The Brewery, Chiswell Street, EC1
15 July 2004
Speech by John Tiner

Preamble

On taking over as Chief Executive last September, I set out in a speech at the Mansion House our future agenda for the FSA. I summarised this in three messages.

  • Firstly, that the FSA’s priorities would be more geared to implementation and delivery, moving on from the policy development stage of the organisation’s evolution.
  • Secondly, that we would look to harness the positive forces in the markets, both retail and wholesale.
  • Thirdly, that the FSA would become an easier organisation for you all to do business with.

Nine months on, I believe that we have made progress in all these areas. There is much more to do, but I am satisfied that the momentum for change is now with us and we have a leadership team in place at the FSA to see this through. In my remarks this morning I'd like to highlight the main areas of our work over the year and show how I believe we are moving in the right direction.

Policy formulation

Policy formulation has of necessity been a major preoccupation in the early years of the FSA's life as we have worked to establish a single coherent regime to replace the nine predecessor regulators. However, that phase is now largely complete and our focus is shifting to implementation and delivery.

EU policy initiatives

In September I said that we hoped, for the benefit of all our stakeholders, to limit the number of policy initiatives we brought forward. This is a challenging aim, given that over the period 70% of new rules have been driven not by us but by legislation at the European Union level, arising from the hugely ambitious Financial Services Action Plan. Imposing new or revised requirements through our rulebook is an important regulatory tool, which we will continue to use where appropriate.

However, we are absolutely determined that we will exercise our discretion to make new rules only where this can be justified by a robust market failure and cost benefit analysis. This principle has been firmly built into our internal processes. Our Regulatory Policy Committee, which we set up in January, will approve new policy initiatives or allocate resources for policy development only if these tests are met at the outset.

Superequivalence

When it comes to implementing European Directives, we have built into our processes a presumption that we will not implement measures beyond EU requirements (so-called superequivalence) unless this can be justified in terms of market value and cost benefit analysis. So, for example, in implementing the Markets in Financial Instruments Directive we will not be superequivalent on admission to trading rules, nor on financial resources requirements for Recognised Investment Exchanges and Recognised Clearing Houses.

We are also looking carefully at other cases where existing requirements could be disapplied when this Directive is implemented in the UK. However, this does not mean that superequivalence is always to be avoided. There will be circumstances where it is sensible, given the nature and structure of UK markets, to impose or retain superequivalent requirements. For example, as we said at our conference last week, in implementing the Market Abuse Directive, we plan to retain some aspects of the current UK regime, for example its application to spread betting and to the OFEX and AIM markets; the market agrees with us that these are sensible arrangements which benefit our market and should be retained.

Consultation

Last September I said the FSA aimed to halve the number of Discussion and Consultation Papers we would publish in the financial year 2004/05. In the first three months of the year we have issued just six Papers. As you can see from the schedule of planned consultations that we now publish on our website, we are well on schedule to meet this overall aim. I fully recognise that it will take time for this much lighter load to be felt by the industry and others – not least because of major consultations expected in 2005 on implementation of the new Basel framework and of the Markets in Financial Instruments Directive.

Transparency issues

In the meantime, I imagine that we will continue to hear complaints about consultation overload. But be in no doubt that this lighter load is the shape of things to come. I welcome the comments which some have made about the transparency and effectiveness of our consultation, especially in the context of international practice. I know that this involves a lot of hard work by many of you here today, and I would like to thank the firms, trade bodies, consumer representatives and other individuals and organisations for their thoughtful input to our policy process – we need your help to get it right. I should also like to thank the Panels for their constructive and challenging comments and suggestions on a whole range of issues.

Need for regulation of insurance business

In particular areas of regulation the need for significant reform is widely accepted. One of the first things the Board asked me to do when I joined the FSA just over three years ago was to lead a programme to modernise the regulation of insurance business in the UK. This project, together with our review of with-profits and our work on the integrated Prudential Sourcebook, represents a very substantial programme of reform.

