Good Morning,

I am delighted to have the opportunity to address you again in my capacity as Chairman of the Financial Services Practitioner Panel after another year. The last twelve months can only be judged a success for the FSA and I am delighted to place on the public record the Panel and my own admiration for the way in which Howard and his team have steered a fine path through the recent difficult years.

Of course, not everything is perfect but if we judge by the need for there to be an atmosphere of broad confidence between regulator and regulated then I believe it is fair to say that this condition for effective regulation is met. It is only a few years since perhaps most practitioners were fearful of the potential powers ofthe Authority; today, with its emphasis on a proportionate and risk-based approach broad confidencehas been established.

As a consequence the UK remains a desirable place to do business, but the Panel has frequently expressed the view that there needs to be more analysis of the effects of new regulations on our international competitiveness and that care needs to be exercised to ensure that we neither damage our current relative advantage nor, in absolute terms, inhibit the willingness of our financial services industry to show the flexibility, innovation and risk-taking that has been its hallmark for most of the last century. Relative comparisons with continental Europe may give considerable cause for comfort amongst policy makers but that is only appropriately judged if Europe itself is creating an environment that encourages flexibility, innovation and risktaking. It is far from clear that the processes of developing European regulation – with all their necessary in-built compromises – will continue to foster such enterprise. And for wholesale markets the competition is the United States which even the positive CSFI study placed ahead of the UK overall.

It is not the Panel’s practice to comment on Consultation Papers while the consultation is in progress and therefore I will resist the temptation to comment on those controversial CPs in the 170s – save to say that international competitiveness (more than on most occasions) will need to be uppermost in the FSA’s mind in considering subsequent actions.

The last year saw the publication of the Panel’s second major survey of authorised firms. By repeating many of the questions from the first survey we begin to see trends emerging. On two of the resulting issues the FSA has made a strongly positive response: first, the need to find the effective mechanism for providing guidance to regulated firms without either becoming a free consultancy service or, in the effort, making new rules de facto and, second, the anxieties of Chief Executives that the burden of regulatory costs in total has grown to a level that a substantial number view as excessive.

On the first, internal action is being taken and with increasing familiarity with the new regime also assisting, I hope that the third survey scheduled for 2004 will reveal demonstrable progress in this area.

The second, no doubt, will remain a concern for many. It is not a consolation that costs may be higher in other centres. The issue will lie around the willingness of practitioners to take risks to create wealth and here only absolute costs matter. That the Authority takes this issue seriously is helpful but my successors will, I am sure, continue to keep a close eye on this matter.

The survey also revealed unequivocal support for good and firm regulation, and for the single regulator. It is in everyone’s interest that the marketplace in which they participate, whether as producers or consumers, is fair. Saving, in particular, is a complex activity requiring an ability to understand risk from all involved. I have no doubt that the FSA fully understand this and the Panel welcomes the trend in FSA thinking which will focus regulation more clearly around customers’ needs than around the sometimes arcane structures of different products I was asked, in a different environment the other day, about who company boards feel most accountable to – a question born out of the current frenzy around corporate governance, of which more in a moment – and I answered “customers”. For without customers whose needs are being satisfactorily met there will be no sustainable returns to shareholders or jobs for employees.

It is curious, then, that the development of the Sandler world starts now with products and price whilst the FSA endeavours to develop a regulated delivery system which will in practice determine who the products can be sold to, while asking the practitioners to take responsibility for defining the need and the relevant customers. This process seems to me to be back-to-front and puts the FSA into an unenviable and difficult middle ground.

I am glad I’m not standing in Colin Brown’s shoes for I would be worried about misbuying – probably deriving from either unsuitability or a failure to assess risk properly. I am concerned that from a practitioners’ standpoint, however brilliantly the FSA devise the distribution regime, practitioners will be left still with the risk that, even having followed the FSA’s rules, they could fall foul of the Financial Ombudsman Service. The consequence seems to me to be that vendors will still need to follow pre-Sandler suitability fact-finding processes (with the associated costs)
without the prospect of economic benefit. Surely the Government does not want another failure in the savings area. I hope it will hear both the Consumer and Practitioner Panels.

In our Annual Report the Panel expressed concerns over the FOS and the possibility that it is in danger of defining risk or creating rules without the same rigor and public scrutiny to which the FSA is subject. I must report an improving dialogue with the FOS and a positive willingness to discuss these issues. We see no conspiracy or malevolent intent but the structure within which the FOS is established will probably ensure continuing tension in this area, no matter how well-intentioned everyone may be.

This is an issue that the Panel urges the Treasury to examine in the forthcoming socalled N2+2 Review. The Panel recognises that finding parliamentary time for primary legislation as a result of this Review may prove impossible but it would be disappointing (to say the least) if anticipation of this difficulty causes the Review, by omission, to prejudge such issues.

