Bernard Sheridan

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Striking the right balance between Statutory and
Voluntary Codes

• Bernard Sheridan
• Head of Consumer Information
• 15 December 2005

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• Canada, February 2003
• -20C to -30C
• Dublin, October 2004
• 10C
• Kuala Lumpar, December 2005
• 20C to 30C

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The Irish Context

• Huge increases in personal debt
• 35bn March 2000
• 95bn March 2005
• Interest rate uncertainty
• First ECB rate change in 5 years in December 2005
• Immigration
• 70,000 people from April 2004 April 2005
• Increases in house prices
• Average house price in Dublin
• March 2002 237,000
• March 2005 340,000

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Who We Are

• Established 1 May 2003
• Single regulator
• Consumer at the heart of regulation
• Cohesive approach - consumer protection,
  prudential supervision and financial stability
  all interlinked
• CEO, Consumer Director, Registrar of Credit
  Unions are all statutory positions

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Working Closely with the Central Bank
Financial Services Regulator
Independent component of the Central Bank and
Financial Services Authority of Ireland
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Who we Regulate

• Banks and building societies
• Insurance companies
• Funds and fund service providers
• Stockbrokers
• Exchanges
• Investment, insurance and mortgage intermediaries
• Credit Unions
• Money lenders
• In total over 6,800 providers

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Our Mission and Vision

• Helping consumers make informed financial
• decisions in a safe and fair market and
• fostering sound dynamic financial institutions,
• thereby contributing to financial stability.

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Statutory Powers

• To impose codes of conduct
• The Consumer Director may issue codes or
  impose requirements under an enactment or
  statutory instrument referred to in subsection
  2.
• To impose sanctions
• To monitor provision of financial services and to
  promote competition

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A Principles-based Regulator

• What does this mean in practice?
• Heavy reliance on people in key leadership
  positions in financial services industry to do
  the right thing

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Overall Objective

• Aiming for ideal
• Safe and fair market
• Responsibility of the financial institutions
• Ethical behaviour

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Defining Ethics

• Closely related to values
• Obedience to the unenforceable
• Doing the Right Thing comply with letter of
  law or behave ethically?
• Sense of honesty, fairness, decency
• High standard of responsible behaviour, business
  practices

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Why Do We Need Ethics?

• Consumers who entrust their money to financial
  institutions should be able to do so with
  complete confidence in the integrity of those
  with whom they deal
• A reputation of Honesty and trustworthiness are
  two of the foundations of banking and finance.
  Banks and financial institutions depend on the
  confidence of customers that funds can be safely
  entrusted to them
• When confidence in financial institutions and
  financial markets is undermined health of
  financial sector and whole economy is threatened

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Ethics in a Principles-based Regulatory
Environment

• Based on ethical leadership of firms tone from
  top
• Reporting upwards
• Ability to speak up
• Role of Audit Committee
• Role of whistleblower
• Fitness and probity

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Particular Ethical Issues in Financial Services

• Sales Practices, mis-selling
• Product Design design of investment funds (e.g.
  lessons from split capital trusts)
• Marketing methods, deceptive advertising
• Churning, twisting and flipping
• Commission and payment structures, personal
  trading
• Payments Structures driven by profit generation
  and bonuses
• Reputation risk
• Bank lending practices
• Socially responsible investing
• Reward systems Do they recognise values?

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The Challenge

• To create through leadership a sense of ethics in
  organisations
• Set the tone at the top and enforce it
• Learn from mistakes
• Use opportunities for change
•  
• Measure of success will be consumer confidence in
  institutions and confidence of foreign investors
  and rating agencies in the Irish financial
  system.
•  
• Confidence is based on contract of trust

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Encourage Ethical Behaviour

• Lead by example
• Close working relationship with industry
• Encourage voluntary codes of ethics
• Deal with failures in a strong and transparent
  way

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The alternative to ethical behaviour More rules
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Formal regulation
Best Practice
Voluntary codes of behaviour
High level of compliance
Values-based corporate culture
Ethics
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Advantages of Statutory Codes

• Regulator is independent of the industry in a
  better position to balance the interests of
  consumers and firms appropriately
• more likely to engender consumer confidence
• with an enforcement dimension, is more likely to
  be effective
• is more likely to be designed to enhance
  competitive pressures and
• enjoys legal clarity.

