Select Committee on Treasury Minutes of Evidence

Examination of Witness (Question 40-59)



  40. Why does that say what it says? It makes you look stupid.
  (Mr Brydon) I did not write those words.

  41. This is your organisation's report. There is no point in denying what is being said.
  (Mr Brydon) I am not. If you are seeking information, let me explain how we work. We work by trying to gather in the views of practitioners in all sorts of practical ways, making sure that if there is a really big issue or there is a major issue of international competitiveness arising, or whatever, that there are channels available for the FSA to hear this in a way that is as detached and impartial as we can do, given that we are by definition partial as practitioners. If we are going to have successful channels which open up that sort of dialogue in an effective way, we are not going to do it by sending in Exocets towards the FSA, and it is quite a reasonable thing for us to develop our own agendas in our meetings, and at the same time to ask the FSA to synthesise the issues that they see as important going forward so that we can prepare and think about the things they are going to bring to us in the next 12 months or so.

  42. I am just glad that we do not do that in parliament, ask the government to do a summary of what they think is important. Never mind. The final point is page 7, the statement under (e): "We were consulted on the various elements of the FSA's budgets and are satisfied that costs are being carefully controlled." First, who did you consult on the various elements of the FSA's budget and second, can you explain to this Committee what steps you went through specifically to come to the conclusion that the costs are being carefully controlled?
  (Mr Brydon) The FSA bring to us draft budgets at an early stage, first of all in broad outline, and then in increasing detail until we see almost the final version—and the difference between almost final and final is totally trivial. We have had the opportunity to comment all the way through that on the build-up of costs, the extent to which they have been achieving synergies, and so on. We have had a sequence of meetings with Paul Boyle, who is the COO[3] now, to understand how the budget has been developed. We are not trying to establish that £182.6 million is exactly the right number and £182.5 million would be better; what we are trying to establish is that there are good procedures in place to make sure that the amounts in broad terms are reasonable, given the things that the FSA was given to do. So we have undertaken that again recently with the current budget to try and get a broad shape. If you are asking me a different question, which is would we all like less, the answer is obviously yes.

  43. I did not ask that question. Finally, page 8. How are members of the Panel appointed? Does someone ring you up and say, "Look, old boy, we would quite like you to be on this FSA Panel" or is it openly advertised, or do they ask for volunteers? How is someone asked to be on the Panel?
  (Mr Brydon) In the early stages of its formation I was not at the heart of that, but I understand the process to have been that there was wide consultation with all the sort of people you would expect, together with leaders of the trade associations.

  44. Who are the people I might expect?
  (Mr Brydon) The Bank of England, the Treasury, the FSA itself, the trade associations—all those who had a direct interest in the issue. I know that my own nomination to the Panel came because the Fund Managers Association, as it was then, was asked to recommend—not nominate—someone to the Panel, and I was then asked if I would be willing to do it. That is how I ended up on the Panel, and I think that is how most members did. I think it is wise of us not to make this a one-to-one relationship in a delegate sense from the trade associations, partly because there are lots of other tiny interests. We would have a gigantic panel if every trade association was represented. What we are trying to find is a balance to produce the right mixture of people, who will gain respect from their peers and be able to be above the battle, and look across and represent the interests of other parts of the industry as well. For my part, I was "Nolanised" in the process of becoming Chairman, and therefore it was a recommendation of the FSA, but endorsed by the Chancellor of the Exchequer.

Mr Mudie

  45. Do you find it satisfactory that the FSA appoint the members of the Board and appear to appoint the Chairman?
  (Mr Brydon) It is the same answer as to many other questions. For the moment, it is fine and it works, and it is one of those things that is not broken so I would not change it. You could envisage a situation where, if there was a deterioration in relationships and if practitioners in general thought it was not satisfactory, we would hear a big groundswell and we would do something about it. At this stage I do not think it is a problem.

  46. When I glance at the Consumer Panel, that seems to be appointed differently.
  (Mr Brydon) One of the reasons why the Consumer Panel is different—although Colin Brown will no doubt speak for himself—is there are not trade associations, natural blocks of constituencies, from which leaders have already emerged.

  47. What we are actually saying is this is a Practitioner Panel set up and chosen by the regulator.
  (Mr Brydon) To advise the regulator.

  48. Yes. It seems a bit strange.
  (Mr Brydon) Maybe, but it works.

  49. Of course, you cannot answer this, but coming from the north, I have a view that when I come down south, Londoners rule everything. You are an elite. You either get in the House of Lords or you get on the Practitioner Panel. At least on the Consumer Panel there seem to be some Scots represented, but yours seems solidly City.
  (Mr Brydon) All the guys in my office yesterday said I lost my voice at Murrayfield, so I qualify, and Ian Harley of Abbey National is a Scot.

