FSA Annual Report 2006/07 - Better Regulation Ltd

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106 Section six – Appendices Appendix 2 It is also, of course, important that firms and their advisers are able to access and stay abreast of our statements and publications; as we have previously announced, we are working to deliver new technological solutions that will enable them to do this. We recognise that as we introduce more high-level rules into our Handbook some industry groups may wish to produce their own supplementary guidance. In our view it is for the industry to initiate and drive the production of any such material. In September 2007 we will publish a Policy Statement setting out our future approach on industry guidance; we believe this will address many of the Practitioner Panel’s concerns. We agree with the Panel on many aspects of the use of such guidance; complying with it must be voluntary, and we acknowledge the resource implications for trade associations of producing this material. It is of course not the role of trade associations to monitor compliance with guidance. We agree that we must explain clearly to firms the status and meaning of our confirmation of industry guidance. One of the topics we discussed in some depth at the recent conference, and which will be discussed in more detail in our proposed Enforcement Guide on which we have recently consulted, is the role of enforcement in a more principles-based regime. Concerns have been expressed about the impact that enforcement actions may have in a less prescriptive, more principles-based environment. We are not looking to trip firms up; we take account of a firm’s behaviour and its positive engagement with desired regulatory outcomes when considering the most appropriate course of action. We cannot use hindsight or apply later, higher standards retrospectively when deciding whether to take enforcement action. We acknowledge that when we publish details of our enforcement decisions in cases based on breach of Principles only, we must explain clearly the basis on which we took action, and we must ensure that our application of the Principles is consistent. We maintain a dialogue with the FOS about principles-based regulation and about industry guidance in particular, and we will say more about this in our September Policy Statement. Where a FOS decision has a wider application we work proactively with the ombudsman service within the framework of the ‘wider implications’ process. Costs of regulation The Deloitte cost of regulation report, published in June 2006, encouragingly confirmed that much of what regulation requires is good business practice. As the Panel notes, most of the rules identified as imposing the highest incremental costs were in the retail investment and pension advice sector, and related to point of sale disclosure. Alongside the Deloitte report we published a progress report on our Better Regulation Action Plan. This included our plans to use the results of the Deloitte study to assess the benefits of the regulatory requirements that generate the highest incremental costs (and that, for example, are not required to remain in place as part of the implementation of a Directive). By the end of 2008 we expect to have reviewed rules giving rise to over 80% of the administrative regulatory costs identified in our studies.
Section six – Appendices Appendix 2 107 We have demonstrated, through the significant simplification of our conduct of business rules and our recent decision on the Menu, our commitment to move away from detailed, prescriptive rules. This will give firms greater flexibility in meeting our regulatory standards. However, as we have highlighted in our Annual Report, we continue to find too many instances of retail firms not treating their customers fairly. While this remains the case, regulatory intervention will continue to be necessary. Financial Services Compensation Scheme (FSCS) In March 2007 we published a Consultation Paper (CP07/5) proposing new funding arrangements for the FSCS. Finding a solution has been difficult; unsurprisingly, it has not been possible to devise funding arrangements which have universal support from the industry. However, there was general acceptance that the present arrangements were no longer fit for purpose. We believe that the model we have proposed is more rational, fairer to the various players in the market and more robust. It will also put the FSCS in a better position to provide an enhanced level of compensation for unforeseeable events. We do not expect our proposals to affect capital requirements or credit ratings for general insurers (or indeed for other firms). Although the proposals would raise potential exposure levels for general insurers (because of the revised sub-class thresholds and potential exposure to the defaults of other sectors), we do not consider there to be any change in the existing practice for the recording of such potential exposure, either under accounting practices or our own capital requirement regime. Unless a liability to the FSCS is at least ‘more likely than not’ and can be measured reliably, we would not expect it to appear as an accounting liability or affect a firm’s capital requirements under our rules. It would be reasonable to apply the same logic to credit ratings. We also announced our intention to consult separately on a final level of compensation funding to be made available based on wholesale business, which would involve firms which are not currently required to contribute to FSCS compensation payments. We explained our position on this issue to the Panel before publishing CP07/5. Wholesale and retail markets are not wholly insulated from each other. In our judgement it is reasonable to consider that a major default in the retail market could have a knock-on effect on the stability and profitability of the wholesale market. The retail and wholesale sectors often stand as counterparties to each other, interacting in mutually beneficial business relationships. Wholesale institutions therefore have a real interest in maintaining confidence and stability in the retail market. The proposed model also offers considerable benefits for some firms that have both wholesale and retail business. The focus of the proposed model on eligible income means that much of the business of such firms would be excluded from the relevant sub-classes, reducing their potential exposure at this level compared to the current model. We will take into account the issues raised by the Panel in developing our thinking on this further. We agree that there are practical issues relating to the design of any wholesale pool; for example in our current consultation we have sought stakeholder feedback on appropriate tariff measures for a wholesale pool. The fact that we have taken the decision to consult separately reflects the difficulty of this issue and the seriousness with which we are considering concerns that have been expressed.
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FSA Annual Report 2006/07 - Better Regulation Ltd

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