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CEO's Speech At The FSA Annual Public Meeting: Speech By Hector Sants, Chief Executive, FSA, FSA Annual Public Meeting, 24 July 2008
24/07/08
The last year has been difficult for the FSA. Perhaps the most challenging since its creation ten years ago. You should be in no doubt we regret the events surrounding Northern Rock.
But respected and durable institutions grow stronger in times of adversity. In the last twelve months we believe we have both achieved much and learnt much. And I have no doubt that the FSA is now a stronger organisation as a result of the hardships of the last year.
What have we achieved?
I have said we regret the events surrounding Northern Rock and will comment on the lessons that we have learned shortly. But I do not want my report on the last year to solely address this critical issue. This would present a distorted picture of the last twelve months at the FSA. We have achieved much over in this period: in the development and implementation of policy; in consumer education; and in our supervisory action.
Policy Achievements
We have delivered on the policy agenda we set out in the 07/08 Business Plan. I would like to highlight just two aspects today - Solvency II and MiFiD.
The Markets in Financial Instruments Directive came into effect on 1 November last year. MiFID is a major part of the European Union’s Financial Services Action Plan designed to help integrate Europe's financial markets. It aims to provide a harmonised regulatory regime across Europe for investment services, and to increase competition and consumer protection in investment services. I consider its implementation a policy, supervisory and operational success for the FSA. It was a good example of how our collaboration and consultation with industry, our exercise of influence within the EU, and our on-the-ground work with firms combine to achieve improvements in the financial environment.
The Solvency II Directive is perhaps the most important piece of EU-driven work we are involved in. Its aim is to establish a set of EU-wide, risk-based solvency requirements for insurers, and it could have considerable consequences for the UK’s insurance sector.
The development of the level 1 framework has been generally consistent with the outcomes the UK would like to see. But there is a long way to go and we continue to devote a lot of energy and senior resource to all the European working groups involved in its development. I am on the Managing Board of the Committee of European Insurance and Occupational Pensions Supervisors. And one of our Directors chairs the Internal Models Expert Group which is key to the UK’s interests. We also devote a lot of effort to involving the UK industry through the FSA/Treasury High-Level Group and our Insurance Standing Group.
Consumer Education Achievements
The FSA leads the National Strategy for Financial Capability. It is our long-term ambition that UK citizens are able to look after their financial affairs in a responsible and confident manner. We continued to make steady progress towards that goal over the last year as we carried out ‘Delivering Change’ – our strategy to improve the financial capability of the UK.
We met, and in many places, exceeded most of our targets. We estimate that so far our financial capability programmes have reached over four million of our 2011 target of ten million people.
We are delighted that, following the Thoresen Review, the Government asked us to lead the Pathfinder programme to test delivery of the UK’s first national money guidance service. This will enable us to leverage our success to date in this vitally important area.
Supervisory Achievements
Our supervisory achievements over the last twelve months have been considerable. I am extremely proud of the hard work, commitment and courage of our teams. All financial firms, but especially banks, have had to adapt to the changing conditions of the marketplace. Many firms have had to develop new funding and capital plans and thoughtfully adjust their business models. Our supervisors worked with them to ensure this was achieved. This required determined and intensive work, some of which, no doubt, some firms felt was overly intrusive and directive. But I believe the circumstances warranted this approach and that the industry generally recognises this.
Lessons Learnt
More important, arguably, than all these achievements are the lessons we have learnt. I have already said that the standard of supervision of Northern Rock prior to the summer of 2007 was unacceptable to the FSA and that we regret what happened. I have also said how important it is that we learn lessons from that failure. I believe we have. Our Internal Audit report sets out clearly what we need to do. We have already made many of the necessary changes, and we will complete our Supervisory Enhancement Programme by the end of the year.
The programme includes a commitment to have a minimum supervisory resource for all high impact firms. This will ensure the necessary focus and continuity with these key initiatives. It will lead to increased costs and that we are thus likely to exceed the levels of expenditure shown in the Business Plan for 2008/09 which will also have consequences for next year. I do, however, believe that this necessary investment is supported by the firms who will benefit from the resultant higher quality supervision.
It is important to recognise that there are lessons to be learnt not only from our supervisory failings of previous years but also from our supervisory achievements of the last year.
Drawing on the lessons I have learned from both experiences, I would like to spend a moment focusing on our progress in respect of the core underpinnings of a successful regulator.
Culture
We need a good culture. A culture which attracts and retains quality individuals. A culture which encourages decisive yet considered judgements. A culture which is respected and admired. Cultures such as this can only be built through time and concerted action. I believe this year we have moved closer to the culture we aspire to. In particular, I believe we have demonstrated our willingness to be brave and to make difficult, directive judgements – even when we know we will be criticised by vested interests. The most recent example of this was over short selling.
People
Culture goes hand in hand with people. As I have said many times, we need the right people in the right jobs. This means the right mix of career regulators and experienced market practitioners, built on a vibrant graduate programme. I believe we have achieved much this year towards this goal. Especially pleasing has been the depth and experience of many of those we have hired from the industry.