  50. The membership has changed because you have added the Stock Exchange, etc, but there are other exchanges, are there not?
  (Mr Brydon) We were asked to bring in a representative of exchanges. Clara Furse does not represent or is not a delegate of the London Stock Exchange. She is there because she has a knowledge of stock exchanges.

  51. It just ties in with how you raise things: a quiet word with the Chairman is the preferred method of the Practitioner Panel.
  (Mr Brydon) It is a very effective way of making sure that the organisation knows.

  52. It is not so good for us from outside, wondering what the hell is going on and what conversations are taking place. It sounds very much like an old boys' network, southern-dominated, appointed by the FSA, whose methods of regulation you are looking at, all from the people who probably lunch and dine together. It sounds absolutely cosy. Would you accept that?
  (Mr Brydon) You started by saying this was a question I probably cannot answer. I think what you have got to think of is that this is an embryonic organisation that has been working to try and help make the process a little bit better than it would otherwise have been. One of the interesting questions we ask ourselves in terms of measuring our own performance is: does the fact that all the executives in the FSA know that they have to come and present what they are thinking of doing to us mean that they do things slightly differently than they otherwise would, because we make them think harder about the issue, because they do not want to look silly if they come with an obvious point they have not thought through? The process at the moment is in its early stages. So far it has proved an effective channel to get the views of the financial sector through. It is not clear how effective yet, because we will only know that when this whole regime is in full-blooded implementation. We will continue to do the surveys, so we will create an independent benchmark of how the FSA is performing. I am not sure they would have done that for themselves.

Mr Tyrie

  53. After N2, non-executive directors become jointly and severally liable for a whole range of failures of their firms. This is significant in the context of Enron. Have you had any representations to you that this may lead to people being fearful to take on such directorships and to try and find ways round the rules, particularly in relation to the structure of domestically owned subsidiaries of firms whose parent operates outside the regulated zone?
  (Mr Brydon) The straightforward answer is no, in terms of any formal representations, but in terms of the issue itself, I think it is an issue that is going to be on the agenda; it is a new risk in the system, if you like, which needs to be monitored and thought through very carefully, and watched for precisely the reasons you are saying.

  54. I do not mean this in any way as a personal comment, but I keep in touch with some of the regulated community. I have articulated two of the quite major concerns that they have come forward to me with. These are common currency in the industry, I think, both the ones I have mentioned, yet neither of them have ended up with you in any capacity, even though you are aware of them. What worries me is that here we have a body whose specific task is to make these sorts of representations, which is not considered important enough, or for some other reason—I do not know what—finds itself having had no representations to pass on to the FSA.
  (Mr Brydon) I take you back to the way in which we operate. There is no evidence that that view is not being well communicated and well debated with the FSA through the trade associations. I am sure it is. That is how I know about it. You asked me a specific question, which was have we had direct representation. No, we have not. Do we know about it because trade associations discuss it with us? Yes. Are they discussing it with the FSA? Yes. Is there a dialogue and an understanding of the issue going on? Yes. Does that mean that we all understand and like the answer? Not necessarily, but there is no formal breakdown in process. Where we can really help is if there is a breakdown in process. That may come, and this issue may become more attenuated in due course. Then I think our role would become much bigger. But I think if we went and got ourselves deeply involved in every single issue—and there are lots and lots of issues at this level at the wrong stage, I think we would end up building ourselves into a great big organisation, the expectations of which would grow disproportionately to its ability to deliver.

  55. These are big issues, quite fundamental issues.
  (Mr Brydon) They could be.

Mr Beard

  56. The third issue I want to take you to in your report here is " . . . we spent a good deal of time [on] the interaction of the market abuse provisions of the Act and the functions of the Takeover Panel. We supported the arguments of the Takeover Panel that the Bill should be amended to preserve its position as the sole arbiter in takeover disputes." The FSA was brought into being to overcome the inadequacies of self-regulation through nine different bodies. It seems strange therefore that your Panel should see a self-regulating, voluntary body as something which should be able to overcome or replace the word of a statutory body.
  (Mr Brydon) I think the Panel on Takeovers and Mergers is in a somewhat different position to the old self-regulatory bodies in the sense that it regulates a specific activity at a specific moment. It is not a standing regulatory framework for the day-to-day behaviour of businesses throughout the course of their activity; it is a very narrow activity, and, notwithstanding the occasional time when it has not been perfect, it has a fantastic record of having succeeded in resolving without the use of the courts very complex issues at very short notice in great turmoil. Our anxiety at that time was that if you dragged this into a more statutory, more structured, more bureaucratic framework—and we had all those fears that were referred to earlier about the regime that was coming down the road towards us—then you might lose that very flexibility which makes the market work so much better in the UK than in most other countries. So far there is no evidence that that has happened, because, as I said at he beginning, Howard Davies has taken a very sensible line and a practical way of trying to find a balance between those difficult issues. But again, as I have said with several of these things, we will not know how this regime will work until it is tested to a stress point, and that stress point has not arrived yet.

