FSAs new regulatory approach makes good progress

Building the new regulator: Progress Report describes how the FSA has:

• identified a set of 15 key risks to its statutory objectives and elaborated from these a common risk model - based on assessing the impact and probability of risks occurring to the FSAs statutory objectives - for use across the 10,000 firms it regulates;

• begun work on extending the model to non-firm-specific risks that have a potential impact across the industry as a whole, and on markets and consumers;

• taken forward the identification and analysis of key regulatory themes - such as e-commerce and the implications of a low inflation environment - which cut across different industry sectors and have wide-ranging implications for consumers;

• refined the strategic basis for its future use of regulatory tools including those designed to identify, assess and measure risk; those designed to track the development of identified risks; those designed to prevent them crystallising or increasing; and those which respond to risks when they have crystallised.

Introducing the paper at a conference of 800 delegates from firms consumer groups and professional firms, Mr Davies set out the FSAs regulatory philosophy. He explained that financial regulation had in the past been influenced by the "dangerous dog" phenomenon, whereby extensions in regulation had been imposed in response to individual crises and scandals.

Mr Davies said:

The key justifications for a regime of prudential regulation in the financial system plus some forms of conduct of business regulation lie in first, the existence of important information asymmetries in the market; second, externalities arising from the possible systemic impact of the failure of some firms; and third, the problems of fraud and misrepresentation.

So the framework for the new regulator is, we hope, straightforward. It is based on an assessment of threats to the achievement of the objectives set for us by Parliament. We have chosen to use the same risk assessment model across the whole financial sector. The key advantage of doing so is that it allows us to allocate our resources in a rational way, rather than based on some historical model of sectoral regulation.

And it allows us to do so in an intellectually consistent manner, with the intensity of regulation related to an assessment of the extent to which it is necessary in order to correct the information asymmetry which is at the heart of the rationale for our existence. And if we can secure popular market and political support for this approach, then we should have a much firmer basis on which to assess the case for any extension or indeed retrenchment of regulation in the future.

Mr Davies spoke about how the FSAs new approach was already influencing its stance and practical response to some current issues:

• Mortgage regulation where the FSA is focusing on a disclosure based regime to counter the information gap faced by consumers;

• Endowment mortgages where the FSA is using a range of regulatory tools - from direct information and messages to consumers to disciplinary action with firms - in a structured and proportionate way based on the different position and types of risk faced by various groups of endowment holders;

• Polarisation where the FSA approach is based on examining how use of disclosure tools might in future continue to deliver the consumer protection benefits of polarisation while avoiding its adverse effect on competition;

• Improving consumer understanding of the status of providers and of product characteristics and their potential risks. The FSA is undertaking a fundamental reassessment of the disclosure regime linked with the production of good quality information in the form of comparative information tables.

Other conference speakers were:

• Richard Bent, Head of Financial Regulation at the Treasury, who spoke about the key issues and timing of the secondary legislation needed in the run-up to the date next year when the Financial Services Authority fully takes over as the single regulator;

• Phillip Thorpe, FSA Managing Director for Authorisation, Enforcement and Consumer Affairs. He spoke about the Grandfathering process for transferring the current authorisations of firms and individuals with the existing regulators across to the new single FSA regime, and the completion of the single FSA Handbook of Rules and Guidance;

• Michael Foot, FSA Managing Director of Financial Supervision, who described how the new risk model was being implemented for firms: and

• Christine Farnish, FSA Director for Consumer Relations who spoke about the FSAs overall approach to getting a fair deal for consumers.

Notes for editors

1. The Conference A Radical New Approach to Regulation was held at the Royal Lancaster Hotel, London.

2. Building the new Regulator Progress Report 1 is available on the FSA Website fsa.gov.uk under Publications. Two Briefing Notes on the Gradfathering process were also published today and are available on the FSA Website.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime. The Act also requires the FSA to have regard to a set of principles of good regulation including a proportionate approach to rule-making, facilitating innovation in the financial sector and ensuring that regulatory requirements do not distort competition.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.