Of course, there is always more to do. But I would like to dispel, I hope once and for all, the view of some commentators that the FSA is staffed by out of touch bureaucrats. Anyone who meets my colleagues, or even looks at our website, would realise that this is simply not the case. We have an excellent balance of market and regulatory experience within our senior team and at all levels of the organisation.
Operational Infrastructure
As with any job, people can only do their best work when they have the right tools. To best equip our staff, we have continued to invest in our operational infrastructure, training and improved risk identification and mitigation processes.
Our training over last year was focused on ensuring that management are well-equipped to lead and manage the organisation, and that our frontline supervisors have the necessary technical and soft skills. And we are further upgrading our supervisory training and competence framework as part of the supervisory enhancement programme.
We made a considerable investment in our premises, creating a work space that gives us the flexibility to easily respond to changing demands.
And we continued to invest in our technology, improving our market monitoring, data gathering and knowledge management tools. These investments will enhance our ability to identify risks and more effectively follow through with firms to ensure they are considering and where necessary addressing them. Risk identification and partnering with firms to mitigate risk are at the heart of effective supervision.
Conclusion
In conclusion, we must acknowledge that the last year has been a difficult one for the FSA, overshadowed as it was by the events surrounding Northern Rock. But, it was also a year in which we achieved much and learnt lessons that I believe will ensure the FSA establishes itself as a strong and enduring institution.
As to the future? It is clear that the current year has as many challenges for us as the last. We have seen several acts playing out in the markets. The first act, last summer, was a liquidity crisis. In the autumn we moved into the second act where the concern has been about capital. We are now anticipating the third act, which is likely to feature a downturn in the real economy. The good news is that we are moving through the acts. But the risks in each are material and neither we nor our firms can afford to relax.
Inevitably we will enter the final act - the ‘new normal’. The new normal will require firms to adapt their business models, consumers their spending patterns and consequently generate new challenges and change for us. I have already previously observed that the era of “easy money” is gone for some come and all of us must take that into account, whether we are managers of financial institutions, borrowers or savers.
The underlying objective of the FSA will, however, not change. We remain committed to delivering a quality market place: a market place that is orderly and fair; a market place where borrowers and savers can make long-term financial commitments with confidence; a market place which works for everybody.
Chairman
Before finishing, I would like to take this opportunity to publicly thank Callum for his outstanding contribution as Chairman, and for his tireless engagement with the many difficult issues we have faced over the last 12 months. I have especially valued his personal counsel.
24/07/08
The last year has been difficult for the FSA. Perhaps the most challenging since its creation ten years ago. You should be in no doubt we regret the events surrounding Northern Rock.
But respected and durable institutions grow stronger in times of adversity. In the last twelve months we believe we have both achieved much and learnt much. And I have no doubt that the FSA is now a stronger organisation as a result of the hardships of the last year.
What have we achieved?
I have said we regret the events surrounding Northern Rock and will comment on the lessons that we have learned shortly. But I do not want my report on the last year to solely address this critical issue. This would present a distorted picture of the last twelve months at the FSA. We have achieved much over in this period: in the development and implementation of policy; in consumer education; and in our supervisory action.
Policy Achievements
We have delivered on the policy agenda we set out in the 07/08 Business Plan. I would like to highlight just two aspects today - Solvency II and MiFiD.
The Markets in Financial Instruments Directive came into effect on 1 November last year. MiFID is a major part of the European Union’s Financial Services Action Plan designed to help integrate Europe's financial markets. It aims to provide a harmonised regulatory regime across Europe for investment services, and to increase competition and consumer protection in investment services. I consider its implementation a policy, supervisory and operational success for the FSA. It was a good example of how our collaboration and consultation with industry, our exercise of influence within the EU, and our on-the-ground work with firms combine to achieve improvements in the financial environment.
The Solvency II Directive is perhaps the most important piece of EU-driven work we are involved in. Its aim is to establish a set of EU-wide, risk-based solvency requirements for insurers, and it could have considerable consequences for the UK’s insurance sector.
The development of the level 1 framework has been generally consistent with the outcomes the UK would like to see. But there is a long way to go and we continue to devote a lot of energy and senior resource to all the European working groups involved in its development. I am on the Managing Board of the Committee of European Insurance and Occupational Pensions Supervisors. And one of our Directors chairs the Internal Models Expert Group which is key to the UK’s interests. We also devote a lot of effort to involving the UK industry through the FSA/Treasury High-Level Group and our Insurance Standing Group.
Consumer Education Achievements
The FSA leads the National Strategy for Financial Capability. It is our long-term ambition that UK citizens are able to look after their financial affairs in a responsible and confident manner. We continued to make steady progress towards that goal over the last year as we carried out ‘Delivering Change’ – our strategy to improve the financial capability of the UK.
We met, and in many places, exceeded most of our targets. We estimate that so far our financial capability programmes have reached over four million of our 2011 target of ten million people.
