Monday, 11 October 2004
Speech by John Tiner


I would like to thank Scott Dobbie and the Securities and Investment Institute for inviting me to the opening of its Scottish office in Edinburgh.

It comes as no surprise that you should choose to open an office in a country in which you have over 1000 members. It also seems appropriate that the Securities and Investment Institute, as an organisation which aims to promote the advancement and dissemination of knowledge and hightypical standards among practitioners, all supported by authoritative research, should find a market for its services in Scotland, where there continues to be a thriving financial services industry.

I also see some similarities between the Securities and Investment Institute and the FSA. We share your interest in promoting high standards in the financial services industry and the FSA only has one office outside of London, also in Edinburgh. I suspect we also share a common ambition to see the rebuilding of trust and confidence in the British public in the long term savings industry.Although the Securities and Investment Institute is just over 12 years old, the financial services industry in Scotland is very long established. From the Bank of Scotland being formed in 1695 to the Royal Bank of Scotland in 1727 and the creation of Life Insurance in Scotland in 1815. Given the reputation which Scottish people enjoy for their prudence and care, it is interesting to note that the overdraft was invented in Scotland in the 18th Century.

Of course, the financial services industry has gone from strength to strength over the last two or three hundred years. It now boasts leading global players in the banking and life insurance industries and a thriving and internationally renowned asset management sector. It has also secured a major reputation in areas such as investment administration, custodian services, credit card services, software engineering and IT support. These activities are all central to firms providing their customers with high quality service and businesses with cutting edge and sufficient support. These characteristics, with the intellectual leadership which comes from hosting some of the world’s major financial institutions serve to create a rich base of talent in the Scottish financial market.

Scotland’s success is evidenced by a few figures. Nearly 100,000 people are employed directly in the financial services industry; Financial services provides seven percent of Scotland’s GDP; and Edinburgh is the sixth largest centre for insurance and fund management in Europe. It is probably true to say that the severe bear equity market over the last four years has proved a major challenge for many financial institutions. It has challenged their business models, cost structures, product and service offerings and has brought caution to the question of how they should manage their business going forward. Not surprisingly some Scottish firms have also faced these challenges. I very much hope they are able to respond positively and productively to these challenges, so that they emerge fitter, wiser and with the dedication to serve in the best interests of their customers, including through treating them fairly.

I suppose I should say a few words about regulation. It is a fundamental principle of the FSA that we work with the grain of the market and not against it. A basic principle of economics is that efficient markets are the best way of optimising the allocation of resources and this basic principle is central to justify whether and how regulatory intervention is necessary. Since becoming the FSA’s Chief Executive about a year ago, I have instituted clear disciplines that we will only consider regulatory intervention if a market failure analysis demonstrates it to be necessary, and then only actually intervene if the particular tools we select are justified on cost benefit grounds.

This does, of course, present us with some challenges with implementing European directives, which have not always been subject to these same disciplines. In September last year, I committed to cutting the burden of consultation through fewer new policy initiatives and making the FSA’s handbook more accessible, more relevant to each type of financial business and easier to understand. Just over a year on it is timely for me to mention briefly the first significant progress we have made in delivering on these commitments, which in summary, are all about delivering less, but better policy. In my September 2003 speech I set the FSA a target of halving the number of Discussion and Consultation Papers we would publish in the financial year 2004/05. We will meet this target by publishing 22 over the financial year. Given the quantity of European legislation we are required to implement, this is not an insignificant achievement.

But although publishing fewer consultation papers is a positive step, it is important that the proposals we do make can be justified. Cost-benefit analysis has a crucial role to play here. Working with the grain of the market means that a regulator should only intervene where the market itself is unable to correct a market failure. Once a proposal to intervene has been made, we test whether that intervention will produce net benefits. This two stage process is key to the way in which we will develop the regulatory regime for financial services in the UK. Of course, many, if not the majority of new regulations will arise from the EU Financial Services Action Plan. The FSA is very aware of the burdens these changes impose. However, where we have discretion, we will exercise that discretion with rigour and care.

Importantly, we are also a regulator which takes a pragmatic approach to regulation. Over the past six months we have been able to give reassurance to a range of different kinds of industry participants that regulation does not need to apply to them. This has included house builders who sell homes with the benefit of structural warranties, and group risk managers who organise insurance on behalf of a single group of companies or joint venture. Within the past week or so, we have given guidance that insurance organised as part of a Private Finance Initiative deal does not need the organiser to be authorised.


