Ian Mason's financial services and compliance column: July 2011

The FCA will be an intelligence-led regulator. There will be a new senior level business and market analysis team, which will analyse how markets work and how they interact with consumer behaviour. For example, very high returns on particular products (as was the case with PPI) may indicate that consumer detriment could occur. The FCA will have the power to ban new products, either strangled at birth before launch or after they have already been launched. So firms should expect the FCA to intervene earlier in retail markets to protect consumers before they suffer detriment.

The FCA will also have another reason to intervene because of its duty to promote competition. This is different in nature and scope from the current FSA remit in this area. The FCA will be focusing more expressly on the costs and charges of products. Where these are excessive, then the FCA could introduce rules concerning charges, or require product providers to justify those charges by demonstrating that consumers can still achieve a reasonable return. Even so, the intention is that the FCA will not be an economic regulator in the sense of prescribing returns for financial products.

The FCA will also develop a new culture, with a proactive "can-do" approach, and a willingness to be bold in the use of its powers. This sounds like a development of the FSA Enforcement "bold and resolute" mantra, but how realistic is it, when many of the FCA staff will have transferred across from the FSA? (This is not to forget, of course, that the FSA has demonstrated innovation in recent years, particularly in the use of its enforcement powers.)

The FCA's supervisory approach will build on the more recent interventionist approach of the FSA. The FCA will be less willing to rely on the governance and compliance culture of firms to ensure fair treatment for consumers. The FCA's risk tolerance will be less than the FSA's, although exactly how different this will be is not yet clear. The intelligence-led approach is likely to generate more thematic visits for firms, and there will be less firm-specific supervision. Small and medium-sized firms will be communicating with the FCA principally through returns and base-line monitoring. They will have less personal contact with their supervisors. Only large and other systemically important firms (such as inter-dealer brokers) will require a more active supervisory programme.

There is some concern about how the FCA will regulate the conduct aspects of wholesale participants, which have traditionally benefited from a "lighter touch" approach as these involve market professionals such as banks, hedge funds etc. The FCA will regard professional counterparties as "consumers" also, but the document states that it will take a differentiated approach, although it is not clear what this means. The document specifically refers to the oversight of "wholesale small and medium sized enterprises (SMEs) covering such activities as corporate finance advice, hedge fund asset management and other institutional wealth and long-only management boutiques" and states that a tailored approach will be developed.

Intervention is probably most likely in areas where products developed on wholesale markets have an impact further down the value chain, as occurred for example with Lehman-backed structured products and high risk mortgage-related securities. The FCA will be looking more closely at product governance at the top of the chain.

The approach document contains a greater emphasis on transparency than under the FSA. There will be greater engagement with consumers and their representatives, who traditionally tend to be poorly represented in consultations in comparison with firms and their trade bodies. The FCA will also publish more information about its views on markets (key trends, products and services) and the comparative performance of a firm.

However it is probably in investigations and enforcement where firms will notice the increased transparency the most. The Government and the FCA (despite industry concerns) are now clearly committed to the publication of enforcement action at the Warning Notice stage. This stage takes place when the FSA has presented its case to the FSA's Regulatory Decisions Committee (RDC), but before the firm or individual has presented their defence by making their own written and oral representations to the RDC. The slight concession is that the FCA (under the new process) will have a right, but not a duty, to publish the Warning Notice, and will consult with the firm or individual before deciding on publication. However, the subject of any investigation will inevitably argue that he will be prejudiced by the publication of a Warning Notice, so it would seem likely that some kind of additional prejudice or other factor will need to be demonstrated to the FCA to delay publication.

There are no costings for the FCA in the approach document. However, the new market analysis and intelligence function will require additional budget, and a more interventionist approach is also more resource intensive. The approach document also states that the increased level of thematic work is likely to result in a need for greater enforcement resource, which is expensive. It is therefore unsurprising that in a recent speech to the British Bankers' Association (BBA), Hector Sants stated that "In the case of the FCA, it seems likely that the extra capabilities needed to deliver against its expanded mandate will increase its cost relative to the FSA", so firms should be prepared to pay proportionately more for the heavier regulation.

Responses need to be sent back to the approach document by 1 September 2011. The FSA will continue to develop a new risk model to replace the old ARROW model, as well as fleshing out the FCA's operational capabilities and culture.

The FCA is, of course, only part of the picture, and in the UK the FCA will be developing the new regulatory approach in conjunction with the PRA and the Bank of England. It will also need to work within the increasingly important European legislative framework, in particular with the new European authority, ESMA. The UK authorities are already positioning that supervisors need to have firm-specific discretion and that new regulations need to be tailored to local circumstances, so the "UK v Europe" battle will continue to be fought.