• FSA Library
  • Communication documents
    • Speeches
      • 2004

15 December 2004
Speech by David Kenmir

I am speaking to you today as a senior manager of a very complex organisation, whose remit extends from large investment and retail banks and insurance companies to much smaller entities. One of the key themes of today is that, in basic framework terms, the requirements are the same. However, the issues facing JP Morgan, for example, are clearly different from those facing a sole trader. The responses that firms need to put in place are those that are appropriate to them and to their business; there are no ‘one size fits all’ solutions in this area.

 

II. Agenda

I would like to set out:

• The legal framework within which this whole regime is founded.
• The framework in the handbook.
• Some of the philosophical points behind the regime.
• The role of the Financial Services Skills Council.

 

III. Legal Framework

Putting this speech together helped me to understand my job and what I do at the FSA. I am a member of the senior management of a large organisation and I have my own accountability frameworks, which deal very much with the same sorts of principles that are set out in the legislation.

1. FiSMA

   Many of you will have read the Financial Services and Markets Act (FiSMA) from cover to cover. I had the dubious honour of doing so six times in the run up to the legislation being introduced. As well as talking to you about what is on the page of FiSMA, it is important to remember the context around this issue. To do that, we need to look back to what was happening in 1997, when the Chancellor decided that it would be a good idea to have a single financial services regulator in the UK. One of the drivers for this was the perceived failings in the current regulatory system; very topical at the time was the issue of the Barings failure – what had allowed it to fail and what the role of senior management in the organisation was.

   Partly in response to the Barings saga, the Bank of England, the Securities and Futures Authority (SFA) and the Securities Investment Board all issued their own view of a policy framework, which made much clearer what we thought senior management should be responsible for. Many of the thoughts in those three papers were carried forward into the legislation and the FSA handbook. You should bear in mind that the political debates taking place when this regime was invented were all around how senior management can be held accountable, where appropriate, when there is a problem. And, furthermore, whether it is possible to design requirements for senior management in businesses which, if properly implemented, would prevent similar failures in the future.

   The Approved persons regime

   We are not a zero failure regime; our rules are, in many ways, merely words on pages. However, it is what you do in your organisations in response that is important. Within that context, we have several legislative tools. In FiSMA, the first one is the principle that says: ‘In everything that we do in the FSA, we must have due regard to the responsibility of those people who manage the affairs of authorised persons.’ There was a lot of debate in 1997 about the importance of senior management in this new framework that the Treasury was designing.

   To give further teeth to that basic concept, the approved persons regime was constructed, which says that, if you do certain things in firms, you need to be approved by the FSA. I will go into further detail on this later on. However, on the face of the legislation, there are some categories of people who we are entitled to include in the approved persons regime, e.g. ‘a person who performs a function that is likely to enable that person to exercise significant influence over the affairs of the firm.’ In simple terms this is the senior management of the company.

   Expectations of senior management

   Further down the legislation, it says that we can issue principles which are statements of our expectation of senior management or approved persons in general. It also says that, in order to give firms and individuals slightly more help, we need to issue a code of practice that elaborates on what those principles mean in detail.

   I have been struck, during my time at the FSA, by the fact that when a firm has problems, it forgets that there are many other obligations on company directors or partners. For instance, do your senior management’s arrangements have due regard to health and safety legislation, company law or to insolvency law? When I become involved in firms’ failures, I look at their balance sheets and in many cases they seem to be insolvent. Directors of such firms who inappropriately prefer one class of creditors could be banned by the DTI.

   A much broader picture

   A topical issue is the impact of Sarbanes Oxley legislation in the US. More generally, we have had various codes in the UK about appropriate corporate governance standards. All these things, if they impact on your business, need to be included within the framework you put in place for running your business. Rather than merely being about FSA requirements, this is a much broader picture that applies across all sectors of industry in the UK and worldwide.

 

IV. Handbook

1. Key Roles
   
   

   The handbook expands on the legal framework. It goes to the next level of detail and discusses the criteria we use when we assess whether someone is fit and proper to be an approved person. It sets out the scope of the regime and, in particular, it talks about the importance of certain key roles:

   • The person in the organisation responsible for apportionment and oversight.
   • The importance of capturing the board of director and partners, or the sole trader within the regime.
   • The role of the compliance officer.
   • The role of the money laundering reporting officer.

