FSA – KEY PRIORITIES IN REGULATION AND THE FSA’S STRATEGY

Ken Hogg, Director, Insurance Sector, FSA addressed the Future of Life Assurance IEA Conference on 19 May 2010. Starting by reassuring the audience that he had enjoyed 20 years experience in the sector prior to joining FSA – and thus encouraging the audience that he had first hand experience of the sector, he moved on to discuss three key strategic priorities as follows:

• Intensive and integrated supervision;
• Protecting consumers; and
• Shaping European and International financial regulation

In relation to intensiv and integrated supervision, Mr Hogg stated:

“We are taking a more intensive supervisory approach in all areas of our work: challenging firms’ judgments more critically; monitoring markets more closely; and intervening earlier when we identify risks. This a radical shift in approach for the FSA; from focusing on the systems and controls firms have in place to manage risk, to focusing on the risks inherent in a firm’s business model and judging firms on the likely consequences of their decisions and their management of these risks.”

“The problem with the old style of regulation was that it was retrospective. We rarely intervened until there was clear evidence that something had gone wrong. And intervention needed to be evidence-based; based on observable facts. To respond to the lessons learned from the financial crisis by only affecting change in the regulation and supervision of banks would be to continue down that same retrospective road. That would be closing the door after the horse had bolted or fighting the last war.”

Regarding protection of consumers, he stated:

“This year we’ve launched a new conduct strategy. And what that seeks to do is to build a more comprehensive understanding of the drivers of business models, to identify the core strategy and the drivers of income and profitability. Put in simple terms, we want to understand how your business makes money, and whether in doing so it poses any risks to consumers.”

Shaping European and International financial regulation was addressed with the comment:

“The FSA has supported the development of a modern EU regulatory standard for insurance from the very beginning. At the core of Solvency II are several key elements that we believe are essential for a modern solvency regime: a strong focus on risk-management – supported by market-consistent valuation of assets and liabilities – with the responsibility for the running of the firm on the shoulders of senior management. From a capital perspective, the aim of Solvency II is not to seek excessive prudence; rather it is to ensure that firms’ hold the right amount of capital. Delivering it in practice though has already proved hard work and there is more to come. But there are benefits, for firms, for the industry and for us as regulators in implementing this new standard.

Finally, Mr Hogg concluded by considering the challenges faced by the convergence of key regulatory initiatives in 2012.


Source: Financial Services Authority

FSA Website

FSA – CLIENT MONEY AND ASSETS – DEAR CEO LETTER

Sally Dewar, Managing Director, Risk, has followed up on the CEO letter of January 2010 with a reminder to those CEOs who had failed to respond by 13 May 2010.

The letter asks for a response by 30 June 2010 with the following confirmations:

• That the firm has properly considered the content of the letter dated 19 January 2010 and its accompanying report;

• Whether or not the firm is in compliance with its obligations for client money and assets; and

• The name and contact details of the person in the firm who has overall responsibility for the firm’s compliance with the FSA’s client money and assets requirements in the CASS part of the FSA’s Handbook.

Failure to respond will lead to S165 or S166 work being required, thus all firms are advised the check that they have confirmation of receipt of their response by FSA by the 30 June.


Source: Financial Services Authority

FSA Website

FSA – SPEECH BY LORD TURNER ON DRIVERS OF THE FINANCIAL CRISIS

Lord Adair Turner, Chairman, FSA addressed the European Association of Banking and Financial History, Brussels on 21 May 2010 in a speech entitled “Something old and something new: Novel and familiar drivers of the financial crisis”.

In a detailed and erudite speech, he stated that financial and economic history, together with theory, tells three key things:

• Firstly, that financial markets and systems, and more broadly still, monetary relationships and the artifice of money itself, play a central role in market economies. The economic transformation of the last 200 years is in part the history of real developments, technologies and productivity growth; but it is also crucially a history of the development of complex financial relationships. And the financial system plays a far larger relative role in the modern market economy than it did in the pre-industrial economy. Increasing prosperity has tended to be accompanied by increasing financial intensity.

