On 18 July 2002 the FSA Annual Public Meeting
was held. Set out below is a summary of the main
points made by Sir Howard Davies and other
speakers. The full script of the
Chairman’s speech is available on the FSA website (www.fsa.gov.uk/pubs/transcript2002).
Speech by Sir Howard
Davies
1.
With regard to the recent developments concerning Enron and
WorldCom and the downturn of the stock market in general, Sir
Howard Davies said that these appear to “have more to do with
investor confidence and trust than with economic
fundamentals. (…) We do
appear to be buffeted by winds from across the Atlantic, rather
than by any domestically generated bad weather.
(…) And a weak stock market does not in itself necessarily
justify any regulatory response.
He went on to say that these problems could
potentially happen here and that the regulatory regime for
accounting and audit oversight was in the process of being
reassessed; the Treasury and the DTI – with the support of
the FSA – would be publishing a paper on options for reform
towards the end of the year.
2.
Sir Howard Davies pointed out two areas of major concern arising
from recent share price falls:
-
split capital investment
trusts: these were strongly
capitalised and profitable in certain sectors such as
banks. However, there were problems with some
split capital trusts where absurd claims had been
made. This was an area where investors were
significantly misled about the security/safety of their investment
and the FSA would continue to investigate and take appropriate
disciplinary action. Issues of leverage and
cross shareholdings were singled out as particularly meriting
FSA’s investigation;
-
the life sector/occupational pension
schemes:the FSA issued revised guidance in June on
the stress testing of portfolios and considered the close
monitoring of the minimum insolvency requirements an important
exercise. New prudential rules are to come into
effect in 2004; there are no current plans to revise capital
adequacy requirements in view of further market downturn since June
2002.
3.
The strategic aims for 2003 are:
-
enabling consumers to take informed decisions and achieve
fair deals;
-
regulating in a way so that firms and senior management
understand and meet their obligations;
-
increasing consumer confidence in efficient, orderly and
clean markets; and
-
establishing – in a process involving both market
practitioners and consumers – an appropriate, proportionate
and effective regulatory regime in which both consumers and firms
have confidence.
Sir Howard Davies stated that the pensions
review is now 98% completed and he had no desire to see a repeat of
such a review in the future. He also highlighted
the anti-money laundering regime, which has now come within
FSA’s remit.
4.
In light of the Sandler Report, the focus of work to be undertaken
will be on:
(i)
the regulation of distribution;
It appears that while the FSA still believes
polarisation to be anti-competitive and unhelpful for purposes of
consumer protection, the proposal to require IFAs to be remunerated
on a defined payment basis may be amended. The
FSA is looking at alternative suggestions and intends to formulate
its final view in the autumn and to introduce the required rule
changes quickly thereafter.
(ii)
the governance and structure of with-profits
funds;
The FSA is reviewing whether funds should be
reconstructed on a “charges less expenses basis, a suggestion
put forward in the Sandler Report. A
comprehensive paper will be published by the end of this
year.
(iii)
the design and regulation of simpler products targeted at the mass
market;
The FSA seems to have taken on board the
suggestions made in the Sandler Report relating to new product
features. It recognises that the attempt to free
conduct of business regulation must not bring about the risk of
widespread mis-selling.
(iv)
consumer
education;
The FSA aims to put forward preliminary
proposals in the autumn and to enter a proper consultation period
in early 2003 focusing on its long-term strategy in this
area. It would need more funds to augment its
current workplan.
Speech by Colin Brown (Chairman of the FSA
Consumer Panel)
Colin Brown emphasised the importance and
success of the continuous dialogue between the FSA and the Consumer
Panel. He described the Panel as a harsh critic
and force behind FSA, influencing its approach on endowment
sales. For example:
He identified as core problem the
consumers’ high expectation of investor protection on the one
hand and their lack of understanding of investment products and
market mechanics on the other. He considered
that, against this background, the FSA had some way to go to embed
consumer issues in the regulatory regime and wanted to see even
more consumer objectives taken into account.
Colin Brown set out four messages to the
FSA:
1.
FSA to deal with the public’s zero failure expectation and to
explain how the system works;
2.
FSA to be tougher and more adventurous in its regulatory approach,
in particular with regard to financial promotion;
3.
FSA to address the risk of mis-selling in their current
discussions/consultations on depolarisation and the stakeholder
system;
4.
FSA to guard against the risk of market
participants second guessing the FSA’s risk-based approach
and trying to exploit the system.
Speech by Donald Brydon (Chairman of the
FSA Practitioner Panel)
Donald Brydon reiterated the role of the
Panel and how it works. It is neither a part of
FSA nor a “super trade association. Its
approach is one of dialogue rather than
confrontation.
In particular, he said that while the
Panel’s responsibility was to contribute the industry view on
the formulation of FSA policy, it did not engage in providing
detailed responses to Consultation Papers; this was for the
individual firms to do. He rejected the notion
that all rules emerged from a comprehensive consultation process
involving the Panel; some rules emerged in a rather
“imperfect form.
The message he wished to send to the FSA was
that there were many questions of interpretation and a need for the
FSA to realise that practitioners required clear rules/a clear
regulatory environment to do business in.
With regard to the Consumer Panel, he pointed
out that it was important to balance consumer concerns against the
need for innovation and international competition.
Questions
During question time the following issues
were raised:
1.
Carol Sergeant (Managing Director, Regulatory Processes & Risks
Directorate) stated that FSA enforcement action is focused on cases
that are significant in terms of size and rule breach, in
particular those relating to consumer protection
issues. FSA also takes cases particularly
seriously in which firms are found not to be co-operating during
the process leading up to possible enforcement action and failing
to respond to warnings from FSA.
FSA is not concerned about minor technical
breaches and will focus on big and important cases but it has a
budget earmarked for smaller cases. The overall
number of enforcement cases has dropped by 25% since N2 with 5
reported cases.
2.
FSA confirmed that insurance and mortgage regulation are expected
to enter into force during the second half of
2004. This will, however, depend on the adoption
of the Insurance Intermediation Directive. FSA
intends to publish a Consultation Paper on mortgage regulation
within the next 2-3 weeks; another paper on capital adequacy
requirements is to follow at a later
stage.
3.
FSA seeks to maximise its input in relation to EU legislation and
the “Brussels process. It will make
special efforts during the preparation and negotiation process of
Directives to set out UK market requirements, how the UK markets
work and what needs to be done to remain
competitive. The FSA recognises that the process
of EU wide harmonisation will bring about changes to the UK
regulatory regime.
4.
FSA also plans to improve the web version of the Handbook and
to upgrade its search facilities.
For further information please contact Simon
Morris at simon.morris@cms-cmck.com or
on +44(0)20 7367 2702.