Select Committee on Treasury Minutes of Evidence

Examination of Witness (Question 1-19)




  1. Good morning, Mr Brydon, and welcome to the Committee's inquiry into the Financial Services Association's Practitioner Panel. Would you introduce yourself for the record.
  (Mr Brydon) My name is Donald Brydon. I am Chairman of the Practitioner Panel. I am also the Chairman and Chief Executive of AXA Investment Managers.

  2. Are there any introductory remarks you would like to make to us?
  (Mr Brydon) Perhaps I could just make one. You have had a little brief which describes what we do. I think it is important to understand what we do not do[1]. We are not established with a significant secretariat and support to give detailed answers to all of the detailed consultations and activities of the FSA, but rather to give general guidance across the whole of industry at a high level during the process and to feed back to the FSA the broad views of practitioners in terms of the attitude and response to what is happening. We do not set ourselves up to compete with or duplicate the work of the trade associations, who are quite competent to go into the detailed analysis of each of the individual detailed proposals.

  3. If I could press you on that particular point, your Annual Report is quite thin on these issues. What do you do that the trade associations cannot do? What is the rationale for your existence?
  (Mr Brydon) Well, you set us up!

  4. No, I did not set you up; it was the Government that set you up in the Financial Services Act.
  (Mr Brydon) I beg your pardon. What we do first of all is to bring together people from across all the trade associations. Importantly, our membership is not made up of delegates from trade associations. They are people who are, I hope, respected in all of their fields. Therefore we bring together people from the investment industry, insurance, banking and so on with specialisations in things like derivatives and exchanges. That is a unique forum in which these senior people can get together and look across all the issues and themes that the FSA is paying attention to. For an individual trade association, by definition they will have deep working parties able to examine, at the end of the day, the devil being in the detail, the very specific issues around drafting of individual rules and the ways in which those rules are interpreted. What we can do is help the FSA not to create an unnecessary row in the process, and try and smooth the process so that at least by the time that the regulation emerges, there is an understanding of what the consequences are likely to be, and a broad support for the direction that the FSA is travelling in. It may not always be so, but at least it gives us that opportunity. From the FSA's point of view, it gives them a forum of senior people that they can consult across trade associations and across industries who can give them a different level of advice.

  5. How responsive is the FSA to the needs and concerns of the practitioners?
  (Mr Brydon) I think it is fair to say that we do not know yet. We are still in the very early stages of this new regime. We meet once a month, and we have always found when we have asked members of staff of the FSA to come and see us and discuss their policy and what they are thinking about doing that they have been happy to do that, and they have exposed not only their thinking which is going to end up in the consultation document but the things they have thought about en route and may have discarded or are thinking between options and they have sought advice on. In that sense, they have been very responsive and very helpful. In terms of the practitioners' understanding of what the output is going to be like, it remains to be seen, and I was very encouraged in Howard Davies's brief the other day that he made a very particular point of saying that they have tried to emphasize that they plan to use their new powers responsibly, that they are not looking for exemplary scalps, they are not trying to trip people up, but rather, they are trying to create a framework in which behaviour is good and that consumers are well protected. That has, I think, been very much part of the theme we have been saying to the FSA throughout the period, that we are looking for proportionality in the way they do things, an understanding of what is important and what is not important, focus on risks so that the really important issues are getting a major examination and the trivial are not, that we move away from American-style box-ticking mentality to a much more "touchy-feely" dialogue mentality, which helps everyone to understand in what is always an evolving environment what is likely to happen next. It is fair to say that we appreciate the degree of consultation the FSA went through. As we pointed out last year, we were almost in "consultation fatigue" as practitioners, but it was still an exercise very well worth while doing, and one that Europe could very well learn from. But the proof of the pudding is in the eating, and that remains to be seen in the actual exercise of the regime as we move forward.

  6. Some comment has been made in the past few months in the light of the problems in the insurance industry that perhaps the FSA focus should be less on regulation of banks and more on insurance. If the FSA went along that line, would you support that?
  (Mr Brydon) I do not think it is for us to support or object to.

