Policy
Response
FSA Discussion Paper 08/3: Transparency as a Regulatory Tool
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Contact: Brian Morris Date: 4 Sep 2008 |
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Introduction
The Building Societies Association (BSA) welcomes the opportunity to comment on the ideas set out in DP 08/3.
The BSA represents all 59 building societies in the United Kingdom. Building societies have total assets of over £360 billion and, together with their subsidiaries, hold residential mortgages of £250 billion, more than 20% of the total outstanding in the UK. Societies hold about £230 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
The Discussion Paper includes a thorough consideration of the case for and against increased disclosure and acknowledges the polarised nature of the views expressed on either side of the debate.
In considering responses to the DP, it would be easy for the regulator to view these as being equally polarised and dismiss industry concerns as being born out of a mindset that is hostile to increased transparency. This is a trap that should be avoided if the concerns of the industry are to be accorded appropriate consideration.
The BSA is instinctively favourable to regulatory transparency in principle. However, there are risks inherent in the FSA’s proposed approach that need to be addressed and mitigated.
The FSA appears to be selecting targets for publication - initially at least - based on the ease with which it can access information, as opposed to the intrinsic utility to consumers of the information concerned. Complaints data is a case in point. Such an approach runs the risk of distortion, ie by according too much significance to certain categories of information, when other factors – such as product performance - are much more important.
The FSA has acknowledged the important role of consumer responsibilities and the BSA strongly endorses this. We see transparency of information as an important ingredient in the promotion of consumer responsibility. Clearly, if the regulatory system provides for consumers to take responsibility for their actions – within defined limits – they need to be armed with the wherewithal to make informed choices.
However, FSA’s proposals for increased publication of firm-specific data go too far and risk inadvertent naming and shaming, without due process.
The potential for misinterpretation of information should be considered as part of any decision to disclose. This is particularly important in febrile times, such as the present, when the impact of the media or consumer groups misinterpreting or over-reacting to information disclosed by – or required to be disclosed by - the FSA could be disastrous for an individual firm or group of firms.
We note that because no amendments to the FSA Handbook are being proposed, the FSA is not obliged to issue a consultation paper on its proposals. It is nonetheless important that the significant shift in regulation implied by the FSA’s proposals is considered fully and debated thoroughly. In this context, some of the timescales for implementation that are aired in the discussion paper appear unduly tight.
Responses to the questions in DP 08/3
Q1 - Do you agree that transparency is a legitimate regulatory tool?
Clearly, Parliament has given the FSA powers to publish information in pursuit of its regulatory objectives, so it is legitimate in the narrow sense of being legal. More broadly, transparency is legitimate where it can help to reduce consumer detriment – eg by empowering consumers to make informed choices. But, as acknowledged in the DP, this must be subject to rigorous cost-benefit analysis.
Transparency must only ever be supplementary – and, ideally, complementary - to other regulatory tools. Most importantly, it must never be seen as supplanting effective supervision. Even as a supplement to supervisory tools, disclosure requires careful handling if the balance of the relationship between FSA and the firms it supervises is not to be undermined.
The mutual trust between supervisor and supervised would be threatened by ill-considered transparency, thereby undermining trust and engendering a more litigious approach by firms in their relationship with FSA.
Nor should transparency be used to avoid due process in enforcement cases. ‘Naming and shaming’ should occur only at the culmination of rigorous due process and not as a matter of course via systematic publication of firm-specific data.
Q2 - Do you agree that this high-level cost benefit analysis captures the main potential impacts of regulatory transparency, both positive and negative?
Broadly, the high level cost-benefit analysis in Chapter 2 of the DP covers the main ground. However, it does not appear to identify the detrimental impact of unnecessary or ill-focused transparency. It should be borne in mind that the compliance costs associated with disclosure are ultimately borne by consumers, irrespective of whether in the first place they fall on the individual firms or the FSA. Also, it should be acknowledged that for small firms, including smaller building societies, the costs of disclosure are often disproportionately high.
Q3 - Do you agree a Code of Practice on Regulatory Transparency is the right approach to enable the FSA to achieve consistency of decision-making?
