John Tiner, Chief Executive, FSA
Mansion House
23 September 2003

My Lord Mayor, Your Excellency, My Lords, Aldermen, Sherriffs, Ladies and Gentlemen. May I thank you Lord Mayor for hosting this wonderful Banquet in recognition of the Financial Services Authority. Indeed, you yourself Lord Mayor have been a great advocate for the City and explaining its many virtues as the world’s leading financial centre. It is also an enormous pleasure to be among so many colleagues from the financial services industry.

May I also congratulate you on your sense of timing. I think I would be right in saying that this dinner was pencilled into the diary at least 12 months ago. That was 3 months before Howard announced he would be heading off to academia, 6 months before Callum McCarthy was appointed Chairman and 9 months before I was appointed Chief Executive and yet here we are on the 23rd September just 2 days into our new jobs. I imagine people will be hoping to hear a flavour of what lies ahead and I will try not to disappoint.

There has been much talk about how Callum and I will divide up the high level responsibilities at the FSA. Its simple really; Callum will chair the Board and all that goes with that, and I will run the FSA and all that goes with that. We see our respective roles as a team effort – working together and with the rest of the senior management team and our Board. So we will be joined at the hip. And its just as well we are both vertically challenged or I might otherwise be left suspended in the air and my wife is always reminding me to keep my feet firmly on the ground (I don’t dare say short or I’ll have to report my positions to Michael Foot). I had wondered whether I might crack some kind of joke about the anomolies in pay between City of London and New York regulators – But having seen the terms of John Reed’s arrival, I think I’ll just keep schtum.

Howard has been an extraordinary leader of the FSA. He built the organisation from scratch, presided over a 10 way merger (which according to the Sunday Telegraph, is an experience he does not think is too much in demand in the employment market), set the FSA on the ground breaking course of risk-based regulation and has personally positioned the FSA as a respected institution domestically and a world leader internationally. All this has been achieved through the deepest bear market in generations. I must say that I am personally delighted that Howard accepted the Chancellor’s invitation to build and lead the FSA in its formative years, as the opportunity to work with Howard was one of the main reasons why I took the plunge into the world of regulation two and a half years ago. Howard has an incredible appetite for work, although not even he could quite clear his in-tray before last Friday. If I peek under the dozen or so cases of market misconduct which are reaching their final stages, I find the investigation into alleged collusion among split capital investment trusts, which is progressing apace; policy decisions on soft commissions, the unbundling of broker services and analyst research and decisions on the regulatory regime for so-called Sandler products – just to mention a few. So on behalf of all the staff at the FSA we thank Howard for his massive contribution to the organisation and we wish him well in his future endeavours and, who knows, the sky blues of Manchester may maintain their early season form and pick up a trophy or two next May. Or perhaps not.

Looking forward, I will you give some idea of the internal and process developments we foresee at the FSA, some of the policy, market and supervisory initiatives we will be taking in the retail financial services market and the status of some important work we are doing in the wholesale market. All of these build on the considerable foundation that Howard has bestowed.

The last 5 years at the FSA has been characterised by a huge programme of reform. From the introduction of the Financial Services and Markets Act to the formulation of a single rulebook, and from liberalising the market for investment advice to much needed modernisation of insurance regulation. Any business expansion ambitions the FSA may have harboured were then rewarded by the Government’s decision to bring mortgages and the sale of general insurance into the scope of statutory regulation. So in essence, you could say that, in its first five years, the FSA has been the ‘reforming’ authority.

I think that the changes at the top of the FSA, effective yesterday, coincide with a natural evolution in the FSA’s remit from policy development and reform to policy implementation. This confluence of events gives us the chance to do some radical thinking – don’t worry we are not about to unpick the policies of the past few years – but I am referring to the way in which we go about our work.

