The FSA's retail agenda: working with the industry
Speech by Hector Sants, Chief Executive, FSA
AIFA dinner
21 November 2007
Good evening, I am delighted to have been asked to address you this evening, particularly as this is the first time I have spoken at an AIFA event since I took over as CEO of the FSA. I have three key themes for this evening: Firstly, I want to explain that we want to use our supervisory strategy to do more to achieve the right outcomes, and also that we want to do this by working with the industry. Secondly, I want to emphasise that we recognise the real value that IFAs add for consumers, and the contribution that you make to the outcomes we are seeking. And finally, I want to demonstrate to you that we do listen and that we are aware of the concerns that are expressed by AIFA as well as by others in the industry.
Principles Based Regulation
However, before turning to the detail of our retail agenda, I would like to say that the FSA remains committed to implementing more principles based regulation. What's more, I would emphasise that we will not be diverted from our efforts in implementing such a regime by recent market turbulence. I am aware that a number of commentators have asked whether now is an appropriate time to drive forward a regime of fewer and less prescriptive rules.
More principles based regulation will mean that firms are under a constant obligation to review the conformity of their business practices, whether in calm or turbulent markets, with our principles and high-level rules. Considered review on a day-to-day basis of questions such as whether consumers are continuing to be treated fairly and, critically, are the business risks being managed, should be the norm in a more principles based world.
I am aware that some firms are concerned about the lack of certainty they will have in this world, and also about the potential lack of FSA guidance and safe-harbours. I should add, however, that many other firms are enthusiastic about the initiative, seeing it as an opportunity to focus on good outcomes for consumers rather than being tied up with detailed regulations. It is my hope and expectation that under principles based regulation, firms will be able to worry less about process and concentrate instead on the strategic outcomes for their business. I would therefore encourage all of you to treat this initiative as a business opportunity. We hope that firms' more thoughtful engagement with the outcomes we signal we would like them to achieve, on an ongoing basis, will lead to outcomes that are better for both their consumers and firms themselves. It is one of my personal beliefs that good regulations are generally good business practices.
To be clear, I believe the recent events surrounding Northern Rock reinforce rather than contradict this need to focus on the outcomes and consequences of management actions rather than just on the compliance of the actions with a set of rules. We are not operating a 'no fail regulatory regime'. We recognise that a successful financial market place requires innovation and competition. In turn, that means there will be failures. But a principles based regime, in our view, provides the best chance of achieving the requisite balance between the benefits and risks of innovation.
Supervision
I would now like to move on to the first of my main themes for this evening, and give you some thoughts on our supervisory strategy and the improvements that we are planning to make. I also want to talk about some of the other activities that we carry out in support of firms that you might not be aware of.
As IFAs you will be well aware of the nature of our supervision strategy. We take a risk-based approach to regulation, which means that we do not routinely visit all small retail firms. We seek, rather, to have sufficient contact and appropriate data collection systems to ensure all those who are willfully trying to evade our regulations believe there is a reasonable chance of being caught and that we are alerted to things that help us catch them. In other words we seek to have sufficient resources to ensure credible deterrence.
However, given that I firmly believe the vast majority of firms are run by decent, honest people, for me it is important for you to recognise that as part of our supervisory strategy, we also aim to educate, guide and inform the firms that we regulate; objectives which are just as important to us as the more traditional forms of deterrence to which I have referred. We recently carried out an extensive survey of 1,000 small firms to find out what they think of our communications with them, which yielded some very encouraging results. I’d like to take a couple of minutes to tell you about some of the activities we undertake to support firms, and to give you some of the survey results that tell us what seems to work best for you:
- When we undertake cross-firm projects, one of our key objectives is to produce material to help firms by educating them with results of good and poor practice. Recent examples have included issues such as the quality of advice, affordability and PPI.
- We run ‘roadshow’ events in various parts of the country – about 30 each year - where we give presentations on current topics of interest. These events include one-to-one surgeries, where firms can ask questions or air their concerns with supervisors on any topic of their choice. Also, our Industry Training department runs courses, workshops and distance learning programmes to help firms to understand our regulatory requirements. Half of firms have attended an FSA event, and nine out of ten attendees said that these events had helped them to think about how they operate.
