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I am delighted to be here with you this morning to set out the FSA's agenda for 2007.
I am also pleased to be sharing the platform with Jonathan May of the OFT, and that Robert Skinner will be setting out later today developments in the industry's own Banking Code. I will touch on the interaction between us and these organisations, including how we work together to avoid duplication.
Our main focus for 2007 will be on “making a real difference” – to consumers; to our own effectiveness; and to regulation internationally. Within our overall priorities, our retail agenda focuses on delivering an effective and efficient retail market for financial services and products. We structure our work in the retail area around four pillars:
- Capable and confident consumers;
- Clear, simple and understandable information available for, and used by, consumers;
- Soundly managed and well capitalised firms who treat their customers fairly; and
- Proportionate, risk-based and more principles-based regulation.
I want to convey four key messages today:
- First, a shift towards more principles-based regulation will provide firms with greater flexibility to deliver outcomes in a way that better matches their business model. But while we will reduce the burden of detailed rules, our high level requirements will not change.
- Second, an efficient and effective retail market requires capable, confident and informed consumers who can act as a strong market force. That is why we are devoting considerable resources to building up the capabilities of consumers and ensuring that they have the right information to make appropriate decisions. But we cannot achieve this by ourselves - we need your help.
- Third, while retail banks appear to have adequate financial resources today, the good times will not last forever – indeed there is evidence that the clouds are already darkening and that banks need to prepare now for the potential storms ahead.
- And fourth, our thematic work - such as our recent work on the quality of advice and on payment protection insurance - shows that the retail market is not yet delivering the consumer outcomes we are looking for on Treating Customers Fairly.
More Principles-Based Regulation
We are moving towards more principles-based regulation because we believe that this is the best way of making a real difference to consumers. We believe that there are four key elements to the "delivery mechanism" here.
First, we are continuing to emphasise the responsibility of senior management of firms to deliver a significant change in the way that their firms treat their customers. It is for senior management to deliver this, not simply to leave it to their compliance departments.
Second, a more principles-based approach provides firms with greater flexibility to determine for themselves how best to run their business, and to decide for themselves how to deliver fair treatment to their customers in a way which is consistent with their commercial objectives.
Third, providing flexibility rather than prescribing detailed processes should enable firms to compete and innovate more effectively in product design, in the quality of customer service, and in providing value for money.
Fourth, this delivery mechanism can be reinforced by the FSA in various ways, including through our work on financial capability and disclosure; our supervision of firms in a more principles-based way; and, where necessary, our taking enforcement action against firms and their senior management when they fall below the standards we would expect of them.
Our consultation last month on our new Conduct of Business sourcebook marked a significant milestone in delivering more principles-based regulation. We are proposing not simply to amend the existing Conduct of Business sourcebook, but to create a substantially new, shorter and clearer sourcebook. We have a general presumption not to retain or create detailed rules, except where they are required to implement European legislative requirements or are the best way of achieving a specific regulatory outcome, for example where we judge it desirable to prescribe the wording of information that we require firms to give to consumers.
We will supplement our consultation with conferences in January. And we will hold workshops later in the year to help firms prepare for the new regime. But, in the meantime, do please take the opportunity to review the proposals and give us your views on this important change in approach.
Reform of our Handbook does not end with a new Conduct of Business sourcebook. By the end of 2008 we will have reviewed a wide range of our requirements, which in total account for more than 80% of the administrative costs we impose on firms, and we will have removed many more detailed rules that are no longer effective or proportionate.
Not everyone is comfortable with more principles-based regulation. Some in the industry have raised concerns that as we move away from the 'safe-harbour' provided by detailed rules, firms may be left without any useful guidance to assist them in meeting their obligations. So let me make two observations here.
First, we will supplement where appropriate our Principles and other high level requirements with examples of good – and less good - practice, with case studies and with statements of how we interpret the minimum standards necessary to meet these requirements. For example, one area where we were asked by the industry to clarify our views was on the respective responsibilities of product providers and distributors.
In our recently published Discussion Paper on this subject we have made statements about desirable outcomes, without detailed instructions on how to achieve them. Importantly this allows for the wide (and evolving) range of existing market structures without creating ever more detailed rules to cover all eventualities. What we ask is that product providers ensure that their products are soundly designed; that they identify which types of consumer the products are likely to be suitable for, and which types of consumer they are unlikely to be suitable for; that they consider which distribution channels are appropriate for the distribution of the products; that clear, understandable information is provided to these distribution channels; and that at a high level the product provider considers whether a product is ending up with the intended target audience. This does not place new regulatory responsibilities on either party, nor is it intended that providers should monitor individual distributors.
