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Speech by Vernon Everitt, Director of Retail Themes, FSA
CBI (West Midlands) Executive Lunch, Birmingham
14 September 2006

Firstly thank you for inviting me to speak to you all today and thank you to our hosts Clarke Willmott.

As a regulator in this climate of better regulation and removal of unnecessary red tape, I want to spend the time explaining the FSA's overall approach to the regulation of the financial services industry. I’d then like to move on to an area in which you can help us in overcoming one of the biggest obstacles to a more efficient and effective market for retail financial services – the low levels of financial capability among the UK population.

The FSA

First, some background to our organisation.

We regulate an industry which employs more than 1 million people and accounts for some 7% of GDP. We were were established in 1997 by the then incoming Labour administration – the second thing they did after making the Bank of England independent in respect of monetary policy – as a result of a 10 way merger of a proliferation of financial reguators that had grown up over time. We are now a one-stop regulatory shop for virtually all aspects of financial services regulation. Alongside, though operationally independent of us, is a single ombudsman for handling individual complaints from consumers and a single compensation scheme which provides a last resort safety net, with limits, when firms fail. We have 2,800 staff and an annual budget of some £266mn. We are funded by levies on the 29,000 firms – large and small – that fall within our remit.

We are established by an Act of Parliament, which has given us four statutory objectives:

• Maintaining confidence in the financial system
• Promoting public understanding of the financial system
• Securing the appropriate degree of consumer protection
• The reduction of financial crime

Flowing from these, we articulate what we are trying to achieve through three strategic priorities: to promote efficient, orderly and fair markets, both retail and wholesale; to help retail consumers achieve a fair deal; and to improve our own business capability and effectiveness.

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Our approach to regulation

In terms of the overall regulatory approach we adopt to deliver these priorities, our clear preference is to encourage efficient markets as the best means of providing quality goods and services to consumers. Only after market solutions have been exhausted should regulatory initiatives be contemplated.

We take a risk-based approach to regulation. There are numerous risks in the financial markets, so we adopt a disciplined process to identify the big ticket risks to our objectives. This so-called "risk-based approach" is designed to align our finite resources with addressing the big risks that matter most. This means that we, and others, need to accept that some things can and will go wrong – what we refer to as a "non-zero failure" regime.

We are also seeking to place much greater weight on the application of high level principles rather then reliance on thousands of detailed rules. Principles-based regulation is not new. The 11 high level principles for financial firms – including a requierment that firms treat their customer fairly – have been around since 2001. They set overarching requirements for all financial services firms. These are the regulatory equivalent of 'first principles' that articulate what action and behaviours we expect from firms and which provide the very backbone of our regulatory regime. Critically they focus on what the regulations are trying to achieve and so are expressed in terms of outcomes rather than processes or procedures.

But while these Principles have been in place since the FSA's creation, we have all lived with a rather unsatisfactory hybrid of thousands of detailed rules which sometimes prescribe requirements at a great level of minutiae sitting underneath these high level principles. We will never get away from this entirely, but we see real benefits for firms, markets and consumers, as well as our own people, in tipping the balance materially towards principles and away from prescription. Why is this?

First, we want to encourage and foster good business practice throughout the financial services sector recognising firms' duties to their owners and their customers. We believe that providing firms with the flexibility to decide more often for themselves what business processes and controls should operate so compliance with the principles is secured, will better align good regulation with good business practice. This approach will provide greater clarity about what really matters to us and will engender a shared appreciation of the outcomes we are seeking to achieve.

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Secondly, we believe that firms who seriously commit to a set of outcome-based principles are in the best position to judge the detail of how best to deliver those outcomes in the marktplace. For example, firms can best figure out how they deliver fair treatment to their customers in a way which is aligned to their commercial objectives in terms of customer service and retention.

Thirdly, in its policy making the FSA has a duty to have regard to the international competitiveness of the UK markets. Many independent surveys have attributed some of this success to the more pragmatic system of regulation we have operated in the UK and I believe this will only be reinforced by this change in approach.

So that explains our high level thinking on market efficiency, but what about the many regulations that firms are asked to comply with each day? The concept of better regulation has been rising up the public agenda but for us this marks heightened public interest in an area that has always been at the core of our business. Finding the balance between discharging our duties and avoiding unjustified costs to firms and, ultimately, consumers has, since the FSA's formation, been an integral part of our regulatory process. In December we published a Better Regulation Action Plan that included some of the deregulatory initiatives we have taken in recent years. We have since published a suite of studies that moved us closer than ever before to understanding where our regulation imposes costs on firms. We also, in June, issued an updated Action Plan that listed our more recent actions on this front – for example streamlining our anti-money laundering requirements and removing detailed rules on training for firms that only deal with wholesale or non private customers.

One particular initiative in this area for which I am personally responsible is that of developing our relationship with Office of Fair Trading. In April this year, we published a joint action plan which outlined areas where we think we can reduce the administrative burden that is currently faced by regulated firms by looking at the scope for process efficiencies, removing requirements which duplicate or near duplicate each other and in joining forces on our consumer communications. This will go some way to making a regulated firm's life easier, but there is much more to deliver here and we are determined to look for further efficiencies between us on an ongoing basis.

So that's our overall approach and the steps we have been taking to relieve the burdens of regulation on the firms we regulate.