- We maintain a section of the FSA website that is dedicated to the needs of smaller firms. This includes good practice guides, tools for advisers on topics such as the assessment of consumer needs, and versions of the FSA Handbook that are tailored to the needs of specific industry sectors. The site receives about 60,000 visits each month, and our survey indicated that 93% of firms use the small firms pages, and almost as many have looked at the dedicated TCF pages, which is encouraging. But you have also told us that the user-friendliness of the site could be improved, so we will be working on that.
- We issue targeted email communications, but at the same time we ensure that these are restricted to one a month, so that we don’t overburden your inboxes. Almost 90% of you are reading it, so this is a particularly effective form of communication.
- We publish a financial advisers newsletter, which is read by three quarters of firms. In the survey you told us that the newsletter is very useful, but you also asked us to concentrate on fewer key issues, and to reduce jargon.
- We also run an industry placement scheme, where members of FSA staff spend time with firms, both to learn more about the industry from a practitioner’s perspective, but also to be on hand to offer advice and guidance on regulatory issues. An FSA supervisor has also recently completed a two-month secondment to AIFA.
I hope you will agree that this is a comprehensive programme of activities. But even so, we have recognised a need to intensify our efforts, and this is why I recently announced our plans to increase the contact we have with small firms. The aim is to help firms to make faster progress in meeting our Treating Customers Fairly initiative, so that we can be better at identifying the firms that are most in need of regulatory attention. Building on the risk-based approach that I have described, we are introducing an ongoing programme of structured visits and telephone assessments to test the quality of management and progress towards embedding TCF. This will be a significant enhancement to our supervision strategy, and I can further announce that there will be a 25% increase in the number of small firm supervisors to make this happen. This is consistent with recommendations for more effective supervision that were made by the RDR Group that considered ways to improve Sustainability, and has been strongly welcomed by the Smaller Businesses Practitioner Panel.
The results of these TCF assessments will help to inform our risk profile of individual firms so that we can better target resources at the firms that pose the biggest risk to our objectives. We hope that these assessments will provide a direct benefit to those firms who are trying to do the right thing and treat their customers fairly, and will complement the help we already give to small firms. And, of course, they will also help us to get better at identifying and taking action against the minority of firms that aren’t trying to do the right thing. This is something that you tell us again and again that you want to see more of. There will be a significant corresponding increase in Enforcement resources, to ensure that we can take the appropriate action against those that harm the market’s reputation. In summary, our intention is that decent market practitioners seeking to build quality business see us as their partners and take action against those who are not treating customers fairly.
Retail Distribution Review
I now want to move on to recognise the value of the services that the financial advice community provides to consumers. The independent advice sector is a vital part of the financial services industry, it dominates the distribution landscape with around 60% of life and pensions market share. It is essential that we have a healthy market to ensure that consumers have access to good quality advice to meet their needs. We do not, as some have suggested, have an anti-IFA agenda. What we care about is that consumers can, and do, access high quality advice when they seek it; and that the industry is visible and innovative. A vibrant and innovative market, by necessity, has to have a strong small firm component.
You will all be aware of the importance that we attach to the retail distribution review. This industry review has the specific objective of improving the way consumer needs are met, and recognises the importance of financial advice in achieving this goal. We believe that you should be seeing this review as an opportunity rather than as a threat. We have the opportunity to create higher standards of professionalism across the board – standards which many of you have already reached – but, crucially, we also have the opportunity to raise consumers’ awareness of these standards, to have greater trust in this part of the industry and to recognise the value of financial advice. Opportunities also exist for many of you to increase the sustainable value in your businesses, by moving to a business model that is based on a recurring income stream rather than on one-off transactional remuneration. We are asking the industry to be visionary about the future of distribution rather than seeing the proposals in the context of today’s market.
We are still in listening mode with regard to this review and will not rush to premature conclusions. Certain themes are beginning to emerge, but it is too early to draw any firm conclusions. You might find it helpful to know that I believe a successful model needs to be simple, easy for the consumer to understand, yet flexible enough to encourage competition, and offer the opportunity of a fair economic return. Critical to this approach, I feel, will be the use of easy to understand language. We need a market structure which is understandable to all - consumers and practitioners. Thus, for example, if you are selling, it should be clear is what is happening. Likewise if you are giving advice.
