Being compliant is not about box ticking, it's about integrity, says John Quigley
It is a frequent complaint that the FSA does not understand how the London market operates.
It is less frequently said that regulated firms do not understand what the FSA is for and how it operates. But it is in this failure of firms and their individuals to understand the FSA that the seeds of disaster now lie.
Unlike GISC and the old self-regulating organisations, the FSA is a creature of statute. Its objectives are set out in the Financial Services & Markets Act. The FSA regulates the entire industry – and expects uniformly high standards from everyone. Claiming "we are different from investment bankers" is not a reason for low standards of training and ethics.
From 15 January next year, only those firms that have been authorised by the FSA will be able to act as insurance intermediaries, and the FSA is only allowed to authorise firms that meet the threshold conditions.
The FSA has abandoned the old regulatory approach of depending primarily on a highly prescriptive and detailed set of rules. There are rules that brokers will have to obey, both about conduct of business and accounting, especially for money that belongs to clients or insurers. But these rules are secondary in the FSA system to adherence to the high level principles.
The FSA is ultimately about integrity. Acting with integrity is its first principle. Integrity is not about box ticking. It is about how we behave towards our customers, those we deal with in the markets (including the FSA), our colleagues and ourselves.
Listen to FSA chief executive John Tiner. He recently told the Treasury committee that he is determined that customers are treated fairly. This, he said, requires real change at the coalface, not lip service.
Training is a central part of this process. People cannot give good advice and look after clients unless they are properly trained. This in turn requires proper appraisal processes, supervision and a realistic budget.
Training and supervision is not limited to technical knowledge. Such acquired knowledge and experience has to be applied ethically. FSA director of enforcement Andrew Procter, describing the actions for which Chiyoda directors had been banned from the markets for life, summed up their conduct in one word: "fiddling".
The FSA expects that senior managers should display high standards of integrity and should ensure that those who work for them achieve and maintain equally high standards.
Given the right culture, environment and opportunity, most individuals will work out when something feels or is wrong, or when something may create difficulties.
Application forms for firms applying for authorisation and individuals applying for approval have a clear central purpose. They are designed to test whether chief executives understand what they have to do, and whether directors understand that they have responsibilities beyond winning business.
The forms are also designed to test whether everyone is, and will continue to be, properly trained and competent.
Market confidence is the first objective of the FSA. The fact that a firm does not deal with retail consumers is not an acceptable excuse for failing to achieve high standards of conduct with other parties in the market and commercial clients. Even when failure does not put a customer at risk, it undermines confidence in the market as a whole.
The FSA is particularly sensitive to the reputational damage that an errant London market broker could inflict. The World Bank has pointed to the FSA as an example of how to regulate. The FSA believes that we benefit from London being seen as a robustly regulated and trustworthy market. It is not going to allow that hard won reputation to be damaged if it can avoid it.
The application process is not about form filling and box ticking. It is about demonstrating integrity by showing proper management, proper controls, proper systems and proper training.