The FSA's ‘Treating Customers Fairly’ (TCF) Initiative: What is So Good About It and Why It May Not Work
| Date | 01 September 2011 |
| DOI | http://doi.org/10.1111/j.1467-6478.2011.00550.x |
| Published date | 01 September 2011 |
| Author | Andromachi Georgosouli |
JOURNAL OF LAW AND SOCIETY
VOLUME 38, NUMBER 3, SEPTEMBER 2011
ISSN: 0263-323X, pp. 405±27
The FSA's `Treating Customers Fairly' (TCF) Initiative:
What is So Good About It and Why It May Not Work
Andromachi Georgosouli*
This article examines the Financial Services Authority FSA's `Treating
Customers Fairly' (TCF) initiative as a case study of a regulatory
strategy that aims to stimulate the self-regulatory capacity of the
regulated population to advance socially desirable goals ± in this
particular case, fair treatment for customers. It considers the develop-
ment and nature of TCF and notes some difficulties that jeopardize its
overall effectiveness. Parts one and two of the article consider the
development and nature of TCF, while part three examines its appeal.
Part four provides an overview of some problematic aspects of the
FSA's initiative. The conclusion draws together the main threads of the
analysis and considers the future of TCF and, more generally, con-
sumer protection in the United Kingdom's system of financial regula-
tion. The aim is to make a modest contribution to the debate about the
proper direction of the present reform of financial regulation.
INTRODUCTION
Consumer protection is one of the four statutory objectives of the Financial
Services Authority (FSA).
1
It is currently pursued by a range of regulatory
405
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School. Published by Blackwell Publishing
Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
*School of Law, University of Leicester, University Road, Leicester LE1
7RH, England
a.georgosouli@le.ac.uk
1 Originally, section 2(2) of the FSMA 2000 set out the following four statutory
objectives: market confidence, public awareness, consumer protection, and the
reduction of financial crime. A fifth statutory objectively ± financial stability ± was
added by virtue of s. 1(3) of the Financial Services Act 2010. After the launch of the
Consumer Financial Education Body (CFEB) last April and in the light of s. 2(5) of
the FSA 2010, the statutory objective of `public awareness' was transferred from the
FSA to the CFEB. On the FSMA 2000, see M. Blair and G. Walker, Financial
Services Law (2006) 108±12.
I am grateful to Cosmo Graham and four anonymous referees for their comments and to
the University of Leicester for granting me a generous period of study leave, during which
this article was written.
measures including the FSA's `Treating Customers Fairly' initiative (TCF).
2
TCF is an on-going project that involves developing a common view of the
rights and responsibilities of both consumers and firms.
3
More importantly, it
mandates senior management to work out for themselves what practices
guarantee fair treatment for their clients and it is premised on the idea of
(enforced) `self-regulation', here understood in its broadest possible sense as
any arrangement whereby the conduct of an activity is under the control of
persons actively engaged in the activity.
4
More than ten years ago, the establishment of the FSA brought an end to
self-regulation as a form of institutionalized collective self-discipline in the
financial industry.
5
However, TCF implies that self-regulation is making
something of a comeback, in the sense that it signifies a growing emphasis
on the capacity of each individual firm for self-control. Crucially, this is
happening at a time of major institutional reform.
6
With respect to consumer
406
2 This is one of the overarching strategic projects of FSA regarding retail markets: J.
Edwards, `Treating Customers Fairly' (2006) 14 J. of Financial Regulation and
Compliance 242±53; S. Wilson, `Treating Customers Fairly ± Principles-Based
Regulation in Practice', FSA speech, 7 August 2007; FSA, Towards Fair Outcomes
for Consumers (2006); C. Briault, `Treating Customers Fairly', FSA speech, 20
March 2006; O. Page, `Treating Customers Fairly', FSA speech, 16 February 2005.
3 This is discussed below in section II.
4 Although there is no clear dichotomy between self-regulation and public regulation,
the term `self-regulation' typically implies a form of regulation which is based on
consensus and which encompasses a broad array of institutional arrangements that
may vary in terms of the degree of formality of their establishment, the character and
level of state involvement, the nature of their enforcement, and so on. In financial
regulation, the term `self-regulation' may refer either to collective self-discipline
within a club or association or to the capacity of each individual firm to exercise self-
control. An example of the former is the Self-Regulating Organizations (SROs)
during the 90s, while a modern example of the latter is the Treating Customers Fairly
initiative. On the notion of `self-regulation', see E. Hupkes, `Regulation, self-
regulation or co-regulation?' (2009) J. of Business Law 427±46, at 428; B. Morgan
and K. Yeung, An Introduction to Law and Regulation: Text and Materials (2007)
92±3; A. Ogus, `Rethinking self-regulation' (1995) 15 Oxford J. of Legal Studies 95±
108, at 97; P. Cane, `Self-regulation and judicial review' (1987) 6 Civil Justice Q.
324±47, at 324.
5 Sir H. Davies, `Reforming financial regulation: progress and priorities' in Regulating
Financial Services and Markets in the 21
st
Century, eds. E. Ferran and C. Goodhart
(2001) ch. 2. For a critical analysis of the predecessor regime which was established
by virtue of the Financial Services Act 1986, see A. Page, `Financial services: The
self-regulatory alternative?' in Regulation and Public Law, eds. R. Baldwin and C.
McCrudden (1987) ch. 13.
6 A. Georgosouli, `The revision of the FSA's approach to regulation: An incomplete
agenda?' (2010) 7 J. of Business Law 599±617; M. Hall, `The reform of the UK
financial regulation' (2009) 11 J. of Banking Regulation 31; S. Sassoon, `The
Tripartite Review: A review of the UK's tripartite system of financial regulation in
relation to financial stability ± Preliminary Report' (March 2009), at
www.conservatives.com/New s/News_stories/2009/03/Osbo rne_welcomes_Sassoon_
report_into_tripartite_financial_regulation.aspx>.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
protection, the Consumer Financial Education Body is already in place and
by 2012, the FSA will be split between a new prudential authority ± the
Prudential Regulation Authority (PRA) ± and a new Financial Conduct
Authority (FCA), which will be primarily charged with supervising the
conduct of business.
7
Taking into account that TCF will eventually be
integrated into the new consumer protection regime, the time is right to
assess its potential.
Before moving on, some further points need to be made with regards to
the scope and objectives of this inquiry. The first one is that this article does
not aim to contribute to the growing empirical research on management-
based regulation.
8
Rather, its objective is to highlight certain problems that
are endemic in regulatory approaches like TCF and to draw some general
conclusions about the current reform of financial regulation and the future of
consumer protection in the United Kingdom. Finally, it should be said from
the outset that although the core claims of this article touch upon the issue of
discretion and how it may be adversely circumscribed or even negated as a
result of the overzealous ex-ante intrusive practices of regulatory officials
and/or the use of technology, a full exploration of the nature of discretion
and the significance of human judgement in regulation falls beyond the
scope of this inquiry.
9
407
7 The Financial Conduct Authority was formerly known as Consumer Protection and
Markets Authority. HM Treasury, `A new approach to financial regulation: building a
stronger system' (2011; Cm. 8012) para. 4.6; HM Treasury, `A new approach to
financial regulation: judgement, focus and stability' (2010; Cm. 7874) ch. 4, both
available at gov.uk/fin_index.htm>; S. Nicoll, `FSA 's
approach to consumer protection', FSA speech to Scottish Financial Enterprise, 24
June 2010) at : hes/
2010/0624_sn.shtml>.