I want to turn now to one of the major obastacles we see in helping deliver a fair deal for retail consumers – the financial capability of the UK population. I hope to persuade you that this is an area in which you can help bring about change.

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Financial capability and the workplace

We find it helpful to think in terms of the four pillars essential to delivering a more effective and efficient retail market:

• Capable and confident consumers.
• Clear, simple and understandable information available for, and used by, consumers from the industry and FSA.
• Soundly managed and well capitalised firms who treat their customers fairly and;
• Proportionate, risk-based regulation founded on key principles, including a reliance on the senior management of firms to discharge their obligations.

Low levels of financial capability among the population goes directly to the first of those pillars – capable and confident consumers.

The challenges we face have been underlined by the findings of a ground breaking survey into financial capability across the UK population published in March. It substantiates concerns held by many about the current level of financial capability in the UK – especially among the young – and provides ample evidence that policymakers, firms, regulators and consumers must act if we are to avoid storing up big trouble for the future.

Five components of financial capability were measured: making ends meet; keeping track of your finances; planning ahead; choosing financial products; and staying informed about financial matters. From this, four main themes stand out:

• People from all sections of society are not taking the most basic steps to plan ahead adequately, whether for retirement, or for a rainy day. This is not always because they simply lack the money to do so; many know they have issues to address, but often they are daunted by them and just don't know where to start. We also found that some of the most capable consumers are those on low incomes given that they need to manage money very effectively just to get by. So no one should assume that low income equals low capability.
• Half a million people are already experiencing severe problems with debt. A further million have fallen behind with some of their debt repayments. And another two million households are only just coping, so for them even a small adverse change in their circumstances would lead to a ‘tipping point’ into debt repayment problems.
• Many people do not take adequate steps to choose financial products to meet their needs, or to shop around.
• Lastly, the greatest demands are placed on those least equipped to deal with them. The under-40s live in a considerably more demanding environment than their parents and are generally less capable than their elders. For example, the costs of higher education and of retirement are increasingly being borne by individuals rather than the state or employers. This means that the price tag of not having the necessary skills to make sound financial decisions is becoming increasingly significant.

So that then is the easy part – analysing the problem. But what can be done about it?

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Workplace-based initiatives

Working with our many partners, including the CBI (where John Cridland has made a major contribution to shaping our response), AMICUS and the TUC, we have devised a programme that will reach 10 million consumers over the next 5 years. The programme majors on: improving financial capability among children in schools and young adults in universities to lay strong foundations for the future; on providing employees with ready access to information in their place of work; on targeting resources to people at critical life stages (for example starting a family); and on the provision more generally of relevant, user-friendly and accessible information and money advice, to help with planning and with choosing products.

Delivering financial capability through the workplace is a key element in all this.

This is because financial capability is really important to both employers and employees. The issue of poor financial literacy not only reinforces the plight of the poor and vulnerable in society, it also holds back innovation and growth.

A pilot project which we ran in 2005 showed that the workplace – whether an office, a factory floor or a school staff room - is an effective channel for improving financial capability. We are now beginning to roll out an ambitious programme of financial capability education for delivery through the workplace right across the UK. This will allow us to reach a very large and diverse range of people, including some of those on low incomes who may not have access to any other forms of money advice.

This programme – which we call 'Make the Most of Your Money' - involves a trained presenter visiting a worksite, free of charge, to deliver seminars to employees. All employees at the worksite receive a financial information pack covering budgeting, managing debt, and long-term planning for the future (including pensions) and all are invited to attend a seminar.

41 employers are already signed up for this financial year, including from national and local government, education, the media, manufacturing, retail and financial services, and we are in discussion with around a further 100 firms.

We have a pool of more than 90 seminar presenters, each of whom will have been through a training process before they present a seminar.

The high level feedback from employees is positive:

• 94% of attendees have provided feedback
• 88% rated seminars good or excellent
• 63% found the educational materials provided useful or very useful
• 82% of seminar attendees said they would take some action as a result of attending

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Employers too have seen a number of benefits. Employees develop a greater understanding of the employee benefits the firm provides – e.g. an increased understanding of the value of pension provision as part of the total remuneration package. In addition, employees appreciate the effort that has been made by the employer in providing the programme, enhancing the employer's reputation as a good place to work. More generally, employees are likely to feel more in control of their financial affairs, so less likely to worry about them at work. Indeed this might help cut back on the employees stress levels, leading to a reduction in sickness.

Further independent evaluation will be undertaken as we progress with the programme, including follow-up to see whether people acted on their intention to review their finances.

Over the next five years, our target is for 'Make the Most of Your Money' to reach four million employees, all of whom will receive a straightforward financial information pack and around half a million of whom will attend a seminar. The initiative will help participants improve their ability to understand, manage and plan their financial affairs, and we hope that many will seize the opportunity to take immediate action to review their financial situation. I also hope and expect that the introduction of a National Pension Scheme will generate even more interest in workplace-based personal finance initiatives.

I hope that I have given you a flavour of the enthusiasm we have already found for the Make the Most of Your Money initiative, the momentum that is building behind it, and the benefits many more employers and employees will be gaining in the next few years.

I would like to urge more firms to provide financial education for their employees, and to help today's consumers to become better informed and more able to take greater responsibility for their financial affairs.

You can find contact details on the Financial Capability section of the FSA website so do please get in touch – because we all stand to gain.

Thanks again for the opportunity to talk to you today. I hope that you found the description of what we do and how we do it useful.