  7. Would you say there is a need for that?
  (Mr Brydon) I think the Tiner review is travelling in the right direction to examine the whole way in which insurance is regulated. We support that and have been part of the discussions and consultation on that. In that sense, we have no issue with the proposition.

Dr Palmer

  8. You have diverse groups on the Panel. To what extent do you encounter conflicts of interest, and should they arise, how do you resolve them?
  (Mr Brydon) We have only found one occasion where it has been better for us not to have a view than to have a view, if you like, and that has been in relation to polarisation. In the discussions on polarisation we have had the opportunity to make comment. In fact, even the FSA say in their consultation document that the consequence of what they are consulting on now is that there will be both winners and losers, and we probably had some of each around the table. So what we said to the FSA was that we wanted to be sure that they were going through a good process and that all the issues had been fairly and squarely laid before people. But we as a Panel will not have a view on whether polarisation of itself is a good thing or a bad thing. We all have our individual views.

Mr Tyrie

  9. Do you think if a regulated firm thought it was being coerced by threat of a serious investigation, and the attendant bad publicity, into doing something that it thought was wrong or was having its business damaged by the threat of investigation, that this is something they should immediately bring to you?
  (Mr Brydon) It would be very helpful. We are not setting ourselves up as an Ombudsman for all regulated firms, but there is a risk, and we pointed this risk out very strongly during the passage of the Bill, the risk that there is a very great deal of power concentrated in one place, and that if you are a regulated person, sometimes it feels quite frightening, just in case you tread over a line you did not intend to tread over. That is why I was particularly pleased by the remarks that Howard Davies made, because if the regime is proportionate and thoughtful, and there is not an attempt to trip people up but an understanding that in the real world things sometimes go wrong, and very good people can run organisations, things can still go wrong.

  10. So people should come to you with that sort of complaint?
  (Mr Brydon) I think first of all they would go to their trade association, and if they were not getting satisfaction and there was no practical support, we are a last line of defence. But in general, what we say is, if there is a good dialogue between the trade association and the FSA successfully on an issue, whatever the issue is, there is not really a role for the Panel. The Panel's role comes when that relationship has broken down or has become so adversarial over a particular issue that progress is not being made in either direction.

  11. I ask you this question not in any sense as a personal attack. It is just a reflection. Have you had any such comments brought to your attention?
  (Mr Brydon) No, but then N2 was only two or three months ago.

  12. I say that because I have had such comments brought to my attention by people who are too afraid to go public, some of whom as soon as they retire say they will go public in a big way about the treatment they have received. What I am just observing is that there are already people saying that the checks put in place on this huge power you have described are porous, that they are weak, that they are inadequate.
  (Mr Brydon) I think we are going to become a significant communication channel for that issue, whether it is on individual, specific cases, bearing in mind that we are not setup with any resources specifically, and we could not handle specific cases. In all probability, a case like that is going to be extraordinarily complex and turn on nuances which are difficult.

  13. One source of protection which a firm might have is to go to court in, as for example, in the United States, but in Britain the FSA is immune from any legal action except in the case of bad faith, therefore leaving them very exposed. I know that you have worked very hard on this to try and get some sort of compensatory regime, as I did when the Bill was in Committee. But what we have is a long way short of what you originally asked for, is it not? It is a voluntary arrangement, where the FSA, if they feel like it, can take notice of a recommendation from the Complaints Commissioner to pay an ex gratia payment in compensation. In the light of the way regulation has developed in the United States, do you think that in the long run this is going to be a satisfactory compromise?
  (Mr Brydon) The honest answer to that is we do not know. We are going to be sucking it and seeing it as it develops. We are also troubled by the fact that an individual could end up at the Lord Chancellor's Tribunal in public, being questioned about his integrity, in a circumstance where it might well be that he is innocent, if you take a case where the FSA has overstepped the mark and it has been too aggressive, despite all the attempts not to do that. That individual probably only has his reputation, and once he has been through that public process, inevitably his reputation is going to be tarnished. It feels like a no-win process for the individual, and we have argued that case, but unsuccessfully so far.

