New consumer watchdog to get tough on financial firms

By Marianne Curphey

There's a new consumer watchdog organisation in the UK, which consumer advocates hope will make it much more difficult for financial firms to mislead consumers.

On 1 April, the Financial Services Authority, which has regulated financial services since 1997, was abolished, giving rise to two new organisations -- the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). It's the FCA that will likely affect consumers' lives the most, particularly when it comes to predatory lending.

Here is a look at the changes that are coming, how they affect you and what differences you may see when the new watchdog takes over.

What is the new watchdog and when does it take over?
The FCA is responsible for protecting consumers from harmful or mis-sold financial products. According to a March 2013 government announcement, in 2014, it will take responsibility for the regulation of consumer credit, which currently falls under the jurisdiction of the Office of Fair Trading (OFT). financial-reform

The other new regulatory body, the Prudential Regulation Authority, will be a subsidiary of the Bank of England. Its job will be to regulate banks, building societies and other companies that take deposits from consumers, and also to supervise insurance companies.

Why was the FSA abolished?
There have been criticisms from consumers and advocates that the FSA did not intervene quickly enough to prevent scandals such as the mis-selling of payment protection insurance (PPI) and has been too slow to deal with payday lenders.

How is the FCA supposed to be different?
The main difference is that the FCA will have a narrower focus. While the FSA was charged with broad financial regulation (including the soundness of financial institutions and making sure big institutions did not fail), the FCA's concerns lie only in how those firms treat their customers. The Prudential Regulation Authority will pick up the responsibility for monitoring banks' stability. The Treasury provides a diagram showing the relationship between these two organisations here.

Compared to the FSA, the new watchdog organisation will be able to take quick and more extreme actions against firms and products it has deemed harmful to consumers.

"Consumer credit is going to come under a tougher regime and hopefully the FCA will have more power to prevent problems for consumers," says Frances Walker, head of media at Stepchange Debt Charity. "It will have significant powers including product intervention power."

One of the FSA's biggest new powers is the ability to ban financial products straight away without consultation. In the past, the FSA had to go through a lengthy analysis of a financial product before removing it from the market, meaning a risky product could continue to be sold. In the future, if the FCA deems a product risky, it will be able to remove it from the market before the consultation and analysis process, according to this announcement from the FSA. If it deems the product safe, the product can return to the market. If not, it will be permanently banned.

The FCA will also be able to ban any adverts related to products while it's consulting on them, order firms to compensate consumers, impose unlimited fines on offending companies and ban companies (and even senior managers) it deems responsible for the problems.

Which businesses might the FCA target?
The FCA recently announced that its first order of business will be policing the payday loan industry. The FCA has the ability to cap payday loan interest rates and limit the number of times these loans can be rolled over. Yet it's still not certain whether the FCA will actually use these powers when it takes authority over consumer credit in 2014.

Walker says she's hopeful that bringing regulation of payday lenders, formerly monitored by the Office of Fair Trading, under the FCA regime will benefit consumers.

"The OFT had more limited powers and not the resources it needed and it has not had a happy history on consumer intervention," she says.

Debt collection agencies will also fall under the FCA's jurisdiction, and the agency's scrutiny could do much to weed out rogue collectors.

However, Walker emphasizes the start of the the new watchdog's operational powers over consumer credit is a year off and some of the issues are still at "consultation stage."

What do consumer protection groups think about the new regime?
"The sounds we have heard so far have been positive," says Paul Crayston, spokesman for National Debtline.

He says a new regulator would definitely make a difference, but "we have yet to see whether that difference will be positive or negative, although we are cautiously optimistic."

It's a good sign, though, that the FCA has been given "more teeth" than its predecessor agencies, says Crayston.

"It has been given further powers already and that is a good thing," Crayston says.

See related: Payday lenders to face severe crackdowns, New rules set to curb aggressive bailiffs

Published: 9 April 2013