New watchdog sees alternatives emerging to banks

LONDON Tue Oct 16, 2012 4:01pm BST

1 of 4. Britain's Financial Secretary to the Treasury Greg Clark speaks at a Thomson Reuters Newsmaker event, in the Canary Wharf business district of east London October 16, 2012.

Credit: Reuters/Andrew Winning

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LONDON (Reuters) - Britain's new financial watchdog is in talks with crowdfunders and other innovative sources of finance to give small firms more choice in raising funds, part of government efforts to increase competition in banking.

The Financial Conduct Authority (FCA) will be launched next year and its Chief Executive Martin Wheatley told a Thomson Reuters newsmaker event it will be open to approving new business models to serve smaller firms (SMEs) and customers.

"We have licensed our first 'crowdfunding' platform and we are in discussion with a number of people who are offering very different forms of providing financing to SMEs," Wheatley said.

Banking in Britain is dominated by Barclays, HSBC, RBS and Lloyds, which represent 80 percent of retail accounts, and the government is keen to increase the availability of finance to smaller companies.

Various attempts to achieve this, such as Project Merlin and more recently the "funding for lending" scheme, have already been launched, but many smaller companies still complain of difficulty in getting funds from the big four.

Crowdfunding refers to websites that help small firms raise money directly from the public as banks become more risk averse and focus on building up their own capital reserves.

"It's our job to make sure ... that we facilitate different business models entering the industry," Wheatley said.

The FCA is part of sweeping changes to UK banking regulation after the credit crisis and aims to help customers switch accounts and lift barriers to new lenders entering the market.

"We need strong regulatory action to promote competition. It's an urgent task," UK financial services minister Greg Clark told the Thomson Reuters event.

Yet hopes that competition would be boosted by Spain's Santander buying more than 300 branches from RBS were dashed last week when Santander pulled out of the deal.

Wheatley said there would be no let up in the "credible deterrence" push against financial crime already begun by the Financial Services Authority (FSA), which will be scrapped to make way for the FCA and a new banking supervisory unit at the Bank of England.

The FCA will set up a research unit as a "radar" to spot problems with markets or products early, before consumers have to seek compensation for mis-selling.

MORE DRACONIAN

"The FCA is promising to be a far more draconian regulator than its predecessor," said Steven Francis, a regulatory partner at law firm RPC.

Wheatley said there would be no pulling back on the regulator's hardline approach as he tries to draw a line under two decades of mis-selling scandals that have hit consumers in the pocket, and also crack down on market abuses and insider dealing.

"We would like to be able to reflect on the fact that firms have put consumers at the heart of their business and that consumers are getting the right products at the right price and then we can tone back our approach," Wheatley said.

"We are not seeing that happening and we have to take a firm line that things have to change."

Kevin Burrowes, UK financial services leader at PwC consultancy, said financial firms must urgently introduce effective controls to demonstrate they are taking care of their customers. "The City (Britain's financial sector) now well and truly has a second sheriff who has been clear about what is expected," Burrowes said.

Wheatley published a document showing how the FCA will supervise 26,000 financial firms and tried to reassure the industry he will carefully use new powers, such as being able to ban products and force the withdrawal of marketing literature.

Outlawing specific sales practices would be an "intrusion too far".

Britain's dual regulatory approach - with the FCA overseeing conduct and the BoE financial health - aims to increase the intensity of supervision, which was found wanting ahead of the financial crisis of 2007-8.

The industry is already alarmed that the FCA can tell the public far earlier if it is taking action against a particular financial firm.

Adrian Coles, director general of the Building Societies Association, said the FCA was taking an apparent "guilty until proven innocent" approach.

"Sadly, in the days of 24/7 media and Twitter, recovering a reputation after such an announcement - if events prove this warranted - will be very difficult," Coles said. "The innocent may well pay for the sins of the guilty."

(Additional reporting by Matt Falloon; Editing by David Cowell and David Holmes)

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