Response to the Hampton Implementation Review of the Financial Services Authority
20 March 2008
The Better Regulation Executive (BRE) and National Audit Office (NAO) have published a review of the FSA undertaken at the invitation of HM Treasury.
The review focuses on the assessment of regulatory performance against the Hampton principles and Macrory characteristics of effective inspection and enforcement. It was carried out by a team drawn from the BRE, NAO, Food Standards Agency and the National Consumer Council, supported by staff from the BRE and NAO.
Summary
We welcome the Review team’s report as an opportunity to explain our regulatory approach on these important issues.
We are pleased that the team concluded that to a high degree we regulate in accordance with the Hampton principles and Macrory characteristics. We welcome the review’s finding that we have a strong culture of ‘better regulation’.
The report identifies four issues for us to address in order to meet the Hampton criteria more fully. We summarise below our response to each of the recommendations. In most cases these issues and our response to them already feature in our current work plans. We will, of course, consider carefully the other findings and comments in the report. We will report to the FSA Board in six months on any changes we have made, or propose to make.
Advice and guidance to smaller firms
Issue identified in report:
"The review team recognises that the FSA has increased its efforts in recent years to target its advice and guidance to smaller firms more effectively. However, the review team consider that the FSA should build on these efforts to further help small firms to meet their regulatory requirements. The review team welcomes the FSA’s Small Firms Strategy which should be a driver for this process."
We recognise that there are greater challenges in communicating with smaller firms than with larger ones and have put substantial effort into increasing our assistance to smaller firms since 2004/5 when mortgage and general insurance regulation was introduced. We continue to assess the effectiveness of our different channels of communication (such as the Firm Contact Centre (FCC), the dedicated small firms section of our website, roadshows, surgeries and newsletters). Over the past three years we have sought to learn more about the needs of the smaller firm audience. As the report notes, an independent survey of 1,000 firms in 2007 showed significant progress – 93% of those surveyed had visited the small firms website and 67% found it easy or very easy to use. We will use this information to build on our efforts. In addition, as the report also notes, we are currently enhancing our small firms' strategy to help firms make faster progress towards treating customers fairly and this will also help us respond to the feedback from small firms which highlighted that they wanted more direct contact with the FSA.
Data requirements
Issue identified in report:
"Some aspects of the FSA’s current data collection requirements for small firms appear excessive, especially given the FSA’s overall risk-based approach to regulation. Whilst the review team recognise that data from the Retail Mediation Activity Return (RMAR) can provide useful information to inform the FSA’s risk-based approach, the review team asks the FSA to explore a more targeted and proportionate system of collecting data from smaller firms (for example through a slimmed-down data request; or by moving from requesting 6-monthly returns from all small firms to sampling from within the population of small firms). Such approaches could give the FSA the data it requires to monitor the market whilst reducing administrative burdens for a large proportion of the firms that it regulates."
We recognise and share the recommendation's concern that regulators should be proportionate and targeted in the data they require from firms. For the reasons outlined below, however, we believe the current data requirements for small firms meet these concerns in the context of our regulatory obligations. Consequently, and having recently reviewed the RMAR (as described below), we do not believe the recommended approach would enable us to gather the minimum amount of data we require to meet our statutory objectives. We are therefore not able to accept this recommendation.
The Financial Services and Markets Act (FSMA) requires us to maintain arrangements designed to enable us to determine whether firms are complying with our requirements. Data collection from smaller firms forms an important part of these arrangements. The data we collect on a six-monthly basis is actively used to identify and mitigate risks to the FSA’s statutory objectives arising in individual firms as well as for sector-wide risk analysis. A minimum baseline of data from each individual firm is therefore essential for our risk-based approach, as it enables us to target our resources more effectively and efficiently. It is also cost-effective for firms compared to other tools such as routine visits and firms anyway need to monitor their financial resources, so the RMAR largely reflects information that a firm should be collecting for itself.