  57. What are the other principal issues that have concerned you since this report was published?
  (Mr Brydon) If I give you a preview of one or two things we will say, we are a little troubled, but not to the point of writing—this is really in answer to Mr Ruffley's question « that the governance of the research process in the FSA has not been as rigorous as we might have expected if policy were to be built out of that research, and we have made that comment. In fact, since we made the comments to the FSA, they have restructured the way in which they govern the research, the commissioning, the shape of the questions and how the responses are analysed, so we have been successful with that, but we will continue to refer to it. We have an issue about materiality and complaints. We are anxious that the FSA—and we will say so—focus on those issues that are truly material and do not get bogged down in making up lists of complaints, because somebody came into the branch of a building society and found they did not like the colour of the carpets. There is an issue on the way in which complaints procedures are established today which would say you have to have a process for handling every complaint. The question is, is a remark about the colour of the carpets a complaint or not? When does a complaint start to be a complaint and when is it not? From our point of view, we have a coincidence of interests with the customers; they are the people who help us to exist and our objective is to serve them, so we want, as practitioners, to stimulate complaints because complaints help you to make your business better. What would not be helpful would be if we then started to have lots and lots of trivial complaints which all of us in this room with half an hour's discussion could probably agree are below the parapet, being trapped into a ticking regime which would have the wrong emphasis. I know that Howard does not want that to happen, but he still has this problem of being at the top of a very big organisation, and if you pull a lever here, you cannot be certain that the guy seven layers down is doing it in exactly the way you want to. The third concern is around international competitiveness. I spend part of every week in Paris, and I have sat in a meeting in Paris and heard people say when reading from the Financial Times, "They just rip people off all the time in England." That is because the FSA keeps pointing to small issues where something has not been perfect, and I am not pretending things were right, but we do have a habit of self-flagellating as a result of this process, which is much harsher than in almost every country, and it is a wonderful competitive weapon when you are marketing against Britain. We need to be careful that the balance is right. That is not to say we should ask the FSA to hold back on things that are wrong, but we need to be careful to put things in context. In the same context, part of the savings industry, which is probably by any standards one of the most successful industries in the world, is subject to Deanne Julius, Penrose, the FSA[4], and these inquiries come in all the time. Every inquiry is bound to find something that could be better. It is a continuous drip, drip, drip in the City about the UK financial services industry. That does not happen in France, Germany or any of our competitors.

  58. Are you not in favour of having inadequacies exposed?
  (Mr Brydon) No, I am in favour of having inadequacies exposed, but we need to do it in a coordinated and thoughtful way to make sure that in the process we do not damage UK plc and the employment prospects and so on here. One small issue which we are troubled by and do not know how to solve, and at the moment I think it would be fair to say the FSA do not, but they are willing to examine it with us is, how do those who are regulated give effective feedback on their regulator, their individual regulator? If you have a man coming to see you who is the head of your own regulation for your firm, and you think he is being disproportionate, unfair, has got an agenda or whatever—let us just say he is a bad manager and he is not doing it properly—if you complain about him to his boss, unless you are sure of the result, the guy is going to come back to regulate you next week and he is not going to be any more sympathetic than he was last week—probably a lot less sympathetic. It is complex issue to work out how you can achieve effective feedback on the performance of the regulators in the front line.

  59. Is it not the Panel's job to feed those sort of things back?
  (Mr Brydon) Yes, but you can only do it in generalities. It is not quite as simple as that. If you imagine Mr X coming to regulate me, and I have problems with Mr X and I go to the Panel and say, "I've got problems with Mr X" the Panel in the first instance does not know whether that is because I am trying to duck a difficult inspection because I did something wrong or because the regulator is bad, and I think it would be unwise to get the Panel put in the position of being a judge and jury of who is a good regulator and who is not. That is the job of management in the FSA, to manage the regulators. The question is how to get sufficiently anonymised feedback about individual people in the FSA back to their management in such a way that it does not infect the process of subsequent regulation. It is a genuine managerial problem. The FSA understand it. Howard understands it. It is simply a question of working out a way of doing it. Neither of us have yet found a satisfactory suggestion.

3   Chief Operations Officer. Back

4   Note by Witness: I added "Myners and Sandler". Back

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