Summary of the Issue
The retail financial sector in the UK is currently facing a lot of challenges which include customer exploitation through risky products, unethical practices such as selling products that do not meet the expectations of customers and inadequate supervision of the industry (Turner 2011). The Financial Services Authority (FSA) is the institution that is responsible for the regulation of the retail financial industry.
FSA is currently seeking for more powers to ban the sale of certain financial products that are deemed to be exploitative and unbeneficial to the customers (Turner 2011). Banning the policies is part of FSA’s plan to protect the consumers from losing their investments and promoting fair competition and stability in the industry. In order to achieve this objective, FSA aims at indentifying product problems that are harmful to the consumers and offering solutions to such problems at an early stage (Turner 2011).
The following strategies are to be used by FSA in regulating the activities of firms in the financial services industry. First, products that are associated with significant risks will be banned in the market since they can lead to the loss of investors’ funds (Turner 2011).
This will be done by denying firms the licenses that allow them to sell such products. Second, FSA will regulate the charges that are associated with the various financial products in the market (Turner 2011). This will help in protecting consumers from paying fees that are above their expectations.
FSA will also determine the various products that are suitable for particular segments of the market (Turner 2011). Turner (2011) says that the approach used by FSA to regulate the industry is not effective and should thus be changed. According to the new changes, financial institutions will be supervised by the Bank of England while consumer protection will be the responsibility of Consumer Protection and Markets Authority (CPMA) (Turner 2011).
Regulation refers to the process through which the activities of firms within a given industry are monitored (Meyer, Jones & Ashleigh 2007, p. 45). Regulation within an industry is guided by a set of rules that define what is acceptable and beneficial to the customers, the firms and the industry in general.
The rules act as the benchmarks which are used to judge the activities of firms in a given industry (Meyer, Jones & Ashleigh 2007, p. 45). The regulation has to be done by an independent body that has the authority to formulate and implement policies in the industry.
Thus FSA is the regulator of the UK’s financial services sector. According to the chaos theory of contemporary management, the industry becomes more complex as it grows (Meyer, Jones & Ashleigh 2007, p. 67). The complexity relates to the level of competition, product development and quality of customer services. However, the industry will be more volatile as it becomes more complex. This calls for effective regulation policies that will help the industry to remain resilient to the challenges that face it.
Regulation can be detrimental to the competitiveness of firms especially if it is not done properly. This is because it influences the firms’ ability to make management decisions such as product development, pricing and quality of services (Meyer, Jones & Ashleigh 2007, p. 78). This leads to the debate on whether industries and firms should be regulated or not. In order to answer this question we must consider the rationale behind regulation and how it affects the management decisions of firms.
Rationale behind Regulation
Customers are always concerned with the quality of goods and services that are offered in the market. However, in most cases customers are exploited through products that do not meet their needs. In the UK’s retail financial sector, FSA noted that firms developed and sold financial products that had little value or no value at all (Turner 2011). For example, the structured capital at risk product (SCRP) was found to be very risky (Turner 2011).
This is because the customers always lost a better part of their investment when they redeemed their policies (Turner 2011). This amounts to exploitation since the expected growth outcome is not achieved as promised by the firms when the product is being sold to the customers. It is for this reason that FSA has decided to analyze the risks that are associated with the various products that are sold to customers.
FSA further recommends that the high risk products should be banned in order to protect the customers from losing their money (Turner 2011). Its is worth mentioning that firms will continue to offer products that are detrimental to customers as long as there is no law that prohibits such products (Meyer, Jones & Ashleigh 2007, p. 81). Thus there is a need to formulate regulation policies that determine the quality of products.
Ethical standards refer to the code of conducts that govern the activities of organizations within an industry (Meyer, Jones & Ashleigh 2007, p. 88). These standards act as the benchmarks for assessing the performance of a firm in terms of quality of products and services as well as the methods of production.
Thus ethical standards determine the way activities such as sales and marketing should be done. FSA’s investigations discovered a number of unethical practices in the retail financial industry. For instance, firms were found to be selling high risk products such as SCRPs to customers who did not intend to take such a high risk profile while investing (Turner 2011).
Broker funds which were sold in 1990s led to “a conflict of interest since the sellers of the products played a role in the management of such investments” (Turner 2011). Besides, broker funds were found to be more expensive and performed poorly as compared to other investments (Turner 2011). Unethical behavior is promoted by a firm’s desire to achieve rapid growth at the expense of the customer. Thus in order to address this problem there must be a regulator that sets the standards of quality that must be embraced by all firms.
Promoting Fair Competition
Competition relates to the ability of a firm to command the largest market share in the industry. This can only be achieved through developing an effective marketing plan. However, such plans require a lot of financial resources to support their implementation. Thus firms usually resort to customer exploitation through high prices in order to raise the required financial resources.
The firms in UK’s retail financial industry were found to be charging excessive fees due to the same reason. The additional capital that firms raise through excessive charges is used to implement policies that discourage competition. Such strategies include monopolistic tendencies within the market. By introducing effective regulation policies through FSA, the firms will be able to compete on a fair ground.
