2 December 2004
Statement by the Financial Secretary to the Treasury Mr Stephen Timms: Two-Year Review of the Financial Services and Markets Act 2000
Introduction
1. This statement announces the outcome of the Government’s review of the Financial Services and Markets Act 2000 (FSMA), which establishes the UK’s framework of financial services regulation. This review, which commenced two years after FSMA came into force, builds upon FSMA’s many successes to date. It should ensure that FSMA stays at the cutting edge of current and future developments in regulatory and public policy. The deregulatory reforms I outline below should heighten consumer confidence in the financial services industry, increase competition in places, and ensure that the UK remains one of the most attractive places to conduct financial services business in Europe and globally. More details on the background to the review are set out in the Government’s statement to Parliament on 4 November 2003.
2. There were four main elements to the review, each undertaken by those best placed to deal with the issues at hand. Firstly, the Treasury reconsidered the boundary of financial services regulation. Secondly, the Office of Fair Trading assessed the impact of FSMA on competition. Thirdly, the Financial Ombudsman Service and Financial Services Authority considered how the workings of the Financial Ombudsman Service could be developed. Finally, the Financial Services Authority considered how its practices could be improved. I am extremely grateful to all those who conducted and contributed to the consultation exercises and other work involved in the review.
Redrawing the boundary of financial services regulation
3. The Treasury conducted two consultation exercises on how the boundary of financial services regulation could be redrawn. The responses have contributed to a deregulatory package of reforms.
4. Firstly, I will help to encourage more people to save enough for retirement. Analysis in the Pensions Commission’s first report suggested that at least 9 million individuals might not be saving enough for retirement. This echoes analysis in the 2002 Green Paper. Furthermore, the Commission estimate that 11.3 million workers are not currently making any contributions to private pension schemes. Many employers are currently reluctant to promote the uptake of pensions to their employees for fear of being caught by FSMA. If companies make unapproved financial promotions they risk criminal and civil sanctions. This reluctance on the part of employers extends to not providing written information and other advice about pensions, and not answering questions from employees.
5. I will tackle this problem by providing employers with an exemption from the FSMA financial promotion regime. Employers will then be able to raise employees’ levels of awareness and understanding and to promote the increased uptake of pensions – both in terms of raising the number of workers who take up their own pension, and raising the amount saved by those who already have their own pension. Employers will be able to provide their staff with written material, to complement this with informative presentations, to address staff queries and to involve FSA authorised persons, where helpful, to provide additional expertise and assistance.
6. At this stage I plan to enable employers to promote only their own pension schemes. The workplace could, however, prove to be a fruitful environment for raising employees’ awareness and understanding about other financial services and products, and for developing employees’ capability to make well-informed decisions about how to manage their financial affairs. I will consider in due course whether to enable employers to promote other work-related financial products in future.
7. I will ensure that employees benefit from a range of important safeguards when receiving promotions in the workplace. These should ensure that the bond of trust which exists between employees and their employers is not abused and that employers involve FSA-authorised persons where appropriate.
8. In tandem with these reforms relating to private pensions I will help to boost the performance of occupational pension schemes by introducing further deregulatory measures. I will enable the trustees of occupational pension funds to make a more diverse range of investment decisions without needing to be authorised by the FSA, to take financial advice from a wider range of sources and to question the advice they receive. These relaxations of regulatory requirements are likely to be accompanied by increased competition, for example amongst investment advisers. These reforms should contribute to improving the quality and cost of advice provided to occupational pension fund trustees, and to improving investment decisions.
9. Secondly, I will help to enable people to manage their personal debt more effectively. Many advice centres, such as Citizens Advice Bureaux, are currently somewhat reluctant to provide financial advice and related support because they fear being caught by FSMA. Many people with debt management problems find it difficult if not impossible to access advice from FSA-authorised persons, given their financial position. Yet 6.9 million families report some difficulties in meeting their debt repayments.
10. I will provide advice centres with an exemption from the FSMA financial promotion regime to enable them to provide financial advice and other debt-related support, such as assistance with applications, without advice centres having to worry that they might be subject to the financial promotion restriction. This deregulatory reform will enable advice centres to raise people’s levels of awareness and understanding in financial matters, enabling them to manage their finances better. This should help people avoid getting into debt problems in the first instance, and help prevent existing problems getting worse.
11. I will ensure that this exemption from the financial promotion regime is subject to a range of conditions which should lead to advice centres offering quality support and assistance. Advice centres should be providing a complementary service to that available from FSA-authorised persons.
12. Thirdly, I will introduce deregulatory reforms to make it easier for small, innovative and potentially high-growth firms to attract the funding they need to invest and succeed, and in turn to contribute to the UK’s economic prosperity. I will do this by providing in particular for an exemption from the FSMA financial promotion regime for promotions to business angels.
