Improving the FSA Authorisation process, preparing for the authorisation of the operators of self-invested personal pensions (SIPPs)
Speech by Roger Hillyer, Head of the Authorisation Department, FSA
Association of Member-Directed Pensions Schemes Annual General Meeting
3 October 2006
Introduction
I am delighted to be asked to speak at this Annual General Meeting of the Association of Member-Directed Pension Schemes. This is an excellent time to speak to you. The importance of pensions has never been higher in the minds of consumers or higher on the agenda of politicians. And, of course, there is six months to the start of FSA regulation of self-invested personal pensions (SIPPs). We have our preparations in place – we have published our rules and the authorisation process. Now is the time for you to act. So whilst I will speak briefly about the policy preparations we have made, most of my speech is about the process you can expect so that you can complete your preparations for FSA regulation. I will describe the objectives of the FSA Authorisation process and some of the improvements that we have made as part of making the FSA 'easier to do business with'.
FSA preparation for the regulation of SIPPs
Let me remind you where we are in the preparation for the regulation by the FSA of SIPPs. A year ago, the Treasury published a consultation document setting out its proposals for expanding the range of firms that can set up and operate personal pension schemes. The Treasury confirmed in March this year, that the Financial Services and Markets Act would be extended to include the activity of establishing, operating or winding up a personal pension scheme. We issued a consultation paper in April with our proposals for regulation.
AMPS provided very useful input when we were formulating our policy and we have developed a very good working relationship. In particular, we are grateful to David Phillips and before him Francis Moore for their work.
Last Friday, we published the results of our consultation and attached to this are the necessary amendments to our rules.
The key regulatory change is the creation of a new regulated activity of establishing operating or winding-up a personal pension scheme. From 6 April 2007 it will be illegal to carry out this activity without authorisation.
The key question that firms in the personal pensions market must consider is whether their activities fall within the scope of these new FSA regulations. From April 2007 the range of activities we regulate will be extended to include:
- the establishment and operation of all kinds of personal pension schemes and stakeholder pension schemes; and
- advising on, and the promotion and arranging of rights, under such schemes.
To help you consider whether the activities of your firm require authorisation we have extended our guidance on the scope of regulation with a specific chapter on personal pensions.
The guidance covers some important areas such as:
- what is a personal pension for the purposes of FSA authorisation; and
- what is meant by establishing a scheme, operating a scheme and winding up a scheme
We make the important point in the guidance that there could be more than one person requiring authorisation in relation to one scheme.
You should read this guidance, which you can find on our website, before you apply.
All firms preparing for FSA authorisation need to consider how they can satisfy the test for authorisation 'the threshold conditions'.
As part of this, all firms approaching FSA regulation should consider how they will comply with the eleven FSA Principles for business.
For example:
- will you have adequate financial resources?
- are you satisfied your firm treats customers fairly?
- does your firm communicate to clients in a way which is clear, fair and not misleading?
- does your firm arrange adequate protection for clients' assets?
You need to consider the rules published last Friday that address these issues as they apply to operators of personal pension schemes. As you do this, you need to concentrate on the outcomes that the FSA principles are designed to achieve.
In the application process we are asking operators of SIPPs the steps they are taking to plan for the regulation of their activities. I would expect this to include proper consideration of the FSA principles.
The Authorisation process for operators of SIPPs
We also published on our website last Friday, our application pack for firms who operate or establish personal pensions, together with information to help you through the process such as frequently asked questions.
Some of you are already regulated by the FSA and I know many of you have studied our consultations as part of preparing for regulation. You therefore know that the FSA's objectives are to protect consumers, maintain market confidence, reduce the extent to which financial services business can be used for financial crime and promote public awareness of the financial system.
Objectives of FSA Authorisation
But what are the objectives of the authorisation process – a key regulatory tool for the FSA. A process that this year is likely to consider applications from nearly 2,000 firms. We have three objectives: to make the right authorisation decision, to give good customer service and to operate a fair and efficient process. These objectives guide all our work in authorisations.
The right authorisation decision
Our first authorisation objective - to make the right authorisation decision - is simply expressed: 'it is to authorise those who should be authorised and to refuse those who should be refused'. It is delivering that objective that keeps unsuitable firms out of financial services. It requires us to seek the necessary evidence before approving an application – through the initial application form and through our further enquiries during the application process. The Financial Services and Markets Act gives us the tests we should use for this purpose – 'the threshold conditions'. These threshold conditions require the FSA to be satisfied:
- that the applicant has the correct legal status
- that if the applicant is a UK body corporate, its head office is in the UK
- that the applicant's close links (its parent company and its subsidiaries) do not prevent the FSA effectively supervising the firm
- that the applicant has adequate resources: financial and non-financial, and
- that the applicant is fit and proper.