   It also goes into much more detail about others in the regime such as fund managers and salesmen of certain products, but that is not the focus of today.
   
   

2. Others Who Exert Significant Influence
   
   

   The other thing to remember is that it is not always just the people who work for the firm who exert significant influence. We have all sorts of scenarios where people who are directors of a firm really do not run the business, either because they are accountable for example to a global credit committee at an investment bank, or because it is a private company 100% owned by an individual. Those people are also potentially caught by this regime, and you should be thinking about whether there are people not on your board or your partnership committee who ought to be part of this regime.
   
   

3. Direct Requirements on the Firm
   
   

   The handbook reinforces all of these requirements through direct requirements on the firm; for example, in the area of fitness and propriety, the principles of the business, the systems and controls framework, and the training and competence (T&C) regime. One of the things the fitness and propriety test in the FSA handbook says, is that you must have an appropriate board or group of partners for your firm; and they must have the right balance and mix of skills to run your firm properly. So you need to think about whether your firm meets that basic requirement.

 

V. Philosophical Points

The philosophy is set out in the handbook and the legislation, which contains very high level statements, the meaning of which will depend on the circumstances and the nature of your organisation.

1. Fit and Proper Test for Approved Persons

1. Key criteria

When determining whether someone is fit and proper, we will have regard to several things:

• Honesty
• Integrity
• Appropriate reputation
• Competence
• Capability
• Financial soundness

2. Example of SFA enforcement
   
   

   I would like to describe to you the case of a firm that had come before the SFA enforcement committee three times within two years as a result of problems. It happened to be a stockbroker but that it is not important. The enforcement committee told the firm that it had no idea about compliance, and that it should hire a compliance officer to advise on what it should be doing to run their business in a compliant way, otherwise it would not be allowed to stay in business.

   The following day, the application for the new compliance officer arrived and I was intrigued to find, in the section about relevant experience, a description of the individual’s former career running the local cattery. I was assured by the firm that this person was capable of being a compliance officer. We returned to the committee and said that, in our view, this person was not competent or capable of running the compliance organisation of any firm, particularly one where there were major problems.

   Partly as a result, this firm is no longer in business, which illustrates that when you are dealing with me and my staff, you need to bear in mind how we might react when you present us with similar scenarios. We quite often become involved in complex discussions around whether certain people are capable of filling certain roles, since the issue of competence and capability can be extremely important.
   

3. Context
   
   

   The other vitally important point regarding fitness and propriety is the context. We do not expect the same standards and abilities from the chief executive of HSBC, for example, as we expect from a sole trader in the corporate finance market. The framework is the same – they still need to be fit and proper and to have the knowledge and intelligence to run their business – but, because the issues are different, we are generally looking for higher competence from the chief executive of HSBC than from the chief executive of a sole trader.

1. Statements of Principles
   
   Approved persons need to:

• Act with integrity;
• Exercise due skill, care and attention when doing their job;
• Observe proper standards of market conduct; and
• Always deal with the FSA in an open and cooperative way.

  Andrew, in his speech, will talk about the sorts of things we take into account when determining whether or not someone has met these requirements. These are the principles, and there is an underlying code around each of them which talks about what this means and which you should be able to think about when determining what is needed in your business.

1. Senior Management Responsibility
   
   

   Individual senior managers must take appropriate steps to ensure that the business they are running is properly organised and capable of being controlled. I know, from my own experience, that what causes me the greatest headaches are the things that other people think I am accountable for, for which I am not! If there are similar grey areas around accountability in your organisation these things matter, particularly when things go wrong, since it is only at that point that you will find out where the gaps in your governance framework are. Do you look at whether your overall framework is absolutely clear about who is responsible for what?
   
   

2. Due Skills, Care and Diligence
   
   

   When it is clear who is responsible, they must manage the business properly, exercising due skill, care and diligence in their day to day job, which is what the shareholders, the board and other stakeholders will hold them accountable for.
   
   

3. Compliance with Regulatory Standards
   
   

   Finally, you need to take appropriate steps to ensure that you comply with the regulatory standards that are in place. This, in my view, is much broader than just the FSA rules, and includes other areas such as health and safety legislation which individual directors are also accountable for.
   
