John Tiner Speaks On Regulatory Developments

by Robin Pilgrim, LawAndTax-News.com, London

24 July 2007

Speaking at the body's annual public meeting last Thursday, out-going Financial Services Authority (FSA) CEO, John Tiner outlined the regulatory developments put in place by the Authoity over the past year.

He started by observing that:

"Overall, I believe we remained focussed on the issues that matter, made good progress in our major priorities and laid the foundations for moving successfully towards principles based regulation. And the year was characterised by relatively calm market conditions across asset classes, but with the occasional correction in the equity markets as we saw in February and the more recent tensions in the debt markets."

He continued:

"During the last four years we have pursued relentlessly a consistent set of strategic aims – to help retail consumers secure a fair deal, to promote clean, orderly and fair markets and to improve our business performance. We have differentiated deliberately our approach to wholesale and retail markets, reflecting the needs and characteristics of those markets, and have made progress in a number of important areas. Internally, we have improved our technology platform and management information and invested in the people who work for the FSA. These and other internal improvements are helping us become more efficient and more cost-effective."

Commenting on the FSA's efforts to move towards principles-based regulation, Mr Tiner explained that:

"We have spent much of the last year articulating what a principles-based approach means for us, for firms, for consumers and for our other stakeholders. We, of course, recognise that there are significant challenges. The dialogue we have stimulated has helped not only to identify these challenges, but also possible pragmatic solutions. I am most grateful to our stakeholders for engaging so constructively in this important development for the competitiveness of the UK financial services industry and the quality of our domestic markets."

"To deliver more principles based regulation successfully, the FSA needs to invest in its people and information systems. I am pleased that the Board has backed the significant change programme currently underway, including allocating up to GBP50million to finance the necessary changes."

"Importantly, we have been taking the first steps to making principles-based regulation a reality. We have slimmed down the Handbook by around 1,000 pages, changed our anti-money laundering approach from rules to principles and introduced principles for life insurers to calculate capital on a risk basis, releasing some GBP4bn of regulatory capital for policyholders, shareholders or investment purposes."

With regard to the treatment of consumers in the retail finance sector, the FSA official stated that:

"We continue to have concerns about the fair treatment of customers in some areas of the retail market and we have put considerable effort and resources into identifying problem areas and working with the industry to address them. We have taken enforcement action in the most serious problem cases, for example over mis-selling of Payment Protection Insurance, both to punish the firms concerned and to dis-incentivise poor practice by other firms."

"We have worked with the industry to secure direct benefits for customers where either they have been, or, are at risk of being, unfairly charged, such as the statement of good practice on mortgage exit administration fees. By the end of 2006, the company set-up to distribute the proceeds of the settlement with firms engaged in the spilt capital investment market, Fund Distribution Limited, had fully discharged the fund in excess of GBP140mn to 24,000 investors who had lost money from split capital trusts. This is another example of the FSA’s work to directly protect the interests of retail customers."

"One of the most important areas of progress in the last year has been in Financial Capability. We have led a number of initiatives offering practical help to consumers – at different stages in their life – in understanding and dealing with their own financial needs."

Commenting on the situation with regard to the UK's wholesale markets, Mr Tiner revealed that:

"Relatively calm market conditions have allowed us to address a number of issues in the wholesale markets, such as improving back office standards in derivatives markets and contract certainty in the wholesale insurance market. These significant operational problems have been resolved by the industry, but with the FSA’s prompting, support and oversight. These demonstrate the wisdom of first looking for market solutions to regulatory problems."

"No new rules have been written, there are no unintended adverse consequences and the markets themselves are more efficient and competitive as a result. We have also increased our oversight and understanding of the risks from the hedge fund and private equity sectors. However, our approach remains proportionate and relevant to the risks that these sectors pose to investor protection and market stability."

Addressing the international aspect of the financial services regulator's work, he explained that:

"The international agenda remains very important for the FSA and it continues to receive a lot of time and effort – particularly from our senior management team, led by Callum and me. This is true both at the European level, where the recently published Solvency II directive has been considerably influenced by the FSA's approach – indeed I would go so far as to say that our ICAS regime led the way for the risk-based capital approach envisaged in Solvency II. And it was the FSA and Treasury together which provided the leadership for the ground breaking proposals to improve the efficiency and effectiveness of large group supervision."

"It is also true on the broader international stage, where we have worked with the SEC and the Federal Reserve on our supervision of hedge funds and the major investment banks. This type of multilateral arrangement will be essential for supervision of large, international groups and for regulators to have an understanding of systemic issues in the increasingly complex world of capital markets. The FSA has been at the forefront of developing colleges of regulators and this is a model we hope will be copied for all major international groups."

Looking forward, he predicted that:

"The recent tightening and volatility in the credit markets is an example of the kind of issue that might provide a challenge for the FSA and the market. We have been keeping a close eye on developments and have commented in the past that risk has been under-priced. For us the key is to understand the exposures and the transmission system from investors into the banking sector which underpins financial stability and to be confident that the banks are stress testing these exposures to test the adequacy of the amount of capital in each firm and the system as a whole. At present we believe the system overall is robust, but this is clearly an area the FSA will need to continue to watch very closely."

"The challenge for the FSA is to be prepared, and to spot emerging issues. I believe the changes we have made over recent years have positioned the FSA well to be able to anticipate and respond."

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