8 For a recent empirical investigation of firms' responses to TCF, see S. Gilad,
`Enlisting Commitment to Internal Compliance via Reframing and Delegation',
Centre for Analysis of Risk and Regulation Discussion Paper 64 (2010), particularly
at p. 5, available at c.uk/collections/CARR/pdf/DPs/
Disspaper64.pdf>. This investigation regards TCF as a form of `process-oriented'
regulation and concludes that, under conditions of substantial discrepancy between
the Authority's and the industry's expectations, TCF has been transformed into
business discourse where various professionals lead the process of internalization and
delegation of responsibilities down the organizational hierarchy. Gilad's investigation
falls short of assessing the consequences of this development for the content of
regulation and its congruence (or not) with regulatory goals. Similarly, it does not
take a stance on the merits of this development. The notion of process-oriented
regulation is discussed below in section II.
9 For an insightful examination of the impact of technology on the exercise of human
judgement with special reference to fina ncial regulation, see K. Bamberger,
`Technologies of compliance: Risk and regulation in a digital age' (2010) 88 Texas
Law Rev. 669±739.
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I. THE DEVELOPMENT OF TCF
The regulatory requirement on firms to treat their customers fairly is not
new. It goes back to the days of the Policyholders Protection Act 1975,
which contained the concept of treating policyholders fairly, and of the
Securities and Investment Board (SIB) and Self-Regulatory Organizations
(SROs), which under the Financial Services Act 1986 shared the respon-
sibility of upholding investor protection by producing detailed rules and,
progressively, principles and guidance regarding conduct of business, by
monitoring compliance and taking enforcement action.
10
These rules focused
on information disclosure, the suitability of products to customers' needs,
and the treatment of risk, particularly at the point of sale. They were imple-
mented as part of a system of self-regulation under a statutory framework.
11
To this effect, the SIB exercised leadership while SROs performed a crucial
role as interpretive communities. Their key tasks included cultivating a
common understanding of the relevant conduct of business rules, the
exercise of informal peer pressure to ensure compliance and, ultimately, the
promotion of cultural change down at the level of each regulated firm.
12
This was particularly the case after the new settlement with the bringing
into force of the Companies Act 1989, given that it relaxed the stringency
and legalistic nature of the original conduct-of-business regime and tackled
the problem of creative compliance.
13
By the early 1990s, the regulatory
approach regarding the conduct of business in general and the fair
treatment of customers in particular was transformed into a regime that ± in
the name of `self-regulation' ± placed emphasis on principles instead of
detailed rules and highlighted that the priority of regulatory officials was
the delivery of certain outcomes rather than blind adherence to regulatory
provisions.
14
Despite these efforts, a series of mis-selling scandals during the mid 90s
exposed the flaws of this approach and brought consumer protection to the
408
3(1)(a), although it continued to be in force for certain purposes subject to
modifications by S.I. 2001/2967 ± specifically, arts 1(2), 9, 11, and Sch. 1, Part I ±
and S.I. 2001/3538, art 1(2). As a rule, regulated firms that were directly authorized
by SIB were subject to SIB's conduct of business requirements. Firms that were
members of one of the SROs were bound by SROs' conduct of business rules. For a
general discussion of the Conduct of Business regime under the FSA 1986, see B.
Rider, C. Abrams, and M. Ashe, Guide to Financial Services Regulation (1989, 2nd
edn.) ch. 5. For a more general discussion of the system of financial regulation under
FSA 1986, see Page, op. cit., n. 5.
11 L. Gower, `Big Bang and City Regulation' (1988) 51 Modern Law Rev. 1±22, at 11.
12 J. Black, Rules and Regulators (1997) 30±7; J. Black, `Talking about regulation'
(1998) Public Law 77±105.
13 id. (1997), pp. 75, 92±3.
14 id., pp. 103±5, 129±32.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
top of the reform agenda of the Labour government of the time.
15
After the
Financial Services and Markets Act 2000 (FSMA 2000) came into force and
the launch of the Financial Services Authority (FSA) in place of the SIB,
consumer protection was upgraded as one of the statutory objectives of the
new regulatory authority of the time.
16
Furthermore, it found expression in
High-level Principles for Business, and a comprehensive set of more
concrete requirements regarding the conduct of business, which replaced the
pre-FSMA 2000 regime.
17
Despite the growing attention given to issues of consumer protection in
the retail financial sector, these developments did not make a huge difference
in practice.
18
Thus, in June 2001, and in the face of recurring scandals of
mis-selling, the FSA announced its TCF initiative in a paper entitled
`Treating customers fairly after the point of sale'.
19
In this paper, the FSA
409
15
Strangely enough `mis-selling' does not feature in the FSA Handbook. Nevertheless, it
typically refers to advised sale that does not meet Handbook requirements as, for
instance, the requirements with respect to `know your customer' and `suitability of
advice'. The causes and consequences of pension mis-selling scandals during the late
90s and the regulatory response to this problem are considered in C. Blair, `Financial
Services and Markets Bill: Bill 121 of 1998±1999', House of Commons Library
Research Paper 99/68 (24 June 1999) 11±12, at
commons/lib/research/rp99/rp99-068.pdf>. Prudential was one of the worst offenders
of the pension mis-selling scandal in the late 90s and was eventually forced to pay £1.1
billion compensation (see ). For a
comprehensive discussion, see J. Black and R. Nobles, `Personal Pensions Misselling:
The Causes and Lessons of Regulatory Failure' (1998) 61 Modern Law Rev. 789.
16 Apart from consumer protection, the FSA was entrusted with promoting market
confidence, public awareness, and the reduction of financial crime. The Financial
Services Act 2010, which amended FSMA 2000, added one more statutory objective,
namely, the promotion of financial stability.
17 The financial promotions regime is set out in s. 21 FSMA 2000, which should be read
in conjunction with ss. 25 (contravention of s.21) and 145 (financial promotion rules).
The Eleven High-level Principles for Business are set out in PRIN 2.1 of the FSA
Handbook. More detailed rules on conduct of business are provided in the Conduct of
Business Sourcebook (COBS). There are special conduct of business rules for
insurance companies (ICOBS), banks (BCOB), and firms specializing in mortgages
and home finance (MCOBS). See .
18 Some notable firms among the offenders include Alliance & Leicester (see
www.guardian.co.uk/money/2008/oct/07/ppi.insurance>) and the internet based bank
Egg (see n.co.uk/money/2008/dec/10/ppi-mis-selling-credit-
cards>) which were fined £7 million and £721,000 respectively for serious failures
in selling Personal Protection Insurance (PPI) to their customers, as well as Capita
Trust Company (see FSA, `FSA fines Capita Company Ltd £300,000 for misselling
precipice bonds', FSA/PN/085/2004, at fsa.gov.uk/Pages/Library/
Communication/PR/2004/085.shtml>. On the phenomenon of sales misconduct in
the retail financial services, see R.V. Ericson, `The institutionalization of deceptive
sales in life insurance' (2006) 46 British J. of Criminology 993±1010.
19 FSA, `Treating Customers Fairly after the point of sale', FSA Discussion Paper 7
(2001).
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
highlighted three action points. The first was the broadening of the scope of
regulation beyond information disclosure and the suitability of the products
of the point of sale. The second was less reliance on the Handbook
provisions ± particularly Principle 6 which instructed that `A firm must pay
due regard to the interests of its customers and treat them fairly'.
20
The final
point was greater intervention in a number of key areas.
