I am grateful to all who have taken the trouble to come. It is not surprising that this event should attract so many. It is an important component in the machinery of our accountability – the annual process by which in January each year we set out in the Financial Risk Outlook our view on the risks to the FSA's statutory duties; then, also in January, set out our Business Plan; in June set out our Annual Report covering how we have performed against our previously published objectives; and finally, in July, have this, the culmination of the process, by which we report on, answer questions about, and discuss the work of the FSA against our priorities. It is a cycle of setting out our view on the world, our plans and our performance designed to make our affairs both transparent and accountable.
There is a second reason to expect this meeting to be well attended, which is the scale and range of the activities subject to FSA influence. The sectors we regulate account for over 5% of GDP; they employ over one million; and collectively are one of the most dynamic and successful of British industries – as the recent trade surplus figures show. The UK is the most international capital market centre in the world: the most recent survey of the OTC derivatives market puts London's share of daily global turnover at 38%, well ahead of any other financial centre; the UK is the largest foreign exchange centre in the world; it is the largest centre of fund management in Europe. And, most important of all, the existence of efficient, orderly and fair markets is essential for the well-being of every British citizen and every British firm. So I am not surprised – and am greatly heartened – by the presence of so many here today.
A word about process, which will differ slightly from last year in terms of who will speak from the platform. There will only be one FSA speech, you will be pleased to know, since in John Tiner's absence I speak both as Chairman and as acting CEO. I am very glad to say that John is recovering well and strongly from his operation, and is on track to return to us in September, as planned. I will, if I may, pass on to him this meeting's best wishes for his recovery. There will then be contributions by Ann Foster as Chairman of the Consumer Panel, by Jonathan Bloomer as Chair of the Practitioner Panel and by Ruthven Gemmell as Chairman of the Smaller Businesses Practitioner Panel. I am grateful to all of the Panels for their challenging and constructive engagement in our work.
Ruthven’s report represents an innovation, reflecting the FSA's concern to pay particular attention to the needs of smaller businesses. The most dramatic change in our responsibilities since we were established in 1998 has been as a result of decisions in Europe and by the Treasury to make the FSA responsible for the regulation of general insurance and mortgage business – a decision which resulted in some 14,000 newly authorised firms, almost all of which are in our terms smaller firms, coming within our remit. More than 90 per cent of all firms now regulated by the FSA are categorised by us as smaller firms, and this change in the demographics and the need to be sensitive to the particular needs of such firms – plainly a ‘one size fits all’ regime would not be appropriate - has required quite fundamental changes in our processes and approaches. I believe that we have responded well to these challenges and Ruthven's presence on the platform today underscores just how seriously we take our new responsibilities.
The speakers will then be joined on the platform by Deirdre Hutton, the Deputy Chairman of the FSA, who chairs both the Non-Executive Directors Committee and the Remuneration Committee, by our three managing directors, Clive Briault, David Kenmir and Hector Sants, and by our Director of Finance, Strategy and Risk, Kari Hale, to answer questions. I am grateful to those who have sent in questions in advance. We have an hour and a quarter for questions and answers. We will publish all the proceedings on the FSA website; and will also answer there any written questions which are not covered this morning. After the plenary session, there are some refreshments available before the three breakout sessions, which I hope you have already booked for and will attend. After the plenary session there is also a press conference which will give the media a separate opportunity to put their questions to me.
On this occasion, I do not want to attempt to review the last year in any great detail. This is done, I hope fully and clearly, in the Annual Report under the three headings under which all our activities can most helpfully be grouped. These – which will be familiar to you – are:
- Promoting efficient, orderly and fair markets. We start with that grouping because we are committed to making markets work as the means of best meeting the demands for financial services – best both for customers and for the providers of financial services. We regulate – when we have the choice – only where there is both market failure and the probability that regulation will bring more benefits than costs. Our report highlights the specific areas in which market solutions have been delivered as effective alternatives to regulation.
- Helping the retail consumer obtain a fair deal. We have particular concerns about the information gap between suppliers and customers of financial services – though the retail agenda is very wide indeed. We are working to improve how both suppliers and consumers act: on the supply side to encourage clearer information to be provided and good practice to be followed, and on the demand side to encourage both greater competence and more attention being paid to the important financial decisions which individuals are increasingly called upon to take. But, as our report points out, there remains an enormous amount for all of us to do before we can say that an efficient retail market in financial services has been established.
- Making the FSA an easier organisation to do business with, through improving our business capability and efficiency. This has many facets. Critical to this is the recruitment, training, retention and reward of our staff – where over the year we have taken a number of significant steps to improve our HR practices – and the opportunities for improving efficiency by better use of technology.
