Annual Public Meeting Mark Rothery, Chairman 27 July 2006

Ladies and gentleman,

It gives me great pleasure to speak today as Chairman of the FSA Smaller Businesses Practitioner Panel. As Callum has already said, this meeting is a key element of the FSA's public accountability to its stakeholders.

Insofar as practitioners are stakeholders, smaller firms now amount to over 90% of the firms that the FSA regulates. I am delighted therefore to have been given the opportunity to spend a few minutes at this meeting to present the views of the Smaller Businesses Practitioner Panel.

This Panel was formed by the FSA in 1999 in recognition of the fact that the small firm community would, on occasions, have a different view on regulatory developments and impacts than larger firms. The Panel does not have statutory status in the same way that the Practitioner and Consumer Panels do. However it is no less independent or influential for that. I can provide assurance from my personal experience, that it receives the same respect and service from the FSA as the other
Panels do and that in return the FSA challenges it on its views in an equally forthright manner.

I am sure that John and Callum will not mind me mentioning the day in June this year that I presented the Panel’s Annual Report to the FSA Board. It is the blue document in the pack on your seats. That meeting was just 22 days after I assumed the Panel Chairmanship and, perhaps naively, I was just expecting a fairly friendly welcome and relaxed encounter but, in the event, what I got was a far more humbling experience. The Board – quite bluntly and very strongly – asked me the
question, "how can the Panel continue to grumble that smaller firms get the thin end of the regulatory wedge, yet recent thematic work had indicated that it was some of those very same firms that had repeatedly failed to deal with their customers in a compliant manner?"

In this respect it is important to appreciate that the Panel in no way seeks to excuse or defend poor practices in the smaller firm sector. Regrettably, in a market as diverse and fluid as financial services, the regulator's expectations will not always be met in full. This is true, whether a large or small firm is involved. We would say that on occasions it is harder for small firms to fully comply with rules. This is simply in view of the number of rules there are and the limited resource in smaller firms.

However, that does not mean that any firm should deliberately not comply, nor should they be reckless in their actions.

The FSA itself acknowledges that we do not operate in a zero failure environment. It is inevitable that rule breaches can and do occur from timetotime, in firms of all sizes and for a variety of reasons. This fact does not mean that all small firms are not entitled to an appropriate and proportionate regulatory regime.

In return, small firms have to engage the FSA and take responsibility themselves for creating a well operated sector. This should enable the FSA to have greater confidence in the smaller firm sector. So the Panel does seek to be objective and collaborative, and certainly does not see its role as rubber stamping FSA initiatives nor blindly justifying instances of unacceptable behaviour.

The Panel has a crucial role in explaining to FSA staff the concerns of and daytoday difficulties faced by smaller firms who do not typically have extensive compliance and legal resource. And we seek to ensure that the FSA responds positively and constructively to those issues. Without such challenge it would be sometimes too easy for FSA staff to apply a broadly onesizefitsall approach. The Panel considers that such an approach is not appropriate, helpful or desirable for smaller firms.

We seek to influence staff at the FSA to think creatively about the needs and interests of smaller firms and to accommodate those in a suitably proportionate, pragmatic and riskbased way. Smaller firms have the right to expect this from staff at the FSA at all levels.

To refer to a topical example, the much talkedabout Treating Customers Fairly initiative. The Panel's position is clear on this. We have never argued about the principal aims of TCF or about the necessity for firms – large and small – to treat their customers fairly. Smaller firms will say that this is what they are already doing, and that they would risk losing their valued customers were that not to be the case.

However, it is incumbent on the FSA to make clear to smaller firms exactly what its expectations are in relation to TCF and to then supervise against those expectations accordingly.

Those comments regarding TCF are also relevant in the context of principlesbased regulation more generally. In particular, there is definite scope to provide greater clarity and reassurance to smaller firms about what exactly the shift towards a more principlesbased regime will mean for them in practice.

Principles based regulation – if understood and applied properly – makes considerable sense for the FSA, for regulated firms and for their consumers. Over time, I am convinced that it will raise both the standard of regulation and the performance of the marketplace. I commend the FSA for its vision in promoting principles based regulation as the future.