A series of further developments sharpened up the FSA's approach to
TCF. The FSA's growing appetite for a principles-based approach to
regulation, which was communicated in several publications regarding the
review of the design and content of the FSA Handbook, added a principles-
based and outcome-oriented dimension to the implementation of TCF.
21
Likewise a range of other communication papers highlighted the Authority's
growing interest in internal management, processes, and performance. These
dealt with a variety of issues including best practice in relation to the internal
management of risks pertaining to the fair treatment of customers and the
monitoring and review of processes with respect to the firm's self-evaluation
of its performance. All these are discussed in more detail below.
II. THE NATURE OF TCF
The FSA's style of regulation is rule-based, principle-based, risk-based, and
discursive.
22
The authority has not always given equal weight to each one of
these four elements. More than ten years ago, its priority was the prolifera-
tion of rules and the design of the FSA Handbook.
23
Five years ago much
effort was devoted to the revision of the risk-based framework.
24
Around the
same period of time, the FSA started to accentuate the principles-based
410
20 FSA, Treating customers fairly ± towards fair outcomes for consumers (2006) para.
1.4. Other principles that are also linked with TCF include principle 1 (`A firm must
conduct its business with integrity'), principle 2 (`A firm must conduct its business
with due skill, care and diligence'), principle 3 (`A firm must take reasonable care to
organise and control its affairs responsibly and effectively with adequate risk
management systems'), and principle 7 (`A firm must pay due regard to the
information needs of its clients, and communicate information to them in a way which
is clear, fair and not misleading').
21 The impact of principles-based regulation on the formation of TCF is manifested by
the fact that some scholars actually use TCF as an example of principles-based
regulation. See K. Davies, `Why Treating Customers Fairly is here to stay' (2009)
Compliance Monitor 15±18. As will be explained later on, this is a rather over-
simplified account of the nature of TCF.
22 A. Georgosouli, `The nature of the FSA policy of rule use: a critical overview' (2008)
28 Legal Studies 119±39.
23 FSA, `Designing the FSA Handbook of Rules and Guidance', FSA Consultation
Paper No 8 (1998); FSA, FSA: Meeting Our Responsibilities (1998).
24 J. Black, `The emergence of risk-based regulation and the new public risk
management regime in the United Kingdom' (2005) Public Law 512±48.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
aspect of its approach to regulation. Not only does that continue to be the
case today, but it has also triggered further developments. Indeed, what was
initially launched as a commitment to the delivery of outcomes was pretty
soon followed by an emphasis on the need to bring about cultural change
down to the level of each regulated firm by way of strengthening the
communicative character of regulation and relying more and more on the
regulatory capacity of ad hoc interpretive practice, instead of the usual
rulebook approach to regulation. The Treating Customers Fairly (TCF)
initiative demonstrates this emerging trend.
25
In its current form, TCF draws on management-based, performance-based,
and process-oriented approaches to regulation.
26
These are overlapping and
complement each other, and are quite often used interchangeably in the
literature. However, for the purposes of this article, it pays to draw a
distinction between them, as they allude to different aspects of regulatory
practice.
27
In the case of management-based regimes, firms are induced to
develop plans and monitoring systems for the delivery of certain public policy
objectives. Compliance is determined by whether a firm has acceptable plans,
not on the basis of detailed adherence to prescriptions or outcomes of the
production process. Proc ess-oriented regulatio n focuses on the firms'
engagement in a process of comprehensive self-evaluation, design, and
management of their business.
28
Finally, performance-based regulation
constitutes an extension of principles-based regulation in the sense that it
focuses on the attainment of outcomes and leaves it to the regulated
population to decide how best these can be achieved.
TCF involves developing a common view on the rights and responsibili-
ties of both consumers and firms and helping senior management to work out
for themselves what practices guarantee fair treatment for their clients.
29
It
intends to ensure, amongst other things, that consumer information is simple
411
25 J. Patient, `Treating Customers Fairly: the challenge of principles-based regulation'
(2007) 22 J. of International Banking Law and Regulation 420±5; and Davies, op.
cit., n. 21.
26 Arguably, all these three approaches to regulation mark a shift away from command-
and-control regulation, whose main feature is the prescription of a particular mode of
action and emphasis on compliance with the prescribed rules and standards. P. May,
`Regulatory regimes and accountability' (2007) 1 Regulation and Governance 8±26,
at 10.
27 The terms `management-based' regulation and `process-oriented' regulation are
typically used interchangeably in the literature. C. Coglianese and D. Laser,
`Management-based regulation: Prescribing private management to achieve public
goals' (2003) 37 Law and Society 691±730, at 693±4.
28 N. Gunningham and P. Grabosky, Smart Regulation: Designing Environmental
Policy (1998).
29 The requirements placed on senior managers of regulated financial services
businesses are contained in the `Senior Management Arrangements Systems &
Controls' (SYSC) chapter of the FSA Handbook. These rules have been extensively
reviewed and updated as a result of the implementation of MiFID in late 2007.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
and understandable, that firms operating in the retail sector are well
managed, adequately capitalized and, more importantly, capable of treating
customers fairly. With respect to TCF, FSA has produced a list of six
outcomes that firms should deliver, namely, the following:
Outcome 1: Consumers can be confident that they are dealing with firms
where the fair treatment of customers is central to the corporate culture.
Outcome 2: Products and services marketed and sold in the retail market are
designed to meet the needs of identified consumer groups and are targeted
accordingly.
Outcome 3: Consumers are provided with clear information and are kept
appropriately informed before, during and after the point of sale.
Outcome 4: Where consumers receive advice, the advice is suitable and takes
account of their circumstances.
Outcome 5: Consumers are provided with products that perform as firms have
led them to expect, and the associated service is both of an acceptable standard
and as they have been led to expect.
Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by
firms to change product, switch provider, submit a claim or make a
complaint.
30
The enlisted TCF outcomes echo the content of the FSA's Eleven High-level
Principles of Business but are not part of the FSA Handbook. They are stated
in one of FSA's communication papers regarding TCF. Indeed, TCF is not a
set of new rules. In place of a tailor-made rulebook, FSA has opted for a
regime that places emphasis on interpretive practice and its regulatory
capacity to inform, shape, guide, and monitor the endeavour of each
regulated firm to develop best managerial practice and ultimately deliver the
envisaged TCF outcomes. To this effect, FSA officials are entrusted with the
task of facilitating a complex network of communication whose aim is two-
fold: on the one hand, to explicate, review, and rework the essence of
regulatory norms and, on the other, to bring about cultural change. In the
same spirit, regulated agents are asked to abstain from any passive adherence
to exogenous commands coming directly from the FSA. Instead, the
dominant perception is that the regulated community is capable of becoming
cognisant of the collective responsibility that its active participation in
regulation entails and to work out for itself and on an ad hoc basis what it is
like to internalize basic moral norms into the day-to-day business.
The FSA relies on the capacity of senior managers to bring about cultural
change and incorporate TCF objectives into their firm's business consist-
ently.
31
For instance, senior managers are asked to participate more actively
in the interpretation of the FSA's stipulations and, upon due reflection, to
412
30 FSA, op. cit., n. 20, p. 2; Patient, op. cit., n. 25, p. 421.
31 This is because senior managers are thought to be in better position to know how their
internal processes need to be structured in order to bring about TCF outcomes. H.
Sants, `The FSA retail agenda: Working with the industry', speech at FSA AIFA
Dinner, 21 November 2007.
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decide which is the best way to ensure compliance. In addition, they are
expected to demonstrate to themselves and the FSA how they actually
deliver TCF outcomes.
