The detail – is the light shining through?
Even though iconic BBC series “Yes Minister” highlighted many years ago that open government is not all it’s cracked up to be, governments and regulatory bodies are increasingly linking attempts to minimise financial instability with openness and disclosure of information.
The FSA launched another foray into this area in May 2008 with discussion paper DP08/3: 'Transparency as a regulatory tool'. This DP is aimed at exploring the importance of transparency and whether increasing the amount of firm-specific and broader industry information the FSA discloses could lead to better regulatory outcomes for firms, markets and consumers. Similar calls to action are to be found in activity on PPI and the Hunt Review of the Financial Ombudsman Service, for example, as well as SEC initiatives in the USA.
The main spirit of the paper concerns whether the FSA should publish information it receives from regulated firms (such as under 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)) in order to drive higher levels of compliance with the letter and spirit of regulation. The FSA recognises the polar arguments that requests for greater transparency throw up (namely regulators should disclose all information unless there is a compelling reason not to; and, at the other extreme, regulators should only disclose information if there is a statutory requirement or other compelling reason to do so). As a result, the DP contains, what the FSA has positioned as, a balanced provisional code of practice on regulatory transparency to provide a clear mechanism to guide FSA decisions about disclosure. The FSA states that it is of the view that “naming and shaming” should not be (indeed could not be) the principal motivation behind transparency. Hopefully, this shows the FSA will be unlikely to resort to disclosing everything, especially if it wants to stick to its standards of economy, effectiveness and efficiency and support the push for increased financial capability. The FSA will also have to balance its other statutory obligations (e.g. under the Freedom of Information Act). The FSA wants its disclosures to be illuminating.
The code of practice
The code opens with a statement of intent about the FSA’s commitment to be an open and transparent regulator. It then contains three detailed principles followed by seven points on the practical application of transparency requirements.
One of these practical points may be of particular concern to businesses. Application 2 of the code of practice states “We will provide consumers – directly, through firms, or working with other organisations – with clear information in order to improve their confidence, knowledge and understanding of personal finance.” This is probably intended to link to comments in the DP that the FSA accepts some disclosed information would need interpreting before being given to the consumer but it also gives enough space for the FSA to require additional information disclosures by firms. Section 7 of the DP is relevant here as the FSA has outlined its views on when the FSA should be involved directly in releasing information or where third parties should be used. This mentions expressly that the FSA will consider requiring information to be made available via disclosures by firms.
However, generally, many of the Applications outline what the FSA is doing in some part already (e.g. consultation, guidance to firms etc). In any event, it will be worth looking at the concrete examples (set out in Section 6 of the DP) of the intended application of the code. Section 6 also gives a good update on the FSA’s thinking on other areas close to its heart – such as TCF and thematic reviews, financial promotions and so on.
Information to build financial capability
It is a key belief that financial sector consumers often do not have the information necessary to make good financial decisions. The National Consumer Council believes it is a core matter of principle that ‘consumers have a right to know when businesses act illegally or perform poorly’. In responding to that with release of increasing amounts of information, the FSA will overlook an alternative view that consumers have the right to believe that they are protected by virtue of firms being regulated and in the market place, and that they should not have to review rafts of information about the compliance record of firms as well as information about the benefits and risks involved in their intended financial transaction.
Making this sort of information available to consumers is arguably a flawed approach. Data can be manipulated – in the way it is collected, managed, reported or presented and unless parameters are put in place surrounding these aspects, there is no certainty that consumers would be end up comparing apples with apples – or at least know that they weren’t. It is, therefore, not clear how this would help financial capability, confidence and market stability.
Wholesale take note
The FSA also believes transparency is relevant to wholesale markets and will apply its findings across all the FSA’s scope of activity. However, the DP is slewed in favour of the FSA’s retail agenda and it is doubtful if it will be capable of stirring proper debate unless wholesale firms feedback on it. We would say the wholesale arena should be addressed specifically and transparently in a paper more properly focussed on its needs and circumstances.
The DP does recognise that transparency needs to also bite on the FSA’s role as regulator. Indeed, it says it’s open for discussion and challenge on this area. This DP is part of the Better Regulation Task Force agenda kick started in 1997, which is aiming to drive consumer protection through accountability and transparency. There is a belief that a regulator needs to be seen to be effective.
There is a distinction between simply making information available, which could in some cases cause confusion and have a negative impact, and publishing information in a way that makes issues and practices clearer and can improve how markets function. It remains doubtful whether the FSA and other regulatory bodies can rise to the challenges of being, and being seen to be, effective as they strive for financial stability through transparency alone. We would suggest other measures (such as senior management engagement) would be a better tool – the FSA also acknowledges this.
What happens next?
As no Handbook changes are envisaged, no formal consultation paper will be issued. Discussions with interested groups are planned but, at the end of 2008, the FSA intends to publish the first report showing aggregated data on complaints trends across the industry, covering data received from firms in the first half of 2008. Further data will be published from 2009 onwards.
The period for responses closes on 29 August 2008.