The Brewery, Chiswell Street, EC1
15 July 2004
Speech by Callum McCarthy

Preamble

Ladies and gentlemen, let me welcome you to this fifth public meeting of the FSA. At the very first annual meeting of the FSA in 2000, there were about 100 attendees. This year, we have planned for up to 600. I believe this reflects both the wide interest in our work and the extent to which this is a valuable occasion to present the FSA’s work and to answer questions on that work.

I attach great importance to the processes of consultation on our proposals, in which we listen to the views of the many constituencies affected by our work, and of explaining our decisions. Today is a vital component of these processes.

Introduction

This is the first annual meeting attended by both our Chairman and our Chief Executive, so we plan to depart a little from previous practice. First, John Tiner and I will speak, followed by Ann Foster as chair of the Consumer Panel, Jonathan Bloomer as chair of the Practitioner Panel, and Deirdre Hutton as deputy chair of the FSA board and chair of the Committee of Non Executive Directors (NEDs) of the board.

The speakers will then be joined by our three managing directors – Clive Briault, David Kenmir, and Hector Sants – and by our Director of Finance Strategy and Risk, Kari Hale, to provide a panel that, I hope, will be of sufficient strength to answer the very many questions that we have.

I am grateful to those who have sent in questions. We will publish all the proceedings on the FSA website and will also answer there any written questions that are not covered this morning.

FSA priorities

Let me address the priorities of the FSA. I have said that I regard today as an important occasion in the process by which the FSA explains and justifies our priorities, which are not just our actions, but also the framework for those actions. Those instances where we believe regulatory intervention is not called for and is not justified, are as important as our actions.

We do, of course, consult on each initiative on our rules and on new proposals. I am conscious that our determination to tease out and explain specific issues, and the number of those issues, sometimes make it difficult for observers to discuss the principles and priorities that shape our work, and indeed to discern those principles and priorities. I, therefore, want to set them out for you today. John Tiner will talk more about some of the specific initiatives.

Financial Risk Outlook

Let me start with the process of establishing priorities and accountability, which we are refining. Our process is built round three documents. The first document, published in January each year, is the Financial Risk Outlook, our assessment of the principal external risks to our meeting our four statutory objectives. This sets out what we judge those risks to be, and how we plan to mitigate and manage them, which is the essential environment for our plan.

Business Plan

The second document, also published in January, is our Business Plan for the next year, which sets out our main programmes. All our work falls under three broad themes. The first is promoting efficient, orderly, and clean markets, which is a necessary condition if we are to continue and develop the UK’s position as the most international of the world’s capital markets. The second is to help retail customers obtain a fair deal where there is a need, both for providers and for customers of financial services, to raise their game. The third is to make the FSA a more efficient and effective organisation that is easier to do business with.

In our business plan, we have set out under each of these three themes our main programmes with our target dates by quarter for achieving our objectives. We report on progress quarter by quarter.

Annual Report

The third document is our Annual Report, published in June, which will enable all those interested in our work to compare the previous year’s promises with actual outcomes and to consider the reports of the Consumer, Practitioner, and Small Business Practitioner Panels and of the Complaints Commissioner. It also provides a factual and objective basis for this important meeting.

All this process is designed to establish transparency and accountability, and I regard it as a process that is essential for the legitimacy of the FSA. As a contribution to that process, I should report that of the 21 milestone objectives that we set out in the plan for quarter one and quarter two of 2004, we met 19 on time, and were late with two. For one of those, we were late as a deliberate act of policy, in that we delayed to allow more time for firms to tailor their principles and practices of financial management to specific funds, rather than produce standardised documents.

We will continue to measure and to report our progress against plan, so you can judge how we are doing.

Policy framework

That describes the process. Let me turn to the policy framework. All our work builds on the framework of a belief that efficient and fair markets provide the best outcome for both customers and providers of financial services. Our concern is therefore to seek solutions that enhance the working of efficient markets for financial services. It is worth spelling out the implications of this, as it provides the context for many of our specific initiatives.

