February 2007

CP 07/4: Training and Competence Sourcebook review

This CP, published on 28 February 2007, seeks views on proposals for a much shorter T&C Sourcebook, to apply only to retail firms and business. The current "commitments" in TC1 will be replaced by a new overarching competence rule in SYSC (this will apply to all firms). The new sourcebook itself, for retail business, will have fewer rules and "a modest amount of more focused guidance". The exam requirements for specified retail activities are to be retained (together with the existing "safe harbour" for firms using exams taken from the FSSC's list of "appropriate examinations").

The new competence rule in SYSC will in effect extend to all firms the competence requirement that has already been introduced into SYSC for "common platform" firms, consequent on MiFID. This requires firms to employ personnel with the skills. knowledge and expertise necessary for the discharge of responsibilities allocated to them (the "competent employees rule"). It is recognised that wholesale firms, although no longer subject to a compulsory exam requirement, may wish to continue to require staff to take exams as part of demonstrating competence, and the new SYSC provisions will indicate that the FSA will take such arrangements into account in assessing compliance with the "knowledge" component of the competent employees rule. This is a reminder that the streamlining of the T&C sourcebook does not imply any reduction in overall standards of competence: it is about giving firms greater flexibility over how to demonstrate compliance - in line with a more Principles-based approach.

The consultation period runs to 23 May. Subject to the outcome of the consultation it is proposed to make the new rules to take effect from 1 November.

The CP is supported by a separate assessment of the costs and benefits of the current retail exam requirements.

February 2007

Nationwide fined £980,000 for inadequate systems and controls relating to information security

This fine (reduced from £1.4 million for cooperation and early settlement) was widely reported in the press at the time it was announced on 14 February 2007. The FSA found that Nationwide had failed to respond quickly and appropriately following the theft of a company laptop (it was not until three weeks after the theft that the firm became aware that the laptop contained large quantities of confidential customer information of a kind that could have been used to further financial crime). FSA considered that Nationwide failed adequately to consider its risks relating to information security and to take reasonable care to ensure that it had adequate procedures to manage those risks. Section 4 of the Final Notice cites a number of examples, including the procedures being in an unwieldy electronic format, not well structured, with inconsistencies and lack of any prioritisation; reliance on self-certification; and inadequate controls to ensure that the procedures were understood and staff adhered to them.

The fine is no doubt intended to signal to firms the seriousness with which the FSA take information security where failures can increase the risk of financial crime, and firms generally will want to ensure that their procedures are appropriate and, importantly, that they are observed and appropriately monitored.

February 2007

FSA Business Plan 2007-08

This was published at the beginning of February. As usual it sets out in some detail the main areas FSA plan to focus on in support of each of its key objectives.

The big picture is dominated by the drive towards more principles-based regulation (on which a "vision paper" is promised for April), and implementation of MiFID. Other major areas are TCF (where there will be a particular focus on firms' management information and corporate culture), the future of retail distribution, the sale of PPI, commission transparency in the insurance sector and the prevention, detection and prosecution of market abuse and other forms of financial crime. A list of some other areas of likely thematic focus can be found on the "Other themes" page of the Bovill website.

FSA are also putting increasing emphasis on financial capability, increasing their spending by over 70% to £17.4 million. They are also investing in their people strategy, to help retain the people they need and to attract new talent, and a major upgrading of their information systems and technology.

January 2007

FSA recognise industry solution to contract certainty

FSA announced on 24 January 2007 that "the [insurance] industry has met the challenge laid down to achieve a solution to contract certainty in the UK". The industry has reported that 90% of contracts in the subscription market and 88% in the non-subscription market are now achieving contract certainty (the complete and final agreement of all terms between the insured and insurers before inception).

While the industry solution has dealt with the perceived market failure without the FSA having to make new rules, FSA will continue to treat contract certainty as a supervisory priority in 2007, and will consider action against any firms found to be falling behind the rest of the market in reducing the number of contracts that do not meet the market's contract certainty standards.

Some examples of good and bad practice were included with a dear CEO letter sent to firms in December 2006.

Press release | Dear CEO letter (December 2006)

January 2007

Inquiry launched into FSA regulation. 

The Treasury Committee is to undertake a short inquiry into the scope of Financial Services Authority (FSA) insurance regulation.

The committee is seeking submissions of written evidence focusing on; the current extent of regulation of the insurance market, the need for, and potential effects of, extending regulation to the bundled travel insurance and extended warranty markets and the form any proposed future regulation might take, including models for non-statutory regulation.

An oral evidence session took place in late November with the committee expected to publish a short report of its findings later on.

January 2007

Financial Risk Outlook

FSA publish the Financial Risk Outlook around the end of January each year as part of setting the scene for their own business plan and fees consultation.  The central economic scenario this year is one of relatively benign economic conditions and financial stability, albeit with an increasing risk that the operating environment over the next 18 months could become more challenging.  As usual, the outlook presents some alternative scenarios, and it underlines the importance of firms improving their stress testing - a point highlighted in the press release accompanying the document.

Other priority risks and issues include:the financial crime, operational and insurance threats posed by terrorism;

• difficulties in valuing illiquid financial instruments and the associated conflict-of-interest risks;
• the increasing risk of financial crime generally;
• the challenge to firms of implementing regulatory reform (notably CRD and MiFID);
• some consumers could face financial problems because of high levels of borrowing;
• concern about the sustainability of the retail distribution sector and the fair treatment of customers.

The last point ties in also with the FSA's concern about consumers' general low level of financial capability.  FSA plan to step up their work in this area significantly.