We are delighted that, following the Thoresen Review, the Government asked us to lead the Pathfinder programme to test delivery of the UK’s first national money guidance service. This will enable us to leverage our success to date in this vitally important area.
Supervisory Achievements
Our supervisory achievements over the last twelve months have been considerable. I am extremely proud of the hard work, commitment and courage of our teams. All financial firms, but especially banks, have had to adapt to the changing conditions of the marketplace. Many firms have had to develop new funding and capital plans and thoughtfully adjust their business models. Our supervisors worked with them to ensure this was achieved. This required determined and intensive work, some of which, no doubt, some firms felt was overly intrusive and directive. But I believe the circumstances warranted this approach and that the industry generally recognises this.
Lessons Learnt
More important, arguably, than all these achievements are the lessons we have learnt. I have already said that the standard of supervision of Northern Rock prior to the summer of 2007 was unacceptable to the FSA and that we regret what happened. I have also said how important it is that we learn lessons from that failure. I believe we have. Our Internal Audit report sets out clearly what we need to do. We have already made many of the necessary changes, and we will complete our Supervisory Enhancement Programme by the end of the year.
The programme includes a commitment to have a minimum supervisory resource for all high impact firms. This will ensure the necessary focus and continuity with these key initiatives. It will lead to increased costs and that we are thus likely to exceed the levels of expenditure shown in the Business Plan for 2008/09 which will also have consequences for next year. I do, however, believe that this necessary investment is supported by the firms who will benefit from the resultant higher quality supervision.
It is important to recognise that there are lessons to be learnt not only from our supervisory failings of previous years but also from our supervisory achievements of the last year.
Drawing on the lessons I have learned from both experiences, I would like to spend a moment focusing on our progress in respect of the core underpinnings of a successful regulator.
Culture
We need a good culture. A culture which attracts and retains quality individuals. A culture which encourages decisive yet considered judgements. A culture which is respected and admired. Cultures such as this can only be built through time and concerted action. I believe this year we have moved closer to the culture we aspire to. In particular, I believe we have demonstrated our willingness to be brave and to make difficult, directive judgements – even when we know we will be criticised by vested interests. The most recent example of this was over short selling.
People
Culture goes hand in hand with people. As I have said many times, we need the right people in the right jobs. This means the right mix of career regulators and experienced market practitioners, built on a vibrant graduate programme. I believe we have achieved much this year towards this goal. Especially pleasing has been the depth and experience of many of those we have hired from the industry.
Of course, there is always more to do. But I would like to dispel, I hope once and for all, the view of some commentators that the FSA is staffed by out of touch bureaucrats. Anyone who meets my colleagues, or even looks at our website, would realise that this is simply not the case. We have an excellent balance of market and regulatory experience within our senior team and at all levels of the organisation.
Operational Infrastructure
As with any job, people can only do their best work when they have the right tools. To best equip our staff, we have continued to invest in our operational infrastructure, training and improved risk identification and mitigation processes.
Our training over last year was focused on ensuring that management are well-equipped to lead and manage the organisation, and that our frontline supervisors have the necessary technical and soft skills. And we are further upgrading our supervisory training and competence framework as part of the supervisory enhancement programme.
We made a considerable investment in our premises, creating a work space that gives us the flexibility to easily respond to changing demands.
And we continued to invest in our technology, improving our market monitoring, data gathering and knowledge management tools. These investments will enhance our ability to identify risks and more effectively follow through with firms to ensure they are considering and where necessary addressing them. Risk identification and partnering with firms to mitigate risk are at the heart of effective supervision.
Conclusion
In conclusion, we must acknowledge that the last year has been a difficult one for the FSA, overshadowed as it was by the events surrounding Northern Rock. But, it was also a year in which we achieved much and learnt lessons that I believe will ensure the FSA establishes itself as a strong and enduring institution.
As to the future? It is clear that the current year has as many challenges for us as the last. We have seen several acts playing out in the markets. The first act, last summer, was a liquidity crisis. In the autumn we moved into the second act where the concern has been about capital. We are now anticipating the third act, which is likely to feature a downturn in the real economy. The good news is that we are moving through the acts. But the risks in each are material and neither we nor our firms can afford to relax.
Inevitably we will enter the final act - the ‘new normal’. The new normal will require firms to adapt their business models, consumers their spending patterns and consequently generate new challenges and change for us. I have already previously observed that the era of “easy money” is gone for some come and all of us must take that into account, whether we are managers of financial institutions, borrowers or savers.
The underlying objective of the FSA will, however, not change. We remain committed to delivering a quality market place: a market place that is orderly and fair; a market place where borrowers and savers can make long-term financial commitments with confidence; a market place which works for everybody.
Chairman
Before finishing, I would like to take this opportunity to publicly thank Callum for his outstanding contribution as Chairman, and for his tireless engagement with the many difficult issues we have faced over the last 12 months. I have especially valued his personal counsel.
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