Summary of responses to FSA consultation papers

The Panel considered the proposals contained to be broadly reasonable. That said, some reservations were expressed about the possible underestimation of the number of such firms applying for FSA authorisation (which could therefore increase the fees for others) and the bases for calculating the respective levy caps.

The Panel supported the proposals insofar as they related to smaller professional firms.

There was concern that the proposals could place proportionately higher regulatory costs on small firms as a result of the sliding-scale approach, and that these may be significantly higher than the fees that such firms were currently paying. Any substantial underestimation in the number of applicants could also have an adverse impact. The proposals regarding post-N(M&GI) application fees and the discounting arrangements for those that operated in more than one fee block were broadly supported, subject to some supplementary suggestions for refinement.

With regard to Credit Unions joining this market, the Panel considered that the potential barriers to entry (and ongoing obligations) continued to make this an unviable option for such firms – this was unfortunate, and more thought on this aspect was needed. Various elements of the proposed disclosure and cancellation requirements were also of particular concern – the Panel put forward a number of suggestions for how these provisions might be improved.

The Panel did not believe that the consumer research supported the proposal that the full range of products be made available through the simplified sales route to consumers across the board, unless additional safeguards were incorporated. The simplified regime should certainly not be extended to non-stakeholder contracts until a successful period of operation had passed. Some issues also remained about the robustness of the FSA's Cost Benefit Analysis.

In any event, the Panel's comments on CP04/11 were set against its wider view that guided self-help was not a suitable process for those inexperienced investors on low incomes.

The Panel argued that the Generic Advice model should be built along the lines successfully employed in the professional firms arena. The question of delivering a workable liability and accountability arrangement would also be a challenge in the absence of any prevailing legal framework. It was crucial that advisers and consumers understood clearly the nature (and limit) of the service being provided; the undesirable possibility of poor "advice" being given – and acted upon – needed to be mitigated.

The Panel supported the intention to raise awareness in and clarify the purpose/use of the wider implication mechanism, and to improve the overall transparency of FOS processes and decisions. The proposition of an individual right of appeal had certain benefits, but practical and perception difficulties made this – on balance – an undesirable addition to the existing (duly strengthened) arrangements.

The proposal to permit co-mingling was welcomed, and the FSA had clearly responded positively to the industry's concerns in this regard. The Panel submitted that the client money regime for PMAs might benefit from extension so as to include commercial, as well as residential properties.

The Panel considered that the further round of consultation had been particularly valuable, and many of the concerns it had expressed in response to CP207 had been met in a largely satisfactory way. There were however a number of remaining anxieties – in particular, relating to the need to allow small firms more time to implement these measures, and on the production and delivery of CFPPFM material. The prospect of investment mixes and rates of return no longer meeting policyholders reasonable or initial expectations was also an issue that required further attention.

The Panel generally agreed with the proposals, including the incentive/discount system for early and electronic applications (although an effective communication program was crucial to this). That said, it was suggested that the definition of ‘annual income’ should be subject to further consideration and/or greater clarity. It was also advocated that the proposed fee bands be more staggered, and that an additional band be introduced for those firms with a particularly modest turnover, to ensure that there was a fair distribution of costs. It was unclear to the Panel how the total funding figure would be assessed as reasonable and be subject to proper audit.

The main issues raised in the Panel’s response related to the desire for the FSA to take maximum advantage of the permitted transitional provisions, both generally and in respect of the discounting rule. However, the Panel did not favour the waiver option as a means of achieving this.

The Panel submitted a comprehensive response to this complex and voluminous paper. This included a number of issues and concerns surrounding the detailed draft rules. On a general point, the Panel was unclear the extent to which the FSA had truly taken into account the position of small firms and the effect that the (financial and other) burdens of the proposed requirements would have on them.

The Panel’s full response to CP187 supported and welcomed many of the FSA’s proposals. However, among other things, it was important that the FSA kept the pre-sale disclosure rules as simple and practical as possible or there would be a risk of unnecessary delays to the sales process (and potential consumer detriment). For various reasons, the Panel also questioned the appropriateness and justification of applying the proposed cancellation provisions. While supporting the concept of a single dispute resolution mechanism, the Panel outlined a number of reservations about the operation and processes of the FOS.

