Monday September 17 2012 - Top 10 Risk Management News

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International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com

Top 10 risk and compliance management related news stories
and world events that (for better or for worse) shaped the week's
agenda, and what is next

George Lekatis
President of the IARCP
Dear Member,

“We will look at how firms make their money, how they pay
their staff and whether they are designing, and selling products with
customers in mind.
This is a change from the traditional regulatory model, which involved
setting standards and then looking back at what firms have done.”
Who said that?

Martin Wheatley, Managing Director, FSA, UK (speaking about the
“incentivisation of sales staff”).

A really interesting change in the regulatory model.

Read more at Number 8 of our list.

Today we can also enjoy the speech by Jaime Caruana, General Manager,
Bank for International Settlements (at the Federal Reserve Bank of
Kansas City’s 36th Economic Policy Symposium).

He said that “There is little doubt that, since the crisis, we have had the
widest, deepest and most far-reaching regulatory cooperation in history.

_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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Participation has broadened, coordination has intensified, and
implementation will be peer-reviewed.

Institutionally, all G20 members have joined the BCBS.

Similarly, the Financial Stability Board’s membership has become more
inclusive.

Emerging market representatives bring useful macroprudential
experience to the table.

And attention is being paid to vulnerabilities in the shadow banking
system, outside the narrow scope of the regulated sector.

Cooperation has intensified with Basel III’s requirement for more and
better capital, backstopped by a simple leverage ratio and international
oversight of weights and implementation.

Cooperation has also widened with the inclusion of international
standards on liquidity management.”

But he continued: “I am acutely aware that, even as intended regulatory
cooperation has reached an all-time high, the risks of fragmenting
banking along national lines have grown.”

Read more at Number 1 of our list.

Welcome to the Top 10.

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Policymaking in an interconnected world

Luncheon speech by Jaime Caruana
General Manager, Bank for International Settlements -
The Federal Reserve Bank of Kansas City’s 36th
Economic Policy Symposium on “The changing policy landscape”
Jackson Hole

Gabriel Bernardino, Chairman of EIOPA
Creating a global insurance supervisory Language
Conference on Global Insurance Supervision

Quarterly Banking Digest, Q2
Important parts and Highlights

10 September 2012
Government lays new Money
Laundering regulations before Parliament

On 10 September the Government introduced legislation to Parliament to
implement important changes to the Money Laundering Regulations
2007.

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For a European Public Space
Remarks by Mario Draghi, President of the ECB on
receiving the M100 Media Award 2012, Potsdam

Basel III Jobs
Average salary % change year-on-year +12.50 %
(Source: http://www.itjobswatch.co.uk/jobs/uk/basel%20iii.do)

Speech by the Chancellor of the Exchequer, Rt Hon
George Osborne MP at Scotland CBI

The incentivisation of sales staff – are consumers
getting a fair deal?

Speech by Martin Wheatley – Managing Director, FSA

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Interesting comments for the ComFrame
A compilation of comments on a common framework for
the supervision of internationally active insurance groups,
known as ComFrame by the International Association of
Insurance Supervisors (IAIS)

Jumpstart Our Business Startups Act
Frequently Asked Questions
In these Frequently Asked Questions (“FAQs”), the
Division of Trading and Markets is providing guidance on
certain provisions of the Jumpstart Our Business Startups
Act (“JOBS Act”) as they affect firms and their obligations with respect to
securities analysts (“analysts”) and research reports.

_____________________________________________________________

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NUMBER 1

Policymaking in an interconnected
world
Luncheon speech by Jaime Caruana
General Manager, Bank for International
Settlements
The Federal Reserve Bank of Kansas
City’s 36th Economic Policy Symposium
on “The changing policy landscape”
Jackson Hole

Let me extend my thanks to President
George and the organisers for the
opportunity to address this gathering – at
an event that is more keenly anticipated by
policymakers and journalists with every passing year.

My question today is: Is there scope for more international cooperation in
monetary policy?

After all, we see international cooperation as essential for financial
regulation.

Why do we reject keeping one’s own house in order as a precept for
financial regulation but accept it for monetary policy?

The question is not a new one. In his famous Critical essays on monetary
theory, Sir John Hicks argued that individual central banks have only
limited influence because:
“… they have been national central banks. Only in a national economy
that is largely self-contained, can a national central bank be a true central
bank; with the development of world markets, and (especially) of world
financial markets, national central banks take a step down, becoming
single banks in a world-wide system …. Thus the problem that was
(partially) solved by the institution of national central banks has
reappeared …. on the world level”.

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That was in 1967, during the waning days of Bretton-Woods.

And financial integration over the past 45 years has made the problem
that Hicks identified even more intractable.

The burden of my remarks today is that central banks need to take a more
international perspective, recognise their collective influence and take
into account monetary policy spillovers.

Monetary policy that contributes to financial stability needs more of the
cooperation that we already practise in financial regulation.

Let me break my main question into four questions and then turn to each:

1. What was the state of cooperation in
financial regulation and monetary policy
before the crisis?

2. Where does cooperation stand after the
crisis?

3. Why is the scope for international
cooperation in monetary policy often
underestimated?

4. Do we need to improve the institutional
framework for monetary policy
cooperation?

Q1. What was the state of
international cooperation in financial regulation and monetary
policy before the crisis?

Since the financial liberalisation of the 1970s, the cooperation on
regulatory standards for large international banks as embodied in Basel I
and II extended well beyond any cooperation in monetary policy outside
the euro area.
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This cooperation involved:

(i) Exchange of information;

(ii) Information-sharing based on a common understanding of how the
world works;

(iii) Joint decision-making; and

(iv) Standards set by an international committee.

The very first papers circulated to the Basel Committee on Banking
Supervision (BCBS) in 1975 surveyed the “Rules and practices to protect
the banks’ solvency and liquidity”.

It turned out that these varied a great deal.

Subsequently, regulators evolved a common intellectual framework and
came to speak a common language.

In 1988, Basel I went one step further, to joint decision-making. It set
definitions of capital, risk weights for assets, and, crucially, a minimum
ratio of capital to assets.

These formulations were based on consensus, not enshrined in a treaty or
in international law.

Instead, the original Basel accord was enacted in national law and
enforced by national regulators.

In fact, market pressure quickly made Basel I the standard even for banks
in countries not represented on the BCBS.

The driving forces for this cooperation are well known.

As countries liberalised their capital accounts and moved to floating
exchange rates, banks seized the opportunity to intermediate
international capital flows.
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Soon after, Bankhaus Herstatt and Franklin National collapsed.

These banks were not globally systemically important financial
institutions, in today’s parlance, but their messy failures did help to drive
forward international cooperation on bank regulation.

When, in August 1982, the big banks suddenly stopped lending to Latin
America, Congress increased the IMF’s resources but demanded higher
capital levels for big US banks.

Concerns about competitive neutrality then prompted the Federal
Reserve to pursue joint action in what became Basel I.

Basel III, to be discussed in a moment, has marked an even more explicit
shift towards internalising the externalities imposed by big banks and
banks’ collective behaviour.
By contrast, monetary policy remained mainly national after the
breakdown of Bretton Woods.
Attempts at cooperation were episodic, mainly relating to exchange rates.
This gave monetary cooperation a bad name – especially in countries with
current account surpluses, which came under pressure to expand
demand.
At the level of theory, monetary policy shifted from the 1930s focus on
competitive devaluation, first to the post-war treatment of monetary
policy as just one instrument in overall macroeconomic stability policy,
and then in the past 25 years to the guardian of domestic price stability.
Flexible exchange rates, it was thought, would provide buffers against
external shocks while policymakers kept their own house in order.
In fact, the largest economies not only remained relatively closed but also
had banking systems with very low proportions of foreign currency assets.
To be sure, the quality of global monetary policy discussions has
advanced over the past generation, as a common intellectual framework
evolved.

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Indeed, one could argue that monetary policymakers shared a more
thoroughly elaborated intellectual framework than did their counterparts
in financial regulation.

