Here is his speech in full.
"Good morning and welcome to the annual public meeting. The purpose of the APM is for us to report on the FSA’s activities over the last year – in formal terms that means the year April 2011 to March 2012. The annual report which we published on June 19 sets out the details of our activities in that year, including a financial report on our revenue, expenditure and balance sheet. And we will be very happy to take any questions on that report.
"But since this will be the last APM of the Financial Services Authority in its current form, it makes sense to place my comments about the year 2011-2012 within the context of what the FSA has achieved over four years since the onset of the financial crisis.
"None of us who were in the FSA as the financial crisis intensified in autumn 2008 will ever forget that experience. I certainly won’t – becoming chairman of the FSA on Saturday September 20th 2008, a week after Lehman’s had collapsed and two weeks before we decided we had to recapitalise and part nationalise significant parts of the UK banking system.
"And the crisis made it crystal clear that the pre-crisis system of prudential regulation had been severely deficient in three important respects:
 Woefully deficient rules on bank capital and liquidity;
 A deficient and under resourced approach to Prudential supervision; and
 And a dangerous vacuum, an “underlap” between the Bank of England and the FSA, an absence of systemic analysis and macro-prudential policy tools
"The first two deficiencies – in the rules and supervision reproach – were clearly described in the FSA’s report on the failure of RBS. We published that report last December, and producing it was a very major activity for the FSA during 2011, but also, I believe, a very valuable one. The report described two fundamental problems to which we have responded with radical change:
 First, levels of bank capital and liquidity in RBS, but also in many other banks throughout the world, which were not just inadequate to absorb potential risks, but dramatically so. Levels which reflected globally agreed approaches, designed by many experts from central banks and regulatory authorities, which were believed to be appropriate and sophisticated but which proved utterly lacking. Since the crisis, the FSA has been at the forefront of actions to put right those deficiencies. Starting in spring 2008, we began to demand higher levels of bank capital – too late to prevent the crisis, but moving in the right direction. From 2009 to 2011 we played, alongside the Bank of England, a leading role in the design of the new Basel III capital and liquidity regime. And from 2010 on we have put in place new quantitative liquidity guidelines. Together these measures have driven large improvements in the capital and liquidity position of the major UK banks, and without these improvements, our banks would have been more vulnerable to the risks to financial stability still posed by the weakness of developed market economies and the stresses in the Eurozone.
 These deficiencies in the capital and liquidity rules were fundamental. Indeed so deficient were they that no system of supervision however perfect could have offset the resulting threats to financial stability. But the FSA’s supervisory approach was also far from perfect – indeed, as the RBS report makes clear, it too was clearly inadequate. At the core of good prudential supervision should be a focus on three things: capital, liquidity, and asset quality. That focus was lacking, and the resource dedicated to the supervision of major banks was clearly insufficient. Beginning in spring 2008, the FSA has therefore implemented radical change in its approach to prudential supervision – with more resources, better trained, and better focused on key issues. That reform has continued over the last year.
MACRO PRUDENTIAL
"So we have fundamentally changed both the regulation and supervision of individual banks. But regulating and supervising individual banks – or other individual firms or markets – is insufficient in itself to ensure financial stability. That requires in addition a focus on the overall financial system, and an ability to use what have come to be labelled “macro-prudential” policy levers. That focus and those levers will now be the responsibility of the Financial Policy Committee of the Bank of England. Hector Sants and I became members of that committee when it commenced work in shadow form in April last year; Andrew Bailey has now replaced Hector on the committee. And Martin Wheatley attends as an observer, and will become a full member when the new structures come into place next year. Engagement with the work of the FPC, both in terms of input into its analysis and deliberations, and in ensuring implementation of its recommendation – many of which are made to the FSA – has been an important new activity of the FSA over the last year. And the creation of the FPC has already made possible a more integrated approach to crucial issues, which was impossible under the previous regime. In particular in that respect I would highlight the FSA’s decision, announced last Friday, to amend our liquidity rules which govern how much self insurance banks should hold against liquidity stress, in the light of the changes to Bank of England policy towards the provision of contingent liquidity insurance. The FPC debated carefully the way in which those different aspects of policy fitted together: such integration of policy was impossible in the pre crisis regime.
"These three sets of changes – regulation, supervision, and the macro-prudential approach – could have been introduced without any legal change in the FSA’s responsibilities. But the new government was committed to structural change, and once it is achieved I believe we will gain significantly from it. There are natural links between prudential regulation and central banking closer than those between prudential and conduct regulation; and the division of the FSA into the Prudential Regulation Authority and the Financial Conduct Authority will enable each to focus on developing the appropriate and somewhat different approaches and skills required to identify and mitigate prudential and conduct risks. Implementing this change against a background of global financial stress is of course challenging. But we are confident we can implement the change without any loss of attention to current risks. And once achieved the new regime will deliver benefits.
