Now there are many factors which contribute to this: the stable economy, taxation, concentration of skills and – a claim which is based not on my personal view but on repeated studies of practitioners including those of the Corporation – the fact that the regulatory regime in the UK is seen to be preferable to those elsewhere. The present picture is clearly attractive – but of course transient. As Baroness Valentine said in the debate last week "We cannot take any of these advantages for granted. The world is changing and we must anticipate and meet those challenges" – a sentiment I endorse completely. This morning I want to identify and examine just three of the regulatory challenges which we at the FSA are conscious of, and set out how we plan to deal with them.
Before setting out what developments I see in regulation, let me very briefly establish what we will be determined to maintain. First, we will want, whenever possible, to achieve our statutory duties through promoting efficient, orderly and fair markets. Any sensible regulator, I would argue, certainly the FSA, believes that the best outcomes for both producer and customer come from efficient markets, not from regulation. You should therefore expect measures which work with the grain of the market of the sort which we have undertaken on softing and unbundling for asset managers, on contract certainty in the insurance market, or on reducing confirmation backlogs in credit risk derivatives. In each of these cases, we have encouraged market developments, and kept direct regulatory intervention as a backstop. You should also expect further effort by the FSA to discourage market misconduct: action against market abuse, insider trading. Second, we will continue to guard against regulation impeding competition and innovation. The FSA has a clean record on this, as judged by the competition authorities. We intend to maintain this. We have, for example, played a leading part in both CESR and IOSCO in avoiding what we judged would have been inappropriate regulation of credit rating agencies, which would have reinforced the present oligopoly. Third, we will remain committed to the policy – not widely shared across the international regulatory community – of treating all firms and institutions which come within our remit on the same basis, irrespective of the nationality of their owners or managers. The UK has benefited hugely from this approach. Fourth, and last, we will remain committed to principles of behaviour: full consultation, listening hard to – and thinking hard about – what is said to us; commitment to real cost benefit analysis; transparency in our dealings with those we authorise; and a highly selective approach to enforcement. Maintaining these principles is as important as how we react to new developments.
Against the background of these elements of continuity, I want to set out briefly three challenges we face: how to respond to increasingly international financial institutions; how to become a more principles-based regulator; and how to retain the FSA's focus.
The first issue is one for the regulatory community as a whole, but, because of the international nature of London as a capital market centre is particularly important for the FSA: how do we across the world regulate the international financial institutions which are becoming of increasing importance, in a way which is not either at best burdensome (because of duplicative regulatory requirements from the various national regulators), and at worst contradictory. One answer to this, much favoured by some European banks, is quite simply to establish primacy for the regulator in the country of incorporation of the financial institution (the home regulator), and give that regulator the responsibility for overseeing the financial institution throughout the EU (if a European institution) or throughout the world. This answer – I don't think it merits the description "solution" – has the merit of simplicity and certainty. Unfortunately, it fails on most other tests – legal, practical, political. In its place, we need a real – ie practical and workable – answer – one which reflects the differing importance of different financial institutions, the differing legal powers of different regulators, the differing competence and resources of different regulators. We at the FSA, which is both an important home and an important host regulator, are much seized of these issues. We have made significant progress in the supervision of major banking groups – UBS, Credit Suisse, HSBC, Standard Chartered are examples – in establishing useful regulatory colleges which enable us to bring together the most important regulators for an institution to establish shared knowledge and clear regulatory responsibilities. Our work with the Swiss EBK and the New York Fed on Credit Suisse is an example of this. We need to extend these principles from banking more generally to other financial institutions. The supervision of exchanges is an obvious area of development.
The second issue is how succeed in making use of principles, rather than ever growing reliance on rules. The FSA will always have a combination of detailed rules and general principles. That is inevitable. But we are determined, for reasons well explained by John Tiner and much commented on by me, to first halt and then reverse the growth in rules and replace, whenever we can, detailed rules with general principles. This policy is applauded at a senior level, but often increasingly questioned as you approach the practical regulator:regulatee frontier: chief executives and chairmen approve, whereas general counsel and compliance officers are sceptical. The issues involved are many and often not straightforward. How do we at the FSA ensure predictable interpretation of general principles? How do we help interpret general principles for firms – particularly those firms (more than 90 per cent of those regulated by the FSA) for which we have no relationship manager, and whose principal contact with the FSA is via our call centre? What part can codes of conduct and industry standards play – without creating barriers to entry? How would a more principles-based regime coexist with the work of the Financial Ombudsman Service? What does this move towards more reliance on principles mean for FSA enforcement policy? It is clear that this move has quite profound implications both for the FSA and for those we regulate. Finding practical answers to the questions I have sketched will be important for all of us. We are determined to develop those answers.
My third issue is how to maintain the focus of the FSA – both external understanding of what we do and don't do, and why; and the internal managerial concentration on a limited number of objectives, which we can measure and against which we can judge our progress. This is a discussion where the FSA is not the decision-maker. That is the prerogative of Ministers and Parliament, where the FSA will seek to discharge efficiently whatever statutory objectives and duties they give us. In the last two years, their decisions have resulted in both a major expansion in the number of firms regulated by the FSA, as we were given the responsibility for some 18,000 mortgage and general insurance brokers, and a significant shift in the emphasis of our work, as now more than 90 per cent of the firms we regulate are ones which, on a risk-based approach, we plan never to visit in the normal course of business, and where supervision in at least the first instance is based on statistical and thematic studies. I very much hope that an overall view is taken of the FSA's scope – what is the proper model of its activities; and that decisions are made with a view as to the opportunity cost, as well as the convenience, of adding further duties to the FSA's present range. Managing the FSA's emerging responsibilities – both influencing the decisions on what comes to us, and efficiently managing whatever does – is one of the FSA's most important challenges.
I have deliberately set out generic issues rather than specific. There are host within the latter category: implementing MiFID; Solvency II; the Capital Requirements Directive; the evolving policy on treating customers fairly; and the changing landscape in the distribution of financial services and products are among the obvious ones. But for this morning's discussion the three general issues are those I consider most relevant.
