Speech - Nick Prettejohn - FSA Annual Meeting - 2008
Mr Chairman, ladies and gentlemen, the Practitioner Panel is, as I think you said Callum, the constructive critic of the FSA and as David Lipsey was talking about greyhounds I was pondering what a suitable canine analogue would be for our role – perhaps Jack Russell rather than greyhound: well meaning, but prone to bouts of irritability.
We support the good work performed by the FSA in a number of areas of the regulatory agenda. The FSA has a supremely difficult and often thankless task and we try at all times to recognise the challenge that the FSA faces, but we cannot and do not shirk from making criticisms or suggestions when they are merited.
Much has been said 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 and such candour is to be applauded. As Hector has emphasised, the FSA must learn the right lessons and we believe that early positive steps have been made in that direction. The Supervisory Enhancement Programme emerging from the internal review [of Northern Rock] will be a major priority for the FSA and we will watch progress closely.
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 the 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 make truly risk‑based judgements about regulatory outcomes without defaulting 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 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 that 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 supports the FSA’s move towards more principles‑based regulation while recognising 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 the FSA senior management extol the virtues of principles‑based regulation, but as a regulated firm what matters is how your supervisor acts, behaves and makes judgements. 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 yard stick of what should be expected of a reasonably conscientious firm and 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.
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 retail firms. Individual initiatives often 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 rearticulate its overall retail strategy. Ultimately, the test will be in the application of that retail strategy in day‑to‑day supervisory practice.
Within that retail strategy the panel particularly supports a repositioning of the Treating Customers Fairly (TCF) initiative within a risk and principles-based supervisory framework. Practitioners are wholly supportive of the objectives and the target outcomes of Treating Customers Fairly. However, we have been increasingly concerned that the TCF programme has become disproportionate and insufficiently risk-based 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, I think, 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 as this concept 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 Callum 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 looks very much 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 up time pro bono for the good of our industry, and 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 active, open and constructive engagement with the panel and extremely generous willingness to attend our meetings. We wish him well in his task of leading the important work of the FSA over the crucial period ahead. Thank you.