Annual Public Meeting Phil Gray , Chairman 24 June 2010

Thank you Chairman and good morning ladies and gentlemen

This speech is one of my first responsibilities having just taken over as Chairman of the Smaller Businesses Practitioner Panel on 1st June and it comes at a particularly important moment in the UK financial services sector following the announcement made last week by the Chancellor.  You could say it’s a little bit like being thrown into the deep end but the reality of the situation is that as a Panel we represent a substantial part of the regulated community that has been very much in the deep end for most of the last two years.

The purpose of today’s speech is to provide an outline of the work carried out by the Panel with the FSA over the last year and also the coming year.  The Panel represents over 90% of all regulated firms in terms of the numbers of firms but we have seen this overall number reduce substantially over the course of the last two years as the recession has hit acknowledging that its impact has been more pronounced in some sectors than others.  In the wider public glare, the global recession and the problems of the financial services industry focus onto big businesses but the fallout from their problems is felt very acutely by smaller businesses. My predecessor, Simon Bolam, commented last year that those from a smaller firm’s background may feel frustrated by the focus on larger firms and I’m sure that this still holds true.

This provides the background, to some extent, for the work that the Panel has undertaken over the past year but we should also comment on what will be focusing on for the next 12 months, particularly in light of the announced changes.  The Panel is made up of experienced practitioners from a range of financial services sectors who provide input and practical day to day experience of the opportunities and difficulties in delivering products and services to consumers.  The Panel is well aware of the significant difficulties faced by the mortgage intermediary market over the last two years, the problems caused by PPI mis-selling and, looking ahead, ensuring that the changes proposed by the RDR are workable for firms but also for our customers.

I think it is important to note that the FSA, its management and its staff, have engaged with the Panel proactively across all areas of policy - this has been welcomed by Panel members and is reflected within our Annual Report.

I should also take this opportunity to thank the Secretariat team for their excellent work on updating the Panel’s website.  This now provides a much more easily available source of information for our community on the work that is being undertaken and importantly also provides the means for firms to raise any issues or alerts that they may have so that these can be brought before the Panel and discussed with relevant FSA teams. 

In the short time available I would like to take this opportunity to highlight a few of the areas which have been at the forefront of our agenda over the last year and so I will touch on the Retail Distribution Review, the Mortgage Market Review, the general burden and concentration of regulation and regulatory costs.

To begin with RDR, the Panel has been supportive of the FSA’s plans to improve the quality of advice given to consumers by raising professional standards and is appreciative of the frequent updates provided to it by the FSA team dealing with this complicated area.  We do however remain concerned that an unintended consequence of this initiative is that many consumers may be excluded from receiving advice and this is therefore an area which we will continue to review with the FSA as the 2012 deadline approaches.  Our community has a direct interest in being seen to be providing a high quality service to its customers but one that is commercially affordable.  The three Panels have worked closely together on this particular area of policy as we view this to be potentially far reaching in its application to the UK personal finance market.

We have been encouraged by the discussions with the FSA team in respect of the Mortgage Market Review since this was first announced. The mortgage market has suffered greatly during the recession and from a smaller businesses perspective, this is most markedly noted in terms of the reduction in the numbers of intermediary firms – this has fallen by around 30% in the last two years.  Smaller lenders have also suffered as the combination of a focus towards increasing liquidity and a loss of consumer confidence has reduced gross and net lending.  It has therefore been important that the MMR does not create any additional difficulties that make it harder for lenders and intermediaries to work together in what remains a still very fragile market.  Having previously cautioned against read across from FSA policy we are also pleased that the FSA have listened to the concerns expressed by intermediaries and the Panel that the mortgage market is a different market to the investment market and we feel that this has been reflected in the outcomes to date.

The burden of regulation has always been an issue for the smaller firms community and this has not eased up.  Whilst the Panel acknowledges that the financial crisis has necessitated additional regulatory action, it remains firmly convinced that the FSA needs to prioritise its regulatory changes to those that are needed rather than those that would be nice to have.  The Panel welcomed the news in the FSA’s Business Plan that some policy initiatives have been shelved or postponed so that focus can be placed on those areas of greater importance and of greater benefit to firms and/or consumers.

Whilst we all feel that we have already had regulatory change upon regulatory change the next two years are of critical importance to the regulated community with the bottleneck that is 2012 looming up.  Between now and then there are several pieces of behaviour changing regulatory policy to be implemented which could have profound effects on the financial services marketplace.  These include the Retail Distribution Review, Solvency 2, capital changes, the MiFID review, UCITS 4 and the introduction of the National Employment Savings Trust.  We have continued to stress the need for new initiatives to be implemented in a joined up manner rather than have one sector being hit by several key projects at the same time.

The cost base of the FSA has been a continual thread of our annual discussions with them and as regulated businesses we all have a commitment to bear.  Businesses are having to squeeze budgets tightly during difficult trading times. It does feel irksome for many small businesses however when costs continue to rise when, for many, the principal cause of the financial problems lay with the major firms. 

The Panel has sought over the years to obtain a greater transparency over how the FSA allocates its fee base and this has been brought into sharper focus with the extensive increase in the FSA’s budgets as it skills up to meet its regulatory responsibilities around major firms.  We have been exercised over trying to ensure that the increase in costs reflects where the additional resource is required and does not fall unfairly onto smaller businesses.  We were therefore pleased with the way in which the fees structure was presented and that this demonstrates that, as much as we all dislike having to pay any fees, the structure represents a fair and transparent way in collecting these fees.  As with all these things there will be some firms who have been affected more than they would expect but, in the main, most smaller firms saw a reduction in the size of their fees. 
We are involved in the fees discussion every year and will continue to press the FSA on their proposals in this area. It is also worth mentioning that feedback confirms that the FSA also believes the Panel’s involvement added value to the fee discussions.

The other area of cost concerning us is of course the Financial Services Compensation Scheme and the cost burden that places on all those well managed businesses, big and small, who have had to pick up the tab for what seems to principally be, although not wholly, larger bank failures and the potential for the costs of this to be felt across the whole regulated community because of the FSCS pooling arrangements.  The funding review of the FSCS is on our radar as we seek to ensure that smaller businesses are protected as far as possible from this huge burden of debt.

Looking ahead into the immediate future, we now have a much clearer picture of what the regulatory landscape will look like but while this structure is being settled and we see how smaller financial services firms fit into it the world of UK finance continues and the ability of firms to provide their products and services in an effective manner has to continue so that consumers needs are served, firms, small and large, flourish and the UK economy returns to good health again.  The Panel sees its main priorities in continuing to challenge the FSA in respect of key policy areas  as the transition evolves.  We will therefore be focussing our attention still onto the implementation of the RDR and seeking to ensure that it delivers a marketplace of high advisory standards without disenfranchising consumers, that prudential and EU requirements are proportionate to smaller businesses and implemented effectively and that the full impact of the costs falling on firms through the FSA/FSCS/FOS are taken into account throughout the FSA’s plans.

We will continue to work closely with Lesley Titcomb and her team with regard to the Smaller Firms Enhanced Supervision Strategy.  This has helped make the FSA more visible to firms who would otherwise not interface with it and this should continue to be encouraged so that firms better understand what the FSA are aiming to achieve and that the FSA understands better the firms it regulates so that this hopefully translates into an effective regulatory relationship within the new regime once it becomes fully operational.

Ladies and gentlemen, thank you for listening to me.

Phil Gray