• Secondly, however, that financial intensity itself creates the potential for instability, and one key driver of that potential instability is that financial markets are inherently susceptible to momentum and herd effects, to over-shoots, to self re-enforcing irrational exuberance and then irrational despair

• Thirdly and crucially, however, it is clear that some booms and busts matter more than others, and that in particular, booms and busts in credit pricing and credit supply are far more important than those in specific commodities or in equities


Source: Financial Services Authority

FSA Website

FSA – WARNS POTENTIAL VICTIMS OF BOILER ROOMS

The Financial Services Authority (FSA) is in the process of contacting more than 38,000 people across the UK to warn them that they could be the target of share fraud after it recovered a master list used by boiler room fraudsters.

The list contains the names and addresses of 38,242 people who the FSA believes may be contacted out of the blue and offered worthless shares. The greatest concentrations of targets are based largely in London and the South East, but there are significant numbers present in Yorkshire and Lancashire too.

The list is the biggest the FSA has ever recovered and is believed to still be in active use by boiler rooms operating in the UK and abroad. The FSA is in the process of writing to every single person on the list to alert them to their presence on it and to inform them how to avoid getting scammed.


Source: Financial Services Authority

FSA Website

FSA – SOLVENCY II – A REGULATOR’S PERSPECTIVE

Ken Hogg, Director, Insurance Sector, FSA addressed the Insurance Day Conference on this key topic on 18 May 2010.

In this speech – which is essential reading for anyone involved in Solvency II preparations within their firm, he stated:

“There are some big events this year which firms need to be fully engaged in. In addition to preparing for the new regime, the most important step forward this year will be the Quantitative Impact Study number 5 (QIS5) which will be testing the near-final specifications for the new financial requirements under Solvency II. QIS5 should be seen as much about being part of firms’ transition work into the new regime and the senior management getting a solid understanding of the impacts, as it is of course about informing the final calibrations."

After stating that the 2 month extension in implementation date should not encourage firms to take their eye off the ball, he went on to address where firms should be now in preparation.

He said: “The most important steps a firm should be engaging in at the moment is QIS5. We would like to see all firms taking part in the fifth Quantitative Impact Study (QIS5) this summer. This is the final QIS exercise before Solvency II will go live and will incorporate both quantitative and qualitative elements at both the solo and group level.

By completing the exercise, firms will be able to identify those areas where further work might be needed, and to form a good understanding of the likely impacts in terms of changes in financial resources requirements. And of course, participating in QIS5 will help to inform the final decisions as to the calibrations and help the formulation of any UK response to the final proposals.

One key element which we believe QIS5 will bring to firms is ensuring they understand how to construct the new balance sheet. The rules on the new Solvency II compliant balance sheet differ substantially from the current UK practice and firms should be already on the way to understanding the changes.

QIS5 should demonstrate the impact on your business and inform any action you might need to take. Participation in QIS5 means that you will be in a much stronger position to make an informed transition into the new regime. This is why we want to see as many firms as possible participating. Firms should be seeing this as a necessary and a useful step.”


Source: Financial Services Authority

FSA Website

FSA – SIMPLIFIED ADVICE

Sheila Nicoll, Director, Conduct Policy, FSA addressed the ABI Conference on 18 May 2010. She stated that FSA recognised that it had an important role to play if Simplified Advice was going to emerge, and for that reason FSA had done a number of things such as:

• Carrying out consumer research, to find out what consumers actually want. This comprised both qualitative and quantitative research, to help FSA understand consumer needs in relation to advice and the sorts of barriers that might be in the way of their accessing advice of any sort. An important finding from this was the potential for confusion in the nature of the service and the importance of being clear about what a simple advice service might offer. FSA also wanted to understand the potential size of the market for this type of service, recognising that there are a number of other developments, such as pension reform, which are reshaping the savings market.

• FSA chaired a number of round-tables, discussing with the full range of interested parties how it might be delivered and bringing together the ABI, BBA, AIFA, the Financial Ombudsman, Consumer Panel and Which? to discuss the issues. As a result, FSA published in the RDR Feedback Statement views on the difference between advised and non-advised processes and how suitability might be interpreted in relation to simplified advice services.