Even so, this shared framework could be indifferent (or even hostile) to
cooperation in monetary policy.

Q2. Where does cooperation stand after the financial crisis?

The short answer is that we have agreed to cooperate more deeply on the
regulatory/financial stability front.

But on the monetary policy front, the pre-crisis convergence of views has
become strained.

There is little doubt that, since the crisis, we have had the widest, deepest
and most far-reaching regulatory cooperation in history.

Participation has broadened, coordination has intensified, and
implementation will be peer-reviewed.

Institutionally, all G20 members have joined the BCBS.

Similarly, the Financial Stability Board’s membership has become more
inclusive.

Emerging market representatives bring useful macroprudential
experience to the table.

And attention is being paid to vulnerabilities in the shadow banking
system, outside the narrow scope of the regulated sector.

Cooperation has intensified with Basel III’s requirement for more and
better capital, backstopped by a simple leverage ratio and international
oversight of weights and implementation.

Cooperation has also widened with the inclusion of international
standards on liquidity management.
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Recognition of potential procyclicality in the operation of capital
standards has led to the adoption of mutual recognition in the new
countercyclical capital requirement, which empowers host country
authorities.

Tougher solvency standards have been set for banks whose failure could
have system-wide effects.

We should not minimise the challenges ahead.

I am acutely aware that, even as intended regulatory cooperation has
reached an all-time high, the risks of fragmenting banking along national
lines have grown.

While there are long-standing differences in the tax treatment of loan-loss
provisions, national bank bonus taxes have been imposed and now
financial transaction taxes are being discussed regionally.

While Dodd-Frank is improving the funding model of US-chartered
banks, other banks that rely on wholesale funding have gained markets
share in dollar intermediation.

While important advances have been made, serious obstacles remain in
concerting resolution regimes given different bankruptcy laws.

A particularly troubling source of fragmentation along country lines is the
inclination to put up national barriers against contagion.

As Mario Draghi has said, “even though each of them may be right,
collectively they have been wrong”.

While regulatory cooperation is the prerequisite for open financial
markets and the free flow of funds, capital controls seem to be gaining
acceptance as a response to the challenge of managing currencies when
yields are zero in most major money markets.

These developments threaten to segment financial markets, not only in
the euro area but around the world.
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Nevertheless, I remain hopeful that the movement towards global
consistency and more harmonisation will prevail over the forces working
to fragment international banking regulation and supervision.

On monetary policy cooperation, there were notable steps during the
crisis.

Widespread, and ultimately in some cases, open-ended, cooperation in
foreign-currency funding through central bank swaps had both the
monetary goal of controlling the relevant market rates like Libor and the
financial-stability goal of providing emergency funding.

Such arrangements are temporary.

But the willingness of central banks – not least the Federal Reserve – to
act quickly and massively averted what could have been a meltdown.

The global nature of the crisis also saw episodic cooperation in policy rate
setting.

For instance, on 8 October 2008, interest rates were simultaneously cut by
the Bank of Canada, the Bank of England, the ECB, the Federal Reserve,
the Riksbank, the Swiss National Bank and the People’s Bank of China,
in a concerted move that was strongly backed by the Bank of Japan.

But a number of issues have strained the pre-crisis convergence of views
on monetary policy.

What can monetary policy contribute to financial stability? And how does
monetary policy work alongside macroprudential action?

Q3. Why is the scope for international cooperation in monetary
policy often underestimated?

This question raises three more.

First, do flexible exchange rates insulate economies as some theory
suggests?
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Second, are bond markets so globally integrated that policies affecting
yields in major countries now have a bigger impact on yields in other
countries than they once did, possibly exerting an even larger effect than
local policies and conditions?

And third, can central banks properly assess the aggregate impact of their
actions on global outcomes, or do they suffer from a fallacy of
composition?

Starting with exchange rates, flexible rates do of course help to insulate a
country from inflationary or deflationary shocks coming from abroad. But
they do it imperfectly.

First, since major currencies are used internationally, the policy rates set
by their issuers directly affect monetary conditions elsewhere.

Borrowing in foreign currencies may be rare in the biggest economies,
but it can be significant elsewhere.

And common monetary and risk factors affect the flow of international
bank credit and portfolio capital.

Since the crisis, while credit to US households and businesses has barely
resumed its growth, dollar loans to such borrowers in the rest of the world
has grown at up to 20% and has reached about $7 trillion.

Second, the foreign exchange market’s behaviour does not always satisfy
the textbook interest rate or purchasing power parity conditions.

Exchange rate movements do not merely compensate for interest or
inflation differentials.

Instead, most of the time, currencies with an interest rate advantage
actually appreciate against lower yielding currencies and can do so for
some time, making the domestic industry less competitive.

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The depreciation of higher-yielding currencies tends to happen fast
during episodes of stress in global asset markets, and many emerging
market economies have found this destabilising.

Next, there is the issue of international bond markets.

As policy interest rates and official bond purchases affect bond yields,
their effects ripple across globally integrated bond markets.

This happens even with independent setting of policy rates and floating
exchange rates.

Large-scale bond purchases can have global effects whether they are part
of an explicit monetary policy or a side-effect of currency intervention.

There is evidence that the large Japanese interventions of 2003–04
lowered global bond yields, as dollars purchased in the foreign exchange
market were invested in bonds.

There is also evidence that the Federal Reserve’s recent large-scale
bond-buying has also reduced global bond yields.

So the integration of global bond markets makes for a global interest in
policies that, intentionally or not, affect bond yields in major markets.

Turning to the possibility of a fallacy of composition, I believe that an
international perspective is essential if we are to correctly assess the
impact of central bank policies on global outcomes.

The price dynamics in commodity markets – which are increasingly
similar to those in financial markets – could be taken as a signal of global
demand pressure rather than being considered by central banks as a
supply shock for each of them.

Similarly, each emerging market central bank might hesitate to raise
interest rates out of concern for capital inflows, given the very low interest
rates prevailing in major currencies.

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Indeed, if central banks were to take an international perspective, they
might discover that they would all be better off by raising rates, thereby
setting global average interest rates more appropriately.

These questions are not easy to answer.

How can we cope with these spillovers: the interconnections arising from
the behaviour of exchange rates, the globalisation of bond markets, and
the collective impact of policies?

John Hicks knew that the one simple answer to the limitations he
identified – a global central bank – would be totally unrealistic.

National central banks have national mandates, and meeting these is
already difficult enough.

We know less about the workings of international linkages than we do
about domestic linkages.

How interest rates will affect the major centres in other countries depends
in part on those countries’ own policies and institutions.

And it would not be difficult to add to this list.

A number of factors combine to make nation states less than willing to
cooperate on monetary policy.

For instance, monetary policy can be redistributional, shifting wealth and
income between creditors and debtors.

This makes it even more politically charged than regulatory policy – if
that is possible.

Nevertheless, I do not believe that monetary policy can be restricted to
keeping one’s “house in order” at all times.

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While such house-keeping is necessary, monetary policy does require
international perspective and cooperation, particularly when it provides
the backing for financial stability.

Q4. Do we need to improve the institutional setting for monetary
cooperation?

We hope that the structural trend that deepens interdependence, namely
the globalisation of financial markets, continues.

If it does, there will be periods, in good times and bad, when international
spillovers will be substantial and highly relevant for monetary policy.

If this notion and the underlying analysis are accepted, then the question
arises of how to strengthen cooperation in monetary policy.

This does not necessarily mean monetary policy coordination at the
global level, but it does require central banks to better appreciate,
internalise and share the side effects that arise from individual monetary
policies.

This will require a shift to a more global analytical approach, one that
seeks to factor in collective behaviour, interactions and feedback effects.

This would also help us to better frame international cooperation.

I therefore tend to agree with the recent call from prominent academics
and practitioners for global considerations to play a more explicit role in
monetary policy frameworks.

But I am more sceptical about their proposal to formalise cooperative
arrangements.