Simplifying the FSA Handbook and making it more accessible

Many of you will, of course, already be familiar with the FSA's existing regulatory regime in the form of our Handbook. Last September I announced that we would simplify the FSA Handbook – that we would reduce it in length, and make it easier to navigate. I am pleased to report that we have made excellent progress. We have, for example, recently published a new version of our Code of Market Conduct which is 30% shorter than its predecessor. The new Listing rules we will publish soon will also be shorter than their predecessors [on a like for like basis]. And we have already published materially shorter rules for unit trusts and other collective investment schemes. On the accessibility front, we now have a series of helpful guides to the Handbook including one for small IFAs and one for credit unions. We have also upgraded the links and search function on our website. In August, we launched online "tailored" handbooks for general insurance and mortgage intermediaries. At less than 10% of the size of the full Handbook these are genuine "handbooks". The technology behind these "tailored handbooks" extracts only the rules and guidance relevant to these firms, delivering on industry demands for sector-specific rulebooks whilst retaining the unitary nature of our regulatory approach. We will be launching a series of these tailored Handbooks for other industry sectors early next year. This will be followed by a "build your own handbook" tool enabling firms with non-typical business models to create their own personal handbook.

Other technological improvements in the pipeline include personalised alerts to changes in the Handbook and the ability to "time travel" through the rules, enabling firms to see how the rules will look after amendment and to prepare more easily for future changes.

Some concern has been expressed at the effects of these changes. Let me dispel some myths:

  • we are not operating to a simplistic target of percentage cuts which will compel us to drop useful material;

  • the result of our work should be simpler text, but there will often be a limit to how much simpler it will be because of the need to implement EU directives – there is no move to anarchy;

  • while we will put much more emphasis than in the past on simply copying out rather than elaborating EU directives, we will not do this in a simplistic way which leaves firms in the dark about what they are supposed to do.

There is, I know, also some concern in the industry that an unwelcome by-product of trying to simplify the Handbook will be to drop guidance which is of real value. I can confirm that that is not the plan. We will delete guidance from the Handbook if it adds no value, for example by simply repeating the wording of the rule. And of course we will delete it if it has been superseded, because the underlying rule on which guidance is being given has changed. We will remain happy to include guidance in the Handbook where the underlying rule would otherwise be unclear. But, as has always been the case, firms should not look to guidance from the regulator as a comfort blanket to reassure them that they do not need to take responsibility themselves for complying with the rules, or that the rule does not mean what it says.

In all of these areas, our motto will be the intelligent application of judgement, to try to strike the best possible balance between clarity about the standards firms must meet, and the freedom of firms managements to take judgements and to innovate.


Implementing directives

I should say a bit more about the approach we take to implementing European directives. European legislation is an increasingly important constraint on the way we operate, with more and more of the content of our own rulebook set by Europe. How do we go about implementing community obligations in a way that fits with the need for better regulation?

The starting point is the text of the Community law itself. This approach, which is known as 'copy out', involves copying out the Community standard into our own rulebook. It provides a healthy discipline against the tendency to over-elaborate Community obligations in the process of incorporating them into our own law, or to keep familiar domestic rules, in addition to the Community standard. Over the past year, we have given much greater emphasis than in the past to the copy-out approach. Our consultation papers now regularly show which of the provisions we are putting forward come straight from European directives, and grey-out directly applicable European regulations, which are included for information, but not made by us. This allows consultees to focus on areas where we are making a choice to go beyond directive requirements, and so whether they agree that this is the right thing to do.

But copy-out is not the answer to all directive implementation problems. Sometimes, for example, it makes sense to adopt the Community standard across a wide range of business that is covered by the Directive concerned, to avoid having two different sets of rules applying to very similar business. Or it may be that, in addition to simply giving effect to the directive requirements, we can take the opportunity to go further than strictly required by the directive, and remove the old rules which applied in the same territory. So the approach we take is one of 'intelligent copy-out'.

We start by being clear, with ourselves and with others, about what the directive requires. We then aim to judge, with the benefit of consultation, whether something beyond simple copy-out is required. For example, we will take advantage of implementation of the new 'markets in financial instruments directive' to look closely at the opportunities for Handbook simplification which this presents.


Targeted de-regulation

People sometimes say that regulation is a one-way street, where the burdens always go up, never down. It would be fair to say that, for example, the need to implement the insurance mediation directive has brought large numbers of additional firms within the scope of regulation. And the Government's decision to accept the view of Parliament that mortgage and general insurance regulation should be brought within our scope has brought a fair number more. As I mentioned earlier, we have been, and continue to be, pragmatic when faced with hard cases about who is caught, and who is not.

But in addition to making the regulatory regime make sense, and in addition to our work to make that regime work for consumers and firms, there may be scope for deregulation. There is for example currently some concern that employers cannot give their staff information about stakeholder pensions and similar products without risking the need for authorisation. We know that HMT are looking at this as part of their two-year review of FSMA, and are certainly not pressing that authorisation should be needed in this situation.

There has also been much concern, rightly, in my view, about the effectiveness of the current ID requirements in the UK's Anti-Money Laundering regime. We are not ultimately responsible for the specific ID requirements since those are set by the industry guidance notes issued by the Joint Money-Laundering Steering Group. We are, however, working closely with them to explore the potential for a simpler system that is more effective in deterring the criminal but at the same time does not inconvenience honest citizens. I am confident that our work in close co-operation with key stakeholders in 'defusing' the ID issue will lead to some deregulation here.

Congratulations, Enjoy your evening.

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