FSA Annual Public Meeting 2007: Questions submitted in advance

The Equitable Life scandal has had disastrous consequences for the industry and the FSA alike. It seems that the FSA has been extraordinarily 'accident prone' in the alarming attrition of the FSA staff responsible. Sir Howard Davis, Michael Foot and Martin Roberts have left. David Strachan has moved on and John Tiner is going. The man responsible until last week, Ian Tower, has suddenly - without warning - left.

When the Parliamentary Ombudsman finally reports is there anyone left in the FSA from the Equitable's regulatory team that can be held to account? Is this string of departures really just coincidental - given that the FSA had sight of the PO’s draft report in January and is potentially subject to criticism?

There is no connection between the Parliamentary Ombudsman's report and the decisions of the colleagues you mention to move on. Their decisions were taken for normal business reasons such as the end of their term in office, retirement and career development.

The FSA will continue to discuss with the Parliamentary Ombudsman her emerging conclusions. Our commitment to engage with her is unaffected by the departure of particular members of senior management or employees.

This Autumn, Equitable Life will seek, by simple majority of those voting, policyholder approval to transfer its With Profit Annuitants to Prudential, and – if this is approved – will seek the court's approval for the deal. The FSA is overseeing this process. The FSA's similar oversight of the Equitable Life 'Compromise' in 2002 was deeply flawed, and its oversight of Equitable's transfer of annuitants to Canada Life in 2006 also merited some criticism.

The Chairman of the Equitable Members' Action Group, John Newman, wrote on 14 June to the relevant FSA official, Ian Tower, expressing concern over several aspects of the proposed transfer. Mr Tower has since left the FSA, apparently at short notice, and the letter and the concerns remain unanswered. As one example EMAG maintains that there should be two separate classes of voters, WP annuitants and non-annuitants, whose interests are not the same.

Will the FSA answer these concerns very soon; and also to take this opportunity to assure all Equitable policyholders that it is doing its duty to ensure that the transfer proposals are transparent, fair to them all, and the best that can be obtained under the circumstances.

In March 2007 the Society reached agreement with the Prudential for the transfer of its with-profits pension annuity business, comprising approximately 62,000 policies.
The process for the transfer of insurance business is governed by Part VII of the Financial Services and Markets Act 2000. This introduces a range of safeguards to protect the interests of policyholders:

• it requires the Court's approval;
• the Society's Board will not implement the transfer unless the members approve the proposal at a vote which will be arranged for later in the year;
• the terms of the transfer and its impact must be reviewed by an Independent Expert (in practice this will be an actuary for a life business transfer), who will give a view on the effect on policyholders;
• as regulator, the FSA is able to scrutinise any proposals to ensure that regulatory requirements are and will continue to be met, including whether consumers interests are appropriately protected; and
• the Court will give the FSA an opportunity to register any objections/reservations it has with the proposed arrangements.

We will ensure that policyholders receive timely and relevant information in relation to the proposed scheme. We will also ask the Society to invite policyholders to make any representations directly to the FSA and we will consider these representations when reaching a view on the fairness of the Scheme.

We responded to Mr Newman's letter of 14 June on 16 July addressing the concerns raised.

We considered the proposed non-profit transfer in some detail, taking into account the Independent Expert's report, and concluded that we had no reason to object to the transfer. We considered the position of the different groups of policyholders, both those transferring and those remaining, including the with-profits annuitants.

Much of the New Conduct of Business Sourcebook is intended to implement MiFiD, which is concerned with a world far away from the straightforward products offered by life assurers and unit trust managers, and the language is far from clear, even though it may be principles - based. I find it far more difficult to understand and navigate COBS than ever I did COB. In the past twelve months, the FSA has moved from having one Integrated Prudential Sourcebook to sectoral Prudential Sourcebooks, BIPRU, INSPRU, MIPRU, UPRU, which are much easier to use than PRU was. In the cause of making the FSA 'easier to use, easier to understand', has the FSA considered taking COBS apart and having sectoral Conduct of Business Sourcebooks which match the Prudential Sourcebooks? In my ideal world, there would be one for Stock Market firms, one for Banks, one for Insurance Companies, one for Unit Trusts and one for insurance intermediaries (life and non-life). It would be so much more simple to navigate and, more importantly, give some certainty to firms that they are providing the outcomes the FSA expects from their sector and not wasting their time trying to understand something which has no bearing on their business.

In July 2005 we consulted in Consultation Paper 05/10 on whether to retain a single conduct of business sourcebook or segment as you suggest. We set out our reasons for preferring a single sourcebook in the CP. Most respondents agreed with our approach.