The major central banks would not be able to publicly outline the mutual
consistency of their policies.

Drawing attention to areas of inconsistency and dissent would probably
undermine effective cooperation.
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Traditionally, the BIS and the various Basel committees have always
sought to complement the domestic analysis at central banks with a more
global perspective.

The informal but structured nature of the meetings that take place at the
BIS has often facilitated analysis and discussion of the many international
dimensions of monetary policies.

For example, after providing support to a central bank review of global
liquidity we are working on regular indicators that seek to capture global
financial conditions.

These and other global measures also serve as inputs to vulnerability
analysis and the early warning exercise conducted by the Financial
Stability Board and the IMF.

The IMF is playing a role as well, with its spillover reports and
macroeconomic policies consistency analysis

Let me conclude by saying that much needs to be done.

Moving towards a more cooperative approach makes more sense than
reversing the internationalisation of markets and segmenting those
markets in the hope of protecting them against spillovers.

We need more research on these questions and I hope that some of the
powerful analytic talents represented here at Jackson Hole will be
brought to bear on them.

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NUMBER 2

Gabriel Bernardino, Chairman of EIOPA
Creating a global insurance supervisory
Language
Conference on Global Insurance Supervision

Good evening, ladies and gentlemen,

On behalf of EIOPA I would like to thank the
International Center for Insurance Regulation for
the cooperation and efforts in organising together with us this Conference
on Global Insurance Supervision.

I am very happy to see today so many colleagues from the supervisory
authorities as well as prominent experts and executive officers of the
insurance industry.

Our purpose with this Conference is to create a platform of discussion
and exchange of views about the international context of insurance
supervision.

Your presence and contribution to this event is key to its success and will
certainly contribute to a better understanding of the different regimes and
will foster further convergence of practices of insurance supervision
worldwide.

Insurance markets are increasingly global.

Many insurance groups have nowadays a huge part of their revenues
coming from business outside their home countries.

This creates new opportunities but also new challenges for insurers, but
also for supervisors.

The promotion of sound and stable insurance markets calls for more
international cooperation.

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We firmly believe that the best way to
reinforce financial stability and consumer
protection is to develop strong global
regulatory and supervisory standards.

This will create a level playing field for
international players, foster a common
language between supervisors and improve
international cooperation and information
exchange.

I would like to share with you some views on
the ways of improving the efficiency of
supervision from a global perspective.

ComFrame ( Common Framework for the
Supervision of Internationally Active
Insurance Groups (IAIGs) - ComFrame is an integrated, multilateral and
multidisciplinary framework for the group(wide supervision of
internationally active insurance groups.

ComFrame was initiated in response to the recognition that, despite the
growing relevance of IAIGs in the global insurance marketplace, no
internationally coherent framework exists for the supervision of such
large, global groups.

I would like to stress that EIOPA is highly committed to contribute to the
establishment of such standards and, in this regard, we consider our
participation in the IAIS very important. EIOPA is actively contributing
to the work of ComFrame.

We consider it necessary to enhance regulatory capital requirements in
order to achieve adequate consumer protection on a global level.

Of course, while calling for this measure, we take into account different
perspectives and developments worldwide.

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Seen historically, the EU had experienced comparable discussions a
decade ago.

We fully support the move to enhanced group-wide supervision.

Cooperation between supervisors in colleges is essential for the proper
supervisory approach to Internationally Active Insurance Groups.

We believe that information sharing and supervisory cooperation under
conditions of professional secrecy is a key, determinative element of
effective supervision.

We need more shared supervision.

Furthermore, Comframe should comprise a capital element, establishing
strong principles for group capital calculations concerning the risks
included, the metrics used to assess them and the overall level of
confidence.

Without this consistency, there is no level playing field internationally.

It is not about one unique system, but about a set of strong principles that
would deliver a range of closer and compatible systems.

Comframe should not be another regime on top of the already existent
ones.

The local regimes should evolve to comply with Comframe.

This is my vision. I recognize that we cannot deliver this immediately, but
at the IAIS we need to set a timetable and concrete milestones to develop
this concept in a step by step approach.

We need to be courageous and open-minded.

We need to be open to change and evolution because the industry reality
is also evolving and changing.

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An extra effort needs to be done by all of us because like Charles Kettering
(a famous American inventor) said one day: “People are very open
minded about new things as long as they're exactly like the old ones.”

Systemic risk in insurance

The crisis prompted a new look at systemic risk, including in the
insurance sector.

The identification and regulation of Globally Systemically Important
Insurers is currently being discussed under the umbrella of the Financial
Stability Board and the IAIS.

EIOPA is keen to contribute to a robust identification process of G-SIIs
and to develop appropriate regulatory and supervisory tools to deal with
their characteristics.

Traditionally, systemic risk was a banking concept.

However, the recent crisis showed us that certain activities developed
under the insurance sector can also pose systemic risk.

Insurance companies or groups that engage in non-traditional, or
non-insurance, activities (for example: CDS, financial guarantees or
leveraging assets to enhance investment returns through securities
lending are more vulnerable to financial market developments and,
importantly, more likely to amplify, or contribute to, systemic risk.

Of course, this assessment may change over time, depending on the
innovations and changes in insurance business models, especially in life
insurance, as well as in the complex interactions between insurance
groups and financial markets.

We should be especially attentive to any kind of maturity transformation
and leveraging occurring in the insurance sector.

As a consequence, the identification of a systemically important insurer
as such, should be a direct reflection of its source of systemic importance.
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While the size of traditional insurance activity is still an important factor,
it should not be the dominant factor in the identification process.

Clearly, the non-traditional and non-insurance activities and the degree of
interconnectedness with other components of the financial system are
more relevant from a systemic point of view.

Consequently, the differences between insurers and banks in the impact
of failures suggest that requirements for loss absorbency and resolution
regimes for insurers should accept these salient differences and propose
solutions that differentiate accordingly.

As a conclusion I would like to underline that we should have no illusions:
the creation of global insurance supervisory standards is a very long
process that is complicated by the difference of cultures and uneven
development of supervisory systems in different countries.

But it is important that the regulators all over the world are willing to
reach mutual understanding and to develop a common supervisory
language, which will help us to promote stability of the financial markets,
to enhance their transparency and to foster consumer protection.
Together we can achieve these objectives.

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NUMBER 3

Quarterly Banking Digest, Q2

Important parts and Highlights

- Capitalisation improved slightly as system-wide leverage declines.
The aggregate risk asset ratio (RAR) increased to 22.1% during the
quarter due to a decline in risk-weighted assets (down 0.7%) and an
increase in capital (up 0.6%).
- Some banks continue to experience significant asset quality
challenges driven by the recessionary environment. Although
non-performing loans (NPLs) relative to total loans declined from
8.3% to 8.1%, large exposures to the real estate sector have led to a rise
in specific provisioning and charge-offs, which has affected the
banks’ earnings capacity.
- Sector earnings have been impacted by higher provisions. Provisions
to NPLs increased from 16.2% to 26.2% in Q2 2012 as a result of
prudent efforts aimed at mitigating the impact of future asset
impairments. As a result, the annualised RoE declined from 8.9% in
Q1 2012 to 1.2% in Q2 2012, and the annualised RoA fell from 1.0% in
Q1 2012 to 0.1% in Q2 2012.
- The Bermuda dollar funding gap widens further. The BD$
loan-to-deposit ratio increased to 154.0% (up from 151.0% in Q1 2012
and 142.0% a year earlier) as BD$-denominated customer deposits
declined (down 1.3%). However, the large FX-denominated deposits,
which declined by 5.1% during the quarter, continues to supplement
the BD$ funding gap.
- Lower investment activity and interbank lending have mitigated
negative effects on domestic credit supply thus far. Lending remained
stable despite de-leveraging during the quarter resulting from
decreases in investment activity and deposits with other financial
institutions.

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Table V shows the liquidity condition of the banking sector over the last
five quarters.