As an organisation focused on delivery, we must have a “can do” approach. We need to be able to act swiftly and decisively when necessary, with our people empowered so that decisions are taken at the right level and at the right time. We will need fewer internal committees and processes only where they add value. We need to live up to the principle and spirit of risk-based regulation in the intensity of our supervision of individual firms and how we allocate resources. We need to build, or develop with our business partners, an efficient, cost effective system for handling the vast amount of data once mortgages and general insurance come into our remit. And, we need to be an organisation that firms, consumers and our other stakeholders find easy to do business with, even if the answer to a question is not the one the questioner would like.

Let me give you a few examples of some of things we will be doing to deliver these. The FSA handbook is an essential document, or should I say collection of documents. It sets out the rules that firms are required to follow in order to meet their regulatory responsibilities. It is incumbent upon us, therefore, to make the handbook as accessible as possible so that firms and individuals are in no doubt as to what is required of them. It was inevitable when merging 10 quite different regulatory regimes into one in time for N2 in December 2001, that the handbook might gain a life of its own and, ultimately, become difficult to navigate especially for the smaller and middle sized firms who do not have the scale to invest in large compliance or legal departments. If Callum and I were to stand not joined at the hip but one on the other’s shoulders, the FSA handbook would stand only slightly shorter than our combined heights. So we will start immediately to look at how we can make the handbook more accessible to firms. There are a number of options, including: the FSA facilitating guides to the handbook (as we have done already in collaboration with the Association of Independent Financial Advisers), or stripping out guidance from the handbook into a separate location on the web, leaving the rules clearly identifiable, or cutting sections down as we have done already with the Collective Investment Scheme sourcebook (which was slimmed down by 40% earlier this year). To those not wearing a handbook anorak, this may sound dull and a rather simple administrative task. I can assure you it is anything but. There is a complex inter-play of legal considerations, European requirements and internal consistency. However, we will be looking to remove rules which do not add value to achieving our statutory objectives or, to put it another way, are disproportionate to the risks they seek to mitigate. This will mean looking more to our principles and so more explicitly placing the emphasis on management to run their firms in accordance with those principles, including those firms who prefer the safe harbour of prescriptive rules.

I hope to be able to deliver some quick wins from this project, particularly in the areas of user-friendly handbook guides for particular sectors and making it easier for firms to focus on the rules themselves.

The second area in which we will be looking to rationalise, I hope for the benefit of all our stakeholders, will be in the number of policy initiatives we bring forward through the Consultation Papers we publish. Again, I do not apologise for what has gone before. Next Monday will see the publication of our 200th Consultation Paper, but, for the reasons I gave earlier, we have been in the policy development and reform phase of our evolution. We must now give firms and their customers, as well as staff at the FSA, time to become familiar with the new requirements and for them to become embedded in the marketplace. Come the end of this financial year we will have published around 60 consultation and discussion papers in the year. Our aim for the next financial year is to cut this number in half. I do not know whether we can achieve this, as much of the initiative and imperative for new proposals are not with the FSA, but with Europe. In particular, I give you here a clear, fair and not misleading risk warning that when the implementing measures of the new Investment Services Directive have been approved by the Commission, there could be an extensive workload for us all. But the direction we wish to go is clear: maintain our commitment to an open consultation process but aim for fewer and if we can, much shorter documents.

My third specific example of internal areas we will be looking to address is enforcement. Howard has stated previously that we will be looking to make more transparent the fact that the FSA is conducting a formal enforcement investigation. Having said we will reduce the volume of consultations, I now eat into my 50% by saying that we will consult on how to bring this into effect. We are also looking at our legal powers with respect to making public, information about financial promotions which we consider unfair or misleading. Here, speed is of the essence, as consumers might be reading the misleading material and writing the cheques that they later regret. We will also take a critical look at all stages of our internal processes leading to an enforcement decision. This will cover pre-investigation enquiry work, the formal investigation itself and the processes followed by the Regulatory Decisions Committee. Of course, we must continue to allow firms and individuals proper and fair rights of response throughout the process. But, while recognising that each enforcement case has its own particular characteristics, I expect to be able to speed up the end to end process of enforcement.