32
In this connection, it is worth noticing that the
Authority places great emphasis on the delivery of outcomes and that overall
it has shown a robust willingness to bring enforcement action against non-
compliant senior managers and firms.
33
One of the recent cases that clearly
demonstrates this is the case of Martyn Powsney ± the former director of an
IFA firm ± who was prohibited from carrying out his business as an
independent advisor because, amongst other things, he was unable to show
that he had put in place adequate systems and controls to guarantee the
suitability of advice and the fair treatment of his firm's customers.
34
Senior managers are not left alone to work out what is expected from them,
given that their decisions are guided and monitored by the FSA. The FSA
resorts to informal means of communicating its commands and expectations.
Alongside discussion papers, speeches, and case studies offering guidance on
good and bad practice, it publishes FAQs and `Dear CEO' letters and
occasionally makes references to industry guidance. It carries out cross-firm
projects and `roadshow' events in order to address questions and share
information with the industry. Furthermore, the FSA runs an industry place-
ment scheme. Finally, the prospect of enforcement action is also assessed as a
vehicle for conveying the Authority's expectations and educating the broader
regulatory community.
35
Alongside the FSA, the Financial Ombudsman Service (FOS) also
performs a crucial role with respect to the delivery of TCF outcomes.
36
413
32 N. Delfas, `Treating Customers Fairly ± The way forward', speech at FSA Freshfields
Client Seminar, 26 March 2009.
33 More than twenty firms selling payment protection insurance (PPI) policies were
fined because they failed to incorporate TCF into their corporate culture. Some of
them are the following: Alliance & Leicester with £7 million (FSA Final Notice: 6
October 2008), HFC Bank with £1,085,000 (FSA Final Notice: 16 January 2008), GE
Capital Bank with £610,000 (FSA Final Notice: 30 January 2008), and Capital One
Bank (Europe) plc with £175,000 (FSA Final Notice: 15 February 2007): Delfas, id.
With respect to the FSA's enforcement action and its problems in the context of TCF,
see Patient, op. cit., n. 25, p. 424.
34 FSA,`FSA bans independent financial adviser for not having appropriate systems and
controls in place', press release, 1 April 2010.
35 On FSA's enforcement strategy, see M. Cole, `Delivering credible deterrence',
speech to FSA Annual Financial Crime Conference, 27 April 2009) and M. Cole,
`How enforcement makes a difference', speech to FSA Enforcement Law
Conference, 18 June 2008.
36 Sections 225±34 of FSMA provide the legal framework of FOS. Its operation is set
out in more detail in the FSA Handbook (DISP: Dispute Resolution: Complaints).
See, also, Memorandum of Understanding between the Financial Services Authority
and the Financial Ombudsman Service Limited (the FOS) (last updated 6 April 2007),
at . Apart from FOS, the Office of Fair
Trading and the Competition Commission also cooperate with the FSA with regards
to the fair treatment of customers. For example, in relation to PPI mis-selling, the
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
Although the chief mandate of the FOS is to investigate consumer com-
plaints regarding the provision of certain financial products and services
and order redress where appropriate, one should also take notice of its role
in cultivating a common understanding of what TCF entails in practice.
37
Indeed, FOS decisions inform the interpretation of TCF requirements
38
and, in the long run, they provide guidance on how to improve
performance.
39
An example that demonstrates the above points regarding the role of the
FOS in the implementation of TCF and how it cooperates with the FSA can
be drawn from recent instances of mis-selling in the single premium
market.
40
Since 2005, the FSA has been concerned about the frequency of
mis-selling of Payment Protection Insur ance (PPI) policies and the
handling of customer complaints. It has been supervising and monitoring
sale practices, and communicating its findings, recommendations, and
stipulations in several ways. These include two statements prompting firms
to consider whether they should be selling single-premium PPI with
unsecured loans and the publication of a `Dear CEO' letter, requesting
firms to abstain from selling single-premium PPI.
41
Where the FSA took
enforcement action, it also published a Final Notice making special
reference to the education of the public as one of the considerations which
were taken into account before deciding on the imposition of administrative
414
FSA asked practitioners to stop selling single-premium PPI on the basis of an earlier
report by the Competition Commission which recommended that the sale of this
product be prohibited after 1 October 2010.
37 Arguably, the exclusion of the legal system from regulatory decision making is a
prerequisite for cultivating a common understanding of regulatory stipulations: J.
Black, `Using rules effectively' in Regulation and Deregulation, ed. C. McCrudden
(1999) 95±121, at 102.
38 P.E. Morris, `The Financial Ombudsman Service and the Hunt Review: continuing
evolution in dispute resolution' (2008) J. of Business Law 785±808, at 791.
39 Lord Hunt, A call for evidence to the independent review of the Financial
Ombudsman Service (2007) ch. 4, at
Call_for_evidence.pdf>. It is worth noticing that the latest Hunt Review on the FOS
pays special attention to the communicative activity of the FOS and makes certain
recommendations for its improvement. See Lord Hunt, The Hunt Review: Opening
Up, Reaching Out and Aiming High: An agenda for accessibility and excellence in
the Financial Ombudsman Service (2008), at
updates/FOS_Report.pdf>.
40 The sale of PPI policies is subject to the FSA eleven Principles for Business and
ICOB since 14 January 2005.
41 FSA, `Letter to the CEOs still selling and underwriting single premium payment
protection insurance with unsecured personal loans' (23 February 2009), at
www.fsa.gov.uk/pubs/ceo/loan_ppi.pdf>; `Update on FSA work on the sale of PPI'
(20 January 2009), at
2009/012.shtml>; `FSA update on its review of the sale of PPI' (30 September
2008), at es/Library/Communication/PR/2008/
112.shtml>.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
fines or other penalties.
42
During this period the FOS helped the FSA
identify practices that posed risks to the fair treatment of customers and
decide on what should be the best course of action. In fact, the FOS was the
first to raise the issue of poor treatment of customers in the single-premium
market and asked the FSA to consider whether it should take wider
regulatory action, in light of evidence showing a substantial increase in
complaints about PPI and an alarming proportion of cases.
43
In addition,
the FOS advised the FSA on the latter's approach in ensuring that
customers' complaints are assessed fairly by the firms and that customers
receive redress where appropriate.
Despite the informal nature of TCF and the emphasis on deliberation, the
FSA has been extensively preoccupied with the managerial affairs of the
firms. Specifically, its approach has been progressively transformed into a
concrete set of intrusive measures, which bear little resemblance with what
was initially a gentle encouragement to abide by TCF recommendations.
44
These measures intend to help regulatory officials monitor and measure
progress as well as guide and control internal activities that in the past, and
because of the rule-centred character of regulation, were beyond reach.
Indeed, nowadays the FSA has a strong voice on a wide range of issues
including the allocation of resources and competences, the degree and
manner of the involvement of key players in communicating these changes,
the nature of staff training, and the kind of remedial action that may be
deemed necessary.
The FSA's intervention may be proactive, with a view to mitigating the
risk that the customers of a specific firm will not be treated fairly, but it may
also be reactive, in response to evidence demonstrating a firm's failure to
comply with TCF.
The `product life-cycle' is an FSA regulatory device that is typically
associated with proactive intervention. Its main purpose is to align firms'
TCF strategies with those of the FSA from the early stages of planning and
production through to after-sale services. However, its significance does not
415
42 See, for instance, para. 5.2 of the Final Notice for Alliance & Leicester, which states
that a `financial penalty is required to strengthen the message to the industry that it is
vital to take proper steps to ensure' that customers are treated fairly, at
www.fsa.gov.uk/pubs/final/alliance_leicester.pdf>. The FSA's policy in relation to
the imposition of financial penalties is set out in ch. 6 of the `Decision Procedure and
Penalties Manual' (DEPP), which forms part of the FSA Handbook.