Profitability

Quarterly returns declined sharply as banks start absorbing
non-performing loan balances aggressively.

Despite stable net interest income over the quarter, increases in
provisions resulted in lower profitability in the sector on average.
Annualised RoE and RoA decreased to 1.2% (Q1 2012: 8.9%) and 0.1% (Q1
2012: 1.0%), respectively.

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NUMBER 4
10 September 2012
Government lays new Money
Laundering regulations before Parliament

On 10 September the Government introduced legislation to Parliament to
implement important changes to the Money Laundering Regulations
2007.

The changes will reduce the regulatory burden imposed by the current
regulations, while strengthening the overall anti-money laundering
regime. These proposals were set out in July 2012 following extensive
consultation and are expected to save firms around £3 million a year.
The changes to the Regulations will come into force on 1 October.

Notes
The Government announced the changes it was bringing forward to
Money Laundering regulations in July 2012.The

Money Laundering Regulations 2007 require regulated businesses to
have appropriate systems and controls in place to identify and verify the
identity of their customers and carry out ongoing monitoring as
appropriate, based on their own assessment of the risk from money
launderingand terrorist finance.

The Government’s approach to money laundering regulation is designed
to make the UK financial system a hostile environment for money
laundering and terrorist finance, while minimising the regulatory burden
imposed on UK businesses.

Changes to Money Laundering Regulations to reduce burden on
British businesses
On 17 July 2012 the Government published its response to a consultation
on changes to the Money Laundering Regulations 2007 and the impact
assessment of the proposed changes.

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Following the consultation the Government will now take forward
proposals to reduce the regulatory burden imposed by the current
regulations, while strengthening the overall anti-money laundering
regime.
The proposed changes to the regulations will apply to businesses that are
at low risk of money laundering and terrorist financing and are therefore
not required to be regulated to the same extent as other institutions,
under current global standards.
The aim of the changes is to make the UK’s money laundering regime
more effective and proportionate, with the proposed changes saving firms
around £3 million a year.
The Government committed to performing a post-implementation review
of the 2007 Regulations, which implement the European Union Third
Money Laundering Directive, two years after they came into force.
This review was undertaken in 2009-10, in conjunction with the Better
Regulation Executive, and entailed an extensive call for evidence,
meetings, conferences and interviews.
The Government’s response to the review was published in June 2011 and
contained a consultation on seventeen proposals to improve the regime,
reducing the impact of the regulations.
The changes to the Regulations are intended to come into force on 1
October.

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NUMBER 5

For a European Public Space
Remarks by Mario Draghi, President of the ECB on
receiving the M100 Media Award 2012, Potsdam
Important parts
It is no secret that the course of European
integration is currently difficult. The global
economy is facing serious challenges.
These challenges are not all of Europe’s
making, as some observers would have us
believe. But Europe is perhaps experiencing
them more acutely than others.
The reasons for this are complex. But one
part of the explanation is clear: the original
institutional design of the euro area did not meet expectations.
In the euro area we have a single monetary policy, but our economic and
financial policies are only loosely coordinated.
This is because the euro area is a union of nation-states with strong
national traditions and preferences.
While there was sufficient consensus to share a currency, economic and
financial policies remained organised largely at the national level.
The global crisis has revealed the vulnerabilities in this arrangement.
Loose coordination of policies neither ensures stability nor does it
facilitate effective crisis management.
The institutional design of the euro area therefore has to be reviewed to
put our economic and monetary union (EMU) on a more secure footing.
But how should this be done?
There are two possible paths.

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The first is to go “back to the past”, to make the original design work
better.
The second is to develop a new architecture that properly reflects lessons
of the crisis.
In my view, the first path is not viable. We have seen that the euro area is
too interconnected for economic and financial policies to be a purely
national responsibility.
We must find ways to guarantee that national decisions do not harm other
members of the monetary union.
In the event of a crisis, there should be effective mechanisms for crisis
management.
And where necessary, this means going beyond coordination, because
this is a matter of europäische Innenpolitik.
We have also seen that maintaining stability requires common
institutions that can react to events.
The euro is the world’s second most important currency.
It makes up 25% of the world’s foreign exchange reserves.
1.5 trillion euros are traded daily on the world’s foreign exchange markets.
And it is used daily by the 330 million citizens of the euro area.
A currency that plays a central role in the lives of so many people has to be
managed with effective decision-making.
The second path, designing a new architecture, is therefore the only way
forward.
The key challenge today is to present a vision to Europe’s citizens of what
this would entail – which is precisely the theme of this conference.
Together with the Presidents of the European Council, the European
Commission and the Eurogroup, I have been given the task of working on
such a vision for the next decade.

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We have aimed to be as pragmatic as possible: to establish what are the
minimum requirements to make the euro function to its full potential.
And our conclusions are both realistic and attainable.
Member States will have to pool more sovereignty in selected policy areas.
This is a clear lesson of the crisis. But we will not need to cede all powers
to Brussels.
Sovereignty will only be pooled where it is essential to ensure a stable and
prosperous monetary union.
This will be accompanied by broad democratic participation and
legitimation.
Our vision for EMU has four pillars – fiscal union, financial union,
economic union and political union.
Progress on all four should be made simultaneously.
The first three pillars will help to steer fiscal, financial and economic
policies in a sustainable way.
They will also help to create institutions commensurate with the degree of
monetary integration in the euro area.
But today I would like to focus briefly on the fourth pillar, political union.
This pillar is essential for engaging euro area citizens more deeply and
making the other three pillars legitimate.
Some observers argue that because of the common decision-making
implied by the other three pillars, political union has to come first. I do
not agree.
Political integration can and will develop in parallel with economic
integration.
Over the past 60 years of European integration, this has always been the
sequence.
For example, public engagement with euro area issues has naturally
deepened through responding to the crisis.
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To commit money via the European Stability Mechanism, Member States
have had to explain the responsibilities of euro membership to their
citizens.
Parliaments are now taking a sharper interest in European affairs.
Closer economic integration has de facto strengthened democratic
engagement.
But this does not mean that we should not strive to strengthen democratic
participation in Europe further.
Democratic engagement already takes place through the Council of
Ministers – where citizens are represented by elected ministers – and the
European Parliament – where citizens elect their MEPs directly.
But more has to be done to make the voice of Europe’s citizens heard. We
need what in Germany is called demokratische Teilhabe.
And this is where you are needed. I would like to ask all of you –
journalists and publishers but also policy makers and academics – to help
to develop a genuine European public space, eine europäische
Öffentlichkeit.
Most of us in Europe are exposed mainly to our national media in our
national languages.
These media naturally define our perspective: our sense of the “public”
tends to stop at national borders.
But this no longer describes reality.
What is happening in other Member States matters to all of us. Problems
that cross borders require citizens to find consensus around common
solutions.
Again, the crisis is itself having an effect.
For example, newspapers in some countries now take a keen interest in
the welfare systems of other countries.
Citizens closely follow the elections of ministers they would previously
have never heard of.
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Certainly, there is an unwelcome side to this related to the potential for
reviving outdated national stereotypes.
But there is also a positive side insofar as it leads citizens in the euro area
to develop a sense of belonging together and to care about decisions in
other regions.
One way to strengthen this trend would be to exchange more media
between countries. And here I would like to invite your contribution.
Could you consider, for example, publishing what we might call
“imported pages” from foreign newspapers?
This would allow citizens to get a better sense of how issues are seen in
other countries; it would increase cultural sensitivity; and it could
generate Europe-wide debates that divide along policy lines rather than
national lines.
Over time, such debate would help to put European decision-making on
a more legitimate footing.
“Imported pages” are but one idea, a starting point. It is with your
dedication and creativity that more such ideas can be developed.
It is a privilege to be part of the European project, for citizens and
journalists alike.
But it is also comes with responsibilities, for citizens and journalists alike.
Ultimately, a genuine European public space is essential for supporting
the long-term vision of the euro area.
Citizens need to be in basic agreement that, within a monetary union,
certain economic models are no longer possible.
They must understand that there are limits to national discretion in
economic policies that affect the area as a whole.
In other words, there needs to be a new consensus on economic policies
that will reinvigorate the European social model and make it fit for the
21st century.