13. In this context I will also allow business angels to self-certify themselves as having sufficient funds or expertise, i.e. as being “high net worth” or “sophisticated”, as required by the new exemptions. Currently the need to go through an employer, accountant or FSA-authorised intermediary before being certified has deterred many investors from going down this route, reducing the pool of funds available. These deregulatory reforms will be accompanied by a range of safeguards which should ensure that people understand the implications of certifying themselves as being high net worth or sophisticated. These safeguards have been successfully consumer tested.
14. Finally, I will introduce a range of other deregulatory reforms which should reduce regulatory burdens in a range of financial services areas without having an adverse impact on consumers or investors. This will include narrowing the scope of the FSMA financial promotion regime and clarifying it in various places, and reducing the number of activities requiring FSA authorisation at the margin. I will provide open-ended investment companies with a range of regulatory freedoms to conduct their business more efficiently, and to compete on a more even basis with authorised unit trusts. I plan to consider additional reforms to the FSMA financial promotion regime in the near future, alongside deregulatory reforms to the FSMA controllers regime. These two pieces of future work should involve further public consultation.
15. More details on all of these deregulatory reforms and on the safeguards which will continue to apply to consumers and to investors are provided in the Treasury’s two consultation feedback statements published today. Copies of these feedback statements have been provided to the House, including to the Library of the House. I envisage that the legislative changes needed to implement these reforms should be in place by spring 2005.
Addressing the impact of FSMA on competition
16. Competition is important in order to improve efficiency and dynamism. Given the influence of financial services on the performance of all sectors of the economy, the wider benefits of competition in financial services can be significant. Increased competition is particularly beneficial for consumers, leading to greater choice, higher quality products and services at lower prices and more innovation.
17. It is important to secure the right balance between competition and regulation. With this in mind FSMA requires the FSA to have regard to minimising the adverse effects on competition which may arise as the FSA discharges its functions, and FSMA makes the Office of Fair Trading (OFT) responsible for keeping the FSA’s practices and regulatory provisions under review.
18. As part of the FSMA two-year review, the OFT assessed the impact of FSMA on competition in financial services. The OFT employed OXERA to undertake an in-depth review by independent experts. OXERA concluded that FSMA has had a positive impact on competition by improving how markets in the financial services sector work, and that the Financial Ombudsman Service and Financial Services Compensation Scheme are beneficial to competition as they build consumer confidence. OXERA concluded that there are no indications of areas where FSMA itself might have had a significant adverse impact on competition. The OFT, FSA and the Treasury welcome these conclusions, confirming that FSMA has struck a good balance between protecting consumers and facilitating competition. The OFT, FSA and Treasury also welcome OXERA’s findings that where there are indications of competition issues in some financial markets, these do not appear to have been caused by FSMA.
19. OXERA also noted that FSMA provides the FSA with a lot of discretion in pursuing its statutory objectives, thus allowing scope for the FSA to influence the ways in which firms compete with each other. This underlines the importance of the OFT’s remit to scrutinise FSA practices and provisions, and the role of effective cost-benefit analysis carried out on all proposed FSA rule changes in ensuring that the possible impacts of regulation on competition are taken into account. The OFT, FSA and the Treasury welcome these conclusions, which reinforce the importance of enhancements being made to FSA cost-benefit analysis. More details on this are provided below.
Developing the Financial Ombudsman Service
20. The Financial Ombudsman Service (FOS) plays a valuable role in providing consumers with a swift and effective means of resolving disputes they have with FSA-authorised persons. The alternative of going through the courts would be more costly and drawn-out, to such an extent that many consumers would probably not pursue redress. As a result many consumers might be deterred from dealing with the financial services industry, or might adopt an excessively cautious approach. An effective FOS enhances consumer confidence. This is beneficial for financial markets and for the providers of financial services and products.
21. The Government asked the FOS and FSA jointly to review the circumstances in which the FSA takes regulatory action instead of individual cases being determined by the Ombudsman, and also whether in specific circumstances decisions by the Ombudsman should be subject to some sort of appeal. The FOS and FSA also consulted on a range of proposed improvements to the current process for handling issues with wider implications, whilst noting that the FOS would remain independent, that individual cases would continue to be determined on their merits and that the service would remain free to consumers. Both consumer bodies and the financial services industry believe that the FOS is doing a difficult job well. All sides value the work and role of the FOS and are anxious to maintain it. The FOS and FSA are finalising their consultation feedback response, and a number of key messages can be drawn.
22. Firstly, the framework set out in the existing Memorandum of Understanding between the FOS and the FSA, which deals with the circumstances when individual cases might be passed from the FOS to the FSA to take regulatory action, does not seem to be in need of amendment itself. Nevertheless it would be beneficial if the circumstances under which cases could be passed to the FSA were more widely understood, and more transparent processes will be introduced to achieve this.
