Compliance officers speak out on 'Dear CEO' letters

Jan 26 2006 Alex Davidson

Compliance officers revealed a range of views on the Financial Services Authority's controversial "Dear CEO" letters during a City forum yesterday. Most speakers expressed the view that dialogue with the regulator was more important than taking a "by the book" approach to the letters.

Andrew Procter, head of European compliance at Deutsche Bank, said that his organisation resisted the temptation to view "Dear CEO" letters as a prescriptive call for action.

"We instead look behind the letter, and say, 'We think we should do it this way'. It may suit our model better. We have the luxury of being able to do this because we have the dialogue with the regulator that allows it," the former FSA enforcement director told a Securities & Investment Institute conference.

Against a background of an expected reduction in the level of consultations by the Financial Services Authority, AXA Insurance UK does not object to "Dear CEO" letters, according to Ian Holloway, head of compliance.

"Some things in the 'Dear CEO' letters are a surprise. We'll talk to the FSA but it would be better if the conversation had taken place before the letter went out."

The FSA has said at meetings with AXA that it did not meet with the industry enough, particularly the insurance sector, Holloway said. "The dialogue is the most important thing."

Martin Saunders, partner at Clifford Chance, suggested that the letters were a "rather blunt instrument" for the FSA.

Andrew Marsden-Jones, senior compliance and risk manager at Morley Fund Management, said "Dear CEO" letters made some valid points. "But they also have irritating bits. One letter told us what we'd have to do on TCF for the next 12 months. But we're already doing a lot. It put us out to receive a letter saying 'you need to do a lot more'."

The "Dear CEO" letter in question was probably not aimed at Morley, Marsden-Jones conceded. "We had to do a lot of work to respond. But I can see 'Dear CEO' can be very useful to the regulator."

A compliance officer said: "The perception seems to be that 'Dear CEO' letters are pushing for best practice - rather than just good - and are being used more."

Sluggish start

The "Dear CEO" concept did not start well, according to Brian Harte, former head of compliance and regulatory affairs at Barclays. "The FSA aimed its first 'Dear CEO' letter at the back offices of small banks in relation to Treasury operations but the industry thought it was aimed at everybody. The media coverage didn't help."

Compliance officers said that the "Dear CEO" letter was part of a potential trend in the principles-based regulatory environment where the rules were to be reduced and the FSA was to offer less formal guidance.
William Macdonald, managing director of Craigcrook Management Services, said of the current regulatory environment: "The risk is that the FSA could introduce standards by the back door, including indicators on the web site, and will not have to consult."

In this environment it is difficult for a firm to say that it is compliant, according to MacDonald. "There's a heightened regulatory risk, which creates a much tougher task for compliance officers, especially the younger, less experienced ones.

Simon Morris, partner at CMS Cameron McKenna, said: "Be alert for the FSA's latest fads. TCF is not a rule, there was no proper CP - just something four years ago - and this is regulation by stealth. It's all done by speech. It is a similar situation for conflicts."

In the principles-based regime, there is effectively a rule-based monitoring programme. Firms write their own rules and compliance monitoring should take "Dear CEO" letters into account, according to Julian Sampson, director of compliance at Insinger de Beaufort.

The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.