Good morning.

As Chairman of the Financial Services Practitioner Panel I feel a little like a poacher at a gamekeepers’ reunion. As I face you I cannot remember who said that “the brain is a wonderful organ: it starts working as soon as you get up and stops as soon as you face an audience”.

Nevertheless this morning I would like to explain the role and workings of the Panel and indicate some of the issues we consider important in the development of the regulatory framework in the UK. But first I would like to make a personal remark. I have, in a sense, come late to regulation although I have worked most of my life in a regulated environment.

Indeed I find most practitioners, whilst mindful of the rules that result, do not spend much time understanding the philosophical underpinnings of the development of regulation nor of the wider consequence that can flow from apparently minor changes to rules.

There is a curious asymmetry between the way many practitioners discuss regulation (and generally their desire for less of it) and the extent to which they press for ever more detailed guidance and rules.

It is hardly surprising given the increasing intrusion of regulation into many activities in the economic life of the country that this should be so. In stormy seas sailors will always seek safe harbours. And the seas have become a lot stormier for most of us.

I could not help reflecting on regulation as I watched arch-demolisher Fred Dibnah describe the evolution of the canals that so reduced product costs through cheaper and quicker transport on television last week. I wonder, had there been a Navigable Waterways Regulatory Authority in operation at the time would progress have been severely hindered on the apparently incontestable grounds of minimising the myriad of risks that the Duke of Bridgewater and others took in building the first canals, or would it have helped?

Practitioners in the financial services sector, even when asking for more rules, I believe, start with broad sympathy for this point. We need to ensure that competitiveness and innovation are not stifled by regulation. Happily I know that the FSA shares this view and in its risk based approach to regulation within the context of the Financial Services and Markets Act is trying hard to get the balance right.

It has also, through its extensive consultation processes, attempted to ensure that practitioners have had a full opportunity to make their views known. The strategic aims just outlined by Dan Waters are very much to be welcomed in this context So where does the Practitioner Panel fit in?
The Panel, which became statutorily constituted with the arrival of N2, was created in November 1998. Its first Chairman, David Challen, summed up the background to its early life thus: “How do you obtain assent, from those who are to be regulated, to an organisation granted great and new powers over them when there is not yet any practical experience of how it will exercise those powers? The organisation may say‘trust us’. The regulated firms (or the ‘victims’ as they may be inclined to see themselves at this stage) may say ‘why should we?’. The government may say…
‘like it or lump it’.”

The Panel reiterated constantly a core message during this period to an attentive audience. We stressed that the FSA needed to show its fiercest and most alarmist critics that their fears were misplaced. The FSA, for its part, understood that it would have to clarify in statements of policy what limits it would place on the use of its powers and that it would have to illustrate, as David put it eloquently, to practical people how in practice regulation would work.

The publication of “A New Regulator for the New Millennium” and the subsequent publication of the Progress Reports on “Building the New Regulator” have addressed in a fundamental way the major issues of proportionality and the need not to be unnecessarily burdensome.
One statement in which practitioners invest considerable confidence in understanding the post-N2 environment is that contained in the Chairman’s statement in the Annual Report speaking of A New Regulator for the New Millennium. There Sir Howard says“once again we underlined that the FSA does not aim for a zero failure regime, which is neither achievable in practice nor desirable in principle”.

I recently gave evidence to the Treasury Committee of the House of Commons and was surprised to be asked if I was comfortable with this statement. I am sure that I speak for practitioners throughout the industry in speaking clearly and unequivocally in support of this statement and in saying that it will be essential that by their actions lawmakers show that they understand this.

If innovation and competitiveness are to flourish in the financial services sector, which is a major employer and foreign exchange earner, then politicians must be clear that reacting to each vicissitude in the markets with a blame-oriented response seeking scapegoats and demanding new rules is unlikely to meet wider objectives of achieving economic prosperity. It has been important in building the confidence of the regulated that the FSA has been so clear in its understanding of this issue.

Additionally it has been a central fear of practitioners that the disciplinary regime to follow N2 would become almost indiscriminately harsh and that the FSA needed to show quickly, by the number of penalties imposed, that it means business. The Chairman’s Senior Executive Briefing papers have also been particularly helpful in building the confidence that both the regulator and the industry need in moving forward. In particular on this topic Sir Howard’s remarks in his Briefing Number 6 at the start of this year have given considerable comfort. He said: “We have tried to emphasise that we plan to use these new powers responsibly. We are not looking for exemplary scalps to make a point. The FSA has no intention of trying to trip people up, or of using a big stick in relation to technical breaches.” Helpfully he added,“Obviously we will not be fully convincing on this point until we have a respectable track record”.

And this is a theme that now pervades all that the FSA does. Practitioners are watching to understand the full implications of the trust that they have so far extended to the FSA as we move from an environment dominated by rule making to one dominated by supervision.

The Practitioner Panel has been, I believe, a helpful early warning radar for the FSA as it built its consultation processes highlighting areas of potential difficulty and helping to shape the framework of rules that has resulted. We have the opportunity to communicate by right to the FSA – and under some circumstances the FSA has the obligation to make public its response to us. But generally I endorse the words of my predecessor that with the current FSA management and Board we should seek to be effective whenever possible by endeavouring to “influence and steer informally and discreetly”.