Our revision of the prudential requirements, setting out a common approach to prudential risk across all market sectors, represents a radical departure from the approach to insurance regulation which has applied for the last 100 years. This work is bringing clear long-term benefits in terms of improving the standards of risk and financial management in both the life insurance and general insurance markets, and in the openness and transparency with which life insurance companies communicate with their policyholders.

In my view the insurance industry has come a long way over the last two or three years and we remain committed to working with them and their policyholders to ensure that these reforms are implemented in full and are long-lasting in their impact. This is an important contribution to restoring confidence in the long-term savings market and to helping retail consumers get a fair deal.

Implementation of reforms to insurance business

Just as there has been acknowledgement that reform is needed, so there is recognition that the reforms we are implementing are positive and beneficial. For example, we welcome Lord Penrose's support for our reforms in his report earlier this year and the comment from the Association of British Insurers on our revised basis for calculating insurance companies' capital requirements, which they described as 'good news for customers and shareholders'.

The regulatory requirement on firms to treat their customers fairly and communicate with them in a way which is clear, fair and not misleading has been in place for over 10 years. Delivery of these key principles in practice is critical if consumer confidence in the financial services industry is to be raised and if the incidence of mis-selling is to be substantially reduced.

From my conversations with the top management of the large retail groups, I believe they recognise the importance of improving on past performance in this area, and I see real commitment at this level to making it happen. The real challenge for them is, of course, to integrate this thinking from the boardroom right through to the actions of sales forces and other frontline staff; this demands cultural change as well as improved systems and controls.

We will shortly publish a paper which builds on the progress that has been made and provides a useful step forward in working out how the principle of treating customers fairly should be applied in practice.

Monitoring financial promotions

As indicated in our Business Plan, we are also strengthening our focus on, and re-allocating resources to, monitoring firms' financial promotions – on which the industry spends over £800m a year. This includes working with firms' senior management to see that their marketing departments have systems and controls which provide greater confidence that the material they produce is clear, fair and not misleading.

We need consumers and the market to help us in this; we recently launched a new Hotline to enable consumers and firms to alert us to advertisements which cause them concern.

Enforcement

Regrettably, it remains the case that some firms fall far short of meeting their responsibilities to their customers. Where this happens we take enforcement action. We are not an enforcement-led regulator; it is one of the tools available to us, which we use in a risk-based way. Financial penalties on firms are often accompanied by a requirement to pay compensation to consumers who have suffered. For example, over the last four years we have fined seven companies a total of £6.8m for rule breaches related to endowment mis-selling and have required five of them to pay in total £227m to policyholders in compensation.

Investigations into splits

Our investigations into alleged collusion in the split capital investment sector have attracted particular attention. This is the largest enforcement investigation which we have ever undertaken. I'd like to take the opportunity today to report the latest position. We have begun to present cases to our Regulatory Decisions Committee and will continue to do so over the coming weeks. We are inviting the RDC to issue Warning Notices proposing regulatory sanctions, including compensation for consumers.

Compensation and settlement

I am disappointed that we have not yet reached an agreement with firms about compensation, but we remain open to proposals by the firms concerned. However, we are not prepared to take any offer, simply in order to achieve a settlement. If we cannot reach a settlement with all the firms concerned we will have settlement discussions with those who have said they are prepared to try to reach agreement through mediation.

So far five firms have said that they are willing to enter into such discussions – an increase of two since I responded to questions from the Treasury Committee about this three weeks ago. Several other firms have said that they would be interested in mediation if we are unable to reach agreement with a larger group.

Customers’ responsibilities

I have spoken about firms' obligations to their customers. The other side of the coin is customers' responsibility for their financial decisions – a principle enshrined in the legislation under which we operate. Callum has referred to our work on financial capability, designed to help consumers to discharge their responsibility in practice. In my capacity as Chairman of the Financial Capability Steering Group I am encouraged by the momentum which this has now developed. I look forward to working with the many organisations committed to raising the level of financial capability in this country and urge them to back this commitment with the necessary funding when the detailed plans have been laid out.

I should like, particularly, to thank the members of the steering group and the seven working groups for their interest and commitment.