43 These cases were eventually overturned in favour of customers: FOS, Annual Review
2008±2009 (2009) 50, at
ar09.pdf>. See, also, FSA, `Update on FSA work on the sale of PPI' (20 January
2009), at es/Library/Communication/PR/2009/
012.shtml>.
44 More recently, the FSA's appetite for more immediate involvement in the managerial
affairs of the regulated firms has been confirmed by the incorporation of the TCF
regime into the Authority's core supervisory processes: see n. 33 above.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
stop there. On the one hand, its very implementation sets out the framework
of communication between the regulated firms and FSA officials and
informs the constant assessment of the firms' performance in delivering TCF
outcomes. On the other hand, it makes it possible for regulatory officials to
control from an early stage matters as diverse as product design and govern-
ance, the identification of target markets, the marketing and promoting of
products, the process of sale and advice, after-sales information, and
complaint-handling practices.
45
Other regulatory measures that work in a
similar fashion include the FSA's cultural framework, which intends to help
firms build TCF into their culture, and Management Information (MI), which
is a device that helps senior managers to keep things in perspective and
allows the FSA to get a more accurate view of the firms' capacity to deliver
TCF outcomes.
46
The FSA's reactive intervention essentially reflects its enforcement
strategy. A case that demonstrates the Authority's approach in this regard is
that of Alliance & Leicester (A&L) ± one of the firms fined for PPI mis-
selling.
47
A&L is well known as the firm, which was ordered to pay the
biggest fine for serious failings in the selling of PPI in recent times.
However, what is perhaps more interesting is that A&L also agreed to
implement a customer contract programme overseen by third-party
accountants. Under this programme A&L undertook, amongst other things,
to contact all customers that purchased PPI in conjunction with an unsecured
loan, to review its policy in respect of product information that was sent to
these customers, to review any rejected complaints and claims, and pay
redress where appropriate. The way in which the FSA treated A&L makes
clear that the FSA's strategy of enforcement goes far beyond `penalizing'
unacceptable forms of market conduct, given that the offender's failure to
comply with TCF is seen as an opportunity for the regulated firm to reflect
on what went wrong and revise internal processes and practices.
To sum up, TCF requires regulated firms to engage in a process of
comprehensive self-evaluation, design, and management of their operations
and their internal governance and controls, all with the view of ensuring that
416
45 Arguably, when the demand for more intervention is so high, it may inevitably lead to
the de facto `rulification' of TCF guidance and, consequently, to the negation of any
attempt to foster compliance with TCF upon due reflection. The phenomenon of
rulification is discussed in F. Schauer, `The tyranny of choice and the rulification of
standards' (2004±2005) J. of Contemporary Legal Issues 803. This point is further
considered below in section IV.
46 FSA, Treating Customers Fairly ± Guide to Management Information (July 2007) 4.
MI is considered in further detail at p. XX below.
47 FSA, `The Financial Services Authority has fined Alliance & Leicester Plc (A & L)
£7 million for serious failings in its telephone sales of payment protection insurance
(PPI)', press release , 7 October 2008. With respect to misselling, consumers may also
bring a legal action in contract, in tort such as for negligent advice, misstatement or
breach of statutory duty as provided by s. 150, FSMA 2000.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
customers are treated fairly. Its aim is to stimulate self-regulation and use it
to the advantage of socially desirable goals ± in this particular case,
consumer protection by securing fair treatment for customers in the retail
financial sector. In the remainder of this article, I assess the merits of this
approach and explain why it may not work in practice.
III. THE MERITS OF TCF
The FSA's approach to TCF is morally compelling. By embracing the idea
of self-regulation, it subscribes to a vision of a political community whose
members are capable of working out for themselves the public standards that
govern their relationships and of acting in important matters with integrity.
48
In this spirit, the regulated firms are not treated as passive recipients of
regulatory commands but as capable of playing their own part in making sure
that their customers are treated fairly, given that, in theory at least, they
enjoy a considerable degree of freedom to make sense of TCF and to
translate it into everyday business practice. Self-regulation also creates a
sense of legitimacy; it opens up the regulatory process and makes it more
transparent.
Apart from being morally appealing, TCF also seems to be an efficient
means of upholding consumer protection in the retail financial sector. The
presence of management-based and performance-oriented elements in TCF
aim to stimulate the self-regulatory capacity of each firm that falls under the
regulatory net. It is in this manner that TCF tries to tackle a series of
persistent problems that are typically associated with rulebook regulation.
These include, but are not limited to, the problem of creative compliance, the
cost of rule making and enforcement, lack of flexibility, and problems of
over- or under-inclusiveness.
49
Until recently, the FSA addressed these
problems by trying to perfect the design of the FSA Handbook. However, the
result was less than satisfactory. Under TCF, the FSA deals with these
difficulties in a manner that relies significantly less on the function of the
FSA Handbook as the main means of communicating regulatory commands.
Instead, it resorts to direct and informal ways of communication.
The decision to rely less on the traditional rulebook approach as a medium
of communicating commands, offering guidance, and conveying threats and
expectations is premised on the belief that a direct and informal way of
417
48 R. Dworkin, Law's Empire (2000) 166.
49 The limitations of rules as instruments of social organization and control and the
problem of creative compliance are well documented in the literature: R. Baldwin,
`Why rules don't work' (1990) 53 Modern Law Rev. 321±37; Black, op. cit. (1997), n.
12; and D. McBarnet and C. Whelan, `The elusive spirit of law' (1991) 54 Modern
Law Rev. 848±73. For a law and economics perspective, see C. Diver, `The optimal
precision of administrative rules' (1983) 93 Yale Law J. 65±109.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
communication guarantees flexibility and adaptability.
50
For example, under
TCF, the FSA can afford to provide guidance that reflects a finite and known
set of circumstances that is specific to each individual firm and to which the
firm can more easily relate. Likewise, when things change, there is no need
for the Authority to go through the formal and time-consuming rule-making
procedure in order to bring regulatory stipulations in line with the latest
industry developments. Moreover, informal communication arguably places
the FSA in a better position to obtain crucial and timely information with
respect to policy reform and the likely reaction of the regulated population.
Furthermore, TCF seems to afford a more participatory and discursive
approach to regulation than the rulebook approach. Indeed, one of the
appealing features of TCF is that the alignment of the industry's perceptions
regarding the fair treatment of customers with the Authority's agenda is
much more a matter of deliberation and persuasion rather than of obeying
commands from above. In addition, the industry's engagement in the
implementation of TCF is more likely to secure higher levels of compliance,
because regulatees are better able to make sense of regulatory requirements
when they have the chance to shape their formation.
51
More generally, the
industry's enhanced role in the context of TCF promises to bring about long-
term cultural change, given that through this involvement each regulated
firm is expected to become more cognisant of its own responsibility in
implementing TCF and, over time, more sophisticated in sensing what TCF
requires, even in the presence of new and unforeseen circumstances.
52
In addition, management-based regulation holds a number of advantages
over traditional regulation.
53
Empirical evidence suggests that it works well
in heterogeneous industries.
54
It trims down the cost of rule making because
it places the responsibility of decision making with those who arguably have
a better view of the risks and the available options for keeping them under
control. Furthermore, it creates favourable conditions for optimal compli-
ance. In this connection, it has been observed that regulatees who are given
the chance to decide issues of procedures and processes are more likely to
418
50 I. Ayres and J. Braithwaite, Responsive Regulation: Transcending the Deregulation
Debate (1992) 110.
