FSA Publishes Annual Report For 2007/08

by Jason Gorringe Tax, News.com, London

02 July 2008

The Financial Services Authority (FSA) published on Monday its Annual Report for the year 2007/08.

The report details how the FSA has delivered outcomes for both firms and consumers throughout the year under the three headings which cover all of the FSA's work.

These are:

• to promote efficient, orderly and fair financial markets, both wholesale and retail;
• to help the retail consumer for financial services achieve a fair deal; and
• to improve its business capability and effectiveness, so as to make the FSA easier to do business with.

In his introductory statement, Callum McCarthy, chairman of the FSA, commented:

"The last year has presented great difficulties for the financial services industry, its customers and for the FSA. A long overdue and much-needed adjustment of the pricing of risk materialised abruptly, with severe and continuing consequences.

"We should all draw lessons from what has been a sobering experience. Banks need to improve their risk management, stress testing and disclosure practices. Investors need to recognise that buying assets whose risk they do not understand on the basis of a credit rating is profoundly unwise. Rating agencies themselves – which perform an essential task – need to change their practices to bring back confidence in ratings. And those responsible for financial regulation and central banks – around the world – need to examine their own policies and practices – something to which the FSA has demonstrated its commitment.”

McCarthy goes on to say that the FSA has been determined to not only contain the damage caused by the past year’s difficulties but also to make the changes needed to improve regulatory policies and the Authority's own performance.

Drawing on these points in his report, Hector Sants, chief executive of the FSA, added:

"I am determined that the FSA will not be defined by the Northern Rock incident, but rather by our response to it. We have demonstrated our willingness to examine ourselves critically and to learn lessons from our mistakes – a quality we believe is central to giving the financial services industry and consumers confidence in the FSA. Like any thoughtful organisation, we cannot and do not claim infallibility.

"It is, however, important to recognise that, from August onwards, I believe the FSA has performed extremely well with regard to its supervisory responsibilities and the manner in which we have intensified our engagement with individual banks. We have ensured that institutions have immediately and effectively reacted to the changed market conditions. In my view, this undoubtedly demonstrates the FSA’s ability to swiftly adapt to changing market conditions. Our success of the last nine months provides an excellent model for the future.”

Looking ahead, McCarthy identifies the introduction of legislation to reform aspects of bank regulation which will have major and longstanding influence over the UK’s financial services sector as one of the most important changes to be made in the last decade.

“I think it essential that, whatever the decisions on particular aspects of these proposals, the four principles which were so clearly set out in 1997 when the present UK framework was established remain the basis of policy. Clear accountability, transparency, no duplication and regular information exchange remain principles to which we should adhere. We must not confuse changes to practices which can and should be improved with changes to principles which are sound and valuable, and where change would be retrograde,” he said.

Finally, as Callum McCarthy is due to stand down as chairman in September, he stated:

"This is the last time I will report as FSA chairman. I do not want the events of the last year to obscure what the FSA has done and continues to do with much success. It is the nature of regulation that failures are very public, and successes often private. But my work over the last nearly five years has convinced me of the continuing value not only of the principles which I have discussed above, but also of the great benefit of a single and coherent approach to financial services. Separation of supervision of banks, securities firms and insurance companies in any form would be a retrograde step which would cost the UK dearly. And – perhaps more important – my conversations with practitioners, here and in the other capital market centres of the world, make clear that they share this view.

"A feature of the UK regime is that the FSA is able, in a way which is rare and may be unprecedented among financial regulators, to show that it treats firms and individuals we authorise and regulate quite without regard to the nationality of those who own or manage the firms. I have no doubt of the benefits this has brought. It is a policy I am confident will be continued."

In a statistical appendices to the report the FSA revealed that its enforcement division closed 262 investigations during the year resulting in 286 outcomes. Of these, 153 concluded with the use of powers (such as prohibition, financial penalties and variations of permissions) and 133 without the use of powers. 13 of these 133 outcomes were private warnings.

The FSA also reported a marked drop in the amount of financial penalties it levied, from GBP14.66mn in the previous year to GBP4.45mn during the year in question.

According to the FSA, this fall reflects the fact that this year it did not bring to final resolution any market conduct cases. However, the Authority added that financial penalty levels do not by themselves give an accurate picture of the range of enforcement actions it takes, pointing out that 30 individuals were prohibited from carrying out regulated activities last year, compared to ten the year before.

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