Listening to concerns
Turning to my final theme of the evening, I want to emphasise that we are aware of industry concerns about aspects of the way we operate. The concern that is expressed to us most frequently by this sector is that we are doing too much too quickly, that the pace of change is too fast, and that pressure to deliver change might impede our commitment to consult and take into account firms’ legitimate concerns. We are also well aware that there is mistrust in some quarters over a perceived lack of accountability in our actions.
We recognise and understand the calls we hear for a period of stability. I have spent time in small firms recently, and this was the clear message that I received. We too are looking for stability, but we see the RDR as an essential process that we all need to go through before we reach the point where we emerge into a stable environment, where the interests of everybody in the retail market are aligned. We also see the RDR as a necessary catalyst to ‘engage the unengaged’ in this market. By this I mean that if we can reach consensus on the key issues (such as increased standards of professionalism and remuneration that is agreed with the customer, not the product provider), we will be in a better position to ensure that the whole of the advice market is given incentives to engage - not just the firms that already meet these standards and have the customer’s interests at the heart of everything they do. We often hear complaints that we have the same opinion of all advisory firms and that good firms suffer because of the overall perception of the industry that the FSA creates. Again, we believe that the RDR gives us all the opportunity to take away this perception. And I should emphasise, as others have done, that this review is not all about the IFA sector. We are looking for better outcomes from all of the participants in this market. I think the RDR provides a good example of how keen we are to listen to the market – we started off with five industry groups (which included representatives of IFAs both large and small) to formulate the initial ideas for discussion, and we have given the industry six months to have that debate. During that period we have arranged over a dozen events specifically for the industry to discuss the RDR proposals, and taken part in over 50 more events that others in the industry have organised, including close co-operation with the work that AIFA has done on the review.
Furthermore, in recognising the call for stability, we also agree that whatever changes come about as a result of the review, there needs to be a sensible approach to transition. We don’t want the changes themselves to result in inappropriate outcomes for firms or consumers. And we have a genuine desire that a real regulatory dividend will come out of all this, that there will be good things for good firms. We want firms to see more value from being regulated, and also to see tangible benefits from managing their risks appropriately.
I understand there have been times when we have not made our intentions, or our motives for those intentions, sufficiently clear, which can call into question the FSA's accountability and transparency. This is something that we are consciously looking to improve, although I think it is fair to say that many of these concerns stretch back to the days of our predecessor regulators. Let me say that I certainly feel accountable – the FSA’s system of independent panels and its Board provide a robust framework of control over our actions. The recent review of the FSA by the National Audit Office confirmed this. And when you sit in front of the Treasury Select Committee, as I recently did, I can assure you that you feel accountable!
But I believe that accountability is a two-way street, and in line with this I would like the relationship between the FSA and the firms it regulates to be more co-operative, more of a partnership. We do need to trust each other. If the FSA is to continue in its efforts to make the regulatory relationship more collaborative, we also need the industry to play its part in demonstrating the qualities of a mature profession.
One final point before I conclude, which I hope will further demonstrate our commitment to fairness and proportionality in regulation – the FSA Board has now approved our new rules for funding the Financial Services Compensation Scheme. The new funding arrangements, which will come into force next April, include explicit cross-subsidy provisions between sub-classes of business. Also, life and pensions providers will for the first time pay compensation costs in the intermediation sub-class, for the activities of their direct sales forces. We believe this is a fairer system, and it should certainly be good news for you, given the impact it will have on the distribution of compensation costs in this sub-class.
In conclusion – I hope my words this evening have helped to increase your understanding of what we are trying to achieve and what drives our supervisory programme. And if I could finish as I started, by restating the three key points that I wanted to make, which are that we want to work with the industry to achieve the right outcomes for everyone in the market; we recognise the importance of the IFA community, and the value it gives to consumers; and that we do listen, and we do our best to take account of legitimate concerns.