Memorandum submitted by the Securities
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 regulatorthe
FSAplans 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
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
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
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 MiFIDthe Market
in Financial Instruments Directiveand 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
Members56 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 environmentSingapore.
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 occasionsmost 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
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 industrypension and other funds, larger companies,
local authorities and charitiesexpect 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 staffand
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
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
consumersand 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
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