A code of practice is a reasonable approach, in principle. However, we have concerns about its vires and how it will be applied in practice, for example:
- how will the FSA’s adherence to the code be evidenced?
- will this be subject to external scrutiny?
- if the FSA wants to amend the code in the future what is to stop it doing so unilaterally? (Given that the introduction of the code is not subject to formal consultation process presumably the same would apply to any amendment to the code.)
Q4 - Do you agree with the three Principles:
(a) We will not publicly disclose information that we believe would infringe any statutory restrictions on us, including those set by FSMA.
(b) We will proactively disclose information that we believe on balance serves, rather than harms, the public interest.
(c) Disclosure should meet the FSA’s standards of economy, efficiency and effectiveness?
The first principle is arguably unnecessary since it refers to statutory safeguards that would in any event take priority over a voluntary code.
The second is more problematic. Notwithstanding the FSA’s statements in the DP about due process in regard to ‘naming and shaming’, it is possible to conceive of circumstances where disclosure of information may unfairly damage individual firms but be judged by the FSA to ‘on balance serve… the public interest’. What controls would be established to help minimise this risk?
The third appears at first sight to be reasonable but, whilst it is hard to argue against any of the “three Es” individually, each one will not necessarily carry equal weight. Mostly, effectiveness should be the main consideration. So, for example, the FSA should not be tempted to publish individual complaints data in isolation of other indicators of a firm’s performance because it is economical and efficient to do so (ie because it already has the data to hand), it must also be effective – in terms of maximising the benefit to consumers.
Q5 - Do you have comments on the detailed wording contained in the Code of Practice on Regulatory Transparency?
No, in that it appears to flow logically from the three principles. However, as noted above we do have concerns about the status of the code and the mechanisms for policing and amending it.
Q6 – Q12 Publication of complaints data
In principle, the publication of complaints data could help with market confidence, public awareness, and the protection of consumers. However, publication could be detrimental in relation to all three objectives.
At first glance, the arguments in favour of publication are that consumers might gain a better appreciation of the firms that do, and do not, treat their customers fairly. However, on deeper analysis, a number of significant problems become apparent:
i - The FOS is obliged to adjudicate complaints on their individual merits, although the matter has been complicated by pressure on the FOS to adjudicate upon complaints that have much wider implications. Publication of complaints data could change the way that firms act and the nature of complaints going to the FOS could change detrimentally. Some firms might be encouraged to settle complaints, not on the basis of merit, but on the basis of publicity attracted by the published statistics. Firms, complaints managers, the media and others would be encouraged to treat the published data the basis for future activities, rather than the fair treatment of customers.
ii - As each FOS Annual Review makes clear, many FOS decisions are not clear-cut ‘wins’ for either the firm or the complainant. This would need very careful handling in respect of the publication of data. Moreover, it would be difficult for complaints data to take adequate account of the size or complexity of the business of the firms concerned. Inevitably, larger or more complex businesses attract more complaints.
iii - The law is absolutely clear that businesses have human rights (see eg Wilson v First County Trust [2001] 3 All ER 229). How can it be fair to publish complaints data with regard to complaints in respect of which firms have no right of appeal? Firms may disagree with many of the adjudications included in the published data, yet, they will have had no opportunity to appeal the decisions in question. What is more, the FOS is not even bound by the law (merely having to take it into account). Publication of data would need to be accompanied by the introduction of appeal arrangements from FOS decisions, otherwise this could well infringe firms’ human rights.
Q13 - Do you agree with our proposals concerning:
- anonymous, benchmarked results; and
- Non-fundamental OIVoPs (Own Initiative Variations of Permission).
The FSA’s proposals aimed at the promotion of benchmarking are helpful. More open disclosure of anonymous examples of good practice will assist firms in their understanding of the standards expected of them by the regulator. This will help the industry as a whole in meeting required standards. Our members’ experience of the feedback from the FSA in regard to mortgage endowment complaint handling was positive and they would support wider use of this mechanism in the future.