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This is a discussion we must begin today. Setting EMU on a path towards
stability is essential so that we can move permanently beyond the crisis.
It will send a clear signal to citizens and financial markets that the euro
area is committed to staying the course.
And it will remove any grounds for doubting the euro’s future.
There are many reasons to be optimistic that Europe will find this path.
The pattern over recent decades has always been to move forward
towards a stronger and more united Europe.
When we have faced challenges, we have invariably found solutions.
Those who have predicted the worst have turned out to be mistaken.
What’s more, the solutions we need do not require extreme approaches or
impossible choices. They require a structured and achievable path
towards completing EMU. This is fully within our reach today.
I am confident that one day I can return to this beautiful historical setting
sans souci.
In the meantime, I am most grateful for your support.
Thank you once again for this award and your kind words tonight and
thank you very much for your attention.

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NUMBER 6

Basel III Jobs
Average salary % change year-on-year
+12.50 %
(Source: http://www.itjobswatch.co.uk/jobs/uk/basel%20iii.do)
The first part of the table below looks at the demand for Basel III skills in
IT jobs advertised across the UK.
Included is a guide to the average salaries offered in IT jobs that have
cited Basel III over the 3 months to 11 September 2012 with a comparison
to the same period in the previous 2 years.

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P a g e | 37

Note:

IT Jobs Watch provides a unique perspective on today's information
technology job market. They present a concise and accurate map of the
prevailing UK IT job market conditions. One of our favourite web sites.
http://www.itjobswatch.co.uk

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P a g e | 38

NUMBER 7

Speech by the Chancellor of the Exchequer,
Rt Hon George Osborne MP
at Scotland CBI

Thank you Nosheena, for your introduction and
may I say it’s a real pleasure to be here.
I would like to begin by congratulating the CBI and
the Scottish business community.
Over the last few years you have achieved amazing
things in difficult economic times.

Of the 900,000 new private sector jobs created in the UK over the last 2
years, 85,000 have been here in Scotland.

Of the 15,000 net new manufacturing jobs created in the UK over the last
year, 4,000 – almost one third – have been here in Scotland.

That is the fastest increase in the number of Scottish manufacturing jobs
since records began.

Politicians often claim that their Government has “created” thousands of
jobs.

But I know that’s not true.

Governments don’t create jobs – you do.

The people in this room and beyond, who take risks, have the ambition
and drive to build businesses.

And our job is to create the conditions to help you do it.

That’s why the message of all the changes we have made this week is
simple: this Government means business.

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In my own department I’m particularly delighted that Paul Deighton, the
man who delivered the best Olympic Games ever, has agreed to join the
Government as the Minister responsible for delivering the economic
infrastructure that the whole United Kingdom needs if we are to remain
competitive.

The economic outlook remains uncertain but there are some positive
signs.

Our economy is healing – jobs are being created, manufacturing and
exports have grown as a share of our economy, our trade with the
emerging world is soaring, inflation is down, much of the necessary
deleveraging in our banking system has been achieved, and the world is
once again investing in Britain.

But the scale of the challenge is so great that there are no quick fixes or
easy routes to recovery.

The debts built up in our economy over the last decade will take time to
unwind.

Added to that was a steady decline in competitiveness, the full extent of
which was masked by the tide of the borrowing boom but which has been
exposed once that tide receded.

None of this has been made easier by the eurozone crisis, which first
flared up the weekend before this Coalition Government was formed and
has cast a long shadow of uncertainty over our economy ever since.
Our strategy remains the same one set out at the beginning of this
Government.

Fiscal responsibility to show the world that we will deal with our debts
and keep interest rates low.

Monetary activism to support demand and spread the benefits of those
low interest rates through the economy.

And a far-reaching programme of supply side reform to restore our lost
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P a g e | 40

competitiveness and deliver real prosperity for the future instead of the
illusion of prosperity built on debt.

Despite strong headwinds that strategy is already delivering results.
The deficit is down by a quarter in just two years, and the safe haven
status that our credibility has earned is delivering record low interest
rates.

That is a direct benefit to the taxpayer, our private sector and our
indebted banking sector – and without it our economic future would be
bleak.

Imagine what a sharp rise in interest rates would do now to Scottish
businesses and Scottish families.

Monetary policy has supported demand and steered a steady path
through a series of external price shocks so that inflation is coming back
towards target.

But monetary activism means much more than this.

Last month the Treasury and Bank of England launched the multi-billion
pound Funding for Lending Scheme.

It is already having an impact through reducing the price of mortgages
and business lending and it is a perfect example of the firepower that the
UK as a whole is able to deploy.

And this week we are introducing a new Bill in the Westminster
Parliament that will allow us to use our hard-won fiscal credibility to
provide guarantees for new infrastructure projects right across the UK.

The full benefits of our programme of supply side reform will only come
in the medium term but it is already having an impact.

Yesterday the World Economic Forum confirmed that the UK has
improved its global competitiveness ranking for the second year in a row,
from 11th to 10th and now to 8th in the world.
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As they put it, “The United Kingdom continues to make up lost ground in
the rankings this year, rising by two more places and now settling firmly
back in the top 10.”

We have already embarked on radical reforms right across government,
not least in welfare where we are tackling deeply entrenched problems to
ensure that work always pays.

We have already made our corporate tax system one of the most
competitive in the world with a commitment to get to a 22p headline rate
– the lowest of any major western economy – and a clear ambition to go
further.

So much so that global companies like WPP, who left the UK only a few
years ago, are now returning to our shores.

And the changes this year to the taxation regime in the North Sea, with
new certainty on decommissioning costs and a new gas field allowance,
are forecast by the industry to generate billions of pounds of new
investment.

I will be making new announcements about the North Sea tax regime
tomorrow that should bring more investment and more jobs here in
Scotland.

We are already reducing regulatory burdens and reforming employment
law, with an extension of the qualifying period for unfair dismissal from
one year to two years and the introduction of fees for employment
tribunals.

But now, in all these areas and more, I am determined that we will go
further, deliver more and make our competitive edge even sharper.
That is precisely what the Scottish economy needs in order to deliver
prosperity for the Scottish people.

Now I know there are those on both sides who call for a change of course.
Some say cut more; others say “no”, spend more.

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P a g e | 42

We are pushing for more economic reform and faster delivery.

But nobody is offering a credible or convincing alternative economic
strategy.

There is no easy path to recovery and prosperity.

We in Britain have to confront our problems head on, be honest about the
scale of the challenge, and be consistent in our determination to succeed.

Of course the challenges we face are not simply economic and financial.

Last year the Scottish Government won a mandate to hold an
independence referendum.

As a result Scotland is facing its biggest decision for three centuries.

My sense is that people want the referendum process settled quickly so
we can move on to the real debate about Scotland’s future.

Scots rightly want to know where they stand on a whole host of issues –
business prospects, jobs, pensions, public services…

That’s why the UK Government is committed to facilitating the process
and ending the uncertainty that is disruptive for UK and Scottish business
alike.

There’s a deal to be done.

We’re ready to do it.

And we can do it – if the Scottish Government is serious about honouring
its election promise to let the Scottish people have their say.

Respect for the right of the Scottish Government to hold an independence
referendum should not be misinterpreted as indifference about the
outcome.

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This Government passionately believes that Scotland is stronger as part of
the UK and the UK is stronger with Scotland in it.

As the Prime Minister has already said, our argument is not that Scotland
can’t go it alone as a separate country should Scots choose to do so.

It’s why would you want to?

Why would you want to, when as a United Kingdom we’ve already
achieved so much?

And when - by pooling our talents and resources across the UK - we can
achieve so much more.

I spoke earlier about the unprecedented economic challenges we face.