Wholesale and institutional markets

In the Wholesale and Institutional Markets, the UK continues to lead the world in attracting international business, and we are deeply committed to maintaining a regulatory environment which supports good quality business. We welcome the conclusion in the report last year by the Centre for the Study of Financial Innovation that the regulatory regime in the UK is ranked ahead of other major international centres. Our aim is to maintain clean, orderly and efficient markets. Promoting these principles will, we believe, continue to raise standards domestically and strengthen the attractiveness of the UK for international players.

During the past year we have dealt with a number of major issues affecting the wholesale markets. Callum has referred to our work on softing and unbundling and on analysts. In these areas, consistent with our core philosophy, we look to work with the grain of the market and to rely on high level principles rather than writing prescriptive rules.

Implementation of Basel 2

Basel 2, having been in gestation for over five years, is now reaching closure. Here too it is time to turn to implementation. This is a major priority for the FSA, and I have asked Hector Sants to lead our work on implementation. As someone who was until recently on the receiving end of such initiatives, he is eminently well placed to do so. He has already established a working group of the leading trade associations whose members are affected by Basel 2 to ensure the work is taken forward in a pragmatic and a cost-effective way.

In Europe, Basel 2 will be implemented through the Capital Requirements Directive; and in order to allow the market adequate time to prepare, the UK is urging the Commission not to implement until 2007.

Financial crime and international security

In the light of continuing uncertainty internationally, we have raised the level of our work on business continuity and financial crime. We are working closely with the Bank of England, HM Treasury and the major firms and exchanges and infrastructure providers in preparing to maintain the financial system in the event of an incident.

On financial crime, we have signalled our intention to look more creatively at identification processes at the point of account opening, so that, on one hand, money launderers are deterred but, on the other, the vast majority of people are not deterred from going about their legitimate financial business. It will take some time to unravel the sometimes over-enthusiastic implementation of the 'know your customer' requirement; we will play our part in helping to redress the balance.

Implementation of the Insurance Mediation Directive

Preparing for the regulation of mortgage firms, starting in October this year, and general insurance intermediaries, starting in January next year, is the largest exercise of its kind ever undertaken by any UK financial regulator. So far, over 12,000 firms have applied for authorisation. Our role here is to implement, consistent with our statutory objectives and principles, the regime prescribed by the Government, based on domestic policy decisions and on implementation of the Insurance Mediation Directive.

Application to members of a corporate group

Some difficult issues have arisen on the IMD. For, example it makes no direct reference to the position of firms which carry on insurance mediation exclusively for other firms within a corporate group. This has given rise to considerable concern that we will be required to authorise and regulate entities in groups which arrange insurance on behalf of other group companies.

Successful implementation

We share this concern, and I am pleased to say that we have found a way in which the directive can be implemented without reaching this anomalous result. We are writing today to the trade body which has raised this issue with HM Treasury and with us, setting out how we think group risk managers can avoid the need to be regulated by the FSA. The basis for this conclusion is our view that group risk managers should not be regarded as being remunerated for their activities where they are funded solely by other members of the group on a cost or cost plus basis and receive no other remuneration because for example they deal net with insurers.

Joint ventures

We are aware that similar issues arise for participants in joint ventures, and we are considering whether we can take a similar approach there too. There are concrete examples of where, within our obligation to implement properly UK and EU legislation, we have taken a sensible and pragmatic approach to which firms need to be authorised and regulated by the FSA.

Professional Indemnity Insurance requirements

One further challenge posed by IMD will be whether firms are able to secure the level of Professional Indemnity Insurance (PII) required by the Directive. The PII market has been difficult for a number of years and the capacity demands on the providers are about to increase significantly with the implementation of the IMD. We do not know if the necessary capacity will be available.

We are pleased that the European Commission has committed to the European Parliament and Council that it will report in the first half of 2005 on the continued appropriateness of PII requirements for intermediaries. Together with HM Treasury we are committed to providing input to this review. In the event that large numbers of intermediary firms are unable to obtain the required PII cover, consistent with our EU obligations, we intend to exercise supervisory discretion when a firm holds sufficient financial resources overall.