But today I would like to address the wider question of how we at the FSA have responded, and will respond, to the very proper concern expressed in many quarters about the costs and the effectiveness of regulation. It is of course easy to pass over the benefits of regulation: the increased confidence for consumers of knowing they can make choices on the basis of reliable information; the confidence of market practitioners that they are operating in markets with proper rules, properly policed; and are dealing with properly capitalised counterparties. I am not one of those who believes regulation is necessarily harmful. But I am someone who believes it proper to examine the costs and the benefits of regulation.
I should start by repeating that the present weight of regulatory initiatives affecting financial services represents a significant hazard. I stress "repeating", since this threat was one to which we drew attention in this year's Financial Risk Outlook. The threat arises from the combination of so many initiatives: the application of Sarbanes-Oxley; the work to prepare for Basel 2; the implementation of the various directives introduced under the Financial Services Action Plan – notably the Prospectus, Market Abuse and Market in Financial Instruments Directives; the introduction of new International Financial Reporting Standards; the FSA's work to introduce long overdue new accounting and reporting standards for life insurance companies.
We are also acutely aware that, to those affected by them, it does not actually much matter from where particular regulatory initiatives originated. What does matter is the cumulative cost and the strain placed on management teams to cope with the aggregate impact. Many initiatives result from decisions taken other than in London, presenting particular challenges to us too. We do much to influence the primary decision - although the principal responsibility for so doing lies with the British Government – and we commit significant senior management and other resources to doing so. But, whatever our efforts, the FSA is often given the responsibility to implement an original decision which would not necessarily have met our twin tests for our own regulatory initiatives, namely that there should be both market failure and a positive cost:benefit analysis. This is particularly a problem for EU initiatives where commitment to impact assessment has historically been more clear in principle than it has been observable in practice.
An example of concern for many firms currently is the Market in Financial Instruments Directive (MiFID). It is deeply unsatisfactory that UK financial services firms face major changes, with the associated costs, for an initiative which has been subject to no comprehensive EU cost-benefit analysis to assess the specific contribution it might make to unlocking the prize of a more integrated European capital market. That kind of approach to policy-making cannot be sensible. Going forward, we will do all we can, alongside a growing band of regulators who share our commitment to assessing costs and benefits, to support Commissioner McCreevy's determination to make rigorous impact assessment a vital determinant of EU legislation.
We are currently planning to consult on MiFID implementation in November, and – as required by statute – we will be assessing the costs and benefits of the changes to our own rules which the directive will necessitate. We are now compiling, in conjunction with UK stakeholders, the building blocks for that analysis. Much will depend on a number of important details still to be finalised in the level 2 implementing measures. But it is already clear that the MiFID changes will impose significant costs on the UK market, including for example, through systems changes and IT upgrades. Industry is understandably concerned about the potential scale of these costs – and I share those worries. It is far from clear that the benefits to the UK will outweigh the costs.
Against this background, it is vitally important that the level 2 measures now under discussion in Europe are not disproportionately burdensome. I know the Commission – who will play the key role in initiating proposals – is also very aware of the possible costs. We strongly support Commissioner McCreevy's expressed determination to avoid unnecessary regulatory burdens. We have already worked hard to exert to the full our influence within the process of translating the Directive into practice, and we await the outcome of the level 2 process.
And, when it comes to detailed implementation in the UK, I want to assure you that the FSA will seek to avoid imposing unnecessary costs, and to maximise the effectiveness of the directive, consistent with the legal duties we will have to implement MiFID. We will not seek any super-equivalent provisions unless there is a clear market value in so doing. We will look to firms to use whatever is fit-for-purpose, not a specially engineered solution. And we will take the opportunity to look at the scope for eliminating existing rules where MiFID will operate.
But clearly there are also major opportunities for the FSA too to improve performance, so let me set out what we are doing. We start with the advantage that we are a risk-based organisation: we do not seek to prevent all financial failures, but accept and indeed plan for a regime in which some firms will fail; we do not set out to visit all the firms for which we are responsible – indeed, the more than 90 per cent of the firms regulated by the FSA which fall within our category D are firms which in the normal course of business we do not expect to visit or inspect but rather to rely on sampling techniques based on the data they provide us, and on what we call thematic work; where we can choose, we choose to operate proportionally – that is to take steps to mitigate risk only if the risk is sufficient to justify the action. And we are of course an integrated regulator, bringing the same principles to banking, insurance, mortgage, investment and securities businesses. In all this, we already incorporate the principles advocated in the reports of Philip Hampton and David Arculus.