"The new regime will ensure focus on prudential issues by the PRA even when much of the world assumes, as it did before the crisis, that prudential risks are low. But its benefits on the conduct side – achieved through the creation of the Financial Conduct Authority – will be at least as important.
TRUST AND REPUTATION
"2008 was a prudential crisis: banks failed. But significant parts of the UK financial services industry – including but not exclusively our major banks – face another crisis as well: a crisis of trust and reputation, produced by the series of mis-selling scandals – pensions, mortgage endowments, split capital trusts, payment protection insurance –which have eroded customer confidence that the industry is looking after its customers’ rather than its own interests. Over the last year, the FSA’s conduct supervisors and specialists have been extensively involved with two important mis-selling issues – payment protection insurance mis-sold to households, and interest rate swaps mis-sold to small businesses. In both cases, we have been determined to ensure that customers get appropriate redress, and have taken forceful action to achieve that.
"But from both cases too we have drawn the lesson that the FCA must in future find ways to intervene earlier on – preventing customer detriment before it develops, rather than having to enforce redress after the fact. We are therefore in the process, as we describe in this year’s annual report, of reforming our approach to conduct supervision as radically as on the prudential site, and the Board is now extensively involved in discussions with Martin Wheatley and the executives of the conduct business unit about the processes, skills and resources which the FCA will need to make a reality of the new approach.
"One crucial determinant of whether the financial services industry meets customer needs, selling appropriate products to appropriate customer segments, is the structure of incentives. If salespeople or advisers face strong personal incentives to sell specific products – for instance as a result of commission based incentives – this may undermine the effectiveness of our requirements.
"The FSA has therefore paid increasing attention to the structure of incentives. The Retail Distribution Review, on which work commenced in 2006, has been designed to remove commission bias in the financial adviser space and over the last year further work on the RDR has been published, providing guidance on legacy commission and our rules on independent advice, to support the industry as they prepare for implementation at the end of this year.
"In addition over the last year, the FSA is consulting on policy in relation to the payments to platform service providers by fund managers again aiming to address issues of potential bias. And we are currently considering issues relating to sales practices in direct sales forces.
MORTGAGE MARKET
"Another crucial area of policy work over 2011 to 2012 was the mortgage market – on which we published a Consultation Paper in December pulling together three years of work, which involved intense analysis of the market, extensive consultation with both consumer groups and the industry, and careful consideration of the policy options. Our analysis revealed a mortgage market which works well for many customers, but which ahead of the crisis had a tail of poor lending practice which tempted a significant minority of borrowers into unaffordable commitments. Our proposed policy response aims to prevent a return of that tail of poor lending practice without undermining provision of mortgage finance to credit worthy customers. We are currently considering the responses to our December Consultation Paper, and will make decisions on rules and implementation timescale over the next few months.
"Better regulated incentive structures and a more effective approach to early intervention will however always need to be supported by the credible deterrence of potential enforcement action, and over the last five years, the FSA has increased hugely the effectiveness and the robustness of its enforcement activities. Before 2005 indeed, the FSA was clear that it was “not an enforcement led regulator” and that was interpreted as implying a less than fully robust approach. That has changed, and we saw a clear demonstration of our new more robust approach last week – in the findings relating to Barclays and LIBOR manipulation. Further investigations relating to LIBOR are ongoing; and investigations of this type require very significant resources and take several years to launch, develop and bring to conclusion. The successful completion of one aspect of the case last week therefore reflects approaches and resources put in place and built up over the last several years.
CYNICAL GREED
"The LIBOR scandal has caused a huge blow to the reputation of the banking industry. The cynical greed of traders asking their colleagues to falsify their LIBOR submissions so that they could make bigger profits – has justifiably shocked and angered people, in particular when we are facing hard economic times provoked by the financial crisis. But sadly it is clear that the behaviours evidenced in the LIBOR case were not, in the years before the crisis, confined to this specific area of financial activity. Documents such as the U.S. government’s Financial Crisis Inquiry Report and the Senate report on Wall Street and the Financial Crisis, or indeed Michael Lewis’s insightful account of “The Big Short” have revealed, for instance, a cynical willingness of many traders to sell securities whose value they doubted to customers whose judgments they disparaged. And too much of what is described in the investment banking world as “creative” or “innovative” , is not creative or innovative on behalf of the real economy, but devoted to tax structures which simply shift money from the generality of taxpayers to the financial sector, to regulatory arbitrage which seeks to gain an improved regulatory treatment of unchanged economic substance, or to accounting devices which attempt to put a favourable gloss on the underlying situation of firms or their clients, for instance understating a country’s true level of debt.
