Financial regulator - Penalties must be seen to be severe

THE appointment of a new watchdog to crack down on banks and insurance firms that mislead customers over the risks of investing in money-making schemes should be warmly welcomed.

Legislation, due to come into force next month, will empower a single financial regulator to take action on behalf of consumers against insurance companies, banks, and other financial institutions that are misleading customers.

There has been a considerable amount of public concern that consumers are being deliberately deceived by representatives of financial institutions, especially when it involves informing customers about the real financial risks that they may be facing. Endowment policies and pension funds are areas that have attracted most attention in recent months, especially those that have been affected by fluctuations in the stock market.

There have also been some highly publicised instances in which customers were hoodwinked by sales people, motivated by the high commissions being paid by institutions just to sell their products, rather than to satisfy the needs of customers. Ethical guidelines are being defined in relation to the sale of such products, and the financial regulator will have power to ensure that these guidelines are being observed and enforced in an area that has hitherto been largely unpoliced.

Those selling financial services will be required to inform customers fully in a transparent manner, about both the benefits and risks entailed in services offered.

The Central Bank was nominally responsible for monitoring this area for a long time, but it never saw looking after the concerns of ordinary customers as one of its real roles. It was more concerned with regulating the banking institutions in order to guarantee the security of their finances, by ensuring that they were not over-exposed financially.

This was done largely by monitoring the extent of the credit that the institutions were providing.

Primarily concerned with stability of the financial institutions, the Central Bank never really saw itself in the role of looking after the needs of the individual customers, or the protection of tax revenue due to the exchequer. Those shortcomings became patently obvious during the DIRT inquiry.

Liam O'Reilly, who will be the chief executive of the financial services regulatory authority, has indicated that he intends to approach the job in a non-confrontational way to begin with, at any rate. The size of penalties imposed on the offending individuals and institutions will have to be dealt with in separate legislation.

Of course, the argument can be made that the naming and shaming of offending institutions will be the real deterrent in such a competitive area. However, the level of the penalties will demonstrate the government's commitment to stamp out misconduct. If only nominal fines are prescribed, those will inevitably be interpreted as an indication that the government is engaged little more than a publicity stunt, or a cosmetic exercise.

If the government wishes to demonstrate real commitment to reform in this area, it will prescribe heavy financial penalties. That is the language that the money people understand best.