Good morning ladies and gentlemen,
I am very pleased to have this opportunity to address you as Chairman of the Financial Services Practitioner Panel after my first eight months in office. Though short, it has been an eventful time – since I took over as Chairman from Donald Brydon in autumn of last year the FSA has undergone a significant senior management overhaul and internal restructuring. I can't help but wonder how the FSA would have rated the management controls in one of its regulated firms, if that firm had changed its Chairman, its entire senior management team and brought in a new CEO all within less than a year! Seriously, though, the Panel welcomes these changes and looks forward to continuing its close relationship with the new FSA leadership. We particularly support the realignment along retail and wholesale lines, which should help the FSA to interact more efficiently with its stakeholders and to ensure that the principle of proportionality is applied in its policy making process.
The Practitioner Panel is currently in the process of conducting its third biennial survey of regulated firms. In the past, the results of the survey have been instrumental in shaping front-line FSA policy decision making. For example, vociferous complaints about the manageability of the Handbook have prompted the FSA to launch an extensive project of reviewing and editing its 7 foot (?) Handbook. We hope that the survey will again have an impact in shaping FSA policy, and that a high response rate will allow us to provide robust feedback to the regulator.
However, by definition the survey is retrospective and primarily designed to assess firms' views of the FSA's performance over the two years since the previous survey. It is thus unlikely to capture any effects as a result of the recent management and structural changes. The FSA's recent reorganisation thus poses us a challenge, in that we will have to be careful in our interpretation of the survey results to draw constructive, forward-looking conclusions from this piece of research that properly acknowledge the FSA's efforts to improve and streamline its organisational structure. We expect to publish the survey results this coming autumn.
The past 12 months have also been eventful for regulated firms, as mis-selling claims related to endowment mortgages keep rising, the split capital investment trust discussions are ongoing and the FSA and HM Treasury are working on a regime for the stakeholder suite of products. While I will not address any of these issues in great detail, I will say that the Panel takes them very seriously and is engaged in ongoing discussions with the FSA on all of them. On stakeholder products, for example, we share the view of our colleagues on the Consumer Panel that any new simplified sales process must provide adequate consumer protection and we have communicated this concern to the FSA.
With the retail financial services industry consistently in the dock over claims of mis-selling and poor customer servicing standards – some of which are clearly justified - it is easy to overlook the considerable efforts that have been undertaken by individual firms as well as trade associations. No one would dispute that serious mistakes have been made in the past in the selling of some financial products, by a number of firms. However, public debate on this subject tends to suggest that the whole industry is crooked and out to fleece its customers.
This implication not only inflicts serious damage on consumers' confidence in savings, it also does not stand up to closer scrutiny. Let's look at endowment mortgages, for example. According to the FSA's own evidence before the Treasury Select Committee, 13 out of 20 companies who have sold endowments to their customers are waiving the right to impose time-bars for people who have been mis-sold endowment mortgages, and a further three or four are looking into doing the same. This means these firms are going beyond their regulatory requirements concerning their response to any mis-selling claims to ensure that their customers are getting a fair deal.
Last month the Association of British Insurers published a revised and updated Mortgage Endowment Code with changes designed to improve communications with customers and policyholders' understanding of the performance of their investments. And in May the ABI launched two new projects designed to help build public confidence in the savings industry. The first will look at the way in which long-term savings are sold, particularly the role of commission; and the second will consider whether there is scope for a new generation of initiatives on consumer service by individual firms or the industry collectively, looking at best practice in other sectors. These initiatives were welcomed by Ruth Kelly, the financial secretary, in recent evidence to the Treasury Select Committee.
The British Bankers Association is also currently co-operating with an independent revision of its Banking Code for retail consumers and small businesses following an extensive round of consultation with representatives from the industry, the regulator and consumer bodies. The aims of this review include introducing greater transparency in the clearing cycle and clarifying the guidelines for the sympathetic treatment of customers in financial difficulties. The Revised Code will be published early next year.
Voluntary initiatives like these by individual firms and industry bodies will go a long way to support the FSA’s aim to restore consumer confidence in savings.
I am quite clear that satisfied, well-informed and confident customers are in the best interests of practitioners as well. For that reason, the Panel is also backing the FSA initiative to boost the financial capabilities of UK consumers. The retail marketplace will become more efficient and competitive if our customers are capable of making well-informed investment choices. One of the Panel's members is on the Financial Capability Steering Group, whose important work we fully support. However, we do recognise that consumer education initiatives will not change public awareness overnight and will take significant time and effort to produce the expected results.
I must also stress at this point that there are two parts to the equation. At present, the onus to prevent mis-buying as well as mis-selling rests almost entirely with the firm. The FSA is obliged by statute to protect consumers, but the Financial Services and Markets Act 2000 also states expressly that consumers must take some responsibility for their own actions. Practitioners accept the difficulties with the latter if at least a basic level of financial literacy and awareness among consumers cannot be assumed. At the same time, we are keen to work with the FSA to better articulate what it believes the principle of consumer responsibility should mean in practice.