Second, we have taken on board the industry bodies’ desire for some form of recognition from us for supplementary guidance that they produce, and have outlined our proposals in our recently published Discussion Paper on our confirmation of Industry Guidance. The Discussion Paper outlines a number of parameters that Industry Guidance should meet before we will give ‘FSA confirmation’. The key point here is that we will not confirm any guidance that we believe will undermine the intended effects of our Principles and other high level requirements. Industry Guidance should be clear, meaningful and assist firms in understanding how they might meet our requirements.
Of course, in the retail banking sphere, you are already familiar with industry guidance. The Banking Code has been in existence since 1999, setting minimum standards for the way in which banks treat their customers; it is because of this Code that we have not introduced any detailed rules in this area. It is good to see that the industry does not sit on its laurels, and next year will be another opportunity to take a formal stock-take to assess how the Banking Code needs to be updated to ensure that it is delivering the fair treatment of banking customers.
Capable and Confident Consumers
The baseline survey we published in March confirmed that financial capability in the UK is too low. It will be a long-term challenge to deliver the step-change required, but it is in our mutual interests to do so, since stronger and better-informed consumer engagement will enable the retail market to work more efficiently and effectively – and with less need for regulatory intervention.
Standing before you today gives me the perfect opportunity to repeat the call that John Tiner made to the industry at the Joint Conference on Financial Capability that we held with the Treasury last month. John called on the leaders of the retail financial services industry to become even more involved with the hugely important work that we and our partners are doing to raise financial capability in the UK.
The need to deliver high quality education in schools is recognised by all stakeholders involved. We know that helping teachers feel confident in teaching issues about money and finance is an important factor in creating a step change in the level of personal finance education. That is why, as part of the Financial Capability Strategy, we are funding the Learning Money Matters initiative through which pfeg – the Personal Finance Education Group – offers help, support and advice to teachers.
In the workplace, BBA members are providing secondees to lead and support the delivery of our ambitious target to reach 4 million employees in the workplace over the next five years. This project is led by a secondee (Jim Dredge) from Lloyds TSB; we currently have one person working with us from HBOS; and I am delighted to announce that another secondee from the Royal Bank of Scotland will be joining us shortly. BBA members – including HBOS, LloydsTSB and Abbey - are also providing presenters free of charge who go into the workplace to deliver our financial education seminars. And we are talking to others about providing people to present these seminars.
Perhaps the most difficult and least developed area to date, but one where we believe BBA members can make a greater contribution, is in widening the availability of money advice. By money advice, we mean guidance across the range of financial issues rather than just about debt, where the Money Advice Trust is already heavily funded by the major retail banks. I am therefore pleased that RBS, HSBC and Sainsbury’s Bank already feature links to our Healthcheck and Debt Test tools on their websites, and that this is leading to a large volume of traffic to these tools. We are talking to several other banks about their provision of similar links as they develop their own consumer information websites.
Finally here, many of the not-for-profit organisations providing financial capability resources are already supported by the financial sector. Through our financial capability Innovation Fund we are awarding small sums to a range of intermediaries who want to take up entry-level money advice work with their clients: notable projects this year have been for social housing advisers and cancer-advice charities, and next year we are targeting older people, lone parents, and financially excluded people in hard-pressed areas. Over the next few years, there will therefore be increasing needs and opportunities for sponsorship from the financial sector at local, regional and national level to build on and replicate the projects we have seed-funded.
Well Capitalised Firms
Let me now play the standard regulator role and warn that the good economic times might not last forever. Four points on this from me this morning.
First, you will already be at least as familiar as I am with the levels of unsecured debt and the possibility that a relatively small change in economic circumstances could result in a large increase in the numbers of consumers facing significant difficulties in meeting their obligations. Even if this is not in itself a significant threat to banks’ capital, it is a potential reputational risk to the industry. Work we did earlier this year showed that banks could make better use of their management information to proactively identify individuals who are starting to struggle - early intervention increases the range of options available. With our online debt tests and revamped consumer website we are doing our best to increase consumer awareness of the risks of over-extending themselves.
Second, we recently issued a letter to bank chief executives that summarised current industry practice on stress testing and showed that the industry still has some way to go to meet the high standards it has set itself.
