FSA annual meeting

United Kingdom

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.


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 [email protected] or on +44(0)20 7367 2702.