CEO's speech at the FSA Annual Public Meeting
Speech by John Tiner, CEO, FSA
FSA
Annual Public Meeting
19 July 2007
It is my honour to present briefly an account of the FSA’s work during the 2006-07 period. Overall, I believe we remained focussed on the issues that matter, made good progress in our major priorities and laid the foundations for moving successfully towards principles based regulation. And the year was characterised by relatively calm market conditions across asset classes, but with the occasional correction in the equity markets as we saw in February and the more recent tensions in the debt markets, more of which later.
But first I would like to highlight some of the key developments over the last year.
2006/07
During the last four years we have pursued relentlessly a consistent set of strategic aims – to help retail consumers secure a fair deal, to promote clean, orderly and fair markets and to improve our business performance. We have differentiated deliberately our approach to wholesale and retail markets, reflecting the needs and characteristics of those markets, and have made progress in a number of important areas. Internally, we have improved our technology platform and management information and invested in the people who work for the FSA. These and other internal improvements are helping us become more efficient and more cost-effective.
Principles-based regulation
We have set out what I believe is a strong case for a more principles-based regulatory approach to financial regulation. Principles provide firms with greater flexibility to achieve the right outcomes for their customers and the marketplace as a whole, and in a way which fits their business model. Principles also allow us as the regulator to adapt more effectively and more quickly to the dynamically changing markets we regulate. We have spent much of the last year articulating what a principles-based approach means for us, for firms, for consumers and for our other stakeholders. We, of course, recognise that there are significant challenges. The dialogue we have stimulated has helped not only to identify these challenges, but also possible pragmatic solutions. I am most grateful to our stakeholders for engaging so constructively in this important development for the competitiveness of the UK financial services industry and the quality of our domestic markets. To deliver more principles based regulation successfully, the FSA needs to invest in its people and information systems. I am pleased that the Board has backed the significant change programme currently underway, including allocating up to £50million to finance the necessary changes.
Importantly, we have been taking the first steps to making principles-based regulation a reality. We have slimmed down the Handbook by around 1,000 pages, changed our anti-money laundering approach from rules to principles and introduced principles for life insurers to calculate capital on a risk basis, releasing some £4bn of regulatory capital for policyholders, shareholders or investment purposes.
Retail Markets
We continue to have concerns about the fair treatment of customers in some areas of the retail market and we have put considerable effort and resources into identifying problem areas and working with the industry to address them. We have taken enforcement action in the most serious problem cases, for example over mis-selling of Payment Protection Insurance, both to punish the firms concerned and to dis-incentivise poor practice by other firms. We have worked with the industry to secure direct benefits for customers where either they have been, or, are at risk of being, unfairly charged, such as the statement of good practice on mortgage exit administration fees. By the end of 2006, the company set-up to distribute the proceeds of the settlement with firms engaged in the spilt capital investment market, Fund Distribution Limited, had fully discharged the fund in excess of £140mn to 24,000 investors who had lost money from split capital trusts. This is another example of the FSA’s work to directly protect the interests of retail customers.
One of the most important areas of progress in the last year has been in Financial Capability. We have led a number of initiatives offering practical help to consumers – at different stages in their life – in understanding and dealing with their own financial needs. For example our new consumer website, Moneymadeclear, went live last Christmas. It provides clear, practical, impartial information to help people make better informed financial decisions. And only last week the government announced that economic wellbeing and financial capability would be included in the curriculum for 11 to 16 year olds. Improving understanding of financial matters at an early stage is essential.
Wholesale markets
Relatively calm market conditions have allowed us to address a number of issues in the wholesale markets, such as improving back office standards in derivatives markets and contract certainty in the wholesale insurance market. These significant operational problems have been resolved by the industry, but with the FSA’s prompting, support and oversight. These demonstrate the wisdom of first looking for market solutions to regulatory problems. No new rules have been written, there are no unintended adverse consequences and the markets themselves are more efficient and competitive as a result. We have also increased our oversight and understanding of the risks from the hedge fund and private equity sectors. However, our approach remains proportionate and relevant to the risks that these sectors pose to investor protection and market stability.
I said last year that tackling market abuse is one of our top three priorities. We have strengthened our surveillance of possible conflicts within investment banks, brokers and investor organisations, succeeded in a number of enforcement cases and have committed to our largest ever IT development to allow us to better track transactions across different markets. But successfully prosecuting market abuse is particularly difficult because of the nature of the offence and the burden of proof required. In order to improve our ability to build strong cases, we would like to be given formal powers to offer immunity in return for evidence.
