The FSA may have helped out small firms during its first year as regulator, but those same firms had better start complying - or face the consequences, Andrew Honey tells Johanna Gornitzki
Bearing in mind that many advisers see regulation as a necessary evil that at best equals more paperwork, and at worst means the death of their business, there can only be one reason why anyone would choose to spend two decades of their life dealing with this subject – genuine passion.
For Andrew Honey, head of department at the Financial Services Authority's (FSA) small firms division, this certainly rings true.
Transformation
Fresh from university, Honey joined the Bank of England in 1986, working in the field of regulation, and he has not looked back. Now working for the FSA, he is responsible for the supervision of around 20,000 small firms in the UK.
Heading this division meant that Honey was at the forefront of the transformation the market underwent when general insurance and mortgage regulation began just over a year ago.
Honey says the last year has required that he focuses on teaching firms what regulation is about.
"The first year was very much about getting firms to understand what's required because on both the mortgage and general insurance side the vast majority had not previously been subject to statutory regulation. On the insurance side, this was particularly relevant because over half had not even been subject to voluntary regulation.
"Therefore, it has all been about education and helping them understand what good practice looks like, while at the same time teaching them what bad practice means," he says.
Apart from educating firms, the FSA has looked at a number of issues. These include non-disclosure, the way firms handle clients' money and the FSA's Treating Customers Fairly (TCF) scheme. It has also done some work on products such as payment protection insurance (PPI) and critical illness (CI). Overall, though, the focus has been on working out where firms are in terms of compliance, explains Honey.
He admits it has been quite a challenge – particularly for small firms.
Honey says: "They don't have a great deal of resources to apply to compliance in the same way larger firms do. We therefore had to recognise the fact that they have a limited amount of time and money to comply with our rules.
"What we are trying to do is say, 'Ok, we recognise that this is new for you and that you have limited resources so we are definitely going to help you in the initial stages.' However, it is not going to be endlessly about helping firms," Honey warns.
He reveals that we will soon see a shift in the way the FSA approaches firms. A new and tougher regulator is about to emerge.
Honey says: "We are now getting to a stage where we think we have put out an enormous amount of information on all the training available and now it is time firms start demonstrating that they are complying."
While, initially, the regulator may have been lenient, Honey is expecting some definite improvements.
The FSA plans to revisit all the areas it looked at last year to see whether firms have met its demands.
Sales of PPI in particular will be scrutinised after early work showed considerable negligence.
As Honey says: "The work we have done identified significant risks to consumers. It showed that many of these products are sold inappropriately. The costs are not explained. The exclusions are not explained. At the same time, the benefits to the people selling PPI are enormous – the incentives to selling it can be significant.
"After what we have identified, we now would want to find that people have taken these issues to heart."
Besides further investigating the issues the FSA looked at last year, it also plans to look in detail at particular problem areas.
One area is non-advised sales. Honey reveals that issues surrounding this have come to their the FSA's attention and admits that non-advised sales is an area the regulator needs to look at.
Honey is concerned about the blurred boundaries between giving advice and providing information, saying there is a real risk non-advice sales would stray into advice.
"What controls have direct sales firms in place to make sure that the people selling their products do not stray off the script and start telling people what do to? It is actually very difficult.
"You only have to ask a few questions and, in the process, the risk of them straying into advice is massive," he cautions.
Whatever this investigation will uncover, the FSA is determined to show its commitment to consumer welfare. The TCF initiative, launched last year, is very much a part of this agenda. Honey says it is a huge piece of work that will need plenty of effort.
He says: "A lot of smaller general insurance brokers we talk to today say, 'Of course we are treating customers fairly. If we didn't we wouldn't have any.' However, they seem to be confused as to what treating customers fairly is about because it is not just about customer satisfaction."
It is about going that extra mile, says Honey. "TCF is not just about complying with rules; it is about being fair to customers and giving them a fair deal," he argues.
Fairly liquid
That said, Honey appreciates that TCF is a concept which is fairly liquid and therefore hard to pinpoint. "How does a firm know it's treating its customers fairly?" he asks.
To make it easier for firms, in particular smaller ones, the FSA recently published a TCF self-assessment tool that outlines a series of questions or prompts to help firms think through what is meant by TCF.
The toolkit is not a checklist, but is designed to show firms what areas they should be focusing on to ensure fair treatment of their customers.
"It is not about directing them into a particular course of action, but it is for them to recognise that TCF may be more than just strict compliance with the rule," Honey says.
Honey believes regulation will ultimately be all about simplification.
He says: "We are very much committed to making regulation as simple as possible. We are looking at areas of the rules we can simplify and we have already done some simplification to ICOB rules when it comes to advising on pension term assurance."
However, he hopes firms will not become bogged down simply looking at regulation in isolation but instead see it as a part of a bigger whole.
He says: "That is the game here – to have confident consumers who purchase products that meet their needs. This is the important thing we should not to lose sight of."
However, while the goal is confident consumers, the main challenge is how to get there.
"There needs to be clarity of what products do and don't provide because it has to be clear to consumers what they are getting. That is our main challenge," he adds.