We are constantly considering how we can make ourselves easier to do business with and have taken a number of steps over the last few years to improve the accessibility of the Handbook. In addition to a full consolidated Handbook we now have:

• Personal Handbooks – these enable users to build, manage and identify relevant rules and guidance for their specific permissions.
• Tailored Handbooks – these set out the relevant rules and guidance for selected industry sectors.
• Focus on Handbooks – these provide a summary of rules in areas of particular interests to firms that are entirely binding if relevant to your firm.
• Handbook Guides – these provide an overview of the relevant Handbook rules for particular kinds of firms.
• Regulatory Guides – provide guidance on particular regulatory topics in the Handbook.

The shortening of the FSA Handbook of Rules and Guidance by the use of more principles-based regulation is now well advanced and that is to be welcomed, provided that the FSA does not use the focus on outcomes rather than process to second-guess firms and turn the regulatory screw on firms who thought that they had understood what they had to do, albeit incorrectly. My former company had a slogan 'Easier to use – Easier to understand'. Apart from what is already being done with customised Handbooks, what else can the FSA do to put that slogan into practice – less Delphic language would be a good start. Another area for improvement would be a reconsolidation of all the rules made during 2006 so that the modules read sequentially, instead of having additional rules inserted with suffixes such A, B, C etc as a result of consultations after the publication of the original draft text.

We acknowledge the concerns raised by the industry about what principles-based regulation will mean in practice, in particular what will happen to a firm should its assessment of whether it is meeting the desired outcomes differ from ours.

When drafting high-level rules, we recognise the need for a careful balance between providing sufficient scope for firms to reap the benefits of principles-based regulation (e.g. increased flexibility) and the need to provide sufficient detail and clarity to enable them to know what is expected of them.

Our move towards principles-based regulation will lead to an increased focus on principles-based enforcement action. We recognise that there is more than one way for a firm to comply with the Principles. When taking action for a breach of a Principle we will judge the conduct by the standards required to comply with the Principle at the time the conduct took place. We will not apply later higher standards.

Over the past few years, insurance has been at the forefront of the FSA's programme of regulatory change. As I see it, only the following remain to be completed:

• Complete the New Conduct of Business Sourcebook by publishing the rules currently shown as either 'to follow' or 'intentionally omitted'
• Complete the consultation process and make the rules to replace ICOB with NEWICOB (see CP 07/11)
• Extend the FSA's regulatory scope to include package travel insurance business
• Make the rule changes needed to implement the Retail Distribution Review
• Complete the Training and Competence Review
• When enacted by the European Commission, amend GENPRU and INSPRU to reflect Solvency 2
• Replace IPRU-INS by merging it with INSPRU or SUP, thus taking it off the 'too hard' pile, and revising the reporting forms as necessary

When this work programme has been completed, both the FSA and the industry can regard the regulatory regime as being in steady state; there would seem to be very little left for the FSA to change. It would then be possible for the regulated to act like Bobby Collins of Leeds United; put their foot on the ball, look up and seek out the big picture before making the next move. Am I wrong? Which sector of financial services is next in the firing line?

The regulatory regime for the insurance sector which the FSA inherited in 2001 was in need of significant reform. It is widely acknowledged that as a result of these reforms, and a lot of work by the industry itself, the insurance industry is now better capitalised, more transparent and has better risk management practices than before.

We aim to regulate only where there is market failure and the prospect that intervention will produce net benefits and, even then, we will see whether informal encouragement rather than regulatory action is the best way forward. Our work on contract certainty in the insurance market is a recent example of that approach. We are a transparent organisation and we discuss our thinking and plans at an early stage, including with the Practitioner and Smaller Businesses Practitioner Panels. We have no plans for other major regulatory reforms beyond those we have already set out, including in our Business Plan.

As one of the authors of Ellis and Wiltshire's Regulation of Insurance in the UK, Ireland, and the EU, I am nearing the end of the third major rewrite needed since 1 December 2001 to reflect the constant stream of rule changes as we have moved from Treasury regulations to IPRU-INS to PRU and on to GENPRU to INSPRU. There is very little in the pipeline now, apart from:

• Complete the New Conduct of Business Sourcebook by publishing the rules currently shown as either 'to follow' or 'intentionally omitted'
• Complete the consultation process and make the rules to replace ICOB with NEWICOB (see CP 07/10)
• Extend the FSA's regulatory scope to include package travel insurance business
• Completion of rule changes needed to implement the Retail Distribution Review
• Complete the Training and Competence Review
• When enacted by the European Commission, amend GENPRU and INSPRU to reflect Solvency 2
• Replace IPRU-INS by merging it with INSPRU or SUP, thus taking it off the 'too hard' pile, and revising the reporting forms as necessary.

I am to retire in three years time having reached a position where there is nothing left for my successor to update. Am I being over optimistic?

See above.