Memorandum submitted by the Financial
Services Authority
1. This note is intended to provide background
to our appearance before the Treasury Committee on 21 October.
It sets out the approach we intend to adopt in the roles we took
up on 22 September as Chairman and Chief Executive respectively
of the Financial Services Authority (FSA).
SCOPE OF
FSA RESPONSIBILITIES
2. As the Committee would expect, our starting
point is the powers and duties given to the FSA by the Financial
Services and Markets Act 2000 which define our statutory responsibilities.
Central to this are the four objectives set by the legislation
for the FSA (to maintain market confidence; to provide the appropriate
degree of consumer protection; to promote public understanding
of the financial system; and to reduce financial crime), and our
obligation to meet those objectives in a way consistent with the
principles of good regulation (these include proportionality,
economy in the use of our resources, encouragement of innovation
in financial services, and taking into account the international
competitiveness of the UK). As required by the legislation, we
have put in place arrangements to ensure the transparency of our
decision-making. Our continuing concern is to discharge those
duties effectively. We are acutely conscious that the reputation
of the FSA will be determined by the way in which we demonstrate
the effectiveness with which we do so.
3. The FSA's duties extend across a wide,
complex and important sector of the economy. The UK financial
sector accounts for just over 5% of GDP, employs around 1 million
people and is a major contributor to the UK's balance of payments,
with net exports worth some £17 billion. The UK's financial
markets are highly developed and international in nature. UK-based
insurers are among the most important repositories of UK household
financial wealth. The FSA's responsibilities have therefore to
be discharged across a wide range of firms, markets, transactions
and products. Our responsibilities will be significantly extended
in November 2004 and January 2005 respectively, when the sale
of mortgages and of general insurance will become subject to FSA
regulation.
RISK-BASED
APPROACH
4. A central concern for the FSA has therefore
been, and will remain, establishing and implementing a consistent
approach across this very wide set of activities towards the way
in which we meet the four objectives set out for the FSA in statute.
This approach has been summarised in the operational aim of the
FSA "to maintain efficient, orderly and clean financial markets
and help retail customers achieve a fair deal". It has been
applied through the principle that similar risks across regulated
entities should broadly be regulated in the same way, regardless
of the institution; and has been applied in practice via a risk-based
operational approach which identifies, measures and manages the
risks to the FSA's four statutory objectives. We believe this
approach should remain the basis of the FSA's work, and wish to
continue to develop it.
CHAIRMAN AND
CHIEF EXECUTIVE
RESPONSIBILITIES
5. The Chancellor's decision to separate
the responsibilities of Chairman and of Chief Executive gives
us an opportunity to develop the present approach. We share a
commitment to making the FSA work effectively, on the basis of
clear responsibilities for each of us. The principal responsibilities
of the Chairman are for the effective performance of the FSA Board
and the establishment of clear and agreed priorities. The principal
responsibilities of the Chief Executive are to implement the strategy
agreed with the Board, in whose formulation he will have played
a major part. He has the executive responsibility for the FSA's
business under authority delegated to him by the Board. In practice,
we expect (and have already developed) frequent and informal discussion
of major policy issues. Both Chairman and Chief Executive will
have responsibilities to communicate FSA policies to the many
constituencies affected by the FSA's work, and to represent the
FSA on a number of important forums, nationally and internationally.
6. We would hope, and plan to achieve, some
significant developments in the effectiveness of the FSA as a
result of clearer responsibility for the setting of priorities
and for the implementation of priorities. These will be set out
in the FSA's Plan for 2004 which will be published next January.
The Board has not yet concluded its discussion on these, but it
is already possible to indicate a number of areas where we believe
we should be able to build on the present position usefully:
(i) We remain concerned about the number
of instances where providers of financial products have marketed
these without due care and attention to the suitability of those
products to the consumers to whom they were sold. We will therefore
want to take all appropriate steps to ensure that the management
of these firms discharge their responsibilities properly; to identify
as rapidly as possible any instances of failure so to do; to stop
these quickly; and to take enforcement action against those who
have behaved badly.
(ii) As well as responsible providers of
financial products, an effective market for financial services
requires consumers who are capable and confident to take informed
decisions. As yet, we clearly do not enjoy this position in the
UK. We therefore need to identify what further and special contribution
the FSA can make to establish how best to improve financial capability.
This is a task which involves Government, the financial services
industry, employers and others. But we believe that the FSA, in
line with its statutory objective of promoting understanding of
the financial system, is well placed to lead work to review what
should be done to pull together and improve the various pieces
of work now being done.
(iii) We believe that there remain important
areas where the FSA's work on maintaining confidence in the financial
system will require strengthening. The FSA has already significantly
increased the resources devoted to supervision of the insurance
sector, and we expect implementation of the new regime for insurance,
as recommended in the Tiner report, to be a continuing claim on
resources. Similarly, the task of implementing the arrangements
for bank capital adequacy being developed under the Basel II proposals
will require further work.
(iv) We believe there is a need to give greater
clarity to the FSA's priorities by establishing these more clearly
and more selectively. As part of this we plan to reduce significantly
the number of consultation documents produced by the FSA; and
to establish as much clarity as possible in the planning and reporting
cycle, as a means of enabling an informed judgement to be made
on our priorities and our performance against them.
(v) We will wish to review the FSA handbooks,
which necessarily reflect the bringing together of some ten regulatory
regimes in a relatively short time. In particular, we believe
there is the prospect of both reducing the size of rule books
and of improving access to them. We regard this as an important
practical contribution to putting the management of firms, and
those who provide financial advice, in a position where they clearly
understand what is required of them.
7. We look forward to elaborating on these
issues in oral evidence on 21 October.
13 October 2003
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