Ladies and Gentlemen,
It’s a pleasure to be able to talk to this BBA conference and to delegates representing institutions from each of the three main time zones of the world.
I hope you are all aware who the Practitioner Panel are but I’ve been asked to give a thumb mail sketch right at the start. We are a statutory body under the Financial Services and Markets Act set up alongside the Consumer Panel to interact with the FSA respectively on behalf of the industry and consumers. There is also a Smaller Businesses Practitioner Panel, - reflecting the considerable number of smaller regulated firms – and whose Chairman is an ex officio member of our Panel.
Each month the 15 or so members meet for 3-4 hours to review regulatory issues amongst ourselves and with teams from the FSA working on particular issues. We review consultation papers before they go out to the industry and subsequently have sight of policy proposals before they are finally cast. But it is fair to say that we take a – sometimes reactive, sometimes proactive – interest in virtually everything the FSA is doing, both strategically and in relation to individual items.
The current members of the Panel are on the next slide. We encourage members to have views across all matters and not just to represent the particular sector from which they come. We have a small secretariat of 3 people who sit at the FSA. Our meetings are held at participants’ premises – currently the London Stock Exchange - last years at Lloyd’s. We are not a drain on your budgets, Ladies and Gentlemen as all of the work is done pro-bono for the good of the industry and it does take substantial time from senior people.
In addition to our monthly meetings, the Chairman has a monthly bi-lateral with John Tiner and a quarterly with Callum McCarthy. Other meetings with FSA senior staff take place as necessary and we operate a system of sub-groups on initiatives we take when Panel members meet with the appropriate FSA teams on such matters as Enforcement Review; Costs of Regulations and Thematic work etc. We encourage the FSA to engage with us in an early, open and collaborative manner, and to view us as a helpful and constructive influence – and not as a problematic procedural hurdle. The Panel wants the FSA to take advantage of our expertise and experience in order to help it help itself.
That’s a potted version of how we operate, but if any of you have questions, please talk to me offline. We exist to help the industry, but for the moment let’s turn to some current issues.
Buried as we have been in all the Financial Services Action Plan, Mifid, CRD etc, it is important never to forget that there is regulatory and commercial life outside the EU and two of the most important principles of good regulations under the Financial Services and Markets Act are to foster innovation and maintain the UK as an international competitive centre for financial services.
I have been greatly encouraged by this week’s statements from the Chancellor about support for UK Financial Services on the world stage because it is an industry in which the UK remains a major world player and which makes a substantial NET contribution to our trade balance - £15BN at the last count, down in 2005 due to insurance losses on Catriona. I emphasise the word NET because that is what really matters. Don’t be fooled by other sectors of services and visible trade who boast about their export earnings but forget to knock off their imports. IFSL the city promotional body has fought long and hard to get this message through by accurate statistics and that has now been achieved. Let us therefore begin by talking about Regulation in an international context.
The FSA has been busy like all of us on the European stage with the Commission in Brussels and the key committees for banking and securities. Our Chairman today Mike McKee has a season ticket on Eurostar to Brussels. A number of directives which looked unpalatable have been brought back from the brink by good co-operative work at Level 2. A few years ago one had the sense in Brussels that “here come the moaning Brits again” was the attitude of many but I sense that the sheer hard work, long hours in consultation that was the hallmark of the Lamfalussy process has brought the industry together and a reasonable degree of collegiate common sense has prevailed. For this the FSA, the BBA , other trade associations and the industry deserves credit.
On a wider scale I was delighted to be invited to talk to the group of international regulators who spent almost a week at the FSA towards the end of last year. There were 82 nations represented that week which surely reflects well on the international standing of the FSA. Of course there were the well known mature jurisdictions Germany, France, USA etc. but there were also smaller nations as well and I was for example quizzed in the sidelines of the meeting by the Mongolian ambassador about whether their proposed new mining law would be attractive to UK based Project Finance teams and would the FSA be comfortable with the resultant levels of security available to Project bankers – just a small example of the importance of regulation to the commercial success of our industry on a world stage.