Better customer capability

In the retail market, an efficient and fair market requires customers who are capable and confident to make decisions. It requires information about services that is comprehensible, relevant, and timely, and it requires providers of services to recognise and meet their responsibilities. Each of these needs improvement, and we are working on each of these.

On the demand side, the essential question of individuals’ ability to take the financial decisions increasingly being required of them, clearly needs to be improved. The FSA is now leading the efforts to develop a national strategy to deliver a step change in financial capability. Our document Building Financial Capability in the UK, and the follow on working of seven working groups led by different partners to this enterprise, are important steps in this long term task.

Clearer customer information

On the supply side, we believe we should be able to make more rapid progress. Our work on key facts for all financial products or our work on the specific improvements in information for policy-holders of life insurance products, are examples of where we believe there is the prospect of significant progress in providing better and clearer information, so that customers can understand the rewards, the risks, and the commitment associated with the product or service being offered to them.

Encouragement of good practice in the industry

Last, we have a programme of work aimed at creating a framework that incentivises firms to build good practice into their business models, and which discourages and, where necessary, punishes bad behaviour and bad practices. Our work on this, which goes by the title of Treating Customers Fairly, is designed to identify good practices at each stage in the lifecycle of a product, from its original design, through its sale and subsequent customer servicing, including complaints handling.

These three programmes – better customer capability, clearer and more understandable information, and encouragement of good practice from those who provide financial services - lie behind and inform all our actions in the retail market.

We see great advantage for both customer and provider of financial services in making the substantial improvements needed if we are to make the markets for financial services more fair and more efficient, not least because it will enable the FSA to avoid more detailed, intrusive, and hence more costly regulation. We do not believe that to be in the interest of consumers, the financial services industry, or the UK economy as a whole.

Further movement in the direction we aspire to depends greatly on the willingness of firms to make further real changes, particularly in terms of better information for and understanding of their customers. It also depends on those customers recognising both their rights and their responsibilities. I am encouraged from discussions with senior members of the industry that many recognise the need for improvement. The task is now to translate good intentions into practice, and it is essential that this happens.

Wholesale markets

Let me turn to the wholesale market, where the task of establishing fair and efficient markets has many aspects. Some of the features are common to both wholesale and retail markets. Our work on revising the listing particulars, our concerns that information should be released promptly to the market, or our re definition of the relevant information on the assets and liabilities of life companies, are all examples of the importance that we attach to relevant, timely, and comprehensible information in the wholesale, as well as in the retail, market.

Conflicts of interest

The wholesale market has a set of problems particular to it, two of which deserve comment here, as they lie behind much of the FSA’s work in the wholesale market. The first is the need not to eliminate, but to manage fairly and openly, the many conflicts of interest that are unavoidable. The need for progress here is apparent, and the FSA’s work on softing and on unbundling, where we are seeking a market solution; our work on research analysts; and our work on market timing are all aspects of the proper management of conflicts within financial firms.

Capital adequacy rules

The second special aspect of the wholesale market is the need for proper capital adequacy rules. The work on this is in the context of Basel 2, which I am glad was agreed at the end of June for banks. The implementation of realistic reporting for life companies has been and will remain a major effort for the FSA. As I said earlier, our aim is efficient, orderly, and clean markets. Our chosen route is to encourage market forces, not to seek to replace them through regulation.

Enforcement

I am conscious that our concern to promote fair and efficient markets rather than to pursue a more intrusive regulatory policy, has been regarded and represented by some as a weak approach. I believe that view to be profoundly mistaken. The responsibilities we are placing on the senior managers of firms are real and heavy, and the consequences of failure can be severe, both in terms of penalty imposed, whether by way of corporate or personal fine, by way of more direct action, or in terms of compensation paid. The reality of vigilance against malpractice and determined enforcement of rules is intended to contribute to, not work against, our policy framework of encouraging fair and efficient markets.

I spent time on our processes for establishing priorities and reporting on our delivery against those outcomes, and on the policy framework within which all our work is conceived and developed. Let me hand over to John Tiner for some more detailed comments on the FSA’s work in the past year.

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