The Panel, as we made clear in our Annual Report, hopes that the Review will examine the costs of complexity of the ever-increasing amount of regulation. Whilst the cost of each initiative taken by the FSA within FiSMA (and many of those resulting from European legislation) can be assessed individually, the totality of the resulting complexity is generally inadequately analysed. The Panel also hopes that the Review will consider the effectiveness of the cost benefit analyses accompanying new proposals. We are conscious that CBA processes are not common in other countries but we believe that Britain can be a leader in the analysis and justification of regulation such that its regulation becomes consequently
cost effective and therefore supportive of our financial services sector. We have been engaged in an increasingly detailed discussion with the FSA in this area during the year.

We have also considered the first (non-rigorous) evidence of the ARROW project and urge the FSA to ensure that there is a well developed feed-back loop established in order that firms obtain value-added through the ARROW visits. Rating the firms involved is not enough; there needs to be an understanding of the actions that can be taken by management to improve their rating. For the Treasury Review we have expressed an anxiety that when the FSA judges the level of co-operation by a firm in an investigation it again acts as judge and jury. It is welcome that penalties reflect the degree of co-operation but power, in this sense, continues to centralise.

The Panel has also expressed its anxiety that extending the remit of the FSA to the regulation of general insurance and mortgages the FSA, correctly, is forced to undertake an increasing amount of what may be termed industrial processes. Such processes may prove to threaten the FSA’s welcome risk-based approach and before an even larger regulator is built (on processes themselves at an early stage of evolution) great care and study should be undertaken lest the success of the FSA is unwittingly undermined.

We have witnessed extraordinary markets in the past eighteen months, and the way in which – in the end – the FSA navigated through these turbulent markets is to be commended. The approach of realism developed by John Tiner – and I should like to add my sincere congratulations to him on his appointment – is both wise and balanced. In some areas of the evolving regulation of the insurance industry the Panel made robust representations and has been pleased that these representations have been treated seriously in this evolution.

The clear statement by the FSA of its non-zero failure approach continues to be welcomed and understood by practitioners. It remains essential that politicians and others when judging the actions of the Authority really understand what this means.

They must also consider the Authority’s actions in the light of analysis of risks at the time and without the benefit of hindsight. There is only so much any regulator can do and those who shout about the failure of regulation when anything goes wrong serve neither the customer nor the practitioner well. Of course lessons may be learned, a subject likely to be of increasing interest to the Panel, but over-strident analysis will only drive those who work for the FSA to seek ever increasingly (and often unwittingly) to protect themselves. Such an environment will lead to increasingly intensive conduct of business rules and, as I said last year, to a sort of nationalised management consultancy.

The Panel also remains firmly of the view that the regulator ought to have a continuous review process, which asks with respect to all its rules if the market can do it better. This remains, I think, a significant piece of unfinished business.

As I approach the end of my term as Chairman of the Panel I would like to finish with two personals comments: First, everyone involved needs to be on guard against the risk that regulation promotes a false sense of security. This risk is clearly, as I have said, run in relation to the Sandler world and I am sure that the industry is keen to work with the FSA to improve consumer education. This has to be an increasing priority for all concerned.

There is much than can be achieved by a joint effort. And, second, I would like to leave you with a proposition that “best practice is the
enemy of judgement”. Obeying rules is no substitute for good judgement, following imposed codes is no substitute for good judgement and anodyne statements found in many areas (and often with respect to corporate governance) that we intend to follow best practice is no substitute for judgement. For those who assess the quality of those judgements it is too easy to codify behaviour, to create checklists and to tick boxes.
Best practice is what is right for one firm, in one set of circumstances, at one moment. It may be different tomorrow as circumstances change. There is a dangerous downward path ahead in the “comply or explain” world. As one principal actor said in this field a few weeks ago “one should be mildly embarrassed to have to explain”. How wrong he was! The embarrassment should be in having to rely on rules, codes and lists to determine behaviour instead of the robust and transparent exercise of judgement.

The same applies in the regulatory field and I hope when the FSA comes to its involvement in the post-Higgs environment – whatever that is to be – that it will resist strongly the otherwise inevitable journey towards replacing judgement with rules.

Finally, I should like to thank publicly the FSA staff and Board for their courtesy, willingness to engage and forbearance (even under criticism), which has enabled the Panel to ensure that the Practitioners’ voice is heard clearly in their deliberations. I would also like to thank both my Panel colleagues for the considerable time they spend on our affairs and our research and administrative support.

We wish Howard success at the LSE and look forward to a continuing dialogue with Callum McCarthy.