I am particularly keen for the Smaller Businesses Practitioner Panel and the FSA to work together on this. John Tiner comments in the FSA Annual Report that the FSA will work closely with the Panels and industry representatives in addressing the challenges that the move to Principle Based Regulation poses. In my view this is essential. If we engage with each other in an open and honest way – and the FSA puts industry expertise to good use at an early stage of the thought process – it will help make this challenging and important transition more informed and manageable.

Furthermore, it should result in a level of communication to small firms, that removes uncertainty and worry.

It is not always apparent that staff at all levels within the FSA understand the impact on Smaller firms of them having to stop what they are doing (which is often earning their living) and examining their method of operation so that they can demonstrate compliance to the FSA in a different form. There is a view that the FSA Principles have existed for some time and should always have been complied with. However, that seems to be missing the point. Small firms will be required to demonstrate compliance to the FSA with the Principles, rather than the rules. This is a fascinating way to rethink and challenge the current method of operating any firm. It will provide an interesting perspective for those of us managing small firms and I believe in many cases improve their operation. However, in many small firms, for a period, this could be an all consuming project that detracts from the day to day purpose of the firm.

I can understand why some firms are concerned that principlesbased regulation might turn out to be a Trojan horse or a wolf in sheep's clothing. I am absolutely certain that this is not the FSA's intention – the SBPP and the industry at large working with the FSA at an early enough stage in the thought process can help to allay that concern. A fundamental part of the process must be to give clear guidance to firms and allow sufficient time for them to evolve. In return, I would suggest that every regulated firm should be prepared to engage with the FSA and contribute towards the development of the Principles Based Regulation regime.

All of my above remarks also play to the wider issue of the Costs of Regulation. Many smaller firms believe that the costs and burdens of regulation are excessive, and that they will continue to rise in the future. The Panel hopes that this fear proves to be unfounded. But it must be stressed that smaller firms inevitably find it that much more difficult to absorb the financial demands of fulfilling their FSA obligations than larger firms do. The recent Deloitte study – commissioned jointly by the FSA and the Practitioner Panel – reinforces our conviction about high costs, especially in
the retail sector. There are a number of areas emerging from that work that have now been opened up for review. We will support the FSA in progressing this work. It is by no means all doom and gloom, and smaller firms have much to be optimistic about. Following the creation of the Small Firms Division, led by Steven Bland with whom the Panel has built an excellent working relationship, and the Regulatory Services Business Unit, the FSA has itself identified the importance of this sector of the market and has really begun to raise its game in respect of smaller firms.

Strategically, we are extremely pleased that smaller firms are now given much higher priority and focus by the FSA. The quality, volume and accessibility of communication material emanating from the FSA are much improved. Smaller firms should be encouraged by these developments.
But with smaller firms being such a large proportion of the FSA’s regulated community, there remains more that the FSA can and must do to make life easier for smaller firms so that they can continue to compete and prosper against a secure and stable regulatory backdrop. Financial services are good for the economy and provide substantial social benefit. As part of that background smaller firms provide value, personal service and flexibility to their clients. In some cases they also
generate significant income for larger providers and manufacturers. They are a popular breeding ground for those looking to choose financial services as a career path. None of which, surely, would be in any of our interests to see falling away.

Finally, a few "thank you's." Firstly, I would like to pay tribute to Ruthven Gemmell who I recently succeeded as Chairman of the Smaller Businesses Practitioner Panel. Much of the Panel's influence and impact over the past 2 years has been the result of his commitment and belief in the smaller firm sector. I would also like to thank my fellow Panel members and our small but highly professional secretariat team for their enthusiasm and substantial contributions.

Lastly, to John, Callum and all their staff at the FSA for the mature way that they come and speak to the Panel. Sometimes those conversations can be quite lively, but they are very seldom dull and I have an absolute belief that it is your wish that all firms whether large or small succeed whilst providing an excellent product to consumers.

Thank you