Risk & Compliance

Less Talk, More Action

As the new supremo of the U.K.'s financial watchdog, John Tiner is promising a double bonus for businesses -- less paperwork and swifter, more effe...
Ben McLannahanJanuary 30, 2004

John Tiner has been dubbed “Europe’s most influential regulator.” As the new chief executive of the UK’s Financial Services Authority (FSA), he wants to overhaul the way financial markets are overseen, slashing red tape while cracking down on repeat offenders. Promising less talk, more action, can Tiner provide a new template for Europe?

Time will tell. But although Tiner’s only been in the hot seat for a few months, it’s clear that the shake-up led by the 45-year-old accountant is going to be radical. With over 2,300 staff at its gleaming headquarters in London’s Canary Wharf, the FSA regulates everything from a £30,000 mortgage to a £300 billion hedge fund. And its remit will soon grow. The FSA is due to start regulating all UK mortgage advisers this autumn and all general insurance brokers in January 2005. That’ll increase the number of firms falling under its supervision to 32,000 from 12,000.

The FSA made its debut in April 2001, uniting the authorisation, supervision and enforcement functions of ten formerly separate banking, insurance and securities overlords. It wasn’t Europe’s first über-regulator — the Norwegian government set up Kredittilsynet, an integrated banking, insurance and securities commission in 1985, spawning imitators in Denmark (1988), Sweden (1991), Finland (1993), Hungary (2000) and Germany (2002). But today the FSA is the largest and most influential body of its kind. It has a much wider mandate than America’s securities-focused SEC, for example, which shares supervisory powers with a range of bodies including the Federal Reserve Board (banking), the Commodity Futures Trading Commission (derivatives) and 50 separate state insurance regulators.

Tiner takes the chair at a tricky time. Over the past year the FSA has been accused of failing consumers following a series of scandals over the alleged misselling of financial products. It’s also been criticised for swamping businesses with paperwork: in its first two years the FSA churned out some 23,000 pages of consultation on proposed regulatory changes — more than six pages for every hour of every working day — according to Compliance Solutions, a London-based consultancy. Wary of consultation overload, Tiner is convinced he can halve the amount of red tape produced in 2004. “We just need the market, and consumers and our own staff, to settle to the regime that’s been created, and not to keep rewriting it,” he says.

The following are excerpts of an interview with Tiner at the FSA’s office in London by Ben McLannahan, senior staff writer at CFO Europe.

The FSA in 2004

Since taking over from your predecessor, Sir Howard Davies, last autumn, you haven’t wasted much time in announcing an overhaul of the FSA’s original structure. Why did you want the change?

The looser structure we had since April 2001, when we were first put on a statutory footing, was the right structure for the FSA at that point. A merger of ten organisations, whether it’s in the business of regulation or the private sector, is a huge undertaking. The old structure integrated various activities, while keeping other activities quite identifiable from the old legacy organisations. It was a kind of compromise, a halfway house between full integration and keeping the identity of the former regulators.

It’s also important to remember that for the first few years of our existence, we’ve literally been writing the rulebook, with all the burden of consultation which goes with that. On top of that, we’ve had to factor in the European Commission’s Financial Services Action Plan (FSAP), which is scheduled for full implementation by 2005.

Now, we’re seeing a slowing of policy development. We’re moving much more into a phase of implementation, actually getting these policies embedded into the marketplace, getting firms to operate according to those policies and principles, and making consumers comfortable with the market that this creates.

The new structure will facilitate that. Three new business units will be effective as of April: a regulatory-services unit will be responsible for processing data and for the authorisation of new firms; a retail-markets unit will oversee insurers, high-street banks, building societies, mortgage lenders and insurance brokers; while a wholesale and institutional-markets unit will focus on the operation of the listing rules and regulation of firms that conduct market business between professionals.

This new structure will also be able to absorb the extra 20,000 or so firms coming under our banner soon. It’ll also let me speed up decision-making, pushing more decisions down to the right levels. That will enable us to be a bit more fleet-of-foot than we were when we were very heavily involved in policy-making.

Finally, we’ll have an organisation that can move resources easily and quickly to meet particular points of risk.

The FSA is known for its risk-based focus. In practice, what does it mean?

It means we evaluate all firms on the basis of the impact they have on our four statutory objectives, which are: to maintain confidence in the financial services industry; to provide an appropriate degree of protection to consumers; to fight financial crime; and to promote public understanding of the financial system.

The way we go about this is by dividing our regulated firms into categories A to D, where A is high risk and D is low. Firms in band A — around 1% of our regulated community — are subject to close and continuous supervision, while those in band D — some 89% of the firms we regulate — are more likely to be subject to a remote monitoring approach, essentially through review of complaints and regulatory reporting. The system means that we direct our scarce resource, which is people, to those problems, those issues and those firms that could present the biggest risk to our objectives.

Having said that, it’s important to note that we don’t operate a zero-failure regime, because it’s neither possible nor desirable to stop all failures. It’s not possible because you can’t police thousands of firms every day, and you need to leave management the freedom to get on with their business. And it’s not desirable because consumers who come into the financial services market need to make their own judgements about risk — to take that judgement away would have a severe impact on competition and innovation.

Another change you’ve made since becoming chief executive is that you personally collared responsibility for overseeing enforcement. Why?