I’ve spent many, many hours discussing with my fellow Finance
Ministers within the European Union how best to respond to the
continuing hangover from the financial crisis and the decade of debt.

As the members of the Eurozone strive to come closer together, the world
would be rightly puzzled if Britain’s response was to break apart one of
the most successful political and economic unions there has ever been.

The British union – and its success - is as much a Scottish creation as it is
the creation of any other part of the UK.

Scots were among the first – and most successful – in taking advantage of
the new trading opportunities opened up by union.

Glance at any atlas and you’ll find Scottish place names on every
continent.

The influence of Scots has been felt in economic development across the
globe.

David Dunbar Buick - born in Arbroath - who founded the famous Detroit
car company.
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Thomas Glover - an important figure in Mitsubishi’s history - who made
an immense contribution to the modernisation and industrialisation of
Japan.

And William McKinnon whose businesses - forerunners of Inchcape -
spanned the shores of the Indian Ocean, from the coast of East Africa to
the new lands of Australia.

Today the advocates of independence argue that Britain’s value to
Scotland is spent.

That union is no longer in Scotland’s economic interests.

And that those who continue to believe in Britain are wallowing in
nostalgia.

I want to take this argument head-on.

I make no apology for sharing all of the instinctive emotional attachment
to Scotland’s place within the UK.

Our shared history and culture.

Distinct yet intertwined identities.

A whole greater than the sum of its individual parts.

And I reject the idea that while Britain has a glorious history, it has little
relevance in tackling the challenges and grasping the opportunities of the
modern world.

300 years of working together means that today the hard-headed
economic interests of Scotland and the rest of the UK are inextricably
bound up together.

Our economic integration and interdependence runs wide and deep.
Working people, investment, goods and services all move freely across the
UK.
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P a g e | 45

There are more than 800,000 Scots who live and work in other parts of the
UK and half a million people from other parts of the UK who live and
work in Scotland.

Each year around 50,000 people move to Scotland from the rest of the UK,
and nearly as many people move the other way.

High levels of investment come from the rest of the UK into Scotland,
with UK firms employing one in five Scottish workers and contributing
around a quarter of Scottish turnover in 2010.

Just as there are Scottish firms, like Scottish and Southern Energy, First
Group and RBS who are significant employers in other parts of the UK.

This deep integration means, for example, that Scottish manufacturers
can produce goods in factories financed through capital in the City of
London and built by Scottish engineers.

Goods that combine raw materials from Wales and components built in
England, powered by electricity from Scotland’s offshore wind industry.
And goods which are sold to the rest of the UK and across the world
through the UK’s road, rail and port infrastructure.

Each year Scotland exports around £45bn worth of goods and services to
the rest of the UK - equivalent to 40 per cent of Scotland’s total output.

This is more than twice as much as Scotland exports to the rest of the
world put together.

And what better illustration of our shared economic interests and mutual
dependence could there be than two of Scotland’s most important sectors
– renewable energy and financial services.

The energy that Scotland generates helps us to meet demand across the
whole of the UK.

It is the larger UK consumer base that ensures the significant investment
costs required for this infrastructure are widely spread and do not fall on
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P a g e | 46

Scots alone.

And then there is Scotland’s 90,000 strong financial services industry with
its distinct contribution to the overall strength of the UK’s world-leading
financial services sector.

Scotland is renowned for the expertise of its investment managers and life
companies – the Alliance Trust, Baillie Gifford and Standard Life to name
but a few.

Those working in the industry would be the first to acknowledge the
benefits they derive from the close ties with the rest of the UK industry
and, in particular the City of London.

Just as those in the City will recognise the historic role and expertise
within the financial centres of Edinburgh, Glasgow, Aberdeen and
Dundee.

It’s little wonder that the economic fundamentals of the Scottish economy
are so aligned with the rest of the UK, and that its structure and
movements are similar.

Productivity in Scotland is 99 per cent of the UK average, the closest of
any nation or region within the UK to the overall UK average.

The employment rate in Scotland is 101 per cent of the UK average, again
the closest of any nation or region.

And earnings are now 97 per cent of the UK average, rising in recent
years.

These facts reflect the hard work – including by many of you in this room
– who have strengthened the Scottish economy and fostered enterprise.

So I am clear: full political and economic union across the UK - a source
of many of our past successes - continues to underpin the UK’s and
Scotland’s strength and credibility today and into the future.

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P a g e | 47

At the heart of the UK’s strength are the institutions and frameworks we
share.

It’s these institutions that support our fully integrated domestic market –
more deeply integrated than any single market between separate states
could ever be – and help to drive our prosperity.

Now I know that the proponents of independence - applying the most
reassuring bed-side manner - say that an independent Scotland would
retain everything from the pound and the Bank of England to UK
financial services regulation.

However, I simply don’t think it’s credible to suggest simultaneously that
in an independent Scotland everything will change and nothing will
change.

For one thing, although Scotland has always shared the benefit of the
UK’s interest rates, which are now at record lows, it’s very unlikely that
the government of an independent Scotland could borrow as cheaply.
And it’s the interest rate on government bonds that is one of the key
determinants underpinning the cost of all credit in the economy.

So there would be higher interest rates: a sobering thought for all Scottish
households with mortgages and all Scottish businesses.

And let’s be clear: independence would change the UK’s current
institutional arrangements for ever.

Scotland and the rest of the UK would become separate, foreign
countries.

What’s the point otherwise?

Let me take one of our oldest institutions, our single UK currency, the
pound Sterling.

A single currency that has supported more than three centuries of
economic and social integration.
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How can we foresee what effect abandoning this 300 year-old
commitment – or even talk of abandoning it – could have on confidence
and prosperity?

After flirting with the Euro and floating other possible arrangements, the
Scottish Government’s latest position is that an independent Scotland
would seek to enter a formal monetary union within a sterling zone.

But the conundrum of the Eurozone crisis is how difficult it is to combine
currency union with full fiscal and political independence.

The members of the Eurozone are now faced with what I’ve described as
the “remorseless logic” – the very lesson of the Eurozone crisis – that you
can’t have monetary union without greater fiscal and political integration.
Greater fiscal integration – because membership of a monetary union
means greater interdependence, not greater independence.

That’s why the eurozone are developing plans to control the fiscal
positions of individual member states so that they can avoid the risks of
contagion for all members of the union.

Greater political integration – because sharing a currency – and perhaps a
central bank – means policies that are consistent not divergent.

Members must be prepared to forgo individual interests and
circumstances for the interests of the union as a whole.

So it’s difficult to argue for establishing a monetary union while pursuing
fiscal and political separation.

In a world in which a separate, independent Scotland wished to pursue
divergent economic policies, what mechanism could there be for the
Bank of England to set monetary policy, as it does now, to suit conditions
in both Scotland and the rest of the UK?

As Chancellor of the Exchequer, I have seen no such credible
mechanisms proposed by those advocating independence.

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P a g e | 49

I am not clear they exist.

If the Scottish Government cannot provide answers to these basic
questions about Scotland’s currency then the Scottish people are entitled
to ask this basic question in return: what path is the Scottish Government
leading them down?

We’re better together.

And what about regulation of key sectors of the economy such as
financial services or energy?

Do the separatists propose to dismantle established regulatory regimes
for markets that are highly integrated on a UK-wide basis?

Or are they saying that the point of achieving independence is to
surrender regulatory authority over key sectors in the Scottish economy to
what would become a foreign sovereign authority?

These are choices independence forces upon you, with consequences that
are unknown - and unknowable - at the time you make them.

Again, if the Scottish Government cannot provide answers to these
questions, then the Scottish people are entitled to question what path
the Scottish Government is leading them down.

By contrast devolution within the UK provides Scotland with the best of
both worlds.

Substantial control over its own national affairs combined with the
strength that flows from being an important part of a much larger entity.
In a globalised economy the UK’s scale matters.

Far from holding Scotland back, the UK provides Scotland with a strong,
stable and secure platform.

