5 November 2003
Speech by the Financial Secretary to the Treasury, Ruth Kelly MP, at the APCIMS Conference
1. I always welcome the opportunity to speak directly to members of the investment community. After all, financial services play a vital role in our economy: the industry employs over a million people and accounts for more than 5 per cent of UK GDP.
2. And the membership of APCIMS is a particularly valuable one - not just because of the formidable sums of money under the management of its members but because its members specialise in helping private clients manage their finances. As such you play a direct role in helping individuals in this country to save and to look after their own, and their family’s, financial futures.
3. And ultimately, it is in all our interests – as citizens – to have the savings and investments of this country promoted and safeguarded as effectively as possible.
4. It is certainly an aim to which this Government attaches a great deal of importance – it was the key driver in our overhaul of the regulation of financial services in our first term. Particularly following on from pensions mis-selling, it has been one of the aims underlying the Financial Services and Markets Act, and the regulatory framework that the Act served to establish.
Background to review
5. I would like to discuss this regulatory framework with you today – because while it has been a success it is, nonetheless, right to keep the framework under review. Indeed we are committed to doing so: following the Cruickshank Report the Government promised to conduct a two-year review of the Financial Services and Market Act (FSMA).
6. Yesterday we have announced the start of the 2-year review process. Given this timing, and the interest I know that you all have in this review, I thought it would be valuable for me to outline the structure and the scope that this review will have.
The FSMA review
7. It is important to make it clear that we believe the essential framework of the legislation works well – and the review is not going to be the basis of a grand design for change. However we do feel that we need to take another look at some particular issues – including the regulatory framework.
8. The review will have three key strands to it. The first of these is to scrutinise the impact of FSMA on competition in financial services. The second is to review the some of the workings of the FSA and its relationship with the Financial Ombudsman Service. And the third is to examine the boundary of regulation.
Competition
9. The impact the FSMA has had on competition is a crucial matter.
10. Strong competition between providers increases the efficiency of the industry, and is of particular benefit – in terms of value and choice – to the consumer. This applies across Europe as well has here – indeed the Chancellor has recently called for a review of competition in the European financial services market.
11. We are, of course, aware that regulation has an impact on competition. For example, the cost of becoming authorised in the first place can become a barrier to entry into the industry – particularly for small businesses, for whom the costs of entry are proportionally higher. We will be looking to address these issues in the review process.
12. We have asked the Office of Fair Trading to take over this stream of work, and to scrutinise the impact FSMA has had on competition in the last couple of years. We believe that OFT has the expertise to undertake this work effectively.
FSA practices and changes to the FOS
13. The success of the FSA is pivotal to the new UK regulatory framework. It has been successful – for which I would like to thank Sir Howard Davies, the former Chairman, and all the FSA staff. I of course wish Callum McCarthy and John Tiner well in their stewardship of the FSA in the coming years.
14. However, a number of issues have arisen. Two compliance issues often raised by firms are the difficulty in obtaining guidance, and the complexity of the FSA’s Handbook of Rules. And so I welcome the recent announcement by John Tiner that not only will they be working to make the Handbook more accessible, but plans are also underway to ensure that there is consistency in the guidance they provide.
15. Firms have also highlighted the pure volume of consultation undertaken by the FSA. We believe a proper consultation process is important, particularly before the FSA makes or changes its rules – in fact it is a legislative requirement. However, in response to these concerns, we are happy to see that the FSA have decided to indicate the level of importance of consultation documents to encourage prioritisation in this work.
16. All of these areas – complexity of the Handbook, consistency of guidance, levels of consultation and others such as the FSA’s role in consumer education – will be subject to examination. The FSA will carry out this part of the two-year review, and I hope that they will report on the outcomes in their Annual Reports.
17. I would also like to say a few words about the Financial Ombudsman Service. While the Ombudsman has been extremely successful at representing and extending the rights of the consumer, we are aware that there is some concern over its role within the industry.
18. From the start I would like to be clear that we see the continuing independence of the FOS as critical – without this, it cannot maintain its credibility as an alternative to the courts. It is also critical that it remains free to consumers, in order to continue to be a viable option for them.
19. However I also acknowledge your concerns. There are clearly some issues that it is appropriate to review. The first of these is whether or not the Ombudsman’s decisions should be subject to appeal.
20. The second is how the relationship between the Ombudsman and the regulator should be managed. Or more specifically, what are the circumstances in which the FSA should take regulatory action instead of having cases being determined by the Ombudsman?
21. The third is whether the Ombudsman should become the alternative dispute resolution mechanism for complaints about consumer credit. In principle this seems like a good outcome, but there are some practical considerations that need to be examined.
