Ladies and gentlemen,

It really is one of the great privileges that I enjoy as Chairman of the Smaller Businesses Practitioner Panel to be invited to speak at this FSA Annual Public Meeting each year.

If you have had the opportunity to read the Annual Report of the SBPP, it is one of the documents that is in your packs, you will have been reminded that the Smaller Businesses Panel represents some 93% of regulated firms.

Therefore, I am sure everyone agrees that smaller firms are a significant stakeholder for the FSA to consider.

When I spoke at this meeting last year amongst other things I highlighted how difficult it is for small firms to fully appreciate the FSA's expectations of them.

Two critical pieces of work in the last twelve months have highlighted the accuracy of that concern:
Firstly, the Practitioner Panel carries out a survey of regulated firms every two years. The survey results published in November 2006 revealed that well over half of firms did not think that the FSA had provided a clear enough explanation of how firms should implement the ‘Treating Customers Fairly’ (TCF) initiative.

Secondly, a recent thematic exercise carried out by the FSA itself highlighted that only 41% of smaller firms had moved at the same speed on TCF implementation as had been hoped for by the FSA.

Naturally, both the FSA and the Panel would have preferred to receive a more positive result to both of these pieces of work. We both want firms to be successful and compliant.

The Panel does not believe that in most cases there is any deliberate intent behind smaller firms' lack of progress – in fact we believe that most smaller firms are trying their level best to get it right.
They simply have not understood or heard the messages from the FSA.

This could be that the communications were not written in a language that was familiar to them or they have not been able to prioritise the communications in view of the amount of material that they have been expected to digest.

In the FSA’s own survey, it was noticeable that the vast majority of larger firms had met the expectations on progress with TCF. The Panel thinks that this goes far beyond a large/small firm issue. This is about firms that have enjoyed a closer relationship with the FSA making more progress than those that don’t.

As an example, in my day job, I am Chief Executive of a small friendly society, which is nevertheless fortunate enough to have an FSA relationship manager. There is no doubt in my mind that we benefited significantly from two-way interaction in terms of understanding and fulfilling our TCF obligations on time.

This perhaps illustrates why, in the Panel's view, it is too simplistic to see this as a larger firm/smaller firm issue - it is far more about having access to personal, qualitative and regular dialogue with the regulator.

This should not be taken as a plea for more regulation for smaller firms, this is more about improved regulation.

Put simply, it is a question of support and communication. Smaller firms need more direct contact with the FSA.

While we understand that relationship management for all firms – or all smaller firms - is unachievable, we think that there is now a strong case for the FSA to consider the fundamental question of whether more resources should be dedicated to smaller firm regulation and supervision.
The Panel considers that this would not only add value by helping more smaller firms meet the FSA's expectations of them - and have a positive effect on consumer confidence - but would also have a significant impact on the regulator's perceived performance and willingness to empathise with the challenges that smaller firms face on a daily basis.

No one takes any pleasure from bad headlines – tackling the root causes should therefore be a shared imperative from which all concerned would surely benefit.

We realise that the FSA has a tricky balance to negotiate – and it cannot please everyone all of the time. But we welcome Callum's recent assurance that this aspect of the FSA's operation is under active consideration and we look forward to engaging further on that in due course.

In terms of communication generally, the Panel is always supportive of any FSA initiative that helps smaller firms get to grips with their regulatory obligations - for example, some of the more recent TCF material is particularly helpful - more has been done to improve the FSA website, and the work of the Small Firms Division, of which I will say more later, continues to receive positive feedback from the industry.

I do have a real fear that some firms have stopped engaging with the FSA due to difficulty in coping with the volume of developments. Whilst having empathy the Panel does not consider it to be part of its role to defend those firms. Quite rightly, financial services is regulated for the protection of the consumer, and firms in the sector must expect to attempt to comply with rules and keep pace with developments. Apathy from firms is not the answer.

The twin issues of support and communication are all the more pressing given the move towards a more principles-based framework and the importance that the FSA (and the industry) attaches to its successful delivery.

The Panel has been supportive of the general notion and purpose of principles-based regulation – albeit, it is fair to say, somewhat cautiously. Some smaller firms - with less internal compliance resource and expertise - often prefer the safety and clarity of specific rules. The successful engagement with, and embedding of, principles-based regulation in the smaller firm sector therefore presents various obstacles for firms and regulator alike.

The FSA's recent position paper – Principles-based Regulation: Focusing on the Outcomes that Matter - provides a helpful and meaningful basis to help smaller firms begin to understand and engage with this important shift in approach.

There will, however, be different degrees to which smaller firms wish to take full advantage of the flexibility and opportunities that Principles-based Regulation provides. For the very smallest firms, the transition should be relatively straightforward. But when larger companies and the FSA argue that smaller firms should find it easier to run their business under a principles-based framework – because there are fewer individuals and reporting lines involved – we think that this is something of an urban myth. It is not what smaller firms themselves tell us. In fact, the Panel feels that smaller firms' apprehension and uncertainty is perfectly understandable. Time will tell.

But, first things first, it is essential that smaller firms at least take the time and trouble to proactively consider how this issue impacts their business model.

The Panel is especially pleased at the explicit commitment to enhancing the role of the FSA's Firm Contact Centre – specifically, its ability and willingness to provide smaller firms with more authoritative and qualitative guidance. This will be invaluable.

The Panel visited the FCC earlier in the year, and was impressed at the way its staff performed that difficult and often thankless task. But it is accepted by the FSA that more can be done to make this function a better one – the Panel will follow those developments with a keen ear.

The Panel completely recognises the difficulties that the FSA faces in supervising c.18,000 smaller firms on what is, inevitably, a finite budget. And, more generally, we think that the creation of the Small Firms Division – and Stephen Bland's leadership thereof – has meant that the FSA now has smaller firms more at the forefront of its thinking than ever before; and is making genuine efforts in reaching out to smaller firms and in making itself easier for them to do business with. We commend those efforts. I would congratulate Stephen and his team on all that they have achieved to date.
Enough has already been said today about the FSA's Retail Distribution Review. I will not add much at this stage. But it is, of course, a fundamental and crucial issue for smaller firms that could affect the very nature, shape and sustainability of the distribution infrastructure. This is especially true from an intermediary perspective.

The Panel will reflect over the course of the next few months, and take soundings from the various interested trade bodies, before deciding how best to position itself on this difficult and emotive issue.
I will also resist the temptation to say too much about the overall FSA retail agenda, and the cumulative burden and uncertainty that this poses for firms. Roy commented on this earlier, I will simply say that the Smaller Businesses Practitioner Panel shares those sentiments.

Finally I am particularly pleased to have an opportunity – on what is effectively his last day at the office – to say "thank you and good luck" to John Tiner. The Panel has always enjoyed – as have I personally - a good relationship and rapport with John. We have always found him to be straightforward and constructive in his dealings with us – with a genuine desire to listen and engage with the views of smaller firms. The Panel will not be disappointed if Hector demonstrates those same qualities over this crucial period of time. Hector, we look forward to working with you over the coming period. In particular, we will be interested to hear how you intend to bring your focus, experience and pragmatism from the wholesale side - where it is fair to say that firms are more content with the way they are regulated - into the retail marketplace.

John – we wish you well, whatever the future holds.