Speech - Nick Prettejohn - FSA Annual Meeting - 2007
Chairman, Ladies and Gentlemen,
I am delighted to have this first opportunity to address the FSA Annual Meeting having taken over the chairmanship of the Practitioner Panel from Roy Leighton. 2007/08 has been a very busy year for the Panel and our Annual Report – the green booklet in your pack – provides a comprehensive account of the Panel’s year.
It includes our commentary – and the representations the Panel has made to the FSA and others – on a range of subjects important to regulated firms, I commend the document to you.
We are the ‘constructive critic’ of the FSA and we support the good work performed by it in a number of areas of the regulatory agenda. The FSA has a supremely difficult and often thankless task. We try at all times to recognize the challenge the FSA faces, but we cannot and do not shirk from making criticisms or suggestions when they are merited.
Much has been said and written about the real deficiencies in supervision leading up to the failure of Northern Rock. The FSA has, in the Panel’s opinion, been open and forthright in recognising – in a very public way – those deficiencies. Such candor is to be applauded.
It is obviously crucial for the FSA to learn the right lessons, and positive steps have already been made in that direction. The Supervisory Enhancement Programme emerging from the internal review of Northern Rock will be a flagship work priority for the FSA over the course of the next twelve months and beyond.
The Panel realises that there is little political tolerance for further bank failures and that inevitably, the FSA’s supervision of high impact firms will probably need a more intense and irreducible level of engagement and resource. Equally, we expect that the risk based acuity of supervision will be improved. Moreover we expect that the balance between conduct of business and prudential supervision will be shifted materially towards prudential supervision. Conduct of business issues are important, but it is true to say that they are often easier for the average supervisor to tackle. Partly I suspect because of this, they have consumed too much of the available regulatory resource over the past few years, at the expense of more difficult but often more crucial prudential issues.
The Panel is firmly of the view that the key to the FSA’s success will be improving the commercial understanding of its staff as well as reducing supervisory turnover. Staff must gain the experience and understanding necessary for them to achieve a pragmatic and consistent approach to regulation; and to make truly risk-based judgments about regulatory outcomes, without defaulting back to anything resembling the clichéd but sometimes all too real “box-ticking” of popular parlance.
One of my priorities for 2008 is to discuss actively those issues that concern and interest Panel members rather than simply react to the papers being submitted by the FSA. Consistent with this approach, the Panel has looked carefully and critically at the FSA’s Business Plan workload for 2008/09 with a view to highlighting a number of initiatives which could be legitimately dropped or given lower priority. Given the current environment and the size of the agenda it will be critical over the coming months for the FSA to be crystal clear about its priorities and to manage its activities closely to reflect them. This will make the FSA more effective, and may also reduce some of the existing regulatory burden on firms where it is not appropriately risk based.
The Panel is very supportive of the FSA’s move towards more principles-based regulation, while recognizing that principles based regulation is not necessarily an easy regime for the regulated or the regulator. The Panel believes that the FSA must continue to champion this philosophy with our European and other international colleagues. Most of all we feel strongly that the FSA must do more to help translate the philosophy of more principles-based regulation into real day to day supervisory practice.
It is welcome to hear members of FSA senior management extol the virtues of principles based-based regulation but as a regulated firm what matters is how your supervisor acts, behaves and makes judgments. The Panel has undertaken its own assessment of what more the FSA needs to do in this area and we continue to discuss those practical experiences with the FSA Executive, highlighting some current areas of good practice as well as areas where improvement is needed.
In all of our work, the Panel uses the yardstick of what should be expected of the “reasonably conscientious firm.” We have found this a useful concept in forming our view of the FSA’s supervisory policy and its risk based application, and we will continue to use it in calibrating the impact of both the level and focus of regulatory activity on regulated firms.
We will watch the development of any proposals on Regulatory Transparency with a sceptical eye. This scepticism is based on a view that the FSA already has sufficient means at its disposal to achieve its supervisory objectives, and that selective disclosure of data or aspects of a firm’s performance may turn out to be misleading, as well as encouraging a more adversarial relationship between regulator and regulated.
We continue to have concerns about the quality, robustness, and transparency of the FSA’s cost benefit analysis work undertaken to support its regulatory initiatives; and the internal FSA mechanics used to do so. We are therefore taking a close interest in the process to generate this analysis and the use of its output. Those discussions with the FSA are ongoing.
The Panel has consistently voiced its concerns that the FSA’s retail strategy – at both a strategic and initiative specific level – imposes a disproportionate and significant cumulative burden on all firms in retail markets. Individual initiatives might look sensible in their own right but when you add them all up there has simply been too much. We have not been convinced that the FSA’s overall retail strategy is suitably joined up, prioritised and where appropriate integrated into regular activities. The approach to tackling some real areas of risk has been insufficiently risk based.
The Panel has therefore welcomed the FSA Executive’s decision to review and re-articulate of its overall retail strategy. The Panel recently discussed the initial outputs of that work with the FSA Executive, and we look forward to working with them further as the work develops. Ultimately, the real test will be in the application of the retail strategy in day to day supervisory practice.
Within the retail strategy the Panel is particularly supportive of a repositioning of the Treating Customers Fairly initiative within a proportionate, risk based and principles-based supervisory framework. Practitioners are wholly supportive of the objectives and target outcomes of Treating Customers Fairly; indeed, the outcomes are a very useful framework for thinking about fairness. However, we have become increasingly concerned that the TCF programme is disproportionate and is taking up too much regulatory resource at the FSA.
While recognising the need for the Retail Distribution Review, the Panel is a little disappointed with the FSA’s progress. We are particularly concerned that any proposals might result in a disruptive transition period which results in less advice being available to consumers. We will continue to watch developments in this area very closely.
The Panel is encouraged that consumer responsibility appears to be back on the agenda. While there appears to be a consensus as to the nature of firm’s responsibilities and broad agreement about what might be sensible for consumers to do to protect their own best interests, this has not led hitherto to any view of consumers’ responsibilities.
The Panel is keen to progress this debate further, as this concept of consumer responsibility is essential to the functioning of transparent and effective retail markets. I particularly look forward to discussing this issue with Lord Lipsey and his Consumer Panel colleagues to see where we might be able to establish some helpful common ground.
Finally, some thanks: first, to Roy Leighton for all his hard work as Panel Chairman. When I took over the Panel was in very good shape thanks to his excellent stewardship.
I would also like to thank Sir Callum McCarthy for his active and constructive engagement with the Panel over the last five years, and to wish him the very best for the future when he leaves the FSA later in the year. The Panel very much looks forward to working with his successor.
I must thank my fellow Practitioner Panel members – we are indeed very fortunate to have such a strong group of senior people willing to give significant time ‘pro bono’ for the good of our industry. Our small secretariat team give us enthusiastic and dedicated support, for which we are very grateful.
Lastly, my thanks go to Hector – himself a former Panel member – and his staff for their open and constructive engagement with the Panel and generous willingness to attend our meetings. We wish him well in his task of leading the work of the FSA over the crucial period ahead.