22. In all these three areas, the FOS will be reviewing its work. The appeals issues and the regulatory action concerns will be looked at jointly with the FSA. The consumer credit issue is due to be consulted on by the DTI shortly, and this will include looking at a possible role for the FOS.
Boundary of regulation
23. The third and final strand of the proposed review that I am outlining today is a consideration of changes to the boundary of regulation. Specifically – we would like to consider changing and clarifying the extent of FSA regulation in three areas.
24. The first is to ensure that no unnecessary regulation is imposed on those seeking to market shares in unlisted companies to potential investors.
25. The second is that of financial advice. While regulating advice goes to the very heart of our regulation of financial services, it always runs the risk that you will prevent people from providing advice at all. Organisations such as Citizen’s Advice Bureaux can be reluctant to provide advice from fear of being caught by regulation requirements. We need to address these concerns,
26. The third area is the possible simplification of regulatory boundaries. On this matter, I will be bringing forward some proposals – but I also welcome the input of the FSA.
27. I expect the review to take around a year to conduct and each component will be examined by those best placed to do so. Only occasionally does this mean the Treasury itself. We will of course maintain an overview of the entire review process, and will analyse its conclusions and recommendations when they come.
28. I anticipate that this review will allow us to improve on the FSMA regulatory framework. This review is needed, and this in itself is not surprising: setting up a single regulatory framework was a bold move. Indeed, the UK was the first country with a large financial services industry to take the step towards a single regulator. However it is an approach that is already being emulated by others, and it is in line with developments in Europe.
29. I would also like to say a few words about the wider role that Treasury plays in Europe – as I am conscious that this is a subject of particular concern to you all.
30. The Treasury plays an important role in the development of financial services legislation in Europe. We are putting considerable effort into working effectively with stakeholders to deliver a successful completion of the EU Financial Services Action Plan – with the aim of removing barriers to a single market in financial services in Europe.
31. In order to maximize our influence on the decision-making processes of the European Commission, European Parliament and the Council, the Treasury seeks to ensure that positions take full account of all stakeholder perspectives and are based on sound arguments. The Treasury also believes it is crucial to maintain strong relations with the European institutions and other Member States, particularly their Finance Ministries.
32. And, in order to keep fully informed of UK stakeholder perspectives, the Treasury has been taking a more formalised approach to consultation and information sharing. The core of this approach, along with a number of other initiatives, includes:
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strategy discussions between senior Treasury, FSA and Bank of England officials and senior private sector stakeholders;
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for each new proposal, the Treasury now also forms an industry roundtable. These are open to all interested parties and their proceedings are informal to encourage debate. The roundtables are particularly valuable when gathering information regarding the potential impact of amendments;
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together with the FSA, the Treasury hosts regular stock-take meetings for financial services trade associations and consumer bodies to inform them of crosscutting issues.
Investment Services Directive
33. An issue that I know is of particular interest to you all is the proposed new Investment Services Directive (ISD). I was disappointed by the Council Common Position that was adopted last month, despite opposition from the UK and four other Member States. I believe that in several areas the Council text misses the opportunity to create a competitive, integrated European financial market, and instead will harm competition and increase the cost of saving and investment.
34. An area of particular concern for us during negotiations has been the treatment of "execution-only" business in the Directive. The Treasury believes it is important to ensure that execution-only business is not compromised by over-burdensome and unnecessary regulation. We see such business as a helpful market development that facilitates freedom of choice and provides low cost access to a wider range of investors, thus allowing greater participation in securities markets.
35. Throughout negotiations, Treasury made every effort to ensure that the draft Directive was amended in such a way that will allow execution-only business to continue. To this extent, the Council text is a significant improvement on the original Commission proposal. We secured a carve-out from full suitability obligations for most execution-only business.
36. Nevertheless, the Council text is not perfect. If this element of the text is retained after the involvement of the European Parliament – which has so far supported less restrictive rules – the Treasury along with the FSA will work hard to ensure that this is not interpreted in the UK as restricting normal marketing activity and direct offer promotions.
37. As negotiation of the ISD moves forward to the European Parliament, the Treasury will continue to work to improve the proposed Directive. We will need to continue to work closely with financial sector to achieve this. I would like to thank you in advance for your assistance in this process.
EU Financial Services - Looking Ahead
38. We also need to work together on the future agenda. In that respect, I think we share many priorities. In particular, the need to give priority to effective and consistent implementation and enforcement of existing directives, and the need for new mechanisms for businesses to make complaints about Member States’ implementation of European legislation.
39. I look forward to working closely with APCIMS and its members on these and other issues.