I encourage regulators to talk to regulators – practitioners should have no secrets from their home state regulators but when it comes to international cross border business, practitioners are nervous of extra-territorial intrusion and generally prefer that questions and inquiries are routed via their home state regulator who in turn should be willing to filter the questions being asked in light of good practice in the home state. In China, much business is conducted on the basis of Ying and Yang – reasonable balance, but with flexibility and I think certain international regulators need to learn more about Ying and Yang.
Lastly, on international issues I have one message for the FSA and that is that they need to communicate more what they are doing on the international scene, particularly in meetings on global issues. I think we are reasonably well informed on EU matters but transatlantic business flows are equally important as are the relations with the major economies of the East such as India and China.
Principles Based Regulation
Turning to more domestic matters, why are all these international regulators interested in spending a week at Canary Wharf?
It’s I believe because the UK is pioneering a single financial regulator and one which operates on principles and with a proportionate approach to risk. It is a regulator which allows Consumers and Practitioners to have a seat at the table through their respective Panels – it’s ground breaking stuff and of course we won’t get it all right first time.
Let’s start with the principles based approach. The Practitioner Panel members are senior “hands on executives” in the industry – not too great or too good that they don’t know what is going on in the front line of their business. They and their peers strongly support principles based regulation and applaud the general thrust of what the FSA is doing. However descend from the Executive floor into the Compliance department and you may hear a different story. They are the ones who feel they will get it in the neck if it all goes wrong. This is the dilemma which faces firms and it is down to firms to sort this out.
FSA places great importance on Senior management responsibility and I personally have no problem with this although I have to say that I was brought up in an era when people in Executive positions made decisions after consultation with colleagues and staff but not after 6 committee meetings, fully minuted and designed to spread the blame for things going wrong. We need culturally within firms to ensure that the rising generations of management are decision makers.
However decisive managers need to help their compliance departments to sleep at night so I am very keen to find ways of bridging the perceived void created by principles based regulation. The answer seems to me to develop Industry codes and Guidelines coming from Practitioners and their trade associations and which FSA should be willing to review, question and if satisfied, endorse as what I am calling a ‘Sturdy Breakwater’ but not a ‘Safe Harbour’. The Banking Industry of course has its well established Banking Code Standards Board but in the wholesale industry, I am not thinking of as structured a body, nor one with enforcement powers. I have never quite understood why FSA were not willing to endorse ‘Sturdy Breakwaters’ and my sense is that we are now moving in that direction.
One of practitioners concerns about principles based regulation is that supervisors themselves need to be able to assess the quality of risk based decisions made by firms. Therefore quality of supervisors is an absolute top priority and at the moment the performance is patchy. I have experienced some excellent teams and I have seen some pretty poor.
It is not easy for the FSA as they can’t pay the salaries of some glittering investment back and they have had to amalgamate the teams of various former SRO’s who each had different standards.
Therefore we have strongly pushed for better training and qualifications and we welcome the FSA’s introduction of a Core Curriculum. We also welcome the new week long residential training courses which have been introduced to build knowledge and experience and which will also improve team-working ability. We also believe that the Grey Panthers are contributing to better supervision because teams can’t be expert in everything in the sophisticated world of today’s financial services industry.
One area where we believe greater operational efficiency could be achieved is in work allocation amongst the supervisory teams and this may be happening now. It has been evident to practitioners amongst the bigger institutions that teams were given one large institution to supervise and then a number of smaller, more boutique firms. Inevitably the team worries most about the large institution as a potential threat to FSA’s objectives but they had only experience of that single institution to draw on. I have always believed in grouping a number of institutions under perhaps a larger supervisory team where there would be an opportunity for peer comparison. Also, in the case of foreign banks, it would be sensible to group German banks under one team, Italian e.t.c. to see how similar banks dealt with similar problems and in turn allowing the FSA team to build relations with the home state regulatory counterparty team in Germany, Italy e.t.c. Overall however, I feel we are moving in the right direction, particularly in the wholesale markets. We have a very busy period ahead with Mifid implementation and the industry must have sufficient lead time to get this right and we all need to be working towards the same deadlines throughout the EU and not find some countries allowing audit type deadlines not implementation date deadlines. I applaud the financial services trade associations coming together to plan the implementation of Mifid under the banner Mifid Connect and hope that this will permit easier collegiate working with the FSA’s Mifid task force.