51 O. Lobel, `Interlocking Regulatory and Industrial Relations: The governance of
workplace safety' (2005) 57 Administrative Law Rev. 1071, at 1089.
52 Dworkin, op. cit., n. 48, pp. 188±9.
53 Coglianese and Laser, op. cit., n. 27, pp. 695±6.
54 See, for instance, N. Gunningham and D. Sinclair, `Organisational trust and the limits
of management-based regulation' (2009) 43 Law and Society Rev. 865±900 in
relation to health and safety regulation; C. Coglianese and J. Nash, `The promise and
performance of management-based strategies' in Leveraging the Private Sector:
Management-Based Strategies for Improving environmental performance, eds. C.
Coglianese and J. Nash ( (2006) 249±63 in the field of environmental protection; and
L. Snyder Bennear, `Are management-based regulations effective? Evidence from
state pollution prevention programs' (2007) 26 J. of Policy Analysis and Management
327±48 with respect to the environmental performance of manufacturing plants.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
view them as reasonable and worthy of compliance.
55
Last but not least, by
granting firms the flexibility to develop their own strategies, management-
based regulation enables firms to experiment and seek out better and more
innovative solutions.
Similarly, performance-based regulation concentrates a range of
appealing features. Whereas management-based regulation implies that the
regulator intervenes at the stage of planning, performance-based regulation
entails regulatory intervention at the output stage and, thus, in the context of
TCF, it performs a complementary function. Apart from that, and perhaps
more importantly, performance-based regulation brings the FSA's
principles-based approach to regulation to the next level, in the sense that
the focus is now on the delivery of tangible and measurable outcomes, rather
than on simply demonstrating compliance with regulatory principles. As
with management-based regulation, under performance-based regulation the
FSA delegates powers to firms but such delegation is neither wholesale nor
unconditional. It is structured, it is monitored, and it is assessed.
Furthermore, it is on the basis of this on-going assessment that the Authority
decides further action as well as the appropriate degree of intervention, while
the regulated firms reflect on `what worked' and `what didn't' in order to
draw lessons about best practice accordingly.
56
Finally, the FSA's approach to enforcement in relation to TCF is
compelling. Specifically, the desirability of enforcement action is assessed
in light of its likely impact on the industry's capacity to develop patterns of
self-regulation. It is forward looking; it aims to educate the regulated
industry and precipitate cultural change. Being partly premised on
negotiation, the enforcement procedure itself creates opportunities for the
alleged offender to deliberate with FSA officials, become cognisant of its
failure to comply with FSA requirements, and take the initiative to remedy
any wrongdoing and revise its business pra ctice accordingly.
57
The
involvement of the FOS in the enforcement of TCF also promotes legal
certainty and predictability, namely, conditions that are essential for making
the regulated population confident enough to develop patterns of self-
regulation.
58
The FOS does not simply offer a complaints handling and
dispute resolution procedure that is cost-efficient, speedy, and informal;
59
419
55 Ayres and Braithwaite, op. cit., n. 50.
56 This is discussed in section II above.
57 See also the discussion regarding the FSA's enforcement action against A&L at p.
416 above.
58 FSMA 2000, Part XVI, sch. 17 sets out the statutory framework on the basis of which
the FOS currently operates. The FOS has the statutory power to resolve disputes by
reference to what is fair and reasonable, given the circumstances of each particular
case (s. 228(2)). For a critical appraisal of the FOS, see Morris, op. cit., n. 38, p. 789.
59 The decisions of the FOS are subject to judicial review but so far intervention has
been confined to instances of irrationality. The courts have been reluctant to substitute
the decisions of the FOS on their merits. See, for instance, R. (on the application of
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
its decisions provide valuable interpretive guidance and even out
interpretive discrepancies.
60
Despite its merits, TCF is not free from problems. Some of them cancel
out the FSA's ambition to boost self-regulation and make use of it in order to
further socially desirable goals. These are considered below.
IV. SOME PROBLEMS
TCF is an ambitious project. One of its key advantages is that it attends to the
firms' internal management, processes, and performance with the view of
stimulating the self-regulatory propensity of the regulatees to the furtherance of
consumer protection. Self-regulation flourishes where regulation is practised in
a manner that leaves scope for reflection, initiative, and experimentation, under
conditions of relatively reasonable legal certainty and predictability.
Accordingly, one important question is whether these conditions are present
in practice. Although little empirical research has been done on the
effectiveness of TCF and the factors that may compromise its successful
implementation, a growing volume of literature dedicated to the examination
of regulatory approaches with similar characteristics to those of TCF can help
us draw some useful conclusions about the possible answer to this question.
With respect to TCF, one source of concern stems from the policy
decision to depart from the traditional rulebook approach and to resort to
direct and informal means of communicating regulatory stipulations. TCF
seems to be premised on the belief that in the absence of rules, problems that
are associated with their use ± most notably, that of legal uncertainty ±
vanish automatically. In this connection, it is argued that legal certainty may
no longer be as much a function of the design of rules but it is certainly
contingent to the means through which informal communication is
conducted. TCF does not involve any drafting of rules, but it does involve
the drafting of texts. These texts are no less authoritative than the content of
the FSA Handbook. To all intents and purposes, they command compliance
and may even justify enforcement action; yet what they actually entail in
practice may be at least as uncertain and unpredictable as it would be if they
420
the application of Heather Moor and Egdecomb Ltd)) v. Financial Services
Ombudsman Service Ltd [2008] EWCA (Civ) 642, para. 75 per Burnton LJ, para. 80
per Rix LJ.
60 It is also worth noticing that the FOS also tackles different bureaucratic cultures and
priorities by following through a special procedure which involves institutionalized
cooperation between the FSA and the Office of Fair Trading. This procedure is
essential before any decision to impose further regulatory, disciplinary or court action
by these bodies: Morris, op. cit., n. 38, pp. 788±9. For a more detailed discussion, see
H. McVea and P. Cumber, `The Financial Ombudsman Service and disputes Involving
``wider implications''' (2007) Lloyds Maritime and Commercial Law Q. 246.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
possessed the status of FSA Handbook provisions.
61
The FSA is aware of this
problem, but the way in which it tries to address it is questionable.
Specifically, the FSA relies on intensive supervision and, where appropriate,
the decisions of the FOS. However, as will be explained below, intensive
supervision has its own limitations and may even discourage regulatees from
developing and maintaining patterns of self-regulation. As for FOS
decisions, suffice to say that these come too late ± that is, once enforcement
action has been taken.
One would expect the presence of legal uncertainty to be counterbalanced
by the fact that TCF is flexible enough to allow space for reflection and
experimentation. However, this is not the case in reality, as the way in which
TCF is implemented has eventually caused its `rulification'.
62
This term
describes the situation, where due to the ensuing legal uncertainty and lack
of predictability in a principles-based regime, the regulator responds with an
over-production of detailed and legally binding rules and guidance and/or
decides that greater intervention in the day-to-day running of the regulated
firms is the most appropriate course of action.
63
In the case of TCF, the
industry's demand for more regulatory intervention to address the
uncertainties surrounding the implementation of the `product life cycle'
framework compelled the FSA to resort to highly detailed guidance.
Specifically, two examples that could be mentioned in this regard are the
FSA's Treating Customers Fairly ± Culture and its Treating Customers
Fairly: Guide to Management Information. Both were published in 2007 and
provide a set of detailed key drivers and high-level indicators and contra-
indicators for the firms' perusal.