The UK has broad shoulders.

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P a g e | 50

When Alistair Darling was doing my job, UK taxpayers spent £45bn
recapitalising RBS – and the bank also received £275bn of state support
in the form of guarantees and funding.

This support is equivalent to around two years of Scotland’s total output
on any measure.

A disorderly collapse of Scotland’s banks would have been devastating for
depositors, jobs and growth in Scotland.

That’s why I argue that the whole of the UK benefits from having a
Government with the necessary fiscal firepower, backed by a credible
central bank, which can deliver an effective co-ordinated response to a
major bank failure.

The UK has a large and diversified economy supported by a broad tax
base of 30 million individual taxpayers and nearly 2 million registered
businesses.

We’re better together.

And together our voice is heard abroad.

However broad our shoulders, future prosperity depends - as it has always
done – on our success as a trading nation.

I particularly want to thank the CBI for all the work they are doing to push
Scottish exports.

Scots have never been parochial in their view of the world.

You have always lifted your gaze beyond the horizon.

At a time when the global community is striving to remove barriers to
trade, I don’t believe it’s in anyone’s interests here at home to erect new
borders and barriers to Scotland’s ability to compete in the world market.
Being part of the UK opens doors for Scotland and Scottish business.

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There are enormous advantages to being part of one of the biggest and
best Embassy, Consular and trade networks anywhere in the world.

14,000 people in nearly 270 diplomatic offices, backed by a further 10,000
locals in the 170 countries in which we operate.

This is just one example of a broader and fundamental point.
Britain’s influence – and Scotland’s reach - is truly global.

Scotland walks taller and shouts louder as part of the United Kingdom.
So here in Glasgow tonight – a City that has played and continues to play
such an important part in the story of Scotland and Britain.

Let’s remember the great contributions of the past.

Celebrate the great work being done today by businesses the length and
breadth of this country.

And look forward to what we can achieve together in the days, months
and years to come.

For our vision for Britain is of an economy, open to trade …
…a Britain that extends choice and opportunities for all the people of the
UK…
…a Britain that cherishes the rich diversity of these islands…
…a Britain that taps into the talents to be found in every part of our
country to build a more prosperous future for us all.

Scotland has played and continues to play a central role in making Britain
the country it is today.

A country attractive to inward investment.

A country exporting around the globe.

One of the best places in the world to do business.

And I hope that when the Scottish people come to deliver their verdict,
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Scotland will continue to play that central role within the United Kingdom
in shaping our country’s future.

We are better together.

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NUMBER 8

The incentivisation of sales staff – are
consumers getting a fair deal?
Speech by Martin Wheatley –
Managing Director, FSA

Introduction
We all know what it is like to walk into a bank to do something simple,
like pay a credit card bill, only for the person behind the counter to ask if
you would like to extend your credit, take out more insurance or look at
their competitive mortgage rates?
To be honest, I only have a credit card to shop online, I have all the
insurance I need and the mortgage on my house is fixed.
Banks for me were all about making sure my money was safe and my best
interests were looked after.
The type of place where you would go in, have a pleasant chat with the
clerk and go about your daily business.
Some time ago, financial institutions changed their view of consumers
from people to serve, to people to sell to.
One of the reasons why this happens is obvious – people in our financial
institutions are being encouraged to sell to us through incentive schemes,
bonuses and rewards.
We have found evidence of poor practice and we are concerned that this
reward culture is contributing to mis-selling.
You can read our concerns in a report published today, which makes it
clear this is a problem across the industry.
Why we are here today?
I am here today to talk about how we as the regulator intend to change
this culture of viewing consumers simply as sales targets.

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This paper marks the start of a programme of work that will be taken
forward by the Financial Conduct Authority – an organisation I will lead
and that will focus on making sure markets work well so consumers get a
fair deal.
Poorly designed incentive schemes are a universal problem across many
industries.
Financial regulators have struggled to get to grips with them, and many
consumers have paid the price.
We know dealing with this will not be an easy task – financial incentives
are central to how businesses operate and are at the heart of problems we
have seen over the years.
This is ingrained within firms’ business models, and we need a cultural
shift across the industry to deal with it.
The main points that I want you all to take away from today’s speech are:
- we have found that most incentive schemes that we looked at are
likely to drive mis-selling, and this risk is not being properly
managed;
- while we will be looking at our rules and also the way we supervise,
we expect firms to act now to clean up their act in regards to our
findings; and
- this work will be taken forward by the FCA and we will be taking a
closer look at how firms incentivise their staff.

Why is this so important now?
It has been too easy, for too long, for those selling or giving advice to be
motivated solely by the rewards on offer to them, rather than how to
enrich their customer.
This paper comes at a time when it’s clear that people no longer believe
that they will be treated fairly.

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Recent scandals on Libor and the mis-selling of interest rate products to
small businesses have added to scepticism about where customers are
placed in financial firms’ list of priorities.
But what is also still clear is that we need financial services more than
ever.
Most of us need to save more for our retirements, but many are not doing
enough.
And all of us need a strong, profitable financial services industry that can
give us the advice we need to guide us, that can help to protect us from
the unforeseen, and that can deliver the products that will help us achieve
our life goals.
But the lack of trust and confidence is amplified each time that someone
working for a bank, insurer, or investment firm sells products
predominantly driven by financial incentives for themselves and profit for
their firms, rather than the needs of their customers.
And while public attention has been on the huge rewards on offer to the
few, the effect of more modest rewards on the many needs to be dealt
with.
We need to deal with how incentives and bonuses are used by firms across
financial services to drive sales, and the knock-on effect this has on their
customers.
In particular it is how front line staff have to hit performance targets,
make sales and sign up customers to make a decent living.
Even when – as they sometimes tell us – they do not want to be a part of
that type of culture.
This bonus-based approach has played a role in many scandals we have
seen over the years.
Incentive schemes on PPI were rotten to the core and made a bad
problem worse.
This is not like when you go to a fast food restaurant and the server asks
‘do you want fries with that?’, or ‘do you want to go large?’.
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We all know they ask these questions because they are encouraged to
make the most of every sale, and when customers are standing at the
counter, they are more likely to say yes.
But then we also know what to expect – chiefly lots of salt, calories and a
bigger waistline.
But far fewer of us actually have such a clear understanding of financial
services.
We also mostly trust those selling or giving advice to be acting in our best
interests.
These are often complex and long-term products that turn into long-term
problems if they go wrong.
The cost of going large may cost us a few pence – the cost of buying the
wrong mortgage could see you lose your home.
And while it is annoying that when you buy a TV they only seem
interested in selling you the warranty, that is nothing compared to trying
to find a safe home for your money, only for the person in the bank to only
seem interested in selling you a confusing product that could put your life
savings at risk.
When that happens it is often because the person selling has a financial
incentive to meet targets or sell a certain product.
And based on evidence we will publish today, you will often find the firm
is not doing enough to prevent that happening.
What I expect those running firms to do is start looking at what their
schemes are set up to do.
The dictionary tells us incentives are something that incites an action.
Firms need to ask what type of action it is they incite.
Is it to get the best deal for the customer, or is it to get the best deal for the
person or firm selling it?
It is too often the latter. It needs to be more balanced.