Q14 - Do you agree with our comments and proposals on:
- Naming and ‘faming’; and
- Risk mitigation and redress.
We strongly support the FSA’s view that there must be no ‘naming and shaming’ of firms without due process. However, plans to publish firm-specific data, on complaints and other matters, risk such an outcome.
We note that FSA has an open mind on ‘naming and faming’. The BSA is equally receptive to the idea - in concept, at least - although it is not clear to us how much value, if any, would be added by naming the firm as opposed to merely highlighting anonymously examples of its commendable behaviour. We share FSA’s unease about the halo effect such disclosure could engender and the risk this may pose for consumers.
In regard to risk mitigation and redress, we agree it would not be appropriate to publish firm-specific data. However, we question the value of the FSA publishing aggregate data on mitigating action and compensation paid by firms. We fear that the level of compensation paid by firms may come to be viewed, if not by the FSA, then by external commentators, as a proxy performance indicator for FSA. This would be inappropriate, in that commentators may well perceive higher levels of compensation to be a good thing when, in fact, the opposite is more likely to be true; ie lower levels of compensation indicate regulatory effectiveness.
Q15 - Are there other measures that you believe could be useful in improving the effectiveness of our thematic work with firms?
Broad outcomes of thematic reviews, as have been produced in relation to TCF, can be helpful for firms in developing their own programmes, but we have no specific suggestions for improvements in this area.
Q16 - Do you agree we should take further action, over and above our existing actions, to reduce the risk of consumers making poor buying decisions because of financial promotions that are unfair, unclear or misleading?
The BSA considers the focus should be on greater enforcement action and we support in principle the additional enforcement measures and tools.
Q17 - Do you think that the package of measures described in paragraphs 6.56 to 6.68 will be effective in reducing the risk of consumer detriment?
The package of existing tools and proposed measures appear sensible. It would, though, be helpful to have more detail on the proposed fast track enforcement action for public censure as we are concerned that a limited, streamlined and faster investigation process may increase the risk of an unfair result for firms. It is not clear how it can be speeded up if, as the FSA states, the procedure would follow due process and would not differ from the current process for public censure. The BSA would be happy to contribute to any future consultation on the fast track procedure.
Q18 - Do you think that the benefit of creating a financial promotions Register, as described, would outweigh the drawbacks? If so, why?
No, the benefits of a financial promotions register would not outweigh the significant drawbacks. The FSA has consulted the BSA on this proposal before and our views have not changed. We consider the register would amount to unfair naming and shaming of firms. Public censure should be carried out only after the due process of full enforcement action has been observed.
Q19 - Do you agree with our analysis of the obstacles that are impeding better progress on the TCF initiative?
Paragraph 6.75 of the DP states –
“In the Treating Customers Fairly (TCF) initiative we are aiming to change firms’ behaviour in order consistently to deliver fairer outcomes for consumers”
As noted in response to Question 6 above, we believe that – for the reasons set out – the publication could potentially have a counter-productive effect on TCF. Indeed, firms would be pressured to do whatever was necessary to ‘prove’ TCF by ensuring that the published statistics come out ‘right’. Publication of data would be a blunt tool and, probably, ultimately distorting.
Q20 - Is the mix of measures outlined in paragraphs 6.79 to 6.87 appropriate for helping to achieve better progress?
Aggregated data, such as that referred to in paragraph 6.86, can be useful. However, the suggestion of ‘self-certifying’ is bizarre. In the BSA’s view, the FSA has run a strong and effective TCF project, which – as the flagship of principles-based regulation – has been novel and by no means easy for either the FSA or for firms to grapple with. However, the final deadline is approaching and the FSA has already clearly set out its plans in its June 2008 TCF publication. The onus will soon be on firms to show that they have embedded TCF into their cultures and businesses and for the FSA to show that it regulates TCF effectively and proportionately. We do not think this is the right time for distractions like ‘self-certifying’ or ‘naming and faming’– it is simply a matter for firms and the FSA to get on with the job in hand.
Q21 - Are there other measures that you would like us to take?