Communication with firms
We have also made significant improvements in the way that we interact with firms of all sizes. We have introduced a new relationship management model for the largest 1,300 firms we supervise. We have set out clearly what firms should expect from their relationship manager and we have strengthened our own relationship management capability. For smaller firms we recognise that understanding which regulations apply and how proposed changes might affect them is a real challenge. We have, therefore, been working hard over the last year to streamline and simplify our communication with firms in the relevant sectors and we have continued to make improvements to the service in our firm contact centre.
In both cases – for smaller and larger firms – we have asked for formal feedback in surveys and meetings with senior management and in both cases the results have been positive, as firms experience the benefits of the improvements we have made.
International work
The international agenda remains very important for the FSA and it continues to receive a lot of time and effort – particularly from our senior management team, led by Callum and me. This is true both at the European level, where the recently published Solvency II directive has been considerably influenced by the FSA's approach – indeed I would go so far as to say that our ICAS regime led the way for the risk-based capital approach envisaged in Solvency II. And it was the FSA and Treasury together which provided the leadership for the ground breaking proposals to improve the efficiency and effectiveness of large group supervision. It is also true on the broader international stage, where we have worked with the SEC and the Federal Reserve on our supervision of hedge funds and the major investment banks. This type of multilateral arrangement will be essential for supervision of large, international groups and for regulators to have an understanding of systemic issues in the increasingly complex world of capital markets. The FSA has been at the forefront of developing colleges of regulators and this is a model we hope will be copied for all major international groups.
Development of the FSA
I have been privileged to have been Chief Executive of the FSA for four years and was a Managing Director for two years before that. Over that time, I believe the FSA has made real progress across a large number of areas. In such a short talk it is not possible to do justice to the many individual pieces of work across an extraordinarily broad canvas: from crisis management arrangements in the event of a terrorist attack or market event to compensating mortgage endowments policyholders; and from sensibly handling the issues related to the potential acquisition of the London Stock Exchange to improving financial promotions. Instead, I would like to highlight three areas which I think have been particularly significant.
Firstly, we have made considerable strides in improving our operational effectiveness and making it easier for firms and consumers to do business with the FSA. The first years of the FSA's existence were, understandably, pre-occupied with establishing a regulatory framework under FSMA but the impact of this was to produce consultation paper upon consultation paper. It was essential for us to allow some time for firms to bed down the required controls. We have been successful in reducing the number of consultation papers and new policy requirements, and even before the introduction of the better regulation agenda we had a strong focus on cost-benefit analyses and only introducing regulatory requirements where there is a real market failure which cannot be corrected by the market itself. The move to a more principles-based will take this approach further and will help align regulators', shareholders', management's and consumers' interests.
I referred earlier to the progress we have made over the last year in Financial Capability. This national strategy I launched in 2003 has, I am pleased to note, become a public policy priority – and the FSA has been at the forefront of making this happen. Financial Capability is an issue that demands involvement and commitment from industry, government, consumer groups and the voluntary sector, and I very much welcome the publication in January of the government's long-term approach to financial capability.
Thirdly, I would highlight the dramatic transformation of insurance regulation. If I look back to my first weeks at the FSA in 2001 and the collapse of Independent Insurance, the scale of the problems are brought into sharp focus. Not only did we deal with the specific problems in individual firms and the stability of the life insurance industry against a backdrop of sharply falling equity markets - but we also overhauled our entire regime and introduced risk-based capital, which put insurance ahead of banking regulation in some respects.
Challenges
So, when I look back, there has been substantive progress in a number of areas. And, of course, there have been some disappointments where issues were not handled as effectively as I would have liked – and we have tired very hard to learn from these. I honestly believe the FSA is a learning and listening organisation and so it is far from complacent and there remains much for Hector and his team to do. And markets being as they are, there are bound to be one or two unexpected issues that arise.
The recent tightening and volatility in the credit markets is an example of the kind of issue that might provide a challenge for the FSA and the market. We have been keeping a close eye on developments and have commented in the past that risk has been under-priced. For us the key is to understand the exposures and the transmission system from investors into the banking sector which underpins financial stability and to be confident that the banks are stress testing these exposures to test the adequacy of the amount of capital in each firm and the system as a whole. At present we believe the system overall is robust, but this is clearly an area the FSA will need to continue to watch very closely.
The challenge for the FSA is to be prepared, and to spot emerging issues. I believe the changes we have made over recent years have positioned the FSA well to be able to anticipate and respond.
Conclusion
Thank you for coming today and for the time you and the organisations you represent have spent over the years contributing to the FSA's work.
I would like to close by thanking Callum, the Board, my leadership team and all the staff of the FSA for their support and commitment over the last six years and particularly the last four. The FSA has an enormous task in regulating such a major and diverse marketplace and it has been a real honour and (on the whole!) pleasure to lead the organisation.
I wish Callum, Hector and the rest of the team the best and I look forward to watching the FSA build on what I believe is a solid foundation.