prohibit the entering into of specified agreements or only once certain requirements have been satisfied • Duty to consult unless temporary rules are necessary on an immediate basis (and these can be in force for up to 12 months) • Rules may be made if desirable to advance FCA’s consumer protection or competition objective • Judicial review only route of challenge

  14. Injunctions • Power to obtain court injunctions – no change from existing powers • Can be used not just against authorised firms but those engaged in breaches of the perimeter and those committing market abuse

  15. Challenges to interventions • Exercise of early intervention powers likely to depend on regulator’s judgment and incomplete evidence • Tribunal challenges – for variations of permission, requirements and financial promotions direction, Tribunal’s jurisdiction changed • For disciplinary references, Tribunal to decide what action the regulator should take

  16. Challenges to interventions • In other cases, Tribunal to either dismiss reference or remit to regulator with a direction to reconsider and reach a decision in accordance with the findings of the Tribunal • Findings limited to: • Issues of fact or law • The matters to be or not to be taken into account in making the decision; and • The procedure or other steps to be taken in connection with the making of the decision

  17. How Enforcement will support the early intervention strategy – examplesTom SpenderHead of Department (Retail), EnforcementFinancial Services Authority

  18. Early intervention • Focus on product provider responsibility • Latent risk\forward looking cases • Interventions • Trade-offs and challenges

  19. Morning coffee King George III Suite, Ground Floor

  20. The consumer perspectivePeter Vicary-SmithChief ExecutiveWhich?

  21. Interactive case study: RetailWill Amos, Head of Department (Retail), Enforcement, FSAGeorgina Philippou, Head of Department (Retail), Enforcement, FSA

  22. Apr 11

  23. Board Meeting

  24. So how do you react? • Option 1: You think it sounds like a great product, meeting a previously unmet need, and hopefully bringing in extra revenue for Bargain Insurance Option 2: You don’t say much. This isn’t really your area of expertise, your role on the Board isn’t to analyse new products Option 3: You’ve got concerns about the product, which you raise with the rest of the Board

  25. To all of you who voted ‘3’ – • “You’ve got concerns about the product, which you raise with the rest of the Board” • Well done!

  26. Spotting the flaws in the product at the development stage • Martin Wheatley, January 2012: • “[Firms should] identify the target audience and design a product that meets their needs. So it is clear who you are aiming it at, and that your high risk, high return investment is not meant for the 80 year old widow who visits your branch looking for a way to save without losing her money.”

  27. Spotting the flaws in the product at the development stage • Martin Wheatley, January 2012: • “[Firms should] test the products to make sure they can deliver fair outcomes. This can involve looking to see how the product would fare under different scenarios, to basically see if it will do what it says on the tin.”

  28. Spotting the flaws in the product at the development stage • Martin Wheatley, January 2012: • “[Firms should] have a robust approval process in place before your products are on sale. This means that your sales process gets your product in the right people’s hands. It doesn’t allow the unemployed to take out income protection, or the student to take out a mortgage based on a made-up income.”

  29. FCA to take action at an earlier stage in the cycle • Tracey McDermott, February 2012: • “Early intervention … may also include a willingness to take action – supervisory or enforcement – earlier in the cycle. So you might expect to see the FCA taking action, including Enforcement action, where our judgement is that a particular aspect of the firm’s model – its product selection, its remuneration practices, its training or recruitment, for instance – is likely to give rise to poor consumer outcomes. We won’t wait to see if those outcomes occur.”

  30. What happens next? • Option 1: The Board approves the product and Bargain Insurance starts selling • Option 2: The Board approves the product and Bargain Insurance starts selling

  31. What happens next? • Option 3: Your CEO rejects your concerns • Bargain Insurance starts selling the product

  32. Sep 18

  33. Sep 18

  34. BARGAIN INSURANCE MANAGEMENT INFORMATION PACK

  35. Hosepipe Ban Insurance– SALES

  36. Hosepipe Ban Insurance– CLAIMS

  37. Hosepipe Ban Insurance– COMPLAINTS UK Map showing complaints by region Total complaints = 5,092

  38. How would you expect the Board to react? Option 1: The product has only been on sale for six months, the MI is limited and the data at this stage is inconclusive. The Board agree to wait until they have more MI at the next quarterly Board Meeting before deciding what action to take. Option 2: Send a message to sales staff to ensure that they improve the amount of information that is disclosed about the product’s significant exclusions and limitations. In particular sales staff are reminded to check whether customers are based in Essex. Option 3: Request your compliance team to conduct a full review of the suitability of the product, and tell the FCA that the Board has some concerns which are being reviewed further.

  39. Ensuring better outcomes for customers • Martin Wheatley, January 2012: • “The FCA will be clear with you about what it expects from you … that you monitor the product to see who is buying it and how it is performing. This is not just about selling it and moving on, but taking an interest in how it is actually working in practice.”

  40. Reacting to issues quickly • Clive Adamson, April 2012: • “[there will be] a greater expectation that firms demonstrate that they have resolved issues promptly (not FCA devoting resources to monitoring this).”

  41. Under the new regime we would expect you to vote option ‘3’ Option3 – “Request your compliance team conduct a full review of the suitability of the product, and tell the FCA that the Board has some concerns which are being reviewed further”

  42. Credible deterrence Tracey McDermott, February 2012: “[You] can also expect to see a lower tolerance for firms bumping along the bottom – firms that only fix things when the FCA tells them to, and then do only enough to fix the specific problem. The FCA will be swifter and more willing to take action to restrict, or even prevent, such firms from doing business.”

  43. Getting the culture right Martin Wheatley, January 2012: “I want the culture in your firms, from your product governance to your sales, to be aligned with the best interests of your customers.”

  44. Principle 11 “A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice”

  45. If you voted ‘3’ ‘Request your compliance team conduct a full review of the suitability of the product, and tell the FCA that the Board has come concerns’ • • Supervisors decide product is flawed and should never have been put into market • Sales suspended and customer redress exercise

  46. If you voted ‘1’ or ‘2’ ‘Wait for more MI’ or ‘Ask staff to ensure they improve amount of information is disclosed about significant exclusions’ • • Complaints build up • • Referred to enforcement and penalty imposed • • Sales suspended • • Cost of redress exercise higher • • Consider action against individuals

  47. Redress exercises • Redress to customers from enforcement cases in 2011 exceeded £200m

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