"There is therefore a major challenge for the investment banking industry and related areas of finance: how to rededicate their business to a focus on fundamental economic functions – raising capital for companies creating real wealth, managing customer risks rather than creating new risks to bet against, and how to purge the industry of the culture of cynical entitlement which was far too prevalent before the crisis. These issues should, I believe, be a major area of focus for investigation by the committee of both Houses of Parliament that was announced by the Chancellor yesterday.
"These issues relate to what we label “wholesale” rather than “retail” conduct. And it’s fair to say that in the past the FSA has tended to a somewhat “caveat emptor” approach to wholesale conduct issues. After all, the logic went, we’re dealing here with relationships between professional counterparties, or at least between banks and large institutional or large corporate clients, which ought to be able to make their own judgments. But as we have discussed the regulatory approach for the FCA, we have found we need to consider how far that caveat emptor approach is sufficient. An insurance company or pension funds may be itself a large institution, but sitting behind the company or pension fund are retail investors: and any poor practice which unreasonably shifts income to the industry is at the expense of some end retail customer. There are no free lunches, and shoddy wholesale practice is not a victimless act, even in those cases where it is not defined as a crime. We will therefore need to think carefully how far we should shift our past approach to the supervision of wholesale conduct, and what resources and skills we need to be more effective in this area. This is an issue currently under discussion between the executive and the Board, and one on which we will comment in the FCA approach document which we will publish in autumn.
STRUCTURAL CHANGE
"Looking back over the last four years in which I have been chairman of the FSA, and indeed over the year before that, the story of the FSA is one of radical change. Radical change has been implemented already without structural change in legal responsibilities. But the legal change which will come next year will help reinforce and deepen what we have already achieved.
"The last year, on which we are reporting today, has been a crucial one in preparing for the structural change – indeed a lot of the most important work has already been done. We have now divided our supervisory staff between prudential and conduct units. We have made good progress in working out how functions such as authorisations will work in the new regulatory structure and will pilot how twin peaks will operate at the regulatory gateway later this year. Alongside colleagues from the Bank of England, Hector Sants and Andrew Bailey have developed detailed plans for the move of the PRA to its new offices, now being fitted out. And our IT systems teams have worked out which PRA systems will be integrated into Bank systems, and which will be supported by ongoing FCA systems. And the personnel consequences of all these changes have been carefully assessed and managed.
"As all of you in this room involved in business know, this is a huge challenge, and in an ideal world we would have implemented all this in calmer times. But we are now well advanced with the required changes. We have moved already to what we call “internal twin peaks” – i.e. to the internal division of the FSA between a prudential and a conduct business unit. The prudential unit, headed by Andrew Bailey, will become the PRA: the conduct unit, headed by Martin Wheatley will become the FCA. Following Hector’s departure of the end of June, they will both report to me as Executive Chairman for the final nine months or so of the FSA’s existence.
"And let me take this opportunity to say a thank you to Hector for all the work that he has put in to the FSA as chief executive over the last five years and in particular for his agreement in 2010 to stay on as chief executive for the last two years. The fact that we are as well advanced as we are in our plans for transition to the new structure owes a lot to his leadership.
"Finally in relation to people, I look forward to welcoming John Griffith-Jones as deputy chairman of the FSA and FCA chair designate from September 1. From that time he will be working closely with Martin Wheatley on the further steps in the design and launch of the FCA.
CREATING THE FCA
"Our best current estimate is that “legal cut over” as it has become labelled, will occur in April 2013. Whether that is the date depends not on us, nor on the Bank of England, since we will both be ready to implement by March 1st. It depends on the parliamentary timetable up to Royal Assent and the time needed thereafter for secondary legislation and regulations. From the point of view of the leadership and staff of the FSA, we want legal cut over to be as soon after March 1st as possible. Again, as everyone involved in business knows, once you’ve got to this stage in an organisational change process, the sooner one can complete the better.
"The leadership and staff of both the PRA and the FCA want to get on with creating the new organizations and addressing new challenges ahead.
"Creating the new organisations will be an opportunity to put behind us the damaged reputation which the FSA suffered as a result of pre-crisis failings. A fair assessment of those failings would reflect a wider context – the inadequacy of regulations agreed by central banks and regulators across the world: and the intellectual delusions which left too many apparent experts blind to the impending disaster. But deficiencies in the FSA’s own approach played a part within that wider context – and the FSA has been more willing than any other institution to admit those deficiencies, to learn from them, and commit to and deliver the radical changes needed to put them right.
"The new regulatory bodies to be launched next year – the PRA and the FCA – will build on what has been already achieved – both over the last year on which we are reporting today, and over the three or four or so years before that."
