Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 82 - 99)




  82.  Good afternoon, Economic Secretary, welcome to the second public session of the Joint Committee. As you can see this is becoming quite a popular activity. As you know, we have decided to look at the range of issues that we set out in our press release. We are taking the Progress Report, which the Treasury published a week or two ago, as our main text and asking ourselves how far this meets the concerns of those who commented on the Bill and what are the outstanding issues. After the session with you we are then going to have a number of sessions with consumers and practitioners, taking the issues one by one, to see if we can find out how people are responding to the updated position of where we are. We are very grateful to you for coming today. The first thing is to ask whether you have an opening statement.
  (Ms Hewitt)  If I could, please. Perhaps I could begin, Chairman, by introducing my colleague, David Roe, who is the Head of the Bill team within the Treasury and who will be working very closely with you. I should also like, if I may, Chairman, to thank not only yourself but every Member of the Committee for taking on this task. I think pre-legislative scrutiny by a Joint Committee of this kind is almost without precedent. I am very aware, as my colleagues are, that you do have a very substantial task in front of you and also a pretty challenging timescale. We are extremely grateful to you for taking it on. Obviously I want to make sure that I, but also my officials, work very closely with you. What is important about this process is that we have an opportunity for the executive branch and the legislative branch to work together in getting the best possible system of regulation for our financial services industry. That industry, of course, is a very important part of the British economy: seven per cent of GDP, employing over one million people. I think it is important to have that context in mind when we look at the principles underpinning the Bill and the details of it. The financial markets support enterprise, provide funds for investment, but using for that purpose the savings which millions of people entrust to the industry. All of us as savers, as consumers, as business people, have a shared interest in a regulatory structure that is clear, robust, accountable and fair. It needs to provide proper consumer protection particularly to the small man and woman, the retail consumer who may be quite unsophisticated in financial affairs, but at the same time it needs to work with the grain of the market and take full account of the needs of competition, of innovation and international competitiveness. The standpoint from which we have approached the drafting of this Bill is light touch regulation where possible, protection where necessary. I am happy to say that we have had an excellent, very constructive response to the public consultation on the draft Bill that we published last summer. As you said, Chairman, we have now produced a Progress Report on the main areas on which people commented and our reactions. We have also had a very helpful report from the Treasury Select Committee in the House of Commons which we have taken very careful note of and I am sure that this Committee will also have the opportunity to study it. It is particularly good to see some Members of the Treasury Select Committee on this Joint Committee so that some of the ideas developed in this report can be taken forward further here. I think it might be helpful if I just say a little bit about the six topics which I understand this Committee has decided to focus on. First of all, on the issue of accountability because getting the accountability of the FSA right is crucial. We believe that one of the advantages of having a single regulator, which has been very widely welcomed in the consultation, is that it offers the possibility of much clearer lines of accountability. We want to capitalise on that. I think that the arrangements we proposed last summer in the draft Bill were a very big advance on the present arrangements but a number of respondents had concerns about them and because of that we have reflected further and we have announced several more improvements to the accountability regime. That includes the periodic independent reports into the Authority's efficiency and value for money, the statutory creation of Consumer and Practitioner Panels and annual public meetings. All of these proposals were in response to the constructive comments that we have had. The second issue, which of course is critical to proper accountability, is the question of clear objectives. What we have done in the Bill is to give the FSA statutory objectives on market confidence, consumer awareness, consumer protection and financial crime. I think the responses to the consultation suggested that, with the possible need for clarification in some areas, we have got the balance and the coverage of those objectives and the supporting principles about right but obviously that is a conclusion we hope this Committee will test. The third issue, again closely linked to accountability, is fairness and openness in how the FSA uses its powers. A number of points were put to us about the process by which the Authority might use the extensive discipline and enforcement powers that we propose to give them and how the FSA's role relates to that of the independent tribunal that will be set up by the Lord Chancellor. Again, we have responded to the consultation with some significant improvements, including a duty on the FSA to act in accordance with its published procedures and a right for firms and individuals to see the evidence on which the case for regulatory action rests. The fourth issue has to do with the scope of regulated activities, another area, not surprisingly, of great interest. We are very interested in your views and obviously those of the Treasury Select Committee on the case for and against regulating mortgage advice and also on the question of when financial services regulation is appropriate for members of the recognised professions. Those are both issues where we have to balance the objective of appropriate consumer protection with the desire to avoid unnecessary or even overlapping regulation. Fifthly, our plans for a single Ombudsman and single compensation scheme have generally been very well received. There have been some useful detailed suggestions for improvements and again we have signalled our intention to act on them. Finally, there is the issue of market abuse. We are still looking very carefully at whether we need to make any changes in the Bill's regime for the imposing of administrative fines on people who abuse our financial markets. I really want to underline this Government's determination to take firm action against people who harm the efficiency of the financial markets or undermine confidence in the financial services industry in this way because damage to the financial markets undermines the economy as a whole. Again, we will give very careful thought to your views before we reach a final conclusion on the detail of the measures and whether any further drafting changes are needed to the Bill before it is introduced in the House. I look forward very much to your questions and to working with you and members of the Committee during your enquiry.