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Aligning incentive schemes to good consumer outcomes
I need to be clear here that I do not have an issue with firms having
incentive schemes.
We believe that firms can have incentive schemes that are well managed
and can benefit their customers.
Where we have identified problematic areas, these firms have already
started to change their schemes or systems and controls.
What we are now telling firms is that if you do have an incentive scheme,
it has to be structured and managed in a way that treats the people it will
affect fairly.
As the FCA this will be important to us and we will look at features of
incentive schemes and related controls and how they deliver fair
consumer outcomes.
And it is obvious firms need to make sure performance incentives are
aligned to the goals of an organisation.
There is a problem of course if the goals are simply to sell as many
products as possible – firms need to make money, but not at the expense
of clients and customers.
This is about motivating people to do what is right.
It comes back to organisational culture and ethics and the truism that
what is good for customers is good for firms.
We do not want to keep hearing of instances, such as PPI, where
consumers think they had to buy a product or protection on another
product when they did not need it.
People parting with their money need to be sure they are being sold a
product for the right reasons, rather than just because it makes a lot of
money for those selling it.
Firms need to ask – am I getting the best outcome for my customers here?
This has to become part of firms’ culture and part of how they do
business.
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The customer needs to be truly at the heart of any businesses set on a
strategy of sustainable growth for a long-term future.
I believe this comes down to those running firms focusing on the delivery
of quality products and services and less on reward.
We need to break the link between incentives and customers getting a
poor deal.
Getting this right is going to be a priority for me, and it should be for all
firms as well.
The FCA will expect all firms to have a culture that puts their customer
first, sorting out incentive schemes seems to me to be a simple way to
start doing this, and a solid way of helping the industry to rebuild some of
the trust that has been lost in recent years.
We know this isn’t an easy job and we can’t do this alone.
Making such a change is going to take time and it’s going to need your
full support - ultimately we need you to help us.
By making these changes your customers will be happier and ultimately
your businesses will do better.
The report
Today we are publishing some disturbing findings from our recent
research that illustrate that firms need to start putting their customers
first when they set up their financial incentive schemes.
We looked at 22 firms of all sizes, including high street banks, building
societies, insurance companies and investment firms.
And what we found is not pretty.
Most of the incentive schemes we looked at were likely to drive people to
mis-sell to meet targets and receive a bonus, and these risks were not
being properly managed.
In particular, firms failed to identify how incentives might encourage staff
to mis-sell, suggesting they had not properly thought about the risks or
simply turned a blind eye to them.
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They also relied too much on the routine monitoring of staff, not taking
account of the features of their incentive schemes for example, looking
out for spikes in the sales of each individual before the end of a bonus
period.
I will give you some illustrations of where firms are going wrong and
examples of high-risk incentive schemes we have seen.
Some sales managers earned a bonus based on the volume of sales made
by the staff they supervised.
This may sound reasonable, until you add in that some of them also
played a significant role in checking whether the sales were fair to the
customer.
This created a clear conflict, yet some of the firms we looked at did not
think this was an issue to worry about.
Another is that few firms with face-to-face sales staff had properly
considered the risks of bad practice when the salesperson is talking to the
customer – such as leaving out important information or pressuring
customers to buy a particular product.
Our work found that too many firms had not thought about checking
what is actually said to customers.
Here are a few of the worst examples:
- One firm operated a ‘first past the post’ system, where the first 21
sales staff to reach a target could earn a ‘super bonus’ of £10,000.
- At one firm the basic salaries of sales staff could move up or down
by more than £10,000 a year depending on how much they sold.
- Another firm excessively incentivised one product over another,
therefore – despite claiming to offer impartial advice – there was a
clear risk that its advisers would sell the product that earned them
more money. We also found that the same firm made more money
from sales of that particular product than any other, hence the
bigger incentives for sales staff.

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P a g e | 60

- And another firm allowed sales staff to earn a bonus of 100% of their
basic salary for the sale of loans and PPI, but the bonus was only
payable to those who had sold PPI to at least half their customers.
And I find it alarming that particularly risky incentive schemes, with the
potential for sales staff to earn significant bonuses, without proper
safeguards in place, were common across the firms we assessed.
Our report today must act as a wake up call to all firms.
It sets out the scale of problems we have found and a roadmap to put this
right, with clear expectations and proposed guidance to help firms meet
our requirements.
We expect all firms to read our paper and think how it affects their firm.
We have made sure the firms where we found failings are fixing their
incentive schemes, improving governance and controls and, in the worst
cases, checking past sales to identify if mis-selling has occurred.
What firms need to do
And today I am setting out the steps that all financial firms need to take to
put this right.
1. First, look at your incentive schemes to see if they increase the
risk of mis-selling, and if so how.
2. Second, review whether your governance and controls are
adequate.
3. Third, take action to deal with any weaknesses and flaws
identified.
Firms need to change how they incentivise their staff and learn to manage
their risks.
CEO’s are ultimately accountable for the way their staff are incentivised,
so we expect them to take a real interest in fixing this.
Recurring problems need to be investigated, action taken and redress
paid to consumers who have lost out.

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I want to draw a line in the sand here, and use the report we are
publishing today to set out our clear expectations.
This marks the start of a programme of work to reduce these risks, which
the FCA will take forward, and that will involve further supervisory work,
involving a wider review of incentive schemes, enforcement proceedings
and a possible strengthening our rules.
I am going to be personally involved in getting this right.
This will be part of the ongoing improvements we make to regulation as
we seek to make markets work well and give people a fair deal.
The reforms the FCA will carry out are the opportunity to do things
differently and when we begin our life next year you will see a new
approach from us, driven by our new culture and our new way of working.
At the heart of this culture will be the ability and the appetite to protect
consumers better.
Dealing with behaviour – or people’s conduct – is at the top of our
agenda.
From boardroom to point of sale, the behaviour and attitude of financial
firms needs to be examined and assessed – especially in terms of what
experience and outcomes it offers customers.
This will include pre-emptive regulation that takes a broad and deep look
at firms’ businesses individually and across the board.
We will look for the bigger issues, find them earlier and deal with them
quickly once we spot them.
We will look at how firms make their money, how they pay their staff and
whether they are designing, and selling products with customers in mind.
This is a change from the traditional regulatory model, which involved
setting standards and then looking back at what firms have done.
We will continue with that, but for far less of our time. Instead, we will be
making a judgement on what the businesses we regulate are doing now,

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P a g e | 62

and what they plan to do in the future, looking at how they are making
their money, and whether they are ‘good profits’.
In short, whether they are carrying out their business in a way that is
treating their customers fairly.
And when it comes to dealing with problems, regulators in the past just
looked at what has happened.
We will find out why it has happened.
It is obvious to me that you cannot get to the bottom of what is causing
harm unless you deal with the root causes of problems and the wider
issues that run across firms.
This will be part of a cultural shift for us, so that we are thinking about
things from a consumer perspective.
The FCA can be the template and the way forward for a new type of
regulator, one that nurtures and applies a fresh set of operational values
dedicated to understanding, anticipating and intervening to ensure that
the financial markets fulfil their potential and promise to deliver a fair
deal for consumers.

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NUMBER 9

Interesting comments for the ComFrame
A compilation of comments on a common framework for the
supervision of internationally active insurance groups, known as
ComFrame by the International Association of Insurance Supervisors
(IAIS)
Bermuda, Association of Bermuda Insurers and Reinsurers
ABIR does not support the current proposal to include companies that do
business in 3+ jurisdictions as the first basis on which to determine a
company may qualify as an IAIG.

(Note: IAIG stands for Internationally Active Insurance Group)
(Note: ABIR stands for Association of Bermuda Insurers and Reinsurers)

ABIR would respectfully submit that one of the objectives of ComFrame
is to develop harmonization of the application of group supervision and in
this regard, if for example, a group is operating in 3 jurisdictions within
the EEA, then under the proposed regime harmonization in principle will
have been already statutorily mandated, thus the purpose of introducing
another group supervisory regime is not clear.

We would propose that an IAIG is one which operates with legal entities
in multiple jurisdictions which have separate and distinct regulatory
systems across 3+ supervisory frameworks; for example, Canada; US;
Bermuda; India, etc.

ComFrame should be applied only to those internationally active groups
that have a global footprint and operate with legal entities in jurisdictions
on multiple continents.

The EU and the United States would each count as a single jurisdiction
since they operate with a common cross-state regulatory system.

ABIR also recommends that a smaller number of groups -say the 20
largest–be targeted with COMFRAME; experiment first, learn from that
_____________________________________________________________

Monday September 17 2012 - Top 10 Risk Management News

Monday September 17 2012 - Top 10 Risk Management News

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