A separate UK regulator for conduct risk will boost its importance and is likely to raise costs for financial institutions, says Fitch Ratings. The newly formed Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) will intensify regulatory scrutiny of UK banks and insurance companies.
We expect the FCA to adopt a strong and broad agenda to improve services and protection for consumers following the banking crisis and a series of mis-selling and rate-fixing scandals. Certain products, for example those that are complex, innovative, bundled with others, or involve advice, are likely to be subject to greater scrutiny and therefore potential fines and consumer redress.
In the annuities market we expect the FCA to take steps to make consumers more aware of their right to shop around when buying an annuity at retirement. Some pensioners have lost out significantly by sticking with the provider they built their savings with rather than checking with others for a better deal. One area of focus in the mortgage market is fair treatment of borrowers when interest-only mortgages reach maturity and repayment strategies are inadequate. Costs and the risk of losing their homes can increase for customers if lenders take inappropriate forbearance and repossession measures.
Many financial institutions are already feeling the effects of the shake-up as they prepare for the burden of having to deal with two regulators rather than one. In some cases they have to build relationships with new regulatory contacts. Firms are likely to experience a significant increase in management and compliance costs and could well face inconsistent regulatory decisions, at least until the new structure has bedded down.
The two regulators will often be looking at the same issues from two different perspectives, which could lead to conflicting guidance and confusion. The FCA will be looking from a consumer protection point of view, whereas the PRA will be interested in the entity's solvency and liquidity.
Potential areas of conflict include claims settlements, forbearance measures and mis-selling compensation. For example, the FCA is likely to have regulatory responsibility for the fairness of bonuses for with-profits policyholders from the customer perspective, while the PRA will have regulatory responsibility for reviewing the affordability and solvency implications from the insurer's perspective.
The FCA and PRA will replace the Financial Services Authority on 1 April 2013.
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