Memorandum submitted by the Financial
Services Practitioner Panel and the Smaller Businesses Practitioner
1. In the Treasury Committee's consideration
of the FSA's 2005-06 Annual Report, the Practitioner Panel and
Smaller Businesses Practitioner Panel would like to draw the Committee
members' attention to a number of high-priority issues for regulated
firms, which might merit greater scrutiny during the oral evidence
sessions. These include:
The FSA's principle of Treating Customers
The principle of caveat emptor,
as included in the Financial Services and Markets Act 2000 (FiSMA).
The move by the FSA towards a more
The cost of regulation, especially
for smaller firms.
The implementation of EU directives
and the FSA's international work.
2. The aforementioned points will be explored
more deeply later in this memorandum, following a quick introduction
of the two Panels and their work.
3. The Practitioner Panel was established
in November 1998, comprising senior figures from a cross-section
of the financial services industry, to provide a high-level body
available for consultation on policy by the FSA and to communicate
to the FSA views and concerns of the regulated industries. It
has a statutory basis under Section 9 of FiSMA. The Panel sees
its main role as that of a "constructive critic" of
the FSA. To help the Panel monitor the FSA's effectiveness, it
conducts a comprehensive biennial survey of regulated firms, the
latest of which is currently ongoing and will be published by
the end of this year.
4. Further information on the role and work
of the Panel and its current composition can be found on its website:
Smaller Businesses Practitioner Panel
5. The Smaller Businesses Practitioner Panel
(SBPP) was set up by the FSA in 1999 to represent the views and
interests of smaller regulated firms. It is composed of independent
industry practitioners from a variety of smaller firms, covering
the major sectors of financial services activity. Even though
the SBPP does not have statutory status, the FSA has committed
to treating it in the same way as the Practitioner Panel, and
the SBPP Chairman also serves as an ex officio member of
the statutorily independent Practitioner Panel. This helps to
ensure that smaller firms are properly represented at the very
highest level within the FiSMA framework.
6. Further information on the role and work
of the SBPP and its current composition can be found on its website:
7. Both Panels meet formally on a monthly
basis to discuss current and future issues of relevance to regulated
firmssome of which are driven by the FSA's priorities and
some of which are raised proactively by the Panels themselves.
In addition, both Panels convene smaller sub groups on specific
matters to engage with the FSA in greater detail.
The move by the FSA towards a more principles-based
8. Both Panels are supportive of principles-based
regulation, which they considers the appropriate approach towards
a modern, proportionate and effective risk-based regulatory framework
in the UK. However, if this is to succeed, they have urged the
FSA to properly consider the implications of this new approach
to its work in a number of areas, including supervision and enforcement.
The Panels recognise that principles-based regulation is a new
and largely untested concept, and that a clear-cut, definitive
approach might be an unrealistic expectation at this point.
9. In a recent letter to John Tiner, Practitioner
Panel Chairman Roy Leighton conveyed some commonly held concerns
by practitioners to senior FSA management. As the SBPP has pointed
out repeatedly, smaller firms, in particular, appear to struggle
with some aspects of principles-based regulation (please see
reference item 6 for further detail).
The FSA's principle of Treating Customers Fairly
10. One of the major principles that the
FSA has introduced as part of its evolving principles-based framework
is TCF. While both Panels have been supportive of the TCF concept
generally, they share many of the industry's concerns regarding
its implementation, supervision and enforcement. Consistency of
approach will be crucial to ensure that TCF is applied fairly
across the industry. At present, a lack of clarity persists, especially
among smaller firms, over the regulator's expectations regarding
firms' embedding of TCF, and evidencing thereof.
11. Anecdotal evidence has reinforced the
fear that FSA supervisors' application of TCF in practice might
sometimes be too detail-oriented and meticulous, signalling a
disconcerting departure from the FSA's commitment to high-level
principles. Moreover, it also appears to hint at a possible disconnect
between senior FSA managers' public stance on principles-based
regulation and the day-to-day application of this concept throughout
the organisation. The Panels appreciate that this will be one
of the regulator's major challenges going forward (please see
reference items 2-5 for further detail).
The principle of Consumer Responsibility, as included
12. The Practitioner Panel dedicated considerable
time over the past year to developing a practical articulation
of "consumer responsibility" (or Caveat Emptor)
and engaged in a series of discussions with members of its counterpart,
the Financial Services Consumer Panel, and the FSA. The original
aim of those discussions was to define what exactly was meant
by "the general principle that consumers should take responsibility
for their decisions," as outlined in section 5(2)(d) of FiSMA.
FSA Chairman Callum McCarthy's speech to the Financial Services
Forum in February 2006 was helpful in highlighting the principle
of consumer responsibility and stimulating further debate.
13. As a balance to the principle of TCF
it is important not only to focus on the obligations of firms
during the retail sales processwhich already are prescribed
in great detail in the regulatory regimebut also on what
could reasonably be expected from the consumer; "fairness,"
after all, is a concept that usually is not applied in a unilateral
manner. Both Panels maintain that the lack of a clear definition
of the principle of consumer responsibility is one of the main
drivers of high regulatory costs in the retail sector, as firms
in search of legal certainty often incur additional costs in being
extra careful in complying with existing rules and regulations;
these costs eventually getting passed down to the consumer (please
see reference items 2-5 for further detail).
The cost of regulation, especially for smaller
14. The Practitioner Panel in partnership
with the FSA has conducted a Cost of Regulation study which focused
on regulatory costs across three chosen sectorscorporate
finance, institutional fund management and investment and pension
advicewith the objective of identifying specific rules
from the FSA Handbook where incremental costs may not be justified
by the benefits they aim to secure. The Panels will use the results
of this exercise to engage in a constructive dialogue with the
FSA about the burdens of regulationin particular, on the
retail sideand how these might best be relieved.
15. The SBPP has long held the view that
the costs and burdens of regulation are not only too high, but
that smaller firms feel their impact in a disproportionate waya
view that was reinforced by the findings of the Cost Survey. It
continuously urges the FSA more generally to be rigorous in its
drive for Better Regulation and deregulatory measures; without
that, there is a real prospect of smaller firms being forced out
of business (please see reference items 2-5 for further detail).
The implementation of EU directives and the FSA's
16. The Panels strongly support the trade
associations' view that EU and international regulatory measures
must be implemented in a pragmatic manner that avoids superequivalence
(the implementation of EU Directives beyond their immediate requirements),
unless there is a compelling case for itand FSA senior
executives, including CEO John Tiner, have publicly embraced such
an approach. The implementation of the Markets in Financial Instruments
Directive (MiDIF) will prove to be an interesting test case for
the FSA's commitment in this regard, and the Panels will closely
follow developments in this area.
17. The UK financial services industry pays
approximately one third of all Corporation Tax paid in the whole
of the UK and 11% of PAYE and NHI. Much of this is export led.
The UK has the highest contribution to its trade balance of any
nation in the world from financial exports provided by firms located
here. Consequently, the Practitioner Panel feels that the UK financial
regulatory system needs to be internationally competitive and
attractive and encourages the FSA to maintain a high profile in
world regulatory fora on a bilateral basis, especially with key
overseas developing markets (eg China, India, The Gulf, etc) Much
good work is being done by the FSA on international issues and
should this be maintained (please see reference items 2-5 for