Thank you, Adair.

As you are all aware, the current economic climate is extremely tough for small businesses, who are in the main finding it difficult to survive, let alone flourish. In the next 12 months I am afraid the Panel cannot solve the problems of the Eurozone and the global economic crisis, but what we can focus on is to try and reduce the cost and burden of regulation. Whilst we wholeheartedly agree with the need for regulation, the Smaller Businesses Practitioner Panel has tried to focus on achieving a cost effective and proportionate regulation from the viewpoint of smaller firms. The remit of the Panel encompasses small firms like IFAs/credit unions, and large firms which are small in their relative sectors, such as small banks and deposit takers.

The main offender is often not the direct cost of the FSA itself, but the additional cost and quantum of regulation that companies have to bear from government and other quasi official organisations. We have taken an active interest in the development of the FSA's 2012 and 2013 business plan, and have endeavoured to provide constructive challenges to the FSA's priorities regarding expenditure and overheads. We have been particularly keen to see a separation of the cost of transition against the FSA's business as usual costs, so in future the Panel can hold the regulators to account over the promise that the cost of dual regulation will not be any greater than the current cost that is in place. What is more concerning for smaller firms is expenditure relating to the associated regulatory costs, particularly the Money Advice Service and the Financial Services Compensation Scheme. In both cases the levies and fees charged have significantly escalated over the past few years.

Firstly the Money Advice Service, which is to extend its remit to include debt advice as an additional service, even though it has been difficult to see how the current remit, the existing costs are managed and controlled. In 2011/12, the budget for the Money Advice Service was just over £43 million, and in 2012/13, the total industry funding has risen to £80 million, including spending £20 million on brand awareness and marketing alone. We note that the Treasury Select Committee has some concerns regarding the Money Advice Service, and we fully support its review and consultation in this area.

Secondly, and the area of more significant cost, is the FSCS. Over the past few years we have seen a dramatic increase in levies, which looks set to continue. We are pleased that the FSA has recognised the need to tackle some of the issues and has therefore launched the FSCS Funding Review, in spite of the lack of clarity on the current European position. We think that going forward, that regulators should be charged to look at the impact of the FSCS levy on the viability of firms. We also feel that now would seem the most appropriate time to question whether such a self insurance system is affordable or fit for purpose in its current form. As in most cases, the well run and compliant companies are the ones that are penalised and have to finance the compensation payments to the clients of errant firms. We have emphasised to the FSA that the burden and cost of all the compliance and regulatory requirements can place a disproportionate load on senior management of smaller firms. A significant element of a small firm's regulated to time and costs need to be devoted to compliance and not the best interests and services to their clients. We are therefore pleased that the FSA has, in some areas, tried to implement a proportionate approach towards smaller firms, for example the FSA's approach to harmonised CRD reporting and Solvency II, which shows an appreciation of the need to adapt policy proposals according to the size of the firm.

We also believe that most smaller firms want to try to do the right thing, and the FSA's three year enhanced supervisory programme for small firms has been a useful investment, as it provides opportunities to educate firms via conferences and seminars, opportunities as well as supervision. We have encouraged the FSA to do as much as possible to be clear about their expectations from firms. We have urged the FSA to think more about how they communicate with small firms in all their activities, particularly "Dear CEO" letters, and the FSA website, as the majority of smaller firms must rely on these generalised communications to provide further clarity on what the new legislation means to them.

The Panel has also had to pay special interest to the FSA's major UK policy developments. The RDR continues to be an area of concern for those firms who have been affected, and we have tried to highlight aspects where we feel the FSA needs to do more for smaller firms. For instance, we sought that the FSA seek more clarity from the HMRC around the VAT implications of moving away from commission and into fee based advice models. More worryingly, we have also raised a concern that the direction of the RDR may run counter in some areas to the developments of MiFID II, which, if enacted as the commission has proposed, may give rise to the UK having to gold plate aspects of the proposed directive if it wants to keep the RDR unchanged. Whilst there has been no industry consensus, we have supported the FSA's view that similar principles should be applied to platforms, and that there should be a ban on provider payments to platforms.

Throughout the year we've continued to follow and input into the development of the new regulatory models for the PRA and FCA. Our overriding concern has been to see that the commitment to proportionality in the approaches of the PRA and FCA really is carried through. So for instance, we have sought to highlight in the political debate that it will not just be the largest firms that are dual regulated, it will be small deposit takers, mutuals, credit unions and insurance companies that are regulated by the PRA. This means that nearly 1,300 smaller firms will be dual regulated and so must adapt to deal with two regulators from 2013.

We are actively engaged in discussions on the plans for the FCA approach. We are pleased that the FCA plans to build on existing good practices employed by the FSA, and are supportive of the decision to supervise on a sectorial basis, although we have yet to be provided with sufficient information at this current time to how the needs of smaller firms will be fully taken into account in this dual regulated world, especially from the PRA, but maybe that just highlights the need for the Smaller Business Practitioner Panel to be actively involved in policy debate for the PRA.

Looking forward, the Panel will continue to engage actively in the FSA's plans for transfer of its regulatory responsibilities to the PRA and the FCA. We look to help the FCA to have a constructive approach to the needs of smaller firms, and to improve effective communication with the large constituency of small firms that do not have dedicated relationship managers, and of course, we will continue to focus on cost effectiveness for the regulation of small firms in all aspects of our work.

Over the last few days and weeks there have been a number of events which have highlighted the facts that clients and customers are often not put first in financial service firms. I feel that for many smaller firms, they have no choice but to put their clients first as they need to have long term relationships with those very clients to have sustainable business, so it would be a shame if the burden and cost of and compliance would see their demise. Thank you.

Guy Matthews
Chairman