At a speech at the Mansion House last night, the Chairman of the Financial Services Authority, Lord Turner, said that to design an effective regulatory response to the financial crisis, the industry needs to move beyond the demonization of over-paid financial traders and recognise the fundamental mistakes made by policy makers.

"In finance and economics, ill-designed policy is a more powerful force for harm than individual greed and error".

Lord Turner argued that the crisis had many causes, including "absurd bonuses for excessive risk taking" and "an explosion of exotic socially useless product development", but that underlying these problems were prudential rules and an entire philosophy of market regulation which failed to identify and address the dangers of excessive leverage, and which too confidently relied on supposedly efficient and rational markets always to produce good results.

Addressing that failure requires the implementation of three major sets of reform: significant increases in bank capital and liquidity requirements; clear strategies to ensure that banks will not be bailed out by tax-payers; and macro-prudential tools which can slow down excessive credit growth. But applying these tools will sometimes have unpopular consequences for the supply of credit which society needs to be willing to accept.

Given these priorities, Lord Turner welcomed the decisions reached on the Basel III package of capital and liquidity reforms. Responding to suggestions that the package was weaker than ideal, he pointed out that the total impact derives from changes to the definition of capital and the definition of risk weights, as well as to the ratio itself, with the combined effect being considerably larger than the headline increase from 2% to 7% suggests.

He accepted that if philosopher kings were designing a banking system entirely anew for a greenfield economy, they would choose still higher ratios, but argue that starting where the world economy is today, the Basel III reforms will significantly improve the resilience of the global banking system without harming prospects for economic recovery. But while Basel III is vital, Lord Turner stressed that it is not the end of global regulatory reform. In future, tax-payers should not have to bail out those systemically important financial institutions which in the past have been judged ‘Too Big to Fail’.

Options to achieve this while ensuring that systemic shocks to confidence and lending capacity are minimised, include capital surcharges for systemically important banks, or debt instruments smoothly convertible to equity as firms approach failure.

No set of permanent rules can, however, guard against all financial risks, which evolve in form and change through the cycle. For this reason, Lord Turner said he regarded the creation of the new Financial Policy Committee as the most important element in the Government’s reform package. The FPC will fill the “macro-prudential underlap” which existed between the FSA and the Bank of England, and move beyond a rule driven approach to financial policy to recognise the importance of judgement and discretionary powers to constrain excessive credit growth. Doing that, however, will not always be popular.

To be effective, the FPC will therefore require robust independence, and to be supported by public recognition that constraints on easy credit are sometimes in everybody’s interest.


Source: Financial Services Authority

FSA Website

Thomas F. Huertas Director, Banking Sector, FSA and Vice Chairman, made a speech at Merton College, Oxford to mark the second anniversary of the failure of Lehman Brothers. He commented:

“This tipped the financial system toward meltdown. To arrest this decline, governments rescued major financial institutions and injected massive amounts of monetary and fiscal policy stimulus. Together these measures averted catastrophe. Instead of the Great(er) Depression, the world experienced in 2008 – 2009 the Great Recession."

"Today, the crisis is receding. Although there is concern that the recovery may stall, temporarily reverse direction or even double dip, policymakers are increasingly focusing their efforts on developing and implementing a strategy that will reduce, if not eliminate, the possibility of future crises.”

Dr Huertas stated that with respect to capital the reform has five parts:

1. An increase in the amount of capital required to back trading activities, especially illiquid instruments in the trading book

2. An improvement in the quality of capital

3. An increase in the quantity of capital

4. The introduction of a leverage ratio as a back-stop to the primary risk-weighted regime

5. An improvement in the loss-absorption capacity of non-core capital

Dr Huertas concluded by stating:

“In sum, we have progressed a good way on the road to finding and implementing a cure for crises. Much has been done to improve the resiliency of the banking system. But much remains to be done, and we should press ahead with completing the job, esepcially with ending ‘too big to fail’.”


Source: Financial Services Authority

FSA Website

FSA have published the feedback to Discussion Paper 09/5.

In this Feedback Statement, they summarise the feedback received to the questions raised in DP09/5 “Enhancing financial reporting disclosures by UK credit institutions”, set out the FSA response to the feedback and discuss the next steps to continue enhancing disclosures by the UK’s largest Credit Institutions (CIs).

High quality disclosure by credit institutions is key in fostering market confidence. The financial crisis raised questions about financial reporting disclosures, particularly for the complex financial instruments credit institutions hold. Some market participants were concerned that credit institutions published accounting figures did not capture the reality of emerging problems, damaging market confidence.

DP09/5 discussed whether credit institutions’ disclosures could be enhanced by using prescribed templates or by applying a voluntary code of disclosure. The British Bankers’ Association (BBA) developed the draft BBA Code, which the UK’s largest credit institutions agreed to implement in their 2009 annual reports.