In considering whether an applicant is fit and proper we will consider whether we are satisfied that the applicant is ready, willing and organised to comply with the FSA's principles for business.
In addition, some individuals within the firm called approved persons require specific approval. For those individuals, the FSA must be satisfied that those individuals are fit and proper in relation to the functions they will carry out. This fitness and properness test considers a person's honesty, integrity and reputation, competence and capability and financial soundness.
The FSA website contains details of applications we have refused. Often refusals are for non-disclosure. An important FSA principle is that a firm must deal with its regulators in an open and cooperative way. We therefore consider it a serious issue if an applicant does not disclose matters required by the application form. Other recent refusals have included where we have not been satisfied as to a firm's competence, or where despite repeated requests for further information, an applicant does not provide the further information that we require.
Good customer service
Our second Authorisation objective is to deliver good customer service. You may be surprised to hear a regulator talk about good customer service to those who are regulated - especially where firms are required by law to obtain authorisation. The authorisation process provides a clear benefit in delivering the FSA's objectives. But it is important that we operate in a way that ensures that the costs of the authorisation process are no greater than necessary. Our authorisation process must be part of making the FSA an organisation which is easy to do business with.
To help us achieve this, we introduced a programme of customer satisfaction monitoring. We use an independent market research agency and invite applicants to give us feedback on how well we have performed on a particular application. Initial results suggested a reasonable level of satisfaction, but we put in place a range of measures to improve an applicant's experience of the process. For example, in March we launched major changes to the application forms for retail intermediaries, and in September we launched major changes to the forms used by securities firms and investment management firms. The forms we launched last week for personal pension operators are based on this new style – a style developed through consultation to be easier to understand. It uses a 'build your own application pack' approach which gives you the questions relevant to you and only the questions relevant to you.
Applicants tell us that the speed of the authorisation process is important. The Financial Services and Markets Act give us some statutory deadlines, but we chose to improve on those by setting ourselves voluntary standards. Over the last year we have had a service standard to determine 75% of all applications in four months. We have improved. So with effect from yesterday, we have changed to operating with a service standard of 75% of all applications in three months. In fact our average time to determine authorisations has improved from an average of three months to determine an authorisation a year ago to an average time now to determine an authorisation of two months. We have a risk based approach in authorisation – we apply greater scrutiny to those applications that we consider pose a greater risk. It is those riskier applications that are likely to take longer.
The results of the actions we have taken is that the independent research shows customer satisfaction scores for the FSA authorisation process improving from 62% in early 2004 to 72% in the first half of 2006. We believe we must improve further – we are aiming for 75%.
We will continue improving the speed of authorisation and customer satisfaction but we will always ensure we make the right authorisation decisions. That is what better regulation means in practice in authorisation.
A fair and efficient process
Our third authorisation objective is to operate a fair and efficient authorisation process. The authorisation process depends not only on legal powers, but on the proportionate and fair exercise of those powers. The authorisation process contains a number of important safeguards to ensure fairness. The Financial Services and Markets Act requires the issue of a Warning Notice if we propose to refuse an authorisation. There is then a chance to make representations before the FSA considers whether to issue a Decision Notice. It is the FSA's Regulatory Decisions Committee which hears representations and decides whether to issue a Decision Notice refusing an authorisation. The members of the Regulatory Decisions Committee represent the public interest and comprise practitioners and non-practitioners.
The operation of FSA decision making was reviewed last year and we have further strengthened the separation between the Authorisation staff investigating the authorisation and the members of the committee deciding the case. All substantive communications between authorisation staff and the committee members considering a refusal are now disclosed to the applicant.
And if the applicant wishes, it may refer the FSA's decision to refuse an application to the independent Financial Services and Market Tribunal where the case is heard afresh. As head of the FSA's Authorisation Department, I am pleased that in nearly every case where the FSA has decided to refuse an authorisation, the rehearing by the Tribunal has also led to a refusal decision.
In reality, most authorisations are agreed before a Tribunal process. There is discussion and agreement as to the steps an applicant needs to make to satisfy us it is fit and proper. In those cases, fairness means that we need to act quickly and explain why we are asking for information. In the survey I mentioned earlier applicants are asked after we have processed the application if they think the FSA is fair. When we first asked this at the start of last year, 58% of applicants thought the FSA was fair. In the most recent quarter, 76% of applicants thought the FSA was fair.
Conclusion
In conclusion, our preparations for the regulation of personal pension schemes including SIPPs achieved major milestones last week with the publication of the relevant rules and the application process. We are now ready – it's over to you. You need to prepare your applications for us to consider and you need to prepare your business to ensure it will operate in accordance with the FSA principles.
We look forward to receiving your applications soon. We aim to deal with them in a way that makes the right authorisation decision, delivers good customer service and operates a fair and efficient authorisation process.