Saturday Interview: As the fall of Northern Rock continues to reverberate, Dan Waters, director of retail policy and themes at the Financial Services Authority, is a witness to the fall-out from fiscal trauma, writes Simon Bain

As the fall of Northern Rock continues to reverberate around the Canary Wharf headquarters of the Financial Services Authority (FSA), the regulators at the top of the tree can still feel it shaking.

Dan Waters, director of retail policy and themes, sits just underneath the quake zone, which swallowed up the former retail division director Clive Briault, and the Waters empire covers the regulatory hotspots that go to the heart of personal finance.

This month alone, the FSA will report on sub-prime mortgages and payment protection insurance (PPI), and will come under pressure to release the banking industry from its "waiver" on dealing with court claims for unfair overdraft charges.

It is also working on the mis-selling of self-invested personal pensions, the proposed new regime for financial advice, and the banking code - which could see the FSA override the code with more robust direct regulation.

Waters, a quick-talking American, has an overview reflecting a hidden iceberg of hands-on regulation concerning dodgy practices underneath the pronouncements and penalties that emerge into the public domain.

He was the FSA's first director of enforcement, moving from the same role at investment regulator IMRO, and prior to that was international enforcement supremo for the US Commodity Futures Trading Commission.

"When we do thematic pieces of work, the most important thing is to get them firms to change their behaviour immediately," said Waters. "It may involve looking at the degree to which they have fallen short of standards, it may also involve referral to enforcement."

So why, in the PPI market, has behaviour changed so slowly that the Competition Commission had to step in and propose radical reforms? "PPI is a special problem," he added. "It points to some pretty serious structural problems in that market."

Waters says the FSA's latest mystery shopping exercise will be "at a statistically significant level, so we will be pretty robust in our findings".

Waters admits frankly that, in this scenario at least, rules on written disclosure don't work. "Consumers don't pay much attention to documents. But they do listen to what advisers say We are targeting that discussion, it is an unusual thing for us to have done and we have also targeted the vexed question of whether people are going to be eligible to claim on these policies."

He adds: "At the moment there is very little shopping around, very little choice, but the travel industry used to be like that and it isn't any more - it is possible for things to change."

The financial ombudsman warned earlier this year that the next mis-selling scandal might be in the mortgage market, where lenders had been pushing money at borrowers with scant regard to affordability. Later this month, the FSA is to report its research findings - but Waters is sensitive to any suggestion that the regulator is putting up barriers to borrowing.

"We are doing some focused thematic work on arrears, focused on the sub-prime market. Work on the prime market has generally been pretty encouraging We are certainly not telling people to stop lending."

On the swing from feast to famine in property lending, he says some of it has been a "sensible and reasonable adjustment", adding: "It is interesting to consider what people think is normal, on levels of lending and the range of products on offer, looking back at a year ago, was that a sensible place to be?"

On July 25, the FSA's 12-month freeze on court actions against banks for unfair overdraft charges expires. The court process continues, despite the banks losing on the key issue of whether the charges come under the legislation covering unfair terms in contracts. Consumer groups fear that a full appeal process could mean actions being frozen indefinitely, with the banks continuing to reap inflated profits, and are urging an end to the waiver. "At what point will we have sufficient legal certainty that we believe the waiver can be lifted?" asked Waters. "We have to consider what is sufficient certainty."

He says both the FSA and the courts want to see "momentum" in the case and a resolution achieved "expeditiously". He goes on: "That whole set of issues is part of our review of the banking code. We are conducting a formal review of the effectiveness of the Banking Code Standards Board, and considering the question of whether or not we want to take responsibility directly ourselves for the conduct of business."

The code was revised only this year and now includes for the first time a reference to the "treating customers fairly" principle of the FSA, but the Financial Services Consumer Panel (adviser to the FSA) is urging more hands-on regulation of the banking relationship that affects most consumers.

Waters says: "It is a question of scope, against the backdrop of principles-based regulation. Whatever we decide, we would want to look at the underlying approach of the code itself. They have introduced a fairness provision, but it still has an awful lot of very detailed things in it."

For many firms, treating customers fairly (TCF in regulator-speak) appears to be seen as a management exercise in gathering information, ticking boxes, and providing documentation - or so one leading chief executive commented recently to The Herald.

Waters responds with the first uplift in his tempo. "TCF is about what happens to consumers and the end of the process, about whether what is delivered is as promised or appropriate for the client; it is not about process, it is not about MI management information."

But he admits: "I think some firms have got a bit lost in MI, and it is fair to say that we have sometimes ourselves got a bit caught in the trap of focusing too much on MI and not enough on outcomes."

Currently on the regulator's mis-selling radar is the Sipp market, which has exploded in the past two years. The FSA has been investigating whether high adviser commissions and enticing offers to transfer final-salary pensions into Sipps without advice have sucked in the wrong buyers. Waters says the "major thematic piece of work" is designed to ensure that Sipps are not "a bucket into which everyone is being thrown". Non-advised transfers, he hints, may be first in the firing line.

The FSA's thorniest challenge is to push through its bold manifesto to reform financial advice. Waters says there is a "pretty strong consensus" on its core aim of breaking the traditional commission relationship between firms and IFAs, but not on the radical proposal to prevent the sellers of "tied" products from giving advice.

The banks say this will deprive most consumers of financial advice, while one consultancy argues that quality of advice is no longer about quantity of products, and that the FSA's view is "outdated and incomplete".

Waters responds: "This is not about saying that tied advice is bad If you go to a Volkswagen dealer you don't expect to get advice about a Mercedes."

Similarly, independent advisers may realistically limit choice to a range of representative products.

Waters hints that the regulator may pick its way through the minefield by calling up the concepts of "guided" or "persuaded" selling. He agrees: "What we don't want to do is design a solution that is solving the past."