Sampling would not allow us to operate our risk-based approach effectively – it would for example miss a substantial number of alerts we currently follow up, reduce the accuracy of our trend analysis, and not enable us to determine whether an unsampled firm’s impact has increased. The data that we collect via the RMAR (coupled with other third party data) helps us to build risk profiles of the firm population we supervise, which in turn, allows us to focus our limited supervisory capability on those firms where enhanced regulation is desirable, and also more widely on those sectors where we believe the highest risks lie.
We have recently undertaken a thorough review of and consultation on the RMAR. We have reduced the number of data fields by 30%, which will come into effect on 1 October 2008. As part of this review process, in early 2007 we commissioned independent research into the time required to complete the RMAR. A survey of 45 firms concluded that on average the return takes two to four hours to complete. In parallel with reforming the return, we have taken steps to improve our guidance to firms on the RMAR, such as restructuring the website and help text for the form, and to reduce the need for firms to call the Firms Contact Centre about regulatory returns.
As with all our data requirements we will keep the RMAR under review to ensure that it remains proportionate. However, given that we have recently consulted on changes and firms are preparing to implement changes, we do not propose to make any immediate changes.
Continuity of supervisory staff
Issue identified in report:
"The FSA experiences significant staff turnover in key supervisory grades, which can negatively affect the consistency and quality of the supervisory relationship. Whilst industry was supportive of the FSA’s move to More Principles-Based Regulation’, concerns were expressed to the review team by stakeholders that high-levels of turnover amongst supervisory staff was militating against FSA staff having the requisite skills to deliver this outcome."
As we recognised in our Business Plan for 2007/8, ensuring that we have the right people in place is crucial to the successful delivery of our regulatory strategy and our move towards more principles-based regulation.
There is a balance to be struck between the continuity of supervisory staff and the need to ensure career development, which also contributes to retaining staff within the organisation.
Our people strategy continues to focus on attracting, motivating and developing talented people to achieve our objectives. Successful delivery of this strategy is underpinned by a number of elements. In respect of the continuity and quality of supervisory staff there are two main elements:
- an approach to managing talent which enables us to identify and develop talent at all levels in the organisation, including more effective performance management, and a more structured approach to career development and succession planning; and
- relevant and focused training that enables our people to develop breadth and depth of technical knowledge, to engage constructively and credibly with the industry and other stakeholders, and make the kind of judgements which will be required under a more principles-based regime.
Enforcement
Issue identified in report:
"The FSA needs to ensure that an appropriate balance is achieved in the use of different sanctioning options.
Whilst the review team are not calling for the FSA to develop an enforcement-driven strategy, the review team considers that the current sanctioning culture may have lowered the profile of enforcement options within the FSA’s overall sanctioning strategy.
The FSA should place greater emphasis on the principle of ‘credible deterrence’ as a means of securing compliance."
We agree with the report that it is a positive feature of our approach that enforcement is not an automatic process. It is true that in the absence of other controls this could potentially lead to us taking fewer enforcement cases than we ought to. However, the report recognises that we are aware of these issues and have controls in place to mitigate them.
The aim of our enforcement strategy is to achieve ‘credible deterrence’. We have said in our Business Plan that we will focus on those cases where we think we can make a real difference to consumers and markets, using enforcement strategically as a tool to change behaviour in the industry. In line with our move towards more principles-based regulation, we also expect to see more enforcement cases where principles, rather than specific rules, have been breached. Critical, however, is to achieve a belief among practitioners that those who deliberately seek to evade their responsibilities have a strong likelihood of being caught.
To achieve credible deterrence, wrongdoers must not only realise that they face a real and tangible risk of being held to account, but must also expect a significant penalty. Where we see evidence that standards are not improving despite clear messages to industry, we will seek to increase penalties in order to achieve our goals. We have done this in the arena of PPI sales where we announced in September 2007 that we would be imposing higher fines for serious failings in the retail market including against firms who fall short in relation to PPI. This was followed up in January by the FSA imposing its biggest PPI fine to date against HFC Bank Ltd.
Enforcement is an important component, not the sole element, of a credible deterrence philosophy. Effective supervision and risk mitigation programmes also have a key role to play.