FSA set out some expectations for disclosures in credit institutions’ 2010 annual reports. FSA will discuss these with credit institutions in the autumn, as part of the British Banking Association Code’s (BBA Code) commitment to discuss disclosure matters.

FSA will continue to assess credit institutions’ public reporting, and expect them to enhance the comparability and quality of their disclosures as a result of applying the final BBA Code. FSA will also keep the need for further policy initiatives to strengthen disclosure under review.


Source: Financial Services Authority

FSA Website

The FSA has produced a cost benefit analysis to support its recent proposals to extend the Remuneration Code as set out in CP 10/19. The cost benefit analysis gives little cause for optimism for those who hoped that when faced with the cost bill for implementation the FSA might scale back the proposals. However, it is still hoped that developments at European level and further lobbying may allow this. Comments on the consultation paper are due by 8 October 2010.

There have also been press reports (though no official comment) that the public remuneration reports for large financial institutions envisaged by the Financial Services Act 2010 and suggested by Walker will not be required next year, but implementation will be delayed until next year and so the first reports will not be due until 2012. Whether a voluntary interim solution will be sought and what kind of general financial services industry disclosure will be sought all therefore remain outstanding issues.


Source: Financial Services Authority

FSA Website

Despite the credit crunch, and the knocks to consumer confidence of the past few years, more people than ever before want to be home-owners in the long term. This is one of the many findings of a consumer opinion survey undertaken by YouGov for the Council of Mortgage Lenders.

85% of people cited home-ownership as the tenure they hoped to be living in a decade from now, suggesting that the home-ownership aspiration remains firmly rooted in the British psyche. The CML has asked the same questions about home-ownership aspirations periodically since 1975. Last time the survey was undertaken, in 2007, the proportion who expected to be home-owners in ten years' time was 84%.

Over the short term, the desire for home-ownership has dipped a little. 76% of those surveyed saw home-ownership as their ideal tenure in two years' time - down from 78% last time the survey was undertaken in 2007. This primarily reflects a much lower short-term appetite (42%) for home-ownership among adults aged 18 to 24 - although this is also the age group with the highest ten-year home-ownership aspirations (88%).

It is highly likely that this reflects younger people's lifestyle choices, favouring more flexibility and mobility in the short term, as well as a realistic assessment of the difficulty of entering the housing market under current affordability conditions. CML chief economist Bob Pannell will be looking in more depth at the survey's other findings, and the issues arising from them.


Source: Council of Mortgage Lenders

CML Website

The Financial Ombudsman Service has released its third set of six-monthly complaints data relating to individual financial businesses – including banks, insurance companies and investment firms.

The data covers consumer complaints handled by the ombudsman service between 1 January and 30 June 2010 and includes both the number of complaints received about individual businesses and the percentage of complaints upheld by the ombudsman service in favour of consumers.

During this six-month period, the ombudsman service received a total of 84,212 new complaints – a small increase on the 82,136 cases received in the second half of 2009. Of these new cases, 89% related to 160 financial businesses (out of more than 100,000 businesses covered by the ombudsman).

The number of new complaints about each of these individual businesses ranged from 30 to 12,750. Five financial services groups continued to have more than 3,000 complaints each, which together accounted for 47,507 cases – over half of all the new complaints received by the ombudsman during this six-month period.

The number of new complaints against each business is likely to be affected by the size of the business. However, experts consulted by the ombudsman were unable to agree how size (or market share) should be taken into account, when comparing complaints statistics across the financial services sector.

The data shows that in the first half of 2010 the ombudsman service upheld an average of 44% of complaints in favour of consumers, compared to 53% in the second half of 2009. Across the 160 individual businesses included in the complaints data, this uphold rate varied substantially between 14% and 100% upheld in favour of consumers.

During this period 15,000 complaints about unauthorised-overdraft charges were reviewed and closed. This followed the Supreme Court’s unanimous ruling in November 2009 – that the fairness of unauthorised-overdraft charges could not be challenged on the basis of the "test case" referred by the Office of Fair Trading (OFT).

Natalie Ceeney, chief executive and chief ombudsman, said: The latest set of complaints data shows that some businesses are really committed to ensuring that complaints are handled well, and are used to inform and improve the service they offer their customers.

However, the complaints data also shows there is still more that some businesses need to do to ensure that complaints are properly investigated and fairly resolved. The ombudsman is keen to continue to play its part and help businesses draw lessons from the complaints that we see, so disputes can be sorted out at the earliest opportunity.


Source: Financial Ombudsman Service

FOS Website

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Source: The Consulting Consortium

TCC Website

The following extract on regulation from Edward Davey’s speech to the ABI Investment Conference may be of interest to readers. Click on the link for the whole speech.

“Issues – such as promoting strong boards and engaged shareholders – are particularly important when considered in the context of the financial crisis. After all, the failings of the financial institutions, their management and owners, were an important factor in bringing about the crisis. And the Government recognises, of course, that significant changes are also needed to regulation."