• FSA have had a large number of meetings with firms on a one-to-one basis about the Simplified Advice models that they have individually been developing. These have been very fruitful and have shown that there is commitment on the part of industry to explore and develop ideas and willingness on FSA’s part to provide support. These discussions show the diversity of views on some of the key issues about delivering Simplified Advice.

Ms Nicoll went on to say:

“We should not forget that there is already a Simplified Advice-type process which exists and indeed which has its own regime and sits outside MIFID. Basic Advice is there to deliver simple products to people with straightforward needs. It delivers a small suite of stakeholder products in a cost effective way. The regime is designed to deliver products and offer consumers good value, because of the charge cap and the flexibility in the product.

However, while Basic Advice might look like a great option for the consumer, the industry has been quite reluctant to use this. One thing that this suggests to me is that this is a very good reason why the development of a Simplified Advice process needs to be industry led: regulators and governments are not the best designers of products.”

Ms Nicoll went on to state the following points and went on to discuss each one in turn:

“There are a number of questions to be considered:

• How is the process going to be delivered?
• What is the right portfolio of products?
• What safeguards are there for consumers?
• What level of skills and training is needed by an adviser?
• What regulatory issues might impact on the development of Simplified Advice?”


Source: Financial Services Authority

FSA Website

FSA – APPPROACH TO INTENSIVE SUPERVISION

Speech by Jon Pain, Managing Director, Supervision, FSA addressed the City and Financial Intensive Supervision Conference on 18 May 2010.

He covered three key questions:

• What does the FSA’s intensive approach to supervision mean in practice?
• What outcomes are FSA seeking to achieve?
• What are the outstanding challenges FSA face?

In defining what intensive supervision meant, Mr Pain stated:

“The new approach we have moved to is ‘outcomes-based’ and this is delivered through intensive supervision. This approach is centered on intervening in a proactive way. To do this we needed to operate entirely differently, changing both our philosophy of ‘what supervision means’ and our approach to and the use of resources. We now:

• Undertake more extensive business model analysis, to understand the key drivers of risk and sustainability of your business;
• Make judgements, on the judgements of senior management;
• Act quickly and decisively;
• Proactively look to influence outcomes, not merely react to events;
• Apply a greater depth of analytical rigor – for example, through embedding severe stress tests into our assessment, of how much capital a firm should hold; and
• We back up our intensive supervision with credible deterrence when standards are not met – as evidenced by fines of over £33m for last year.”

Outcomes were summarised into three broad categories that:

• Firms are well-managed and have good governance;
• Firms are prudentially sound on a forward looking basis; and
• Consumers achieve a fair deal and are treated fairly.

Challenges were summarised in three points also as follows:

• International consensus
• The fact that the world-wide economic recovery remained fragile
• Internal risks and challenges for FSA staff.


Source: Financial Services Authority

FSA Website

ABI – TIME TO IMPROVE ACCESS TO SIMPLE ADVICE

The ABI has launched proposals designed to give more consumers better access to simple and affordable financial advice.

The policy paper, ‘Increasing consumer access to advice,’ reaffirms the ABI’s support for the aims of the FSA’s Retail Distribution Review (RDR). It also warns of the real danger that the RDR may end up restricting consumer access to advice, and calls for the introduction of a simplified advice process.

Maggie Craig, the ABI’s Director of Life & Savings, said:

“Every consumer should have access to affordable, credible financial advice. We know consumers prefer to get advice when buying financial products, yet our research shows that full advice costs £670 in total, and is beyond the reach of two-thirds of the UK adult population. While there are barriers to providing simplified advice, they can and must be overcome. We look forward to continuing to work with the FSA to help firms develop these simplified advice services and offer them to consumers.”

Research featured in the paper also shows that consumers want simplified advice that delivers good outcomes. The potential benefits of this include:

• Faster and more affordable advice for consumers with straightforward needs who are unable to access full financial advice. A simplified advice process could provide a personal recommendation in just 30-45 minutes

• The process is automated and IT driven allowing it to be offered via the internet, over the phone or face-to-face using facilitators to guide consumers through the pre-determined questions.

The ABI and insurance industry has developed guiding principles on how a simplified advice process could work. At the policy paper’s launch, the ABI also expressed its willingness to work with the FSA and other stakeholders on taking its proposals forward.


Source: Association of British Insurers

ABI Website