Almost exactly a month ago, Compliance Week wrote about how to get banks not to behave like banks and the efforts of the Banking Standards Board (BSB) to shift the behaviours, standards, and culture of banks to … well more honest and compliance-oriented ones. Earlier, in December 2015, the Financial Conduct Authority announced it was not going ahead with its review of banking culture, but was rather engaging with individual institutions. In part, this move away from a regulatory authority thematic review of culture, said the FCA, was because the review would have been “duplicative” of BSB’s ongoing review.

While there was widespread protest from the Labour Party and even from the Conservative Party of this decision at the time, it appears that dissatisfaction with an industry-based body—the BSB—conducting a review without the backup of an independent regulatory body, i.e., the FCA, is still unpopular.

The Public Accounts Committee (PAC), whose remit is to scrutinise government spending, in this case the substantial budget of the FCA, issued a report that is not only deeply critical of the FCA’s decision to suspend its culture review of banks but also warns of “serious risks” of future mis-selling scandals. “The FCA has withdrawn a planned review of banks’ culture but has not articulated what culture it expects firms to have. There is no guarantee that any improvements in cultures will stick as the regulatory spotlight moves away.”

The concerns over mis-selling follow on from an investigation into compensation paid out as a result of the payment protection insurance (PPI) mis-selling scandal. While many consumer claims have been processed by the Financial Ombudsman Service—more than 12 million consumers were mis-sold PPI and firms have paid over £22 billion in compensation to them since April 2011—the PAC is concerned that claims management companies have been creaming off significant portions of this compensation for themselves. This is adding insult to injury, according to the report, as “they typically charge between a quarter and a third of any compensation subsequently paid [and] … the public bodies involved have been too slow in taking responsibility for this situation, and too passive in allowing it to happen.” According to the report, claims management firms have made £5 billion from processing claims; money, it notes, that should have gone to consumers.

The report points very clearly to issues that both the BSB and the FCA understand are originating problems within the financial services industry: “the cultures of firms and the nature of their sales incentives.” And while PAC admits that the FCA has taken some actions to deal with these root causes, such as promoting changes to firms’ incentive structures, better training of financial advisers, and introducing the Senior Managers Regime, which aims to get senior managers to take greater responsibility for the actions of those they manage, it still warns that the risks of mis-selling remain, and it points in particular to the pensions freedoms reforms as a potential trigger for future mass mis-selling.

(The pensions freedoms reforms were introduced last year to give people aged over 55 more freedom over how to use their retirement savings.)  “Middle managers in financial services firms were often promoted on the basis of achieving sales targets, making it hard to embed more customer-focussed approaches,” notes the report.


1. Claims management companies have taken up to £5 billion out of compensation that should have gone to consumers. 
Recommendation: HM Treasury and the Ministry of Justice should report publicly on the effectiveness of their actions in reducing the role of claims management companies in PPI compensation. The Treasury and the FCA should demonstrate how they will ensure that these problems do not happen again with future schemes.
2. The Ombudsman has a large backlog of PPI claims, with many consumers having to wait more than 2 years for a decision.
Recommendation: By the end of July 2016, the Ombudsman should set out publicly a clear timetable for reducing and ultimately eliminating its backlog of PPI claims, and also report publicly on its progress.
3. The FCA has not done enough to tackle the cultural problems that lie behind mis-selling by financial services firms. 
Recommendation: The FCA should outline the actions it will take to improve cultures in financial services firms, and report to us on their effectiveness in a year’s time.
4. The FCA does not do enough to ensure that consumers understand the financial products they are buying and the possibility of claiming compensation.
Recommendation: The FCA should set out what more it will do ensure firms check consumer understanding of the products they purchase and of their rights to claim compensation, particularly for vulnerable consumers, and report back to us on this work in a years’s time.
5. The Treasury does not know how effective the FCA is in reducing mis-selling, and there are no good indicators of the current level of mis-selling. 
Recommendation: HM Treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and assess regularly how effective their actions are in reducing it.
6. Parliamentary accountability for financial regulation is undermined by restrictions on the NAO’s access to information held by the FCA. 
Recommendation: HM Treasury should outline a timetable for proposing legislation to give the NAO [National Audit Office] access to information so that it can carry out full examinations of value for money.
Source: Public Accounts Committee

More importantly, given the PAC’s remit, the report says that the FCA’s disclosures on the number of complaints to firms “does not identify when alleged mis-selling took place and it does not yet draw together information that could show whether its actions are reducing mis-selling.” Nor are outcomes from its regulatory activities linked to their associated costs, which means the FCA does not know whether it has taken the most cost-effective actions. HM Treasury is equally culpable in the eyes of the PAC, since it could not “explain convincingly how it would know if the regulatory system is succeeding or failing, and has not developed any meaningful measures of what success looks like”.

The FCA—more similar to the U.S. Securities and Exchange Commission than the U.S. Financial Industry Regulatory Authority (FINRA)—has a significant range of enforcement powers at its command. These include criminal, civil, and regulatory enforcements. As such, it is far more powerful than the Banking Standards Board, which is an industry-based body that has only comply or explain powers. Clearly, calls are being made for it to use these powers to their utmost extent.

Concerns were also raised that, following comments made by Chancellor George Osbourne, Martin Wheatley, the former chief executive of the FCA and a fierce critic of the banks, was eased out of his position earlier this year and is yet to be replaced. This personnel change came at a time when HSBC bank was publicly considering whether to move its headquarters away from London. Critics of Wheatley’s firing claim that it was part of a softening stance towards banks. The dropping of the culture review followed shortly afterwards. Yet, earlier this month, news agency Reuters calculated that 20 global banks had paid £152bn in fines and compensation to customers since the 2008 financial crisis. If the government is to continue funding FCA’s approximately 3,500 staff, it looks like more than enforcement after the fact will be required, but effective preventative regulations.