Our industry must also understand that the FSA will, from time to time, need to compromise between what are seen as the distinct interests of producers and consumers. All providers of financial services understand that having contented customers is good business and in this sense the views of practitioners and consumers should be aligned. From time to time, however, it may not be so and practitioners need to be mindful of the FSA’s full responsibilities.

The Practitioner Panel, by necessity, works in a quite different way to the Consumer Panel whose Chairman is due to address you next. Practitioners by and large have a wide array of trade associations to represent their interests in detail and the FSA has shown itself appropriately willing to consult and discuss with the trade associations in depth. Consumers do not have such representative bodies and thus, in some respect,
the Consumer Panel is bound to fill some of the role of a trade association for consumers. I know how difficult it is sometimes to represent fully practitioners’ views. The recent proposals and the resulting consultation on the amendments to the polarisation regime make this all too clear. As the consultation documents themselves say: after the proposed changes there will be winners and losers. The Panel represents them all and it will surprise no-one to know that they do not have coincident views. What we can do is to influence the FSA as far as we are able to ensure that the issues have been well researched and that the consultation is exhaustive and inclusive.

Indeed this characterises a significant proportion of what we do; for, if there is an informed and thoughtful dialogue in train between the FSA and the relevant trade association, then there is little that the Panel can add. For our part too we do not seek to respond to the consultation papers once they are in the public domain. We have the opportunity before and after the consultation phase and this is sufficient.

This is quite different from the operation of the Consumer Panel and, I believe, that it right that it should be so. The result is the Practitioner Panel makes less public noise but this comparative quietness should not be mistaken as prima facie evidence of inaction or ineffectiveness.

However if we felt our arguments were falling on deaf ears we would not hesitate to take our arguments into the public arena. Perhaps this is a good moment to make one comment with respect to retail financial services’ providers. There is a widespread view amongst this sector that the FSA needs to be very careful to ensure that a perception is not encouraged to grow through its own rhetoric that this sector is made up only of product providers seeking to take advantage of ill-informed customers. No one will complain about fair criticism but it is important that the FSA is seen to balance all interests to achieve market confidence.

Practitioners are just as keen to eradicate mis-selling as to see mis-buying discouraged. The plethora of different reviews in this area – by no means all co-ordinated – also does not help.

To return to the Panel. We meet monthly and give our views on a range of policy issues brought to us by senior FSA staff. We regularly influence policy proposals before they see the first light of day. In addition we bring issues on to the FSA’s agenda which have been raised with us by practitioners.

We also receive a detailed presentation of the FSA’s budget and plan - before they are presented to the Board - for our comments which are then made available to the Board along with the minutes of all our meetings. I also have regular access to Sir Howard.

This is an appropriate moment to record the openness with which the senior staff of the FSA approach discussions with us. There is an ever-present risk of such discussions being conducted as a formalistic ritual but this is not the case. We have found the staff to be open and willing to engage in real discussion of relevant issues.

It is good that the seniority of our membership also assists the process. We are further helped in having the co-Chairmen of the Small Business Practitioner Panel as members of our Panel. It has been particularly helpful to have had amongst them a real life IFA who has between able to comment on the burden that many small practitioners feel from having to understand the new rules and all their implications.

This is an area where the test of proportionality is sometimes at its hardest. In our Annual report we commented on a number of issues where we felt it right to give the Board clarity on our concerns. I would like to use the few remaining minutes to refer to one or two of these and make a comment about Europe.

First a very specific point. We have expressed concern that the Financial Ombudsman should avoid as far as possible the translation of individual decisions into de facto rules without the full and appropriate level of consultation that would normally accompany rule making and which has characterised the building of confidence in the FSA. Practitioners do not want to find that regulation cuts even more deeply into product and channel strategies particularly without open dialogue first. It will require great sensitivity to achieve this but without this there is the even
more unpalatable option of far more rules.

We are a little anxious about the interpretation of materiality in action. We have seen opportunities for very detailed examination of process which would impose a heavy cost burden. Having said that I have no doubt that the Board and senior management have got the balance right. It is however still a major challenge to ensure that this balance is understood in the field.

We have also been discussing with the FSA the importance of effective performance feedback – not at the industry level about which I will say a word in a moment – but at the level of the individual regulator. This is a difficult area - for who wants to complain about someone with considerable powers over you? And yet it is important that an objective mechanism is found to achieve this.

We are encouraged that the FSA have engaged in a constructive dialogue on this point although a perfect answer has not yet been found.
We are also concerned about issues of international competitiveness. We are keen to see each initiative within the FSA developed with particular and explicit reference to this point.

Then there is Europe – a whole subject in itself.

When we are fretting about possible over-regulation we need to be careful to balance our domestic fears with the possibility of something more intrusive and worse for the development of our financial services. Here we need to step up our dialogue with the FSA as practitioners and to this end also we will seek to interact more formally with the various trade associations affected.

We have already seen the proposed translation with haste into the UK of regulations which we are not at all sure will be embraced with either the same speed or effectiveness elsewhere.

Finally, we will launch early this summer our second major survey of practitioner opinion which will give us objective information about practitioners views of the development of the new regulatory environment and the FSA. We view this as an important piece of our tool-kit – to use FSA jargon – to ensure that we can continue to speak authoritatively on behalf of practitioners to the FSA.

Thank you for listening.