We needed to look at improving the whole process of enforcement from end to end, from when a problem is identified by our supervisors, through to the investigation by our enforcement division, and then on to our regulatory decisions committee, or the RDC. I want to take some responsibility for making sure we actually improve that process, so it’s better that the enforcement division reports directly to me. Also, it makes something of a statement to the market here in the UK — if enforcement is reporting directly into the top man, then it’s clearly got some sort of priority.

Another important reason is our increasingly risk-based approach to enforcement. We’re looking much more closely at how many and what cases should actually go into enforcement proceedings. In fiscal year 2003, for example, we opened 138 cases, significantly less than the 519 cases we opened during 2002. And in 2003 we imposed 16 fines totalling a little over £10m (E14.2m), compared with 76 fines totalling £10m in 2002 and 79 fines totalling around £6m in 2001. So there’s a clear trend towards fewer enforcement actions, and fewer, but larger, fines.

Conflicts of Interest

Let’s move on to a recent policy announcement that attracted a lot of attention — the issue of conflicts of interest in analysts’ research. In November you told banks that they’ll have to produce written policies explaining how they manage conflicts of interest between research and broking arms. You’ve taken a very different line from the US’s Securities and Exchange Commission (SEC), which slapped enormous fines on ten banks last spring. Why the softly-softly approach?

For one thing, we have not detected the same abuse in this country as has been evident in the US. Of course, we’re not free of problems in the UK — our research has found, for example, that when a bank is the house broker for a company, the percentage of positive research reports and buy recommendations is significantly higher than where the firm is not the house broker. So, there is some kind of systemic bias, which suggests that there is a problem, but not to the same degree that the US has experienced.

What we’ve done is to establish some core principles, such as a ban on analysts attending IPO road shows and being compensated by investment banking revenues. These must be embedded in banks’ written policies. We think this is a response that is both appropriate for the market here in the UK, and also consistent with the principles laid out by IOSCO [the International Organisation of Securities Commissions] in September last year. These include prohibiting firms that employ analysts from trading securities ahead of publishing research on issuers of those securities, and prohibiting firms from promising issuers favourable research coverage, specific ratings or specific target prices in exchange for future or continued business.

The approach we’ve taken is also consistent with our general, principles-based approach to regulation — wherever possible, we like to put the responsibility on management.

The European Commission

Going forward, how much of your policy agenda will be shaped by what’s happening in Brussels?

An increasing amount, quite clearly. If you look at some of our recent policy formulations — the Insurance Mediation Directive, the Distance Marketing Directive, the Investment Services Directive — there are so many influences from Brussels. And of course, looking forward, we’ve got the EU Risk-Based Capital Directive, which will effectively put Basel II into a European context for investment firms as well as banks, and we’ve got the Solvency II Directive, which we expect will follow the same sort of risk-based course for insurance companies that we’ve already set out on.

So we’ll be committing more resources and more effort on the European agenda. After all, we work in a very international market. Many of the firms here have headquarters elsewhere. In fact, it’s often said that the City of London is a bit like the Wimbledon tennis championships — we host the event and all the overseas players win! But there’s no doubt that relationships with other regulators and other major capital markets in particular are increasingly important.

In that sense, the new Lamfalussy structures under the FSAP are a very positive development in creating more cohesion and more co-ordination in the regulatory system in Europe. I’m very pleased that the European Commission has given the go-ahead to set up both CEIOPS [the Committee of European Insurance and Occupational Pension Supervisors] and CEBS [the Committee of European Banking Supervisors]. They’re the equivalent of CESR, the Committee of European Securities Regulators, which has been in place already for a couple of years, and complete the picture.

You’re chairman of CESRfin, the sub-committee of CESR that oversees accounting and auditing issues for European securities markets. In view of the imminent deadline for EU-listed firms to adopt IFRS, do you have any plans to harmonise oversight systems in Europe? Is it worth creating a body akin to the US’s Public Companies Accountancy Oversight Board (PCAOB)?

No, the EU is not planning to replicate the PCAOB system — that’s an appropriate system for one country, but not for the soon-to-be 25-strong EU. But nonetheless it is vital that listed companies in Europe meet high standards in their presentation of financial information. The CESRfin standard number 1 (on Enforcement of Standards of Financial Information in Europe), which was adopted last year, sets the basis from which national regulators in the EU ensure compliance with IFRS by the listed companies in their jurisdiction. CESRfin has also recently published a second draft standard which sets out a mechanism through which enforcers of compliance can discuss enforcement issues in order to get convergence and consistency of decision-making at a European-wide level.

The FSA, as the UK authority for listing, works closely with the Financial Reporting Council and other bodies to see that the UK maintains the highest standards in this area and complies with the CESR standards.

How do you respond to critics who say that Europe needs to go several steps further, creating a pan-European financial regulator along the lines of America’s SEC?

I don’t think we need a European SEC. I’d much rather continue down our present path of mutual recognition of different national regulatory bodies. And I’d hope, frankly, that the politicians will be patient with the Lamfalussy concept, and give it time to see whether it actually can achieve the level of co-ordination and cohesion that we need in Europe, without creating a super-structure. I just don’t think that [a European SEC] would add any value at all-there’s already an increasing level of positive co-ordination that’s going on, both in terms of policy development and of exchanging information about particular firms. To those who say that we need a European SEC to compete with America’s capital markets, I’d say we’re already competing very well without one.