The Financial Services Authority is a creation of parliament and we draw our legitimacy from the statute which establishes our duties and powers as well as the effectiveness with which we discharge our responsibilities. An important component of that is the effectiveness with which we set out our plans and report on our progress against them.

It may be worth re-stating the principles to which the FSA is committed. They are: a concern to make markets work effectively, as the best means of providing benefits to both consumers and providers of financial services; and therefore a commitment, where we have discretion, to intervene in markets only when there is a market failure and where regulatory intervention is likely to be cost-effective; and finally a risk-based approach which accepts that some failures neither can nor should be avoided.

These principles are constant, but the environment in which we aim to maintain them is constantly changing.

Each January, in its Financial Risk Outlook, the FSA publishes a formal assessment of the risks that are present or may emerge. The risks we are particularly concerned about this year include the danger that, at a time of low yields and in a benign immediate economic environment, firms may inappropriately relax their risk controls, or that firms or their customers may, knowingly or unknowingly, enter into excessively speculative investments.

The coming year will see changes in the patterns of distribution of retail financial services in the UK, and the introduction of basic advice for the sale of stakeholder products. It will be important that the benefits which are expected to arise from increased competition and greater accessibility to advice are not impeded by the risks posed by changes in market structures.

We are also concerned about the continuing risks to consumer welfare caused by low levels of consumer understanding of financial risks and rewards, and the threats this poses to developing an efficient retail market for financial services.

There are also operational and strategic risks for firms arising from the scale of EU and other international regulatory initiatives. To help understanding of these issues, we also published an International RegulatoryOutlook in January, setting out how we expect these developments to affect firms’ planning and our own work. We devote very significant effort at all levels in the organisation to influencing policy development internationally, in the EU and beyond.

The FSA is also concerned about the uncertainties created by economic imbalances, both in the UK with a high level of consumer debt and property prices, and internationally through the US external deficit. The latter is clearly unsustainable long-term, and if corrected rapidly these imbalances would place strain on financial institutions.

We also continue to be focused on the risk of operational and market disruption as a result of terrorism.

Against this assessment of risk, our focus will continue to be on delivery: transposing European directives in a way that is sympathetic to the UK marketplace; implementing policies on which we have already consulted; consolidating our risk-based approach; and improving our business capability and effectiveness.

A key challenge for us will be to demonstrate that the costs of regulation are justified by the benefits. We have listened to the industry’s concerns about the impact of regulation on their businesses and this year we will conduct a detailed study on the matter, with a particular focus on small firms. We will also be looking to cut back our requirements where we can do so without damaging our ability to meet our regulatory objectives. This reflects a new determination to be more rigorous about the burdens and costs imposed.

Our programme of work for the year is set out in our Business Plan, also published in January. Even a cursory read will demonstrate that we have a substantial agenda of work ahead, so it may be helpful to highlight a few examples in the areas of promoting efficient, orderly and fair markets; helping retail consumers achieve a fair deal; and improving our business capability and effectiveness.

A major challenge for firms and the FSA, in its day-to-day supervision, is to maintain the standards which make the UK such an attractive place for international business, at a time of unprecedented regulatory change. This includes: implementing the capital requirements directive, which originated in the Basel Committee; various directives deriving from the EU financial services action plan including the Markets in Financial Instruments Directive; and changes to international accounting standards.

The market for retail financial products and services can be made to operate more effectively by developing: capable and confident consumers; better information for consumers; and better and more responsible behaviour on the part of regulated firms. The FSA will continue to provide leadership in developing the national strategy for financial capability. Some of the strands to be delivered in 2005 – such as those related to schools – will be launched nationally in the second half of the year. Others require pilot projects before being launched on a national scale and, where potential long-term funding has been identified, the FSA will fund these pilots.

Work will continue with firms on treating customers fairly (including providing firms with specific guidance on what is expected of them) and improving the quality, clarity and relevance of information provided to consumers.  And 2005 will also see full implementation of the depolarised advice system, including the “menu” designed to explain to consumers the cost of advice, and the basic advice regime for stakeholder products.

Acting effectively remains one of the FSA’s three primary aims. It covers devising policies which are proportionate; using resources efficiently; and making the FSA an easier organisation with which to do business. Building on the progress already made in improving the processing of high volume transactions (eg. rule waivers and requests for guidance), the FSA will make increasing use of technology in its dealings with firms.

Other new and recently introduced initiatives for small firms include the ability to build personal handbooks, capped fee increases for 2005/06 for the vast majority of small firms, and considering a market solution to enable small firms to pay fees and levies by instalments.

The FSA will take forward a detailed study of the costs of regulation, in partnership with the practitioner panel. This will have a particular focus on the costs imposed on small firms. Market failure and cost-benefit analysis will continue to drive policy thinking, and particular consideration will be given to the likely effects of those policies on small firms. The FSA will also continue to develop its risk-based approach to regulation so that it responds to changing risk in a proportionate, economic and effective manner.

Our work will deliver outcomes which are critical to the well-being of the UK’s financial markets – both wholesale and retail. We are committed to working collaboratively and effectively with our various stakeholders in pursuit of those outcomes.