64
These publications may have addressed
the regulatees' demand for more certainty; however, the Authority's
response has not come without difficulties. In particular, given the level of
detail and specificity of these documents, the danger here is that they tend to
substitute the discretion of managerial staff putting the FSA in a position to
actually control matters that were originally supposed to fall within the
competence of firms as, for instance, product design and governance, the
identification of target markets, the marketing and promoting of products,
the process of sale and advice, after-sale information, and complaint
handling practices. The FSA's programme of intensive supervision creates
further stiffness and sclerosis. Through intensive supervision, it attempts,
among othere things, to align the firms' business plans and priorities with
421
61 Conduct inconsistent with TCF requirements may give rise to disciplinary action,
provided that it can be shown that it also contravenes one of the High-level Principles
in the FSA Handbook regarding the fair treatment of customers. On the problems
associated with enforcement action on the basis of an alleged breach of the High-level
Principles, see J. Gray and J. Hamilton, Implementing Financial Regulation (2006)
126±8.
62 Schauer, op. cit., n. 45.
63 Coglianese and Laser, op. cit., n. 27, p. 715.
64 FSA, op. cit., n. 46; FSA, Treating Customers Fairly ± Culture (2007) 21.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
those of the FSA and act proactively. However, the involvement of FSA
officials in the internal affairs of regulated firms tends to leave hardly any
scope for reflection and experimentation,
65
given that too much intervention
erodes trust and makes the regulated population less confident in their
expertise and judgement.
66
So far, the analysis suggests that two fundamental conditions for self-
regulation and consequently TCF ± namely, legal certainty and scope for
reflection and experimentation ± are anaemic. Still, the successful imple-
mentation of TCF also entails that firms have the incentive and the capacity
to generate and share information that is accurate and reliable; otherwise, the
regulator is not in a position to make any safe assessment of the firm's
performance and properly decide any course of action. This depends on
several factors including the cost of planning and implementing processes
and the frequency and nature of decision-making pathologies within the
organizational sphere of each firm.
Several studies suggest that the cost of compliance associated with
management-based regulation like TCF is significant, not least because each
new set of regulatory mandates brings with it a new set of requirements in
such areas as records management, data security, and privacy.
67
MI is a
typical tool that the FSA recommends for the management and channelling
of information.
68
This is essentially information collected during a period of
business activity regarding various aspects of TCF, for instance, customers,
staff, calls, visits, and predictions. It works on two levels. On the one hand, it
enables managers to put information in perspective, align it with regulatory
422
65 By the admission of Hector Sants, FSA Chief Executive, `. . . too aggressive inter-
vention will stifle innovation and arguably reduce risk to a level that inhibits
economic prosperity': H. Sants, `Delivering intensive supervision and credible
deterrence', speech to Reuters Newsmakers Event, 12 March 2009. For a more
general discussion of this point, see C. Coglianese, H. Kilmartin, and E. Mendelson,
`Transparency and public participation' (2008±2009) 77 George Washington Law
Rev. 924±72, at 929; C. Coglianese, R. Zeckhauser, and E. Parson, `Seeking truth for
power: Informational strategy and regulatory policy making' (2004) 89 Minnesota
Law Rev. 277, 337±9.
66 See Patient, op. cit, n. 25, p. 424. In the aftermath of the recent financial crisis and as
a response to growing concerns that it had failed to establish a compliance-driven
culture, the Authority's policy of enforcement was revised and transformed into a
regulatory approach of `credible deterrence' which came into force on 6 March 2010
as part of the FSA's new enforcement regime. H. Sants, `UK financial regulation:
After the crisis', annual Lubbock Lecture in Management Studies, 12 March 2010, at
0312_hs.shtml>.
67 For instance, in a recent report, PricewaterhouseCoopers (PwC) point out that the
`true cost of implementation of the compliance and risk activities in the front, middle
and back office processes is generally multiple times the cost of the risk management,
audit and compliance departments themselves.' PwC, Intelligent Management and
Compliance Cost Reduction 3 (2008).
68 FSA, op. cit., p. 46; Patient, op. cit., n. 25, p. 422.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
stipulations with respect to TCF outcomes, and decide proper modes of
action. On the other, it serves as evidence of the firm's capacity to attain
TCF outcomes. There is no doubt that MI makes it easier for firms to deal
with a tangible proble m ± that of information ma nagement ± and,
consequently, cut down some of the costs of processing an ever-growing
volume of information, especially when supported by compliance
technology. However, this is as far as it goes.
Specifically, MI cannot guarantee the reliability of the data produced. For
one thing, it is unlikely that a firm will disclose unfavourable information,
especially where there is little chance of its ever being discovered.
69
Similarly, people are less likely to pass on information that may be harmful
to themselves or their peers.
70
Human judgement is also subject to auto-
mation bias.
71
This is manifested by the tendency to disregard information
that contradicts information generally accepted as correct. For example,
where firms rely on computer software to ensure compliance with regulatory
mandates or, more generally, where a standardized and automated process of
compliance has been institutionalized within the organizational sphere of the
firm, there is a tendency towards complacency and towards unquestioningly
accepting computer-generated data as correct.
72
Last but not least, the
reward and incentive structure of a firm gives rise to another type of bias; the
`self-serving bias', namely, the tendency to interpret ambiguous information
in a manner that is favourable to oneself.
73
Finally, the FSA's approach to TCF seems to be based on a simplistic and
increasingly obsolete perception of how TCF outcomes are actually trans-
lated into business practice. Nowadays, more and more firms turn to
technology to assess risks and secure compliance with regulatory require-
ments. However, the technology itself is not neutral,
74
given that the
423
69 Coglianese, Zeckhauser, and Parson, op. cit, n. 65, pp. 290, 310.
70 J. Coffee Jr., `Beyond the shut-eyed sentry: Toward a theoretical view of corporate
misconduct and an effective legal response' (1977) 63 Virginia Law Rev. 1099, at
1139; Bamberger, op. cit., n. 9, p. 711.
71 Bamberger, id.
72 The likelihood of this pattern of behaviour increases where computer data may be
used to maximize personal earnings. For example, this is what has happened as a
result of the automation of financial fraud controls in the United States. On this point,
see S. Schwartz and D. Wallin, `Behavioral implications of information systems on
disclosure fraud' (2002) 14 Behavioral Research in Accounting 197±221. Steven
Schwarcz more generally argues that complacency is one of the causes of the recent
financial crisis: see S. Schwarcz, `Protecting Financial Markets: Lessons From the
Subprime Mortgage Meltdown' (2008) 93 Minnesota Law Rev. 373, at 390±1.
73 C. Jolls, C. Sunstein, and R. Thaller, `A Behavioral Approach to Law and Economics'
(1998) 50 Stanford Law Rev. 1471±1551, at 1501±4. This article provides a review of
the literature regarding the effect of self-serving bias on conceptions of fairness. For a
classification of various types of self-serving bias, see J. Rachlinski, `The Uncertain
Psychological Case for Paternalism' (2003) 97 North Western University Law Rev.
1165, at 1172±3.
74 Bamberger, op. cit., n. 9, pp. 675±7.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
reduction of regulatory commands to `code' is informed by the professional
programmers' beliefs and choices about how these should be interpreted in
practice.
75
Accordingly, technology is not merely a tool for implementing
the goals of those who make use of it; it shapes the meaning of those goals
themselves.