Improvements to the Handbook

In my speech last September I talked about my aim to make the FSA easier to do business with. We are working on this. One aspect, which I know is of interest to many in this room, is the accessibility of our Handbook. On this, we have made good progress, and there is more to come. Just recently, for example, we have relaunched the Handbook online including the first set of improvements. The next stage of the project is to build some technology which enables firms easily to construct a handbook which is directly relevant to their particular kind of business.

Organisational efficiency of the FSA

Ability to act quickly

I also said at the Mansion House that we needed to be an organisation which could act quickly and decisively. I think most would agree that our recent swift investigation into certain trades in the shares of Marks and Spencer is evidence that we are on the road to doing this – from announcing our investigation to concluding that we would not pursue investigations into two of the individuals took us just 13 days.

More broadly, we have now completed our end-to-end review of the enforcement process, and I expect, overall, a reduction of some 30% in the time to complete an enforcement case as a result of the new arrangements we will put in place.

Keeping down costs

We are strongly committed to running the FSA as efficiently as possible. On our direct costs, our annual funding requirement for 2004/05 is projected to be £213.3m, marginally lower on a like-for-like basis than the £214m figure for 2003/04. On average, fees directly attributable to the FSA (i.e. excluding those for the FOS and FSCS) will decrease by around 1% this year. The actual fee levied depends on the business carried out by a firm, so within this average figure there will be considerable variances across industry sectors.

But we know that the more significant costs of regulation arise in the direct costs borne by regulated firms in their business in complying with our rules. I have said many times that the costs of regulation must be justified by the benefits to consumers and markets. Over the coming months we will work up a methodology for determining the cost to firms of the FSA's regulatory regime and the benefits derived. We will set out in our 2005/6 Business Plan how we intend to take this work forward.

New organisational structure

Our new internal organisational structure went live in April this year. It is designed to ensure that we commit the right level of resources to our business priorities, taking into account our risk-based approach. I am encouraged by the welcome given by our stakeholders to the thinking behind the new structure. I believe we are seeing already benefits both from the new structure and from removing many committees, project boards and the like and from placing more decision-making responsibility on individuals, who will consult with their colleagues when necessary.

I am particularly pleased with the way in which the new sector teams are tackling their jobs. I see the sector leaders out and about in the marketplace, keeping their ear to the ground, picking up intelligence and ensuring that we as an organisation are focussing on the right things. They are also working with the three business units in building up our technical capabilities in each of the sectors I have identified.

Staffing

Turnover

On staffing, we are committed to recruiting and retaining staff with the right skills, knowledge and experience to oversee this highly complex and dynamic industry. I still hear many myths about our staffing, including that turnover is unacceptably high. This is not true. Turnover is currently running at about 8% after a two-year period of running at 6-7%. We expect this to pick up as confidence continues to return to the market, but this is still much lower than the levels of turnover experienced by the industry itself.

Recruitment

In terms of recruitment, our experience is that we are able to attract skilled professionals from the market. This – combined with our graduate programme (which we are expanding this year), recruitment of senior market practitioners and the extensive use of inward and outward secondments – enables us to develop and refresh our talent base.

Remuneration

We pay market median salaries, but pay considerably more for our higher performers. And we offer an attractive benefits package and market-leading learning and development opportunities.

Working at the FSA is not just, or mainly, about financial reward. We offer a unique insight into the full breadth of the financial services industry and a range of challenging and interesting roles. The public policy nature of our work, in an area of vital importance to the UK economy, means that what we do is of real significance to millions of consumers. This is highly motivating for staff and potential recruits.

I know that some of you will be eager to apply – you can do so on our website!

Conclusion

We are less than one year into the agenda that I announced last September. I hope you will see from my report that we have made significant progress in that short time, and I can assure you that I and my senior management team are absolutely committed to continuing to improve the organisation's delivery so that we promote and maintain efficient, orderly and clean markets, help consumers achieve a fair deal and make the FSA an easier organisation to do business with.

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