No, the current TCF initiative should be allowed to run its course. See our answer to Q20 above.
Q22 - Is there data we collect in our returns whose firm specific and/or aggregate disclosure is neither precluded by directives, nor duplicative of disclosures required by directives, and which would be useful in support of our regulatory functions and objectives?
Paragraph 6.107 discusses the publication of ARROW data. The selection of peer groups/sectors needs to be carefully handled. We welcome the FSA’s statement that it does not intend to disclose information that could be used to identify a particular firm. There is, of course, more to this than simply anonymising data: some firms, including some of the larger building societies, could be identified from anonymous data, so care will be needed by the FSA in the way it presents even anonymous data.
Q23 - Do you have comments on the various proposals set out above?
We consider that whole-market product information is beneficial, primarily to firms and professional commentators such as ratings agencies. So the recent publication of the MLAR derived data is useful. Similarly, sources of funds data (eg showing a retail/wholesale split), and the types of accounts/instruments within those categories could be a useful benchmarking tool.
Q24 - Do you have suggestions for areas of regulatory transparency not mentioned in this Discussion Paper?
We agree with the FSA’s conclusion, in paragraph 6.117, that further disclosures of capital requirements are not necessary; particularly in light of the fairly detailed disclosure requirements under Pillar 3 of the Capital Requirements Directive. Nor is further disclosure desirable: in the current market, disclosure of FSA capital requirements could be destabilising.
In regard to other disclosures of financial information, IFRS 7 already requires detailed disclosure, some of it risk-related. We do not believe the public interest would be served by the FSA publishing - or requiring the publication of - similar information.
We would urge caution in the use of the term ‘peer group’. The FSA tends to allocate peer groups according to asset size. In some circumstances this is unhelpful: building societies of similar asset size can have a different distribution of risk bearing assets and/or activities. For example, a highly diversified society with many subsidiaries requires more capital (not least because of FSA rules on capital deductions) than a monoline residential lender. Lumping such societies in the same peer group could have adverse consequences. For example, a table showing average available capital levels against capital requirements would be open to misinterpretation - comparing individual building societies with the average for the ‘peer group’, could invite ill-informed and potentially damaging comment. (similar considerations apply to the publication of, for example, liquidity maturity profiles.)
Q25 - Do you agree with our proposals to improve the accessibility and content of our Disclosure Log?
It makes sense to accord due prominence to the FoIA Disclosure Log on the FSA website, so as to improve its accessibility.
It is difficult to comment on the usefulness of the FSA including more cases on the Disclosure Log without knowing more about the nature of the cases the FSA has in mind. But, given hat the FSA itself perceives there is no wider public interest in the cases it does not currently publish, and that to publish them will reduce the usability of the Log, it is difficult to understand how the FSA has concluded that this is nonetheless the appropriate way forward.
Q26 - What criteria do you think we should use in deciding whether to publish or publicise information ourselves, or rely on a third party?
There are dangers in FSA relying on third parties to publish information. Price comparison sites are a case in point. Such sites are driven by commercial considerations which mean they may not be impartial and generally are not complete. Accordingly, they have potential to mislead the consumer and FSA is correct to publish such information itself.
Where there is a closed user group - such as the membership of a trade association - it can be beneficial for third parties to publish information on FSA’s behalf. Trade associations may be able to add value to information produced by the FSA – for example, by analysing data which the FSA is unwilling or not sufficiently resourced to analyse itself. This also removes the danger that the FSA’s analysis would be misinterpreted, or would be considered legitimising a certain viewpoint on possibly sensitive data. The FSA should therefore exercise caution when publishing information itself, when the information could be interpreted in a number of different ways.
The BSA has experience of publishing data that has been provided by other parties. To the end of 2007, the BSA’s monthly saving and lending figures were provided by the FSA, and since this date they have been supplied by the Bank of England. The BSA formats the data into tables so that comparisons can be more easily made, draws out interesting trends and publishes the tables with an accompanying press release that attempts to explain the underlying causes of changes in the data, or to suggest possible implications of the trends seen in the data.