"This is why the Government is consulting on the future of UK financial regulation. One option proposed is to join up the work of the Listing Authority and the Financial Reporting Council."

"Creating a new companies regulator – perhaps better described as a Corporate Governance and Listing Authority – could provide real advantages in bringing together in one place those people considering different aspects of corporate governance."

"After all, rules about listing, and rules concerned with corporate governance, audit and accounting, are all concerned with issuers of capital. And companies have a different culture to large financial institutions, which requires an entirely different approach to their judgement of risks."

"This approach would, for example, allow a consistent view between what companies say in offer documents, and what they report a couple of years down the track. That is not always possible at the moment."

"The new regulator, if established in this way, would build on the FRC and UKLA’s track record of effective engagement with issuers, investors and their advisors. The government recognises of course that any move towards this model would have to be made in a way that would ensure companies can continue to raise the capital from the markets that they need to grow. As I have already mentioned, we are consulting on this issue, and would welcome the views of all interested parties.”


Source: Department for Business Innovations and Skills

BIS Website

The FOS has further expanded their online technical resource with information about the ombudsman's approach to complaints where consumers are unhappy with how an insurer has handled the repair of their vehicle.


Source: Financial Ombudsman Service

FOS Website

The first Insurance Intellectual Capital Initiative (IICI) report analyses the strengths and weaknesses of the reinsurance underwriting and broking practices of the Lloyd’s and Bermuda marketplaces.

It finds that Lloyd’s and Bermuda represent distinct and different approaches to underwriting, but that their work practices and risk evaluation methods are showing signs of convergence.

Released in time for the Monte-Carlo Rendez-Vous, the industry-commissioned report also finds that each market can benefit from learning from the strengths of the other to reduce inefficiencies and redundancies at each stage of the process of writing a risk.

“Lloyd’s versus Bermuda is not a robust distinction. Stereotypes are exaggerated and overlook similarities between the markets,” said one participant in the study.

The report argues that the reinsurance industry has experienced three “profound” forces for change. Technological change has improved information distribution and strengthened connections between global markets, while regulatory emphasis on global equivalence in trading practices has generated pressure for convergence across different marketplaces.

Finally, the widespread acceptance of vendor property catastrophe models has led to more standardised approaches to the evaluation of reinsurance risks, levelling the playing field for decision-making on at least some classes of business.

“The generic findings show that a market built around a central physical location, such as Lloyd’s, is valuable for business that requires face-to-face contact at the point of decision-making,” says the report.

“However, much business can be transacted through selective use of face-to-face interaction at prior stages in the process, rather than at the ‘point-of-sale’. Bermuda is an example of such a ‘transportable’ reinsurance market; markets can be established where regulatory and taxation conditions are favourable rather than necessarily being bound to a particular physical location,” it says.

Drawing on the strengths of each marketplace, the report makes a set of recommendations for best practice at each stage of the trading process, offering a guide for reinsurance firms and broking houses to evaluate and change their current practices.

“The specific findings show how the selective use of face-to-face and electronic interaction can reduce inefficiencies and improve decision quality in either type of market,” the report concludes.

The data for the study was gathered from audio and video recordings of live trading of over 800 decisions and across competitors and markets during the 2009/10 reinsurance trading cycle. “This unprecedented level of access is a testament to the reinsurance industry’s willingness to examine its own practices,” the report authors said.

The year-long study was researched and produced by the Aston Business School, working with the Economic & Social Research Council. 17 insurance firms participated in the research, including Amlin plc, Aon Benfield, Arch Reinsurance Ltd, Ariel Re, Axis Reinsurance, Brit insurance, Hiscox plc, Kiln Group, Liberty Syndicate Management, Talbot Underwriting, Tokio Millennium Re, and Validus Re.


Source: Lloyd's of London

Lloyd's Website

More than 80% of brokers say they are "very positive" about doing business at Lloyd’s, according to the latest figures.

A recent independent study revealed that broker views about the Lloyd’s market are now significantly more positive than two years ago, with 84% saying they are "very positive" about doing business at Lloyd’s, a jump from just 67% in 2008. The results emerged from the Gracechurch London Market Study 2010 which was based on interviews with 301 London Market brokers, and included an assessment of their satisfaction levels with the business processes at Lloyd’s.

David Gittings, Chief Executive Officer of the LMA, said:

“This independent research is great news for managing agents at Lloyd’s whose hard work and commitment has been reflected in broker satisfaction being at an all time high. The market has embraced process reform and can now demonstrate not only its strong underwriting and claims performance, but also that it is one of the most efficient markets in the world.”

The study also revealed that reinsurance brokers are the most positive about doing business at Lloyd’s with 91% saying they felt “very positive”. An overwhelming majority of brokers (72%) say that Lloyd’s performs ahead of other markets on obtaining quotations, while 61% say Lloyd’s outperforms the competition in the area of agreeing a final risk acceptance.


Source: Lloyd's of London

Lloyd's Website