23. Secondly, the FOS proposes to draw upon more external expertise when considering individual cases which might have wider implications. This would include drawing upon such expertise to help identify wider implications at an early stage. The Financial Services Consumer Panel and the FOS Industry Liaison Groups would identify relevant consumer and industry experts to provide the FOS with appropriate input and help the Ombudsman deal effectively with wider implications cases. These cases would still be determined fairly on their merits, and on the basis of a full understanding and appreciation of the issues and implications involved.
24. Thirdly, the FOS and the FSA will be introducing more transparency in a range of areas, including the respective roles of the FSA and FOS more generally, how the FOS operates, how wider implications cases are identified and treated, and how the wider implications process has operated in practice. More openness and publicity for the process should raise levels of awareness and understanding amongst consumers and the financial services industry.
25. Finally, these improvements should reduce the need for an appeals mechanism - an idea supported by some members of the financial services industry. The consultation exercise revealed no widespread appetite for appeals in general, nor any convergence of opinion upon a particular appeals model. Appeals would add to the complexity and length of the FOS process, would deter many consumers from approaching the FOS in the first instance and would generate additional costs. For these reasons the Treasury agrees with the FOS and FSA that an appeals mechanism is unattractive. Nevertheless, the FOS is exploring the possibility of providing for test cases to be taken to court in specific circumstances, such as when a point of law is involved. This might replicate the test case procedures which applied to the Ombudsman services which existed prior to FSMA.
Improving FSA practices
26. The FSMA two-year review has involved improving the FSA’s practices in a number of areas, largely designed to reduce the compliance burden placed on the financial services industry. The reforms outlined below should make it easier, quicker and cheaper for authorised persons to comply with FSA requirements. Consumers should benefit indirectly from the resulting reduction in industry costs and from any improvements in compliance records.
27. Firstly, the FSA has introduced a number of ways of making its handbook of rules and guidance easier to use, and the FSA’s handbook website has been subject to considerable development. The FSA has introduced a short guide to the handbook together with tailored handbooks for mortgage advisers and general insurance intermediaries which are less than one tenth the size of the full handbook. Around ten tailored handbooks are planned in total over the next year, covering over two-thirds of the regulated community. A new notification system provides alerts to changes in selected rules and a build-your-own handbook tool will be introduced shortly. These innovations complement a wider initiative to develop e-regulation. Alongside these developments the FSA has made progress in reducing the size of the handbook whilst retaining consumer safeguards.
28. Secondly, the FSA has improved its provision of advice and guidance. The FSA Contact Centres’ remit has been extended from serving consumers and small firms to covering certain large firms as well. All calls and correspondence received through the Contact Centres are subject to new service standards, there are tracking and delivery mechanisms designed to ensure that these standards are being delivered consistently, and public reporting against all service standards is moving from an annual to a bi-annual basis.
29. Thirdly, the FSA is confident that it will reduce by half the number of consultation papers and discussion papers which it issues this financial year, compared to the number issued in 2003-04. At the same time the FSA has continued to consult with those affected by proposed regulatory changes, and has engaged with the Financial Services Consumer and Practitioner Panels at an earlier stage on key policy issues. The FSA has been shortening its consultation documents where possible, and has been managing the timing of consultation exercises proactively to avoid peaks. The FSA has also been indicating more clearly the importance of each issue being consulted upon. By making it easier for consumer and industry bodies to manage the volume of consultation, these exercises are more likely to lead to improved regulatory outcomes.
30. Fourthly, work was commissioned by the FSA to enhance the FSA’s cost-benefit analysis methodology. Separate work has been undertaken on improving the implementation of cost-benefit analysis in the FSA. The FSA should be ready to publish this work shortly. The new methodology also applies to assessing the costs and benefits of rules retrospectively, to determine whether the benefits outweighed the costs as expected, and to considering the cumulative impact on a sector of a large number of smaller measures. The FSA intends to start selective retrospective cost-benefit analyses early next year. In relation to cumulative cost-benefit analysis, the FSA will work up a methodology for determining the cost to firms of the FSA’s regulatory regime and the benefits derived, and will set out in its 2005/06 Business Plan how it intends to take this forward.
31. Finally, I intend to initiate a Regulatory Reform Order in due course to lighten some of the requirements placed on the FSA by FSMA. This should improve the FSA’s efficiency in particular areas, benefiting the regulatory community without reducing consumer safeguards. Proposals would be subject to public consultation.
Conclusion
33. The FSMA two-year review has enabled the Government to upgrade a range of components of the UK’s framework for financial services regulation, for the benefit of both consumers and the industry. Two important public policy priorities will also be addressed, namely helping people to save enough for their retirement and helping people manage their personal debt problems. I am confident that the range of reforms and improvements outlined will ensure that the UK’s regulatory environment remains at the forefront internationally and a model of best practice.
Stephen Timms MP
The Financial Secretary to the Treasury
2 December 2004