Cicero Policy Briefer

Issue 5, October 2006

Regaining the Initiative: the FSA and industry reform

By Terry Paul

In July, I outlined a challenge: that, with the approach of NPSS, we should spend the summer thinking about the eventual form of the pensions industry.

The recent intervention in the debate by Sir Callum McCarthy on the broken pensions model has caused me again to reflect on my earlier article in light of the views expressed on pensions at the recent party conferences.

“We have, at present, a business model which is based on incentives which produce results which are unattractive to reputable providers, unattractive to their customers, and whose benefits to intermediaries are questionable. What are we going to do to change it?” 1

With even the regulator publicly expressing cynicism like this, how can the financial services industry restore confidence to customers?

Sir Callum McCarthy’s brutal assessment also prompts the question: what next for the financial services industry? The speech refers to the issue of incentives for the pensions industry which might deliver change, referring to financial capability and TCF as FSA-driven initiatives aimed at further developing a more effective industry. However, apart from these ‘external’ pressures for change from the FSA, it is clear that innovation must also come from within in order for the industry to regain the initiative and drive forward a pro-active model of change?

With the prospect of a low-inflation environment, waiting for the market to turn is perhaps not an option: self-imposed, internally-driven change must be the only solution.

Perhaps it is time to consider the nature of such ‘internal’ pressure to pro-actively manage the transition from the present “broken” business model to one which delivers better value for the customer. Could it be that the prospect of a more informed customer, an aging population and the anticipation of new funds into the sector via NPSS will function as drivers for change?

Indeed, some might argue that we are currently in that transitional period, as evidenced by the number of recent consolidation deals and the development of the closed funds market.

If the financial industry fails to take the pro-active option, which is communicated wholeheartedly to Government, Parliamentarians, consumer groups and other key stakeholders, then it will leave itself open to additional calls for improved product and distribution mechanisms, leaving others to take advantage of the impetus for change.

In order to avoid others calling for a restoration of confidence in the financial services industry in future parliamentary sessions, the industry must take its current opportunities.

1. Speech by Sir Callum McCarthy, Chairman, FSA, Gleneagles Savings & Pensions Industry Leaders' Summit, 16 September 2006.

Terry Paul can be contacted on +44 (0)20 7665 9533 or click here to email.

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