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While we understand that the complexity of financial products and services will always require a weakened application of the concept of consumer responsibility – or caveat emptor - through safeguards such as "know your customer requirements", an overly paternalistic regime carries with it significant threats to the long-term health of the UK savings industry. An ever increasing reliance on over-regulation, consumer protection, reviews of disclosure and selling practices and Government-imposed product designs undermines the competitiveness of UK firms and the diversity of products available to our customers. It is worth considering at what point the regulator (or, indeed, government) in seeking to protect consumers, actually starts to damage competition and innovation, so disadvantaging the very people whose interests we wish to safeguard.
I do not feel my speech today would be complete if I did not say a few words on the subject of competitiveness. At the risk of sounding like a stuck record, I must stress again a point that the Panel and its previous Chairman have frequently highlighted in the past - that is a serious concern over the international competitiveness of UK firms both retail and wholesale as a result of onerous domestic regulation, combined with an overly zealous implementation of international rules and standards.
Many of my peers in the City and beyond have written to the FSA to warn specifically of the dangers of superequivalence – or gold-plating - in the transposition of European Union directives into UK law. In October Callum McCarthy said “at the FSA, we must ensure that we do not over-engineer implementation and careful consideration will be given before adding further regulatory burdens to the already heavy burdens derived from the EU directives.”
In spite of these public assurances practitioners remain to be convinced. Historically, we have seen examples of how superequivalent implementation of EU rules can result in direct adverse consequences for the affected industry, for instance the original investments services directive (ISD, 1993) and the accompanying capital adequacy directive (CAD, 1996)
More recently in the consultations over the Distance Marketing Directive (DMD) and the Insurance Mediation Directive (IMD), we again see a tendency to propose superequivalent implementation of EU rules.
In the case of the DMD, the FSA consultation paper on changes that financial firms have to make in order to implement it ran to over 100 pages. Its interpretation of what a client is required to be told over the telephone was so extensive that one trade association took expensive detailed advice in order to prove that this interpretation was wrong. I do not believe that any other European country is making significant changes to their existing requirements as a result of this directive.
The final outcome of the consultation remains unclear but we hope that, in line with the FSA's working presumption against gold-plating, industry concerns will be addressed.
The Insurance Mediation Directive implementation highlights another risk from super-equivalence. It can result in a directive having an impact on areas not originally identified as being a problem and therefore producing extra costs with little or no obvious benefits.
The IMD aims to improve choice and reinforce protection for customers whilst helping insurance intermediaries (e.g. insurance brokers and banks) to market their services cross-border in the EU. The Directive sets common minimum standards across the EU for the regulation of the sale and administration of insurance.
The joint HM Treasury/Bank of England/FSA paper in May, entitled “The EU Financial Services Action Plan: Delivering the FSAP in the UK” sets out the UK's approach to implementation: “The FSA has committed not to go beyond the minimum standards necessary when implementing EU law on financial services, except where a demonstrably convincing case can be made for them [on the basis of the FSA’s statutory objectives and principles of good regulation, including cost-benefit analysis.] The UK authorities will also take into account the approaches taken by other Member States when implementing financial services directives and the potential impacts on the competitiveness of UK businesses.”
It is difficult to reconcile these guidelines with the way at least one aspect of the IMD is being implemented in practice. Group risk management operations, which are essentially an intra-group activity, but which often covers a practitioner’s own insurance, are likely to be subject to IMD regulation. This will result in a significant added administrative burden and, in some case, the need to establish separate insurance subsidiaries.
It will put companies operating in the UK at a competitive disadvantage with respect to group risk management compared to those in other European countries where we understand the Insurance Mediation Directive is to be implemented in ways that allow group risk management operations to be excluded from regulation.
Overall, we welcome the FSA's stated new approach to superequivalence, but the industry will continue to scrutinise future consultation papers carefully to ensure the FSA sticks to its good intentions.
If my comments seem heavy on retail issues, this is because, unsurprisingly, they have dominated our agenda over the past year. In closing, I would like to say a few words on the wholesale markets.
The FSA has committed to a light-touch approach to the supervision of wholesale markets – a welcome prospect! - and my investment banking and other wholesale industry colleagues confirm that by and large this has indeed been the case. The regulator’s realignment along a split between retail and wholesale should further enable it to allocate its resources efficiently and proportionately, and rely on self-regulation instead of direct intervention where possible.
Furthermore, the FSA has indicated that trade association guidance would be an effective alternative to detailed direct regulation, where appropriate. A good example of this kind of trade association involvement is the joint guidance on the FSA’s amended conduct of business rules relating to investment research, published earlier this year by the British Bankers’ Association (BBA), the London Investment Banking Association (LIBA), the International Securities Market Association (ISMA) and the International Primary Markets Association (IPMA). The Panel supports greater involvement of the industry bodies and reliance on self regulation to ensure proportionate supervision of transactions between professional counterparties.
Finally, I would like to take this opportunity to thank John Tiner, Callum McCarthy and the FSA directors and managing directors for their constructive engagement with the Panel – even if we do not agree on all matters, the discussions are always stimulating, to say the least! I also want to thank my fellow Panel members for their time, effort and hard work. It is only by their commitment to the work of the Panel that it can function as it does.
Thank you for your attention.