These are just three examples of some of the things we will be doing. Others will be more in the nature of internal organisational and governance changes and we will be working those up over the coming months.

Moving now to the retail marketplace. At the heart of FSA’s role as a regulator is the consumer. The reasons why consumer protection features so prominently in the objectives of regulators around the world have been well rehearsed, and mostly revolve around the asymmetry in the firm/consumer relationship. In the UK, we can also observe some persistent malfunctioning of the market – pensions mis-selling, mortgage endowments, precipice bonds. Of course, consumers must ultimately take responsibility for their financial decisions, but in doing so they are entitled to rely on their financial services provider or adviser treating them in a fair manner.

There are a number of areas where we will be building on our work so far in protecting consumers and in helping them to better understand financial services. Firstly, we have been working for some months in developing, what we call, a “product risk framework”. This is a tool that will help us to assess the risks to consumers of different products being launched or marketed by firms. The framework has three dimensions: (1) the inherent characteristics of the product; (2) the controls firms have in place around the marketing of it; and (3) the target audience of consumers for the product. This is not product regulation through the back door, but a tool to provide an early warning of products that maybe about to be launched or are circulating in the market that present particular dangers to consumers.

However, regulatory tools like this are a second order substitute for firms getting it right in the first place. We are strongly of the view that firms should build into their business strategies and operations the imperative of treating their customers fairly and for this to be reinforced by the actions and tone set at the top of the organisation. I know it is a cliché but there is a clear win win for firms in doing this. On the one hand they will develop stronger relationships with their clients, deepen the loyalty of those clients and reduce their cost of client acquisition. And they will not be playing Russian roulette with their reputations by facing the prospect of enforcement action by the regulator. On the other hand they can expect less intervention from the regulator. We will be stepping-up our supervisory work with firms to see that they make our principle of treating customers “fairly” a reality in their business planning, product and customer strategies and their day to day operations.

Ultimately, firms and consumers have a mutual interest in the market working better and this means having more capable and confident consumers who can identify their needs and then know what to do about them. We think there needs to be a major step change in activity to educate and inform the consumer and that the admirable, but patchy, efforts of many private and public sector bodies working in this area need to coalesce around a national strategy for financial capability. I will set up and chair an Advisory Group charged with establishing, by 31 March next year, a clear view of what the industry, the Government and other parties should best do. Since the FSA has a specific statutory objective to promote understanding of the financial system, we believe we have a natural role in leading this strategy, but that its implementation must be in partnership with firms, employers, trade unions, government, not for profit organisations, the media and so on. We will set out, at the same time as I announce the members of the Group, our initial views on how the FSA can best add value and provide leadership. Our discussions with all of the groups I have just mentioned suggests there is a leadership vacuum and whilst implementation must be in bite-size chunks and carefully targeted, there is a strong collective desire to make a difference. Of course, the payback will be in the longer term, and it is vital that any such strategy is able to deliver some quick and visible successes to maintain the interest of the parties and the momentum of the programme. The prize here is very great indeed. If capable consumers acting collectively can be a more influential force in the market there could be a consequently less rigorous regulatory regime.

You would not expect me to finish without saying something about the wholesale and institutional markets, especially in the context of developments at the European and International levels. We were pleased that the recent CSFI report placed London at the top of the list of major financial centres, as far as regulation was concerned.

It is our job to maintain orderly and clean markets and from time to time we may take decisions which are in pursuit of this aim and which may be unpopular with some of the City houses. We are acutely aware that one of the principles of good regulation in the Financial Services and Markets Act requires the FSA to have regard to the international competitiveness of the UK market. And, I can assure you that the FSA is fully committed to maintaining the City’s competitiveness alongside its reputation. Three major topics on the horizon are analysts research, the listing review and soft commissions and un-bundling of brokers’ charges. Our proposals in CP171 on analyst research and conflicts of interest have received a wide airing. We have had many discussions with both individual firms and their trade associations and have received over 70 formal responses to our consultation. There have also been important developments at both the European level and at IOSCO. We are now digesting all of this material and we will be in a position to announce our decisions around the end of October. But, as Howard has already signalled, we are likely to confirm that senior management should take responsibility for the appropriate management of conflicts. We will expect firms not to allow analysts to attend pitches or road shows or to allow their compensation to be influenced by investment banking interests.

