Select Committee on Treasury Written Evidence

Memorandum submitted by the Securities Investment Institute


  To date the UK financial services industry has been a global success story, contributing £17.8 billion in export earnings and over 5.3% of GDP. The industry regulator—the FSA—plans to reduce the regulatory burden on the industry by removing a number of rules which govern the industry.


  Among the detailed proposals on which the FSA is now consulting the industry are:

    —  Abolish its central Register of individuals for those dealing with wholesale customers.

    —  Abolish mandatory examinations for the same individuals.

  The SII (a charity), its members and nearly all of the firms SII has consulted regard these proposals, at the very least, as going well beyond removing unwelcome bureaucracy. At the most they are simply the wrong targets, as these proposals will not actually help firms. There are many other proposals fully acceptable to SII and its members and firms in FSA's deregulation proposals.

  The SII is the main provider of examinations in this sector and so has a commercial interest in the outcome. However SII is also the professional body setting standards for, and representing, 16,000 individual members working in the sector and has a stated mission to uphold professionalism, integrity and excellence.

  If these changes are made, then the FSA leaves itself open to the charge of giving up direct responsibility for policing the core values of fitness, competence and honesty, which the industry needs to maintain its reputation and global competitive position.

  For the public, the relevance of these proposals is that it may reduce consumer protection, at the intersection between retail and wholesale, such as occupational pension funds, and also the reputation and trust of the industry.


  The SII shares the concern of its members and trade bodies that these two proposals are retrograde steps. In addition, it believes that the FSA is adopting a parochial approach to a global industry and its timing of this proposal is out of tune, both with European developments in MiFID—the Market in Financial Instruments Directive—and the Capital Requirements Directive. Additionally it runs counter to the EU-US Coalition on Financial Regulation, which has identified examinations, licensing and registration of individuals as amongst its priority areas for action in achieving a common approach.

  We have gathered a total of 65 responses from our own research and consultation with regulated firms and SII Members—56 were against these proposals, two were in favour and seven were neutral. In addition, we have consulted with the London Stock Exchange and the Corporation of London, neither of whom support these proposals.


1.   Proposed Abandonment of FSA Approved Persons Register for those Dealing with Wholesale Customers

What is the Register?

  Many professions operate a register of "Approved Practitioners" as a means of assuring the public that the individuals they are dealing with are competent. Entry to a central register, eg Accountants, Airline pilots, Dentist, Doctors and others in the medical profession, involve passing examinations and demonstrating a benchmark level of experience and skill under supervision. The FSA's central Register is no different. Individuals are admitted to it if they are "fit and proper" to perform their role as an Approved Person and meet FSA's criteria for honesty, integrity and reputation, competence and capability, and financial soundness. There are currently some 168,000 individuals on the FSA Register, all of whom have had to be individually approved by the FSA and many of whom will have passed a mandatory examination. Approved Person status brings with it certain obligations. Individuals are held personally accountable for their actions and it places a shared responsibility on the individuals as well as their firms to act properly. Neither can hide behind the other.

The FSA's proposals

  FSA proposes to remove the registration requirement from staff working in the "wholesale" part of the industry, ie those who deal with the assets of larger companies and funds, and not directly with members of the public. This is the sector of the industry where it is common for transactions to involve millions and sometimes billions of pounds of investors' money. The individuals targeted for "de-regulation" analyse, deal, trade, manage funds, and settle and service all aspects of the transactions; most of the jobs are in "the City".

  FSA is planning to transfer its mantle of control over these staff solely to the senior management of the firms.


  The interests of senior management in firms of varying sizes cannot be presumed to be the same as those of the consumers and clients of Financial Services.

  For many members of the public this would be of concern particularly in the light of previous scandals, for example at Barings. It is worth recalling that in the case of Nick Leeson and Barings, the then UK Regulator did not sanction his application for Registration (although his employers considered him competent). As a result he was forced to move abroad to a country that then operated a more relaxed environment—Singapore. Wholesale banking is a global industry so not only did his action lead to the loss of an entire bank and cause market disruption, it also led to Singapore introducing a Register of Approved Persons. As one investment manager commented "While the proposal is only to deregister individuals dealing with wholesale market customers, one should remember cases like Nick Leeson who only dealt with wholesale customers, yet fallout of his activities had an impact on the retail market."

  Our assessment is that the Approved Person Register is a function where the interests of the Regulator and the industry it controls converge and the industry is best served by Government intervention, regulation and monitoring. If FSA's proposals are implemented, it could lead to London tarnishing its reputation as one of the leading international financial markets and place at risk its competitive advantage.

2. Proposed Removal of Mandatory Examinations

  The other major FSA proposal of concern relates to the removal of mandatory examinations for the wholesale sector.

  The regulators have reviewed the examination requirement on a number of occasions—most recently last year (2004)—and on each occasion has returned the verdict that common, transparent, benchmark examinations are necessary. The rules already provide a "light touch" regime to wholesale individuals.

  The examinations concerned are not higher level ones, such as those of the same professional level as Chartered Accountancy. The examinations concerned comprise the basic knowledge and understanding of the UK's regulatory framework with technical knowledge appropriate to specific activities only, eg Derivatives knowledge for people who deal in Derivatives.


  The organisations using the services of the wholesale industry—pension and other funds, larger companies, local authorities and charities—expect to deal with professionally qualified staff. If these organisations can no longer rely on measurable competence from staff in the wholesale industry, demonstrated by passing compulsory appropriate benchmark entry examinations, then they may have to increase the training of their own staff—and at a cost which will be passed ultimately on to retail investors.

  While the proposal to remove the Register and with it appropriate entrance examinations may sound superficially attractive to firms as a means of reducing their financial and regulatory burden, they and their trade associations have told us that, once the implications have been digested, the unintended consequences of these proposals are clear. They may well lead to lower investor confidence, lower standards of competence and honesty, thereby undermining the UK's competitive position and threatening the enormous benefit the financial services industry brings to the country.

  The SII's position is that even after the basic threshold examination(s) is passed, the firms have a great deal of product related training to undertake as well as continuing learning to ensure updating and ongoing competence. The examinations from which the FSA is proposing to withdraw mandatory status form the basic entry level. Such as withdrawal will lead to very wide variation in practice as different firms take different views on the value of training, and many of the decisions will depend ultimately on the view take of the "bottom line". At present there is a clear, transparent, basic level of knowledge, undertaken by all entrants who will be administering and/or dealing in the wholesale market. As one firm said, "some firms will cut costs."

  The FSA's proposals are contrary to the Government's own research on the link between qualifications and productivity (source Sector Skills Development Agency), contrary to the Government's agenda on education and training, contrary to the EU-US Coalition on Financial Regulation and contrary to the interests of industry and its investors.


  The SII is arguing that the FSA should retain its role in policing the perimeter, to protect businesses and consumers—and the UK's reputation as major financial centre. As one firm said "I find it incredible that with other professions raising their standards, we are sending the completely reverse message."


  1.  The SII, a registered charity, is the largest provider of examinations in this sector of the financial services industry and will be affected by the FSA's proposals. It has been gathering views through Roundtable discussions with many firms and has consulted its 16,000 professional members. 86% of the views expressed were against the FSA's proposals.

  2.  The FSA has also proposed deregulation in the Conduct of Business Rules and Money Laundering, proposals which SII supports.

25 October 2005

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