I would like to start by echoing many of the sentiments in Iain Cornish’s speech. This is perhaps unsurprising as there is a close relationship between our two Panels through our shared secretariat and my ex officio membership of the Practitioner Panel.
However, there are often differences on the impact that regulation and supervision has on smaller businesses, which means that we regularly have varying views and concerns to raise with the regulator.
This differentiation has, I am glad to say been recognised by the FSA, which is why the FSA took the initiative to set up the SBPP. Whilst not a statutory panel, like the Practitioner and Consumer Panel, the FSA has always treated us in the same manner. Nevertheless, we are extremely pleased that the Government has also recognised this differentiation and has proposed to make the SBPP an equal statutory Panel in the White Paper.
Whilst this statutory recognition is a positive thing to come out of the regulatory reform programme, there has also been much to concern us with the reforms.
A significant number of smaller firms are being swept up into regulation by the PRA as well as the FCA – firms such as credit unions and small mutuals, will now have to cope with the demands of dual regulation, even though they are extremely unlikely to pose any significant risk to financial stability.
We have encouraged the Government to take size the of firms into account when designing the regulatory system: we do not think it is healthy to end up with a system where there is such an onerous regulatory burden on organisations that only the largest firms are able to survive.
We also believe that there should be some system of formal engagement with firms in the set up of the new PRA. This does not necessarily have to be the existing Panels proposed for the FCA, but at least some sort of equivalent Practitioner Panel to challenge and provide industry perspective to the PRA.
With regard to the FCA, which will be responsible for the majority of smaller firms, we will continue to engage fully in discussions going forward especially regarding its philosophy.
We will be looking into the way that the FCA supervises in this structure. Although we welcome the plan for supervision by sector, we have yet to see how the FCA will guard against smaller firms getting lost at the bottom of the pile if there is no coordination of smaller firm interests.
One of the areas where the Government has suggested that the FCA will take a more proactive role is in product intervention. We have highlighted a number of risks for the regulator in engaging in such practices.
Products are rarely toxic in themselves – the problems normally occur in how and to whom the products are sold. Products developed for a certain consumer or market are sometimes sold to consumers for whom the products are not suitable or targeted when originally designed.
There must also be consideration of the European dynamic to these proposals, as we would not like to see a situation where a product is banned in the UK, but in can be sold into the UK by firms based in other European countries.
Our major concern with the development of the new regulatory system, and in our ongoing dialogue with the FSA has been – and is likely to remain as – the cost and burden on smaller firms.
This year, we have again urged the FSA to focus on its core activities, and not to take on any additional discretionary activities. This has included possibly delaying some of its policies from coming into effect as there is a convergence of material issues which will impact on firms in 2012 and early in 2013. Some of these, we appreciate, are out of the control of the FSA. However, the combined effect of Solvency II, the Capital Requirements Directive, European reporting requirements, the Retail Distribution Review, the Mortgage Market Review, as well as the UK Government’s regulatory reform, coupled with the generally weak economic situation, will place a significant burden on smaller firms.
An additional material cost concern for firms has been the impact of Financial Services Compensation Scheme levies. We, as a Panel, had been fully engaged in the review of the FSCS funding model. Whilst we appreciate that there were good reasons why the review was put on hold to wait for European developments, the problems of FSCS funding do need to be urgently addressed. The effects of the recent financial crisis, as well as the large demands from Keydata and the likely PPI linked defaults has led and will lead to the FSCS requiring far greater funding of defaults than has ever been the case in the past. We have pointed out that small firms in particular find it extremely difficult to plan for a material and unquantifiable potential liability to the FSCS with limited financial resources. This is further exacerbated by the difficulty and expense of obtaining professional indemnity (PI) cover.
The Retail Distribution Review has also taken much of our attention this year. We support the objectives of the RDR overall. However, we have suggested that the RDR should be delayed to allow a regime for simple products and simplified advice to be developed; a broader cost benefit analysis of the whole of the RDR to be carried out; and for the FCA objectives to be set and checked against the objectives of the RDR, to ensure that there are not further changes once the FCA is in place.
We also suggested that professional qualifications be set at different levels to reflect varying consumer needs and enable simplified advice to be provided more easily.
An area which has received less public attention, but one which our Panel has highlighted to the FSA, is the proposed change to the capital adequacy requirements linked to the RDR. We continue to urge the FSA to delay these increases, to allow time for advisers to develop viable new business models.
We have worked with the FSA on the Mortgage Market Review, to promote our view that regulation of mortgages must allow flexibility within the context of safe lending. Firms must be allowed to consider the risk profile of individual consumers and not adopt a ‘one size fits all’ approach. We have therefore welcomed the FSA’s decision to undertake a broad ranging cost benefit analysis at the beginning of 2011.
We have supported the FSA in successfully focussing on European and international engagement over this year as the new European structures have been developed. Smaller firms find it extremely difficult to engage effectively with Europe, as the issues tend to be remote and very long running.
The result is that smaller firms are overlooked with regard to significant regulatory policies: smaller firms have to rely all the more on the FSA fighting their corner for practical, effective and proportional regulatory requirements from Europe. We have seen some good work from the FSA in areas such as Solvency II, liquidity standards and remuneration code in this respect.
A key part of our role is to help the FSA to improve the consistency and quality of supervision when directed at smaller firms. We have been supportive of the FSA’s review of smaller firms supervision, and its programme of more active engagement with smaller firms through targeted roadshows and other forms of communication.
For smaller firms who are supervised at arm’s length, with questions to the regulator answered through a contact centre, it is important that there is some means of constructive and interactive engagement to help smaller firms to understand better how to comply with regulatory requirements. We are encouraging the FSA to continue some programme for active engagement with smaller firms going forward.
I also would like to thank the FSA staff who have provided information and support to our Panel, and particularly the FSA’s smaller firms division. I am also appreciative of the time and effort put in by my fellow members of the SBPP, and look forward to continuing the work of the SBPP over the coming year.