  14. I feel it is something perhaps you should argue more forcibly. Can I take you to another point which is also in your annual report—you do refer to the point I have just raised in your report on page 5—where on page 6 you discuss another issue where you have not as yet succeeded in your lobbying which is also of great concern to the regulated community. This is that the Takeover Panel might find itself being second-guessed by the FSA. Could you say what progress has been made on trying to create what you describe as a "modus operandi", which sounds like a gentleman's club arrangement and a substitute for poor legislation.
  (Mr Brydon) I think there is a position which has been arrived at just now where the problem that we fear is not happening, and the Takeover Panel have broadly been left to get on with what they do, but again, we will never know until the issue is tested right at the boundary. There are no formal, written-down rules which determine that. You are quite right. We are living through a period during which we have been enormously encouraged by the way in which Howard Davies has led the FSA, because on all these sorts of issues, he has understood the problem, he has said the right things to try and make for life moving forward in a practical way that does not disadvantage the common good in the widest sense, and he is trying very hard throughout his whole organisation to inculcate that whole spirit in the way in which things are carried through. But it will only be when it is stress-tested that we will know whether that permeates the organisation.

  15. I have to say that I feel we are uncomfortably dependent on the enlightened despotism of Howard Davies, and when he moves on, if we find someone else less balanced in that job, many problems may flow from the Draconian regulation that has been put on the statute book. That brings me to my last point. On page 4 you refer to another issue which has also been of great concern, which is, of course, that you are dependent on the FSA for your own funding. You have no independent source of finance and if they wanted to restrict the extent of your activities or to prevent the expansion of your activities if you felt the need for it in particular circumstances, they could decide not to increase your budget, which would limit your activities very considerably indeed.
  (Mr Brydon) It is worth remembering though that the budget at the end of the day is paid for by our members, our practitioners.

  16. Your budget in comparison with the FSA's is minuscule.
  (Mr Brydon) Absolutely. In fact, technically we do not have a budget. What we have is the ability to produce our Annual Report independently of the FSA, and they are obliged to print it (and prepare it). They are also willing to finance the survey which we will be conducting in a couple of months' time to follow up on the survey we did earlier in our life. They would be willing and happy to do that, but we have no formalised budget. We rather prefer it that way because, as you know from section 11, we have won the right for the FSA not to ignore us. If we write to them in a formal way asking that something happen, they are obliged to explain in writing, in public, why they would not do so if that was their view. That would apply to giving us resources to do our job as well as to anything else. So it would be totally transparent that they were not being supportive. I think that would cause the ball to bounce into another court, which you would be better able to judge than me.

  17. I am forming a judgment. My instinct is that you would be much better off with an independent budget. That has always been my view. Indeed, the delicate wording on page 4 suggests that there are at least some on your group who think the same.
  (Mr Brydon) No, that is not so.

  18. It says "We believe this to be the right approach for the time being."
  (Mr Brydon) That is right, because you have to remember that report was being written at the beginning of 2001. At that stage we still had not got the regime, so we did not know what the future was going to hold. We will be publishing a new Annual Report in about a month's time.

  19. Can I say in conclusion that I get a lot of informal feedback. A large number of people in the regulated community are extremely nervous about the scale of the powers now in the hands of this new body. Your voice is a very important one, that needs to be heard a good deal. I just raise the thought that perhaps you need to think of ways of getting it raised.
  (Mr Brydon) I think the survey will be the mechanism for that, almost certainly, because it is better that we deal in some evidence than in what is a lot of scuttlebutt at this stage. It is quite true that the process of going through N2 and codifying and organising and changing things caused people a great deal of work, and some of it did not feel at its point of contact hugely value-creating, and that has created an atmosphere and a backcloth for the whole issue. The survey is designed to find out what people think of the performance of the FSA, of their regulators, of us and so on, and when we have that evidence we will have the basis on which to opine about how the FSA is performing in a formal and practical way.

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