It was the Panel’s view that the majority of small firms (being ultimately unable to meet the advanced requirements) would adopt the standardised approach. So, early notice of the treatment and provisions of this would be particularly important. The FSA also needed to consider carefully and justify any proposed areas of super-equivalence. This should include any impact on international competitiveness (for example,
in relation to the apparent preference for applying the risk weighting of exposures on the basis of a firm’s individual credit rating, as opposed to the rating of the sovereign).

The Panel responded to Chapter 8 of this paper, expressing concerns that by reducing the frequency of regulatory returns made by Credit Unions, the risk was increased of the FSA not being made fully and promptly aware of material information (especially given the apparent lack of accuracy in information provided currently by many Credit Unions). This could have consumer protection implications and a damaging effect on market confidence and the sector’s reputation. In the context of the above concerns, the Panel also raised the general point that it was important that the FSA reviewed carefully and critically individual items to ensure their appropriateness for inclusion in low-profile ‘miscellaneous’ consultation papers.

The Panel made some general observations about the cost and purpose/benefit of PII cover. Particular concerns were expressed about whether the proposed levels of policy excess and capital resources were pitched correctly and reasonably for small firms, and on the apparently disproportionate relationship between turnover and sum assured. Issues were also raised about the intention to require non-regulated business to be covered by a firm’s PII policy. Finally, the Panel highlighted the undesirable prospect of an uneven playing field resulting from the respective provisions of the IMD and the ISD.

While the broad framework appeared to be conceptually sound, there existed potential for the whole process to grow in complexity and cost. That said, the Panel welcomed the concession for firms with with-profit liabilities below £500m, and would encourage the FSA to consider the application of such minimum thresholds for small firms more widely. However, there remained a possibility that small firms may be required to adopt the twin peaks approach at some future date, and early notice of this would be vital. Concern was expressed about the possible disproportionate impact on small non-directive firms. The Panel also conveyed its views on a number of the more technical aspects of the proposals.

The Panel expressed concern that the proposals would have serious systems implications which would involve disproportionately high costs (human and financial) for small firms. The Panel also questioned the extent to which the fact of the impending mortgage regulation regime, and the interests of small firms generally, had properly and truly been taken into account. Further, there was also a danger that the FSA's interpretation of the distance marketing provisions – which were themselves seemingly unclear and ambiguous – would cause confusion for firms and consumers. We also provided views on a number of the questions in the paper, including our endorsement for the continued use of the Banking Code to evidence compliance with the DMD and concerns about 'gold-plating'.

The Panel's comprehensive submission endorsed the FSA's objectives on using reporting requirements to establish an assessment of compliance with threshold conditions; and on facilitating an understanding of the risks associated both with individual businesses and the marketplace as a whole. We welcomed the proposals over the collection of data on product sales from providers.

However, the Panel expressed reservations relating to the impact that the proposals would have on the many general insurance and mortgage intermediaries about to enter the world of regulation for the first time. Further, most small firms would need to call upon expert help in order to complete the financial reporting information, imposing a potentially significant extra cost and outsourcing risk. It was also deemed important that the FSA had the capacity to use/deal properly and intelligently with the vast volumes of data in question, and sought to better justify and articulate how the approach would add value for consumers despite the complexity, cost and general burden that smaller businesses would suffer.

The Panel also questioned the need for firms to confirm the activities for which they had permission, when this should already be in the FSA's possession. With regard to any required verification of standing data, the Panel agreed that this should be undertaken by a senior member of staff – but were not persuaded that such a prescribed validation process was justified. Further, it was not considered that the case had been satisfactorily made to seek the specified additional data items.

Finally, further to the point made in its response to CP191, the Panel again raised the importance of the FSA considering carefully and critically the appropriateness (or otherwise) of items for inclusion in 'miscellaneous' CPs so that matters of likely interest or impact were properly scrutinised and that any false perceptions about the FSA's motives were avoided.

It was believed that the process outlined in the CP would undoubtedly lighten the burden for small firms in some respects and make others more logical. But the Panel did not feel that it was appropriate for practitioners to unduly influence the information that the FSA considered was necessary to perform the important task of monitoring the solvency and other economic factors affecting life offices. A big concern for small firms – some without the expertise of in-house IT and actuarial support - was the timescale proposed to introduce these changes in addition to other current and expected burdens. We therefore urged the FSA to allow more time for small firms to prepare for and assimilate these proposals, as well as routinely considering the incorporation of staggered implementation dates in order to allow smaller firms more time generally to introduce and adapt to new initiatives.