Stability of the Industry
According to the systems theory, an industry should be perceived from a broad perspective (Meyer, Jones & Ashleigh 2007, p. 90). This means that the industry is a system that consists of several parts that depend on each other. The UK’s financial industry for instance consists of different parts which include the customers, financial institutions and the expected outcomes. These parts are interdependent due to the fact that none of them can function in the absence of the other.
This means that the interest of the customers and financial institutions must be taken into account in order to achieve the expected outcomes. This can only be achieved through an independent body that regulates the activities of firms (Meyer, Jones & Ashleigh 2007, p. 92). The industry will be stable if the expected outcomes are achieved. The stability of UK’s retail financial industry will be threatened if the customers are not able to realize fair returns on their investments.
Impacts of Regulation on Management Decisions
Regulation determines the type and quality of products that are to be sold in a given market. The regulator determines the products to be sold by taking into account the needs of the customers, the level of competition and the stability of the industry (Meyer, Jones & Ashleigh 2007, p. 78).
This means that firms have limited freedom in making decisions in regard to the development of their products. In the context of UK’s financial services industry, FSA will determine the composition and risk profile of the various policies that will be sold in the industry.
Thus products that do not meet the requirements that have been set by FSA will be illegal in the market. This discourages competition at the international level since customers who are interested in the banned products will channel their investments to overseas firms that sell the products. Besides, the ban on such products limits the customers’ choice in the market.
Pricing is a very important aspect of management since it determines the level of revenue that a firm will realize in the market. It is therefore important that firms be in a position to make independent decisions on their prices since they understand their financial needs better.
The move by FSA to control the fees or prices that financial institutions should charge in regard to their products will discourage growth if the firms will not be able to realize their optimal level of revenue due to the regulation. The high prices might have been caused by external factors such as inflation instead of the firms’ desire to make high profits.
Regulation tends to encourage the development of products that are more or less similar in the market due to two reasons. First, the development of products is informed by the same standards of quality and composition. This makes it difficult for firms to differentiate their products.
Second, it discourages research and development since firms can not experiment on the performance of a given product in the market if such a product is prohibited (Meyer, Jones & Ashleigh 2007, p. 93). This limits the ability of firms to develop competitive advantages in the market.
Form the above analyses it is evident that regulation has both merits and demerits. Regulation helps in protecting the customers from being exploited by the sellers. It also promotes fair competition in the market and stability of the industry. However, regulation interferes with the ability of firms to make management decisions such as pricing, product development and quality of services. This means that regulation has to be done in a proper manner and this can be achieved as follows.
The regulator should have the ability to give orders concerning the operation or activities of firms in the industry. Adequate authority gives the regulator the opportunity to execute its duties and ensure stability in the industry. FSA for instance, was not able to ban products such as SCRPs and broker funds since it had no authority to do so (Turner 2011).
Thus the customers will continue to suffer as they wait for FSA to get permission in order to implement its recommendations. This confirms the need for an effective legislation that would enable the regulator to formulate and implement policies effectively.
The success of good leadership in the industry through the regulator is reflected in the level of discipline among the firms in the industry. Discipline relates to the extent to which firms adhere to the rules and regulations that have been implemented by the regulator (Juvas 2010, vol. 15, pp. 67-84).
Firms will adhere to the rules that have been set by the regulator if the later uses penalties in a judicious manner against firms that violate the law (Juvas 2010, vol. 15, pp. 67-84). Denying firms the license that allows them to sell certain policies is one of the penalties used by FSA to ensure that firms develop products that meet the expectations of the customers. All firms in the industry should be in a position to adhere to all the rules that have been set by the regulator.
Centralization refers to the level to which all stakeholders in the industry are involved in making decisions or policies that are used to regulate the industry.
The decision making process is considered to be centralized if the regulator does not involve the firms or stakeholders in formulating policies (Juvas 2010, vol. 15, pp. 67-84). On the other hand, the process of making decisions will be considered to be decentralized if the regulator includes all firms or stakeholders in the process of making decisions.
According to the contingency theory, a decentralized system of making decisions will be the most appropriate (Meyer, Jones & Ashleigh 2007, p. 93). This is because it enables the regulator to take into account all aspects of the problem. This means that FSA will be able to consider the concerns of the customers and the firms if it adopts the decentralized system of making decisions.
The regulator will not succeed in maintaining stability in the industry if it does not use the right approach. It is for this reason that proposals have been made to disband FSA. The stakeholders in UK’s retail financial industry believe that the approach used by FSA to regulate the industry is inappropriate. Thus it should be replaced by the Bank of England and a new Consumer Protection and Markets Authority (Turner 2011).
Juvas, A 2010, ‘Traits, skills and leadership styles of managers in Croatian firms’, Journal of Contemporary Management Issues, vol. 15, no. 2, pp. 67-84.
Meyer, E, Jones, G & Ashleigh 2007, Contemporary management, McGraw-Hill Education, New York.
Turner, L 2011, FSA seeks power to ban sale of risky financial policies, <https://www.bbc.com/news/business-12274837>