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Statutory Codes and Competition

• Within a sector
• larger firms may dominate a representative body
• Across sectors
• Across borders

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Disadvantages of Statutory Codes

• The regulator does not have market experience
  comparable to that of practitioners
• As with self-regulation, the regulator is
  vulnerable to regulatory capture
• A statutory regulator may be slower than a self
  regulatory body to react to market developments.
• ? not always the case

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Advantages of Voluntary Codes

• Capitalises on the expertise of market
  practitioners
• It has a professional interest in ensuring that
  standards and public confidence are sustained
• The consent of the regulated is more likely to be
  secured.

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Disadvantages of Voluntary Codes

• Can prove to be anti-competitive in nature
• Can be vulnerable to regulatory capture
• Not every firm may subscribe to the
  self-regulatory framework
• May lack credibility and public confidence
• May lack effective enforceability.

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Once upon a time there was talk of a voluntary
switching code to help people switch banks
.. Once upon a time there was talk of a
switching code to help people switch banks Once
upon a time there was talk of a switching code to
help people switch banks. Once upon a time there
was talk of a switching code to help people
switch banks Once upon a time there was talk of a
switching code to help people switch banks Once
upon a time there was talk of a switching code to
help people switch banks Once upon a time there
was talk of a switching code to help people
switch banks Once upon a time there was talk of a
switching code to help people Once banks Once
upon a time there was talk of a switching code to
help people switch banks Once upon a time there
was talk of a switching code to help people
switch banks Once upon a time there was talk of a
switching code to help people switch banks Once
upon a time there was talk of a switching code to
help people Once e
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Many years later when the Financial Regulator
said it would introduce a statutory switching
code suddenly a voluntary code appeared.
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The aims of the Consumer Protection Code are

• to ensure a consumer focussed standard of
  protection for purchasers of financial products
  and services
• to ensure the same level of protection to
  consumers regardless of the type of financial
  services provider they choose and
• to facilitate competition by ensuring a level
  playing field.

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Structure of Consumer Protection Code

• General Principles
• Common Rules
• Banking Products Services
• Loans
• Insurance Products and Services
• Investments
• Advertising
• Definitions

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Main Principles

• Acts honestly, fairly and professionally in the
  best interests of its customers
• Acts with due skill, care and diligence
• Does not mislead its customer
• Makes full disclosure of fees, charges and
  commissions
• Avoids conflicts of interest

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Some Features

• Consumer Code only
• Doesnt contain prudential rules or repeat
  existing legal provisions
• Scope
• Private customers
• Wider than consumer
• Most provisions not completely new but extended
  to other sectors
• If new, derive from
• Specific recommendation
• Particular issue

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Consumer Enhancements

• Factfind and reason why extended to other
  providers
• Standardised complaints procedures
• Banking services included for first time
• Mortgages
• Personal loans
• Current accounts
• Interest rate disclosure
• Prohibition on unsolicited or pre-approved
  credit
• Separate quotation for PPI
• Consolidated debt
• Rules on Claims processing
• Renewal notice extended to other forms of
  insurance
• Specifies minimum information in renewal notices
• Trackers consultation incorporated

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What does the Code say about lending?
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Voluntary Codes Banking

• Switching code
• Code of Ethics

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Voluntary Codes Insurance

• Customer service standards
• Code of practice on life assurance selling
• Handling consumer complaints
• Factfinds
• Life insurance medical reports
• Genetic testing

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Two ends of the Regulatory Spectrum

• Exclusively Statutory Regulation
• Exclusively Self Regulation
• The optimal regulatory matrix, as determined in
  each jurisdiction, will contain elements of Self
  Regulation and elements of Statutory Regulation.

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Model in Ireland
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Essential Elements of a Successful Model

• Strong consumer focus both in regulator and
  industry
• Ethics and values must be embedded
• Close relationship between regulator and
  regulated
• Strong sanctions for non-compliance

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Thank you
Thank you