Along with the Government, we are determined to build and improve on these principles. In part, this involves recognising when our practices have not lived up to our aims. It is important that when there are well-founded criticisms of the FSA we respond to them – something which I believe we have done thoroughly and carefully in respect of the criticisms which have been advanced of the FSA's enforcement regime. The results of that review were published earlier this week, and we are now formally consulting on those aspects that require changes to the FSA Handbook. Equally, we have taken very seriously the concern about the costs of regulation for financial services companies. The concern is clear. Less clear, however, are the facts. In order to establish the facts, a variety of questions need answering: how much of the costs are associated with regulation specific to financial services as distinct from general company or employment law? How much arises from actions of the FSA as distinct from EU initiatives (our assessment suggests that 90 per cent of the costs of the regulation of general insurance brokers arise from the EU)? And what costs would the firm incur anyway, for its own purposes of securing adequate capital and controls? We are determined to establish an agreed basis of fact to answer these and other questions about the costs of financial regulation so that we can put in place a realistic plan designed to make things better for firms, markets and consumers. We are working on this in partnership with the Practitioner Panel to provide the data which will advance informed discussion. We have commissioned Deloittes to look in particular at three sectors: institutional fund management, corporate finance and financial advisers. This will feed into the work recently announced by the Government on securing better regulation.
I hope therefore it is clear that we listen and, more importantly, respond to well-founded concerns. But we do more than simply respond to concerns, for we are determined to identify for ourselves ways of improving our efficiency and our accountability. Let me give some examples of our actions designed to achieve this.
Regulations
Let me start with our rulebook. Our concern has been to ensure that our rules are as clear, and as comprehensible as possible and are no longer than necessary. To that end, we have produced tailored handbooks for each of 14 individual sectors, bringing together the regulations needed for example by someone engaged in asset management or as a general insurance broker. These handbooks are typically about one tenth of the size of the FSA's overall handbook. When we revise handbooks, we take the opportunity to shorten them: the new listing rules are one-third shorter than those they replace; the new Collective Investment Scheme rules are half the size of the old. And, as I have said, when we come to implement MiFID, we will seek to find ways of accompanying the introduction of new rules by eliminating existing regulations, and reviewing more fundamentally whether all our existing rules are necessary – though this will have to wait until we have done the task of transposing MiFID into UK law.
Although the result of these initiatives is more accessible, more coherent and shorter rule books, they remain substantial documents. The individual tailored rulebooks run to nearly 1000 pages each; the new listing rules, which came into force on 1 July, comprise nearly 600 pages. We would like to go further than our present initiatives, to rely more on general principles, the discharge of responsibilities by senior management of firms, and the development of not necessarily best, but at least good, practices. In some instances, we have succeeded, largely by working with the grain of the market, in implementing such an approach. Our policy towards the control of softing and bundled products is a prime example where we have succeeded in establishing principles and general responsibilities, with detailed disclosure agreed between the different groups of market players affected. We hope that this approach will prove successful in this important area. It is however undeniable that in many other areas those affected by regulation, whatever their general professed support for principles and flexibility, in practice prefer the certainty of detailed rules. We have already asked trade associations and firms to help us identify detailed rules which could be eliminated and replaced by reliance on principles which none would contest. This has met with a disappointingly limited response, so I repeat the invitation today to assist the FSA in our determination to move in this direction. We have had some success: we are looking to replace detailed guidance on anti-money laundering by high-level requirements about systems and controls; the whole of the programme which goes under the title of Treating Customers Fairly is designed to establish principles, spread good practice and give guidance in a way which, if successful, will avoid detailed regulation; our "Dear CEO" letters have a comparable aim. But we would like, with general support, to do more.
Accountability
A central concern for any responsible regulator is how to provide appropriate accountability to accompany, and balance, the powers and duties given to it. I started my remarks by explaining the annual cycle of plan, report and this, the Annual Public Meeting. We are seeking to make it easier for us and for you to measure what we are delivering against our plan, through identifying specific milestones within each of our three strategic objectives and reporting on them. Of the 36 milestones set out in our plan for 2004/05, we achieved 31, and rescheduled four either because of factors outside our control or because we and the industry agreed that a delay would be useful. In one case, consultation on projection rates and product disclosure, we caused the delay. In our plan for the current year, we have no fewer than 60 milestones and so far have delivered 26, with 24 of those delivered on schedule. The 2 on which we were late were delayed by only a few days. We publish our progress against our milestones quarterly on our website.
We are also setting out measures for our day to day performance: how we respond to correspondence; how quickly we make regulatory decisions. We now have 70 service standards, and report regularly on our performance against each. We have fully met 60% of these, and have narrowly missed a further 28 – a performance on which we clearly seek to improve. As far as we have been able to determine, I think it is true that no other financial regulator gives as much clarity in reporting on its performance. It is a measure of our commitment to transparency and accountability.
I will stop there. I hope I have shown the FSA's determination to make further progress towards implementing in practice our commitment in principle to being a proportionate and risk-based regulator – as well as some of the problems we need to solve if we are to make the further progress we seek.
Thank you all again for taking the time to be here today, for the various and significant contributions you make to the FSA’s operations and for the, normally constructive, working relationships we enjoy with you. This is essential in ensuring that our regulatory framework continues to lend solid support to the UK’s pre-eminence in financial services, with all the benefits this brings to British consumers.