76
In the case under examination, this implies that to the extent in which the
implementation of TCF relies on the use of technology, the interpretation of
TCF outcomes may turn out to be different from what it was originally
intended in the sense that it may be at odds with the values and goals of the
TCF initiative. Such an eventuality should not be taken lightly, as the
problem is unlikely to be detected and remedied on time due to several
factors including senior managers' lack of familiarity with information
technology and automation bias, briefly discussed above. The impact of code
on the implementation of TCF also suggests that, contrary to what the FSA
assumes, the successful implementation of the TCF agenda is far more
complicated and may not actually be under the full control of the regulated
firms.
To sum up, TCF intends to be flexible enough to let firms adapt
regulatory mandates according to their individual circumstances and ± at the
same time ± create conditions which would allow the Authority to rely on the
firms' self-regulatory capacity for the delivery of public policy objectives.
The analysis calls attention to some difficulties that deprive TCF of its key
advantage.
CONCLUSION
The principle that firms must treat their customers fairly is not new in the
United Kingdom system of financial regulation. It has existed for many years
and has long been underpinned by a substantial body of rules. Despite its
long history, the success of the regulatory effort to protect consumers from
poor treatment has been rather disappointing. Recurring instances of mis-
selling in the late 1990s and throughout the first decade of the twenty-first
century made the FSA disillusioned about the actual capacity of Handbook
provisions to deliver consumer protection and urged it to reconsider its
overall approach to tackling this problem. The result was the launch of TCF
424
75 The term `code' originates from computer science and refers to the text of a computer
program. In the context of law and regulation, code can be used as a means for social
control. Lawrence Lessig is the leading exponent of this idea: L. Lessig, Code and
Other Laws of Cyberspace (2000) and L. Lessig, Code V2 (2006). For a critique of
Lessig's core thesis see, V.M. Schonberger, `Demystifying Lessig' (2008) Wisconsin
Law Rev. 713±46.
76 M. Heidegger, `The question concerning technology' in Technology and Values:
Essential Readings, ed. C. Hanks (2010) 106±8.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
± a regulatory initiative, which developed outside the FSA Handbook of
Rules and Guidance and aimed to institute cultural change down at the level
of each regulated firm by stimulating self-regulatory patterns of governance
under the Authority's watchful eye and directions.
TCF arguably marks a noticeable departure from the typical `rulebook
approach'. It focuses on internal processes, management, and performance.
It combines elements of management-based, performance-based, and
process-oriented forms of regulation and brings the FSA's principles- and
risk-based approach to regulation to the next level of sophistication. It
requires firms to engage in a process of comprehensive self-evaluation,
design, and management of their operations, internal governance, and
controls so as to ensure that customers are treated fairly. Overall, TCF is
designed in a way that promises to boost the capacity of each firm to regulate
itself and deploy it to the advantage of consumer protection.
By embracing the idea of self-regulation ± here understood as the capacity
of each individual firm for self-control and discipline ± TFC subscribes to a
vision of a political community whose members are capable of working out
for themselves the public standards that govern their relationships and of
acting in important matters with integrity. In addition, TCF seems to be an
efficient means for attaining consumer protection. Its key advantage is that it
tries to create conditions that make possible for the FSA to rely on the
industry's self-regulatory capacity for the delivery of socially desirable
goals. It mandates self-regulation, the aligning of the firms' goals and
priorities with the Authority's goals and priorities and, ultimately, the fine
tuning of the firms' business practice in light of the desired policy objectives.
Compared to traditional command-and-control regulation, TCF is arguably
more flexible, adaptable, participatory, and dialectical and, therefore, more
suited to instituting long-term cultural change regarding the way in which
retail firms perceive their relationship with their customers and what `fair
treatment' entails in practice.
TCF works provided that it can actually foster the ability of each firm to
self-regulate. For this to happen, regulation should be conducted in a fashion
that leaves scope for reflection, initiative, and experimentation under
conditions of relatively reasonable legal certainty and predictability. These
conditions seem to be lacking in practice. Legal uncertainty persists, despite
the contribution of the FOS in providing interpretative guidance and
cultivating a shared understanding of TCF. At the same time, other measures
that were taken to tackle uncertainty ± most notably, the provision of detailed
guidance and the FSA's programme of intensive supervision ± rendered TCF
less flexible than was originally envisaged. The difficulties with TCF do not
stop there. Human judgement is full of biases. When ± under certain
conditions ± these pass undetected, the data produced during the imple-
mentation process is of inferior quality. To the extent in which MI ± one of
the key tools for the monitoring and ass essment of the regulatees'
performance ± draws on this data to inform the decisions of the FSA, the
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effective implementation of TCF is jeopardized. Last but not least, despite its
unequivocally positive impact, the increasing use of technology in assessing
risks and ensuring compliance makes the implementation of TCF far more
complicated and much less under the control of the regulated firms.
As it was pointed out in the introduction to this article, by 2012, the
Financial Services Authority will be replaced by two new regulators: on the
one hand, the Prudential Regulation Authority (PRA) and, on the other, the
Financial Conduct Authority (FCA). While the PRA will be primarily
responsible for financial stability and prudential regulation, consumer
protection and consequently the fair treatment of customers will by and large
fall under the remit of the FCA.
77
Given that so far there is nothing to
suggest that the FCA will instigate any major shift in the implementation of
TCF, the observations mentioned above raise some interesting questions
about the actual feasibility ± and indeed the desirability ± of any regulatory
strategy that resorts to patterns of self-regulation to promote socially
desirable goals. In addition, they make plain that consumer protection is not
simply a matter of institutional design but, at least equally, an issue of
regulatory engineering. Accordingly, to the extent in which the reform
agenda misses this point, it is ill-focused and it should be reappraised.
78
Some other themes that seem to be emerging from the discussion above
and call for attention include, but are not limited to, the following: (i) the
overproduction of informal means of communication and their unclear status
and inter-relation; (ii) the impact of intensive supervision on the exercise of
discretion within the organization of each regulated firm; (iii) the creation of
incentives, which would prompt the regulatees to adopt an attitude of
reflective compliance; (iv) the interplay between TCF and technology and
the impact of code in translating regulatory commands into business
practice. All these issues set the agenda for further academic and empirical
research but also point to the direction of the future reform of TCF and, more
generally, of consumer protection in the retail financial sector.
Given the limited space available, a full exposition of the reform agenda
and the specific set of measures that should be put in place must be
postponed for another occasion. For the purposes of this article, suffice to
say that one of the key priorities of the new regulatory authority should be to
reintroduce human reasoning into regulation. To this end, it is not enough
that the importance of human judgement is recognized. The new regulatory
body must ensure, in addition, that tec hnology supports rather than
constraints human judgement. This would entail, among other things,
creating a legal and institutional framework which would allow the FCA, on
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77 H. Sants, `Dear CEO' letter on `Transition to New Regulatory Structure' (7 February
2011), at , and see n.
7 above.
78 A. Georgosouli, `The Revision of the FSA's Approach to Regulation: An Incomplete
Agenda?' (2010) 7 J. of Business Law 599±617 at 600.
ß2011 The Author. Journal of Law and Society ß2011 Cardiff University Law School
the one hand, to participate in and monitor the development of compliance
and risk-analysis technology and, one the other, to foster the accountability
and transparency of technology choices. The desirability of devising a whole
set of regulatory requirements outside the Handbook, as in the case of TCF,
should also be reappraised, given that the shift away from the traditional
rulebook approach fails to offer a better solution to the pervasive problem of
striking a proper balance between certainty and predictability on the one
hand, and flexibility and adaptability on the other. Finally, the development
of capabilities should be reviewed and further intensified, where appropriate.
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