   

4. Apportionment and Oversight
   
   

   In order to ensure that all this works in your organisation, the apportionment and oversight person needs to ensure that responsibilities are clearly divided up among the senior management team, so that everyone knows who is responsible for what. The senior managers, including the apportionment and oversight officer, then need to take reasonable care to ensure that the systems and controls that support those operations are in place, and that they are appropriate to the nature and complexity of the business, bearing in mind that different firms have different needs.
   
   

5. Training
   
   

   For all sorts of reasons, apart from regulation, training is absolutely key. Your staff are the custodians of your personal reputation and livelihood; they protect your brand and drive customer satisfaction. Therefore, having appropriately trained staff who operate within this framework is absolutely vital to everything we do as managers of businesses or as people who advise the managers of businesses.

 

VI. Financial Services Skills Council

1. History
   
   

   As you know, in its rulebook, the FSA used to have a very highly prescriptive exam framework which stipulated that different exams had to be passed in order for people to demonstrate their baseline competence and work in certain areas of the industry. About two years ago, the Government decided to replace the existing NTOs (National Training Organisations) with a network of skills councils, of which there are about 30 in different business sectors, and whose job it is to work with the industry and ensure that the appropriate training is available to staff to allow them to do their jobs. There are different issues that only your firm can address, but there are many core skills that will be relevant to all sorts of people in the industry.
   
   

2. Functions
   
   

   The Financial Services Skills Council was established last year and received its licence from the Sector Skills Development Agency (SSDA). Having appropriately trained staff to maintain the competitive position of the UK economy is central to the Government’s agenda. The skills council performs several functions:

   • It represents your interests at the highest level with Government and regulators.
   • It works with education and training sectors to ensure that courses exist to meet your business needs.
   • It can accredit your in house training.
   • It can provide access to funding to support business improvement initiatives, particularly in the area of training.
   • It can benchmark you against best practice.
   • It runs regular discussion forums for small and large firms in regional networks in order to bring people together to discuss topical and practical issues.
   • It will provide labour market intelligence.

   I would, therefore, encourage you to at least have a look at what the skills council does and, as many people here today have done, to become involved in one of the discussion groups.
   
   

3. Market-Led Solutions
   
   

   This is a very positive development from our point of view; we do not particularly like writing rules, and would much prefer market led solutions that deliver appropriate outcomes for given sectors of the market. Frankly, if the industry agrees on what the appropriate training standards are for people who give advice on unit trusts, for example, there is little point in us having a rule that requires you to pass a specific exam.

   The way we have engineered the handbook passes much of the design, implementation and maintenance of the exam list from us to the skills council. All it says is that you need to have an appropriate qualification if you perform certain roles, and a way of determining what is appropriate is to have a look at the list of exams accredited by the skills council. They are now very much taking the lead in driving forward the FSA’s exam review that was launched some time ago by my colleague at the time David Jackman.
   
   

4. A Personal Perspective
   
   

   Everything I have said also applies to me. It occurred to me that John Tiner is my appointment and oversight officer, which I had not realised before. I think I know 99% of the things that I am accountable for. I have a very complex accountability framework; I am accountable to the media, to Parliament, and to the consumer, practitioner and small business practitioner panels. We have one of the most complex and transparent accountability frameworks within any organisation in the world. I am also accountable to the non executive board members in terms of whether or not I am doing my job properly. Therefore, I sympathise with anyone in the room in the same position, since I know that it is not easy. I also know that it is vitally important to the way that any business is run.

   My job within that overall framework is to set the agenda for my business unit and ensure that it works. Like most organisations these days, my most important asset is the team that I am responsible for, since they are the people who deliver the processes that I am responsible for. How they interact with you is one of the key satisfaction drivers between the industry and the FSA.

 

VII. Conclusion

All of this supports the real need to invest in the training of your, and my, people on an ongoing basis, and not just when they join the organisation.

We expect a firm’s senior management to take responsibility for ensuring that it complies with all the regulatory requirements that we have talked about – not just FiSMA or FSA handbook requirements, but more general ones as well as other pieces of legislation. In my view, the competence of your employees is absolutely vital to the future of your business. Thank you very much for listening, I look forward to taking a few questions a bit later.