Third, our recent work on their retail mortgage portfolios with firms planning to move to the advanced internal ratings based approach under the Capital Requirements Directive demonstrated a wide range of views on the size and impact of any downturn in the housing market. This prompted us to issue 'considered reference points' for assessing downturn Loss Given Defaults. These reference points reflect current market conditions and suggest that an average reduction of 40% in property prices and a 35% downturn repossession rate (i.e. the proportion of loans in default that end up in repossession) form an appropriate basis from which to assess downturn Loss Given Defaults for mortgage portfolios.
Fourth, the move towards higher income multiples on mortgages prompts us to ask whether lenders have appropriately stressed lending at such levels and whether these sales will be appropriately controlled to ensure that they meet the affordability and other responsible lending requirements that we impose.
Treating Customers Fairly
Treating Customers Fairly remains a key area of focus for 2007. Our Treating Customers Fairly work is a pioneering example of our general move towards more principles-based regulation, with a focus on the outcomes we want to achieve rather than on the prescription of detailed rules and formal guidance.
This places a heavy responsibility on the senior management of a firm to consider, for every part of its business and for every part of the product life cycle within a particular business, whether it delivers the fair treatment of customers.
Over the past year we have seen improved senior management engagement, and a real attempt to permeate the Treating Customers Fairly culture throughout their firms. But the results from our thematic and other work show that there is still some way to go before front line/customer-facing staff embrace the Treating Customers Fairly culture and thus before this can translate into significant improvements across the full range of outcomes for consumers.
For example, our two rounds of thematic work on payment protection insurance demonstrated that while PPI can provide a valuable protection against changes in personal circumstances, customers do not always come away from the sale conversation having been given the best possible chance to understand that PPI is optional, what the policy does and does not cover, and how much it costs. Our findings to date show that many firms need to go further to demonstrate that customers are being treated fairly here. Indeed, we are considering whether new rules are required in the area of PPI sales, although we recognise the work underway by the industry trade associations and will take into account the effectiveness of that work when considering whether new rules are justified.
Meanwhile, there are also wider competition issues relating to the structure of the PPI market. These have been covered by the Office of Fair Trading’s market study and its consultation on a market investigation reference to the Competition Commission. This distinction has enabled us to work closely together with the OFT, while avoiding duplication.
Our future programme of work aims to ‘up the pace’ at which firms are progressing with the challenges posed by Treating Customers Fairly. We have set a deadline of end March 2007 by which time we expect all firms to have reached at least the 'implementing' stage of their Treating Customers Fairly work in a substantial part of their business.
We will continue to look at the pace at which firms are getting to the right place, including identifying and dealing with those firms at risk of not meeting the March 2007 deadline. We will be testing the quality of how firms are implementing and embedding Treating Customers Fairly, to ensure that commitment from senior management translates into action at the front-line and into delivering the outcomes we want for consumers. We will be looking for evidence not only that Treating Customers Fairly is embedded within the systems, processes and controls of firms, but also that the Treating Customers Fairly culture is well ingrained throughout firms.
We will also be placing greater emphasis on how firms are measuring their progress on Treating Customers Fairly. The information collected and presented to senior management needs to drive actions taken, not just tell a story. Management information plays a crucial role in a firm’s Treating Customers Fairly programme, enabling the firm to evaluate whether the changes made are having the desired effect and, if not, helping to highlight further changes required. We will be looking to see evidence of this through our firm-specific and thematic reviews.
Basic Advice
I end with a few words on our Review of Retail Distribution. One aspect of this of particular relevance for retail banks is that some of you have told us that you are keen to explore the possibility of introducing a more straightforward advice regime linked to a set of simpler products that could be rolled out through branch network, telephone and internet channels. While it is not for us to determine market structure, we are keen to facilitate innovation and to ensure that the regulatory environment is as efficient and effective as possible, allowing consumers to access appropriate advice. So if you are thinking along these lines please let us know, so that we can take your thoughts into account in our thinking on basic advice, and on retail distribution more generally.
Conclusion
This has been a rapid run through a range of issues. But I hope that I have managed to set the scene for 2007, and as you can see it is an ambitious, challenging agenda for both firms and the FSA.
I very much hope that if I am addressing retail banks in five years' time, we will have seen a successful transition to a more principles-based approach to regulation with industry guidance having expanded its role in the regulatory system; that I will be able to report on a real shift in financial capability, having worked with you and our other partners; that firms will have weathered any storms in the economic climate and will have further developed their stress testing capabilities; and that both firms and I can demonstrate that there has been real progress in the customer-facing delivery of Treating Customers Fairly.
