It is unhappy timing for him because the scandals will be the first thing people think of when they consider, on 1 December, the first anniversary of the FSA having its full powers. The year has passed quickly and without a doubt, has been one of challenges. The FSA got its full powers last year when the world was reeling from September 11, the full implications of scandals were beginning to dawn on the corporate world and global equity markets were going through one of their worst-ever crises.
There could not have been a more interesting and challenging time to be a financial regulator.
It’s worth reviewing early on the brief of the FSA and what it has been tasked to achieve. Indeed, the FSA has a set of four statutory objectives, set down by chancellor Gordon Brown after he announced the creation of the new ‘super’ regulator on election in May 1997.
The objectives are to maintain confidence in the financial markets; promote public understanding of the financial system; secure a degree of protection for consumers; and reduce the potential for financial firms to be used for financial crime.
When it comes to protecting markets, some say Sir Howard himself posed a threat when in February, he commented on whether an Enron-style disaster could strike in the UK. ‘The only honest answer,’ he said in a speech during the World Economic Forum Conference in London, ‘if one means – could there be a large and unpredicted corporate failure in the UK – is yes.’
One City analyst responded: ‘If anything threatened UK markets at the time it was Sir Howard himself.’
That said there is enormous respect for the man and the FSA. One concern occupying City boardrooms is what happens when he steps down in 2004?
He is currently chief executive and chairman of the FSA, but there is no indication of how the jobs will be divided when he goes.
Sir Howard himself believes the organisation he established will remain in safe hands. ‘I’m not due to go until 31 January 2004 which is some way off. And major organisations such as the FSA have a collective and continuing policy not dependent on individuals who hold the senior jobs. Even poor old Man Utd will get on somehow or other after Ferguson leaves,’ he says.
‘With market dynamics changing ever more rapidly in the financial sector, new challenges and issues will present themselves in the future and my successor and his team will handle these in the current context based on the strong regulatory foundations we have laid down over the last five years.’
Sir Howard has also faced the criticism that the regulatory burden introduced by the FSA may be affecting the ability of businesses to turn a reasonable profit and provide the kind of insurance products needed at the low end of the market. In the insurance industry there is a belief that ‘it’s a little bit easy’ for a regulator to ‘lose sight’ of the need for profit.
This is especially the case given the growing alarm over how little British people appear to be saving – or not – for their retirements.
Sir Howard is firm in his answer on this issue. ‘There’s no evidence that we are preventing firms making a profit. The UK financial services industry is very profitable by international standards even in difficult market conditions. ‘Our statutory objectives include the need to protect consumers, but we are aware of the need to take into account the impact of regulation. In fact, the FSA is required to consider the effects of its actions on competition and innovation in the UK.’
On the financial crime front, Sir Howard is willing to make a significant admission. Many City firms and institutions are not doing enough to prepare staff to deal with the possibility of money laundering and that some sectors in financial services are not adapting as fast as others to the need to tackle the issue – especially after September 11 and the beginning of the war on terror.
This is important because experts believe the FSA is faced with a huge task in convincing the regulated firms that they must take action. A City anecdote tells the story of a major institution calculating what its training obligations would be to deal with money laundering and realising it could get away with 20 minutes in the classroom for each member of staff every two years. Such conclusions indicate the FSA’s message is not getting through.
On training, he is ‘satisfied’ there is ‘more awareness’ of anti-money laundering obligations. ‘But,’ he says, ‘there is always more firms can do to train staff on the risks.’
There is also a frank admission from Sir Howard. ‘Historically some sectors have been less conscious of the risks of being used for money laundering than others.’
But he adds: ‘This is changing and we are finding in our discussions with all sectors a stronger awareness of the risks of money laundering and their obligations under the rules.’
When it comes to protecting the consumers of financial services there is much concern among campaign groups. One consumer champion believes the FSA’s responsibilities for consumers should be handed over to another watchdog entirely. They see a conflict between the FSA’s role of protecting markets while at the same time trying to protect consumers.
Meanwhile, industry sees a completely different reform being in need.
Given the frightening savings gap for pensions, estimated at #20bn, they say the FSA needs a fifth objective – making sure consumers save enough for the future.
That’s a tall order. Sir Howard himself couldn’t decide to take it on, but he could ask Gordon Brown to give him the responsibility.
The future clearly lies in the hands of politicians. There’s no doubt Brown will be looking at Sir Howard’s performance and ask whether the statutory objectives have been achieved.
We are only likely to know what he thinks if he is moved to make changes, which, only one year after full powers arrived, is unlikely.
- This article is based upon material from the forthcoming ACCA publication Financial Services Authority: One Year Since N2, written by Accountancy Age news editor Gavin Hinks. The booklet will be available next month, details at www.accaglobal.com..