AMI Annual Dinner
Speech by Callum McCarthy, Chairman, FSA
AMI Annual Dinner
25 May 2006
I am grateful for this opportunity to address the annual AMI dinner – the second year running that you have made the choice – not a very obvious choice – of being addressed by your regulator at this event. I confess that I am not sure what it shows about your values, or your judgment, other than great politeness and remarkable consistency.
What I would like to do this evening is first to be brief: I have yet to hear the comment on any after dinner speech "what a pity he did not go on longer". Second, and substantially, I want to address two issues: what have we been trying to do in implementing the mortgage regime since we took on those responsibilities in October 2004; and how do I see the relationship between the AMI and the FSA developing – other than on the basis of after dinner addresses: more generally, how should regulator and regulated co exist, interrelate and – I hope and believe – help each other?
First: what have we been trying to achieve in implementing the mortgage regime? The FSA has been concerned, and will continue to be concerned, to identify those actions we can take to encourage the market for mortgages to flourish as a competitive, efficient and fair market. Central to this is the provision of information to the prospective customer which is clear (ie is free from jargon and obfuscation), fair (ie describes risks as well as rewards), and not misleading.
So central to our approach has been our concern that firms should produce information which makes it easier for the customer to understand what he or she is being offered, and easier for him or her to compare competing offers. It is this objective – a more competitive and efficient market – which lies behind our work on key fact illustrations and initial disclosure documents.
It is clear that we need – you need – to make further progress on both shorter, comparable and clearer documents, and on the provision to prospective customers of those documents.
Our research, and various mystery shopping tests, show the scope for considerable improvement, and you should expect the FSA to take actions to promote that improvement.
I am very conscious that one way in which we can help is to make sure that those among you who act in accordance with the principles we wish to see adopted – the great majority – are not put at a disadvantage relative to those – a minority – who choose to ignore or flout those principles.
It is frustrating for those in the majority if they see non compliant competitors apparently acting without sanction taken against them. I can assure you that we are taking action against mortgage firms which issue non compliant promotions. To date, much of this action has been educational and – when it deals with a particular firm – has occurred mainly away from the public arena, by means of raising questionable promotions directly with the firm concerned, for rapid correction.
We intend to continue this educational approach: at the start of June we will be issuing a guide to financial promotions, designed to help you produce compliant financial promotions; and will be organising workshops at which both the principles behind our work and specific case studies will be discussed. I encourage you to book quickly while places are still going.
But we will also go beyond educational work and private conversations. It is important for the law abiding majority that those who persist in non compliant behaviour should be stopped, and I think it appropriate that we now add to our continuing emphasis on education a greater use of enforcement in selected cases – just as we have already taken firm action, to the benefit of all those who have adopted the new regulatory regime, against the small number of mortgage firms which have tried to do unauthorised business. In both contexts, we owe it to the law abiding majority to protect them from improper and unfair competition.
There are, of course, many specifics of the activities of mortgage firms in which we have been interested – as you would expect: the implications of treating customers fairly for the different but related responsibilities of product provider and product distributor (on which we plan to publish a discussion document this summer); affordability, with particular reference to self certification and to the sub prime market; outsourcing; how to make it easier for you to report your returns to the FSA.
It is all too easy to see each of these as yet another regulatory enquiry, cost or constraint, without seeing any pattern. So I repeat that our approach has been driven by the objective of making the market for mortgages work as an efficient, competitive and fair market; it has centred on providing fair, clear and not misleading information; and it has been based on education and discussion, with enforcement action playing a small part.
Now, you will have noted that the approach I have described is based on principles, not on detailed rules. We at the FSA see great advantage – for both regulated and regulator, more generally for the efficient attainment of public policy objectives – in making greater use of principles, and reducing the reliance on specific rules. Please note that this is a question of balance: we will never escape extensive rules – some because they are derived from EU directives or regulations which require detailed rules, some because they are appropriate (the two categories are neither mutually exclusive, nor congruent).
We will always be faced with what John Tiner has characterised as the unhappy hybrid of both principles and rules. But there is great advantage to be won in correcting this balance, so that we rely more on principles, and less on detailed rules. Greater reliance on principles will reduce the risk that regulation inhibits innovation; it will reduce the sheer bafflement induced by a rule book of more than 8000 pages; it will concentrate attention on what really matters; and it will make managers in financial services firms think through the real issues rather than reach for the rule book, or for whoever advises them on the rule book.
A move towards greater reliance on principles in regulation has far reaching implications for regulator and regulated. It will require both to raise their game; to think harder about how any principle – providing information that is fair, clear and not misleading; or treating customers fairly; or managing conflicts of interest – is to be interpreted in a particular context; for the regulator to ensure predictable interpretation; for the regulated to accept that there will be fewer "safe harbours" provided by adherence to the letter of the detailed rule.
In this process of interpretation, there will be a need for fuller, open discussion of issues between regulator and regulated. We have already embarked on this process in developing the FSA's principle of treating customers fairly, where through discussions with both firms and trade associations we have explored how this basic principle should be applied in a variety of circumstances across the product cycle from product design to marketing to complaints handling. We need to develop this approach across the board, to make all principles as well understood as is now the case for treating customers fairly.
I see an important role here for the AMI – not that which your associate director Rob Griffiths feared of becoming what he described as "shoe horned into the role of a second tier regulator" – but rather that of valued counterparty with whom the FSA can discuss questions of how particular principles will apply in particular circumstances in the mortgage market; and valued transmitter to AMI members of experience in the application of principles. And when I say "valued" I mean valued not only by us but also – and more importantly – by you, its members, as providing expertise to you, and representing your concerns and experiences cogently and clearly to the FSA.
You are the best judge of how the AMI already does the former, through its guidance and training for its members, in which we are pleased to co operate. I was glad that we at the FSA were able to take part in and contribute to your regional conferences. I can assure you that AMI also does the second task, that of pressing your views and experiences on the FSA, with determination and judgement. I am confident that in a regulatory world of greater emphasis on principles and less on rules AMI will continue to play an important and constructive role – which is what we will work to promote.
So my message this evening is one of a belief in markets, and a determination to make them work efficiently to the benefit of both producers and their customers; an aspiration that we will move towards this by greater use of principles and lesser use of rules; and confidence that AMI will play an important, powerful and constructive part in that process to the benefit of you the members as well as to the benefit of better regulation.