On the listing review the detailed work is nearing completion and we should be ready to publish our paper in two weeks. We think this has been a good time to review the listing environment. It has coincided with the transfer of the UK Listing Authority to the FSA, the changing directive environment in Europe and the overhaul of company law. A key part of the review has been to compare the UK regime with that of other countries. It has also been a highly collaborative effort with very close links to the market. So the consultation paper itself reflects the outcome of a collective effort, rather than just FSA thinking. The context is also important. The UK listing regime has been perceived to be successful in the past, and so we are talking about building on that success rather than correcting major deficiencies. Part of that success has resulted from the view that the UK environment is a rigorous one and that being listed here has real meaning. That point must not be thrown away.

So our proposals aim to keep the strong points, which make UK Listing a sought after recognition, but at the same time we have been able to find some redundant and costly requirements which we propose to remove. For example we propose to give issuers greater freedom as to how they present financial information to investors, as long as it is presented in a fair and balanced way. As a result, we expect that the outcome of this review, in 2005, will be a streamlined regulatory environment for Listing, but one which maintains London’s high reputation.

On softing and un-bundling we have extended the consultation deadline to 10 October. It is therefore premature to talk about the outcome of this consultation. I could, however, perhaps give a steer as to our thinking at this point. We believe that it is widely recognised that soft commission and bundled brokerage services can create market distortions through opaque charging and give rise to conflicts of interest for fund managers. We are also aware that regulators in other countries, notably the US, are looking closely at how well fund managers manage their conflicts of interest and “soft dollar” arrangements with brokers. Customers, and that includes all those investing for the future through their pension funds and pooled investments such as unit trusts, look to the investment professionals to act with integrity. That said, we are mindful of the need to ensure we have workable solutions for example, that do not undermine the international competitiveness of the UK. And we are aware of the concerns about the effect that separate payment for research may have on the supply to investment managers, though others believe there is too much wasted and redundant research, which transparent pricing may help to address. The proposals in CP176 have potential implications for existing market structure. We are working to understand the market dynamics and the impact of voluntary industry initiatives before making final decisions. All these will be carefully considered as we formulate our decisions.

Finally, a brief word about Europe, although it has been mentioned a number of times already, reflecting its increasing importance. The EU’s Financial Services Action Plan is nearing completion. Member States and the European Parliament have enacted a substantial volume of new financial services related legislation aimed at creating a true single market, intended to result in new opportunities for firms and increased choice and better prices for consumers. So that the lessons from this, sometimes rather difficult experience are fully learnt, it is important that we now take some time to take stock and evaluate the results of this ambitious plan and the process involved, before going ahead with a major new legislative programme.

Importantly for us, and for firms we regulate, the conclusion of FSAP at EU level will not mean that the job is done. Indeed far from it. All this legislation must be implemented at the national level. Furthermore, effective implementation across the EU is crucial if firms and consumers are to reap the full benefits from this round of legislative change. To this end we must make full use of the Lamfalussy committee structures in working towards regulatory convergence and effective implementation. We are working together closely with our European partners to make this a reality and will do our very best to align these EU originated changes to our domestic regulatory regime as effectively as possible.

I realise that this has been a skirt around the whole territory of regulation – the regulator itself, the retail markets, the wholesale markets and the international environment.

The three messages I hope you will leave with are: (1) the FSA’s priorities will be geared heavily to implementation and delivery; (2) we will look to harness the positive forces in the markets, both retail and wholesale; and (3) the FSA will become an easier organisation to do business with. Thank you.

Please stand and raise your glass. The Lord and The Lady Mayoress.

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