Investment Management Products
Let me briefly turn to one or two points on the Retail side where many BBA members are active. Here I shall also embrace a wider range of products and in particular, investment products. It has always been a surprise to me that in the UK banks have not been a bigger force in selling investment products than they are. Before you all shout me down, I know that you are big but as a nation, we have a disproportionate amount of investment advice in the hands of IFA’s many of whom do a good job but sadly some of whom have caused headaches and problems for the industry the costs of which should not be visited upon the Financial Services industry as a whole. As financial products become more sophisticated, it is a great opportunity for those of you with a High Street presence, professional salaried and well trained staff to develop this side of your businesses.
Treating Customers Fairly
We need to restore consumer confidence in investment products because this is currently the biggest drag on the performance of the Financial Services Industry.
Clearly there is a need to improve Consumers Financial Capability, although my personal experience is that Consumers are more savvy than sometimes the media and politicians portray. What is clear however is that much good work is being planned to enhance Consumers Financial Capability whether through education in schools, higher education institutes or the work place. For a minority of the population this will always be difficult and we need to give the tools to organisations like Citizens Advice Bureaux to allow them to help others.
To this end I have pressed strongly for a single national Generic Advice website which would be a HUB around which all other Capability works would revolve. Historically the FSA’s Consumer website has been worthy but dull until the welcome and more risqué Mortgages Laid Bare initiative of last year. FSA have worked with the BBC on other communication strategies and I have no problems with links to other sites but the national HUB site should be standalone destination, free from journalistic intervention with content fully endorsed and provided by the FSA in which all can have confidence. I understand that this is now agreed and work is underway.
The FSA has introduced its ‘Treating Customers Fairly’ initiative which I know is a red rag to some parts of the industry who consider they have always treated their customers correctly. But we have to be realistic, this has not always been the case throughout the industry and consumer confidence is still far too low.
After considerable efforts by the Consumer and Practitioner Panels, we came up with a document setting out the responsibilities of both Practitioner and Consumer during the Sales Process and for the After Sales Service. Practitioners were reasonably comfortable with their side but it has proved so far impossible to get the consumer side to agree to be obliged to do more than be honest. They, I think agree they “would be well advised” to follow a range of steps but have not crossed the bridge to say they ‘should’. This is a regrettable ‘impasse’ which leaves Practitioners understandably super cautious in their dealings with consumers and therefore adding to costs to try to ensure that they don’t end up with complaints and in the hands of the Ombudsman. These costs of course end up being paid by the consumer so the agenda does not move forward.
This is vividly illustrated by the problems in deciding on point of sale disclosure documents which seem to be getting longer and longer. The Treasury Select Committee favour simple risk disclosure through traffic light graphics but the industry and I think the FSA feels that is not adequate.
Retail Investment Products are a big area of difficult work to which the Panel devotes substantial thought but there is still some way to go.
We are always open to input from BBA in this area and new thoughts are welcome.
Finally, I would briefly like to mention two key Panel workstreams – one of which is drawing towards a close, the other of which is in the earlier stages. The Costs of Regulation project – being conducted by Deloitte – is being undertaken in partnership between the Panel and the FSA. It is expected to report in late May/early June, and we hope that it will provide a reliable basis on which to identify areas of regulation where the Costs are disproportionately higher than the benefits they are seeking to secure, and to look at how any such burdens might be rolled back. A communication strategy is being developed which will, of course, include the BBA and other trade associations.
Secondly, the Panel has recently embarked on the next round of its biennial survey of regulated firms, to assess – in a comprehensive and authoritative way – industry views of the performance and effectiveness of the FSA. The main quantitative fieldwork will be carried out – again, by GFK NOP on our behalf – during June and July. The previous surveys have had a tangible impact on the nature and shape of the FSA regime, and senior management at the FSA take the findings seriously. We would strongly encourage the banking sector to provide the Panel – in total confidence – with their views when the questionnaire lands on their desks in the summer. I think that is enough from me at this point and I look forward to our open discussion.