  83.  Thank you very much, Minister. We would like to begin with the general subject of accountability. The Government has stressed its commitment to accountability and, as you say, following the consultation process you have proposed a number of ways of strengthening that. However, I think it is still fair to say that there are quite a lot of people who remain concerned that here we are putting together a single large organisation which has a lot of powers across a wide range of areas and quite a lot of discretion in terms of rules and codes of conduct, etc. We would like to explore the extent to which you think that balance of accountability is now right; or whether there are any other ways that one can go if there is still unease about it. We have not yet had much feedback in terms of the revised proposals that you have made.
  (Ms Hewitt)  Indeed.

  84.  But I think it would be helpful if we could begin by just looking at the issue generally and asking whether you think you have now got this right or whether there are any other ways in which you can reassure people that we have here an organisation which is going to be properly accountable.
  (Ms Hewitt)  I think we have gone a very long way towards getting it right. There are some new suggestions being made but there may well be further changes that we should consider. What I would stress is that we are really putting in place here two lines of accountability. There is the accountability to ministers and to Parliament which is absolutely crucial given the public purposes of the FSA. We are achieving that because the Treasury has the powers to appoint but also to remove the board. The Treasury will have the power to commission statutory enquiries in the public interest. There will be an annual report to ministers on the FSA's performance measured against its statutory objectives and any other matters that the Treasury specifies. Those reports, of course, will be laid by the minister to Parliament and will thus be available for parliamentary scrutiny. We obviously hope, and I think the Treasury Select Committee in particular has indicated that it would wish to play a full role in holding the FSA accountable to Parliament. We have also suggested, in light of the consultation responses, that we as the Treasury should have the power to commission specific enquiries into the efficiency and economy with which the FSA carries out its responsibilities. I think that is a full line of public accountability. There is also the second line of accountability to the industry itself. What we have sought to achieve is accountability both to practitioners and to consumers through the annual open meeting that the Authority will have a statutory obligation to hold, through the annual report, through the fact that the board will have a majority of non-executives. They will have a particular responsibility, and powers, to monitor the FSA's compliance in terms of its fulfilment of its objectives but will also be responsible for ensuring that the FSA is efficient in its operation. Some of those non-executives, of course, are and will be practitioners. There will also be a Practitioner Panel, that has already been constituted, and there is a very clear obligation upon the Authority to consult with practitioners and others in introducing new rules and also on its fee arrangements. Again with consumers, in addition to the open meeting and the annual report, they too, or consumer representatives and organisations, will have to be consulted on rules. I think it would be impossible to constitute an effective board for the FSA without having amongst the non-executive directors some people with a specific interest in and experience of consumer matters. Of course there will also be the Consumer Panel currently modelled on the PIA's Consumer Panel but to be expanded in line with the new Bill. So I think that is a pretty substantial set of arrangements for accountability. We had announced, I think in response to the consultation, more specification of the process, for instance the requirement to give feedback when the FSA is consulting on new rules but we are very happy to look at further suggestions on that. What we do not want to do is put so much procedural detail into the legislation in the name of accountability that we then tie the FSA down to procedures that in some years' time may not be appropriate but where it will be impossible to change them without coming back for primary legislation.

Chairman:  Thank you very much. Lord Montague?

Lord Montague of Oxford

  85.  May I start with the consumer arrangements and say how pleasing it is to learn that the Consumer Panel is going to be on a statutory basis, but I am just wondering how that will work and whether you feel it has got sufficient independence. It is customary, as you are no doubt aware, for such organisations to have their own budgets and an appropriate amount of freedom. When we asked Mr Davies about the budget he told us what budget exists at the present time and it seemed to be plucked out of the air. I do not mean that unkindly but it might be worth reflecting on how we can have a budget that has some sort of formal basis and it is not a whim, as it were, of the FSA. Secondly, when it comes to the feeling of security of people on the Consumer Panel that they can be independent without fear they are going to lose jobs, I think they might be happier if they felt they were employed by the Consumer Panel rather than employed by the FSA. That is certainly something that goes through one's mind and your views on that would be very helpful. Staying with the aspect of consumers there was a statement put out in relation to the public at large which said that the new architecture provided investors with a one-stop shop for information and redress. It seems to me it is more of a two-stop shop. I am thinking of the Ombudsman scheme and wonder whether there will be any relationship and whether you would consider some benefit to a relationship between the Consumer Panel and the Ombudsman scheme. Finally, the final thought coming from me is there are the public, and if they are uncertain in some particular situation, what do they do? Who do they go to? Who can they expect a response from? How will the rules work?
  (Ms Hewitt)  Let me take those in turn. Starting with the Consumer Panel, I have a very strong belief that the Consumer Panel, and you could just look at the people that are already on that Panel, have exactly the qualities of independence of mind and commitment to the interests of consumers that will enable them to play a very effective role in relation to the FSA. By putting that Panel on to a statutory basis we have really underlined our commitment to consumer protection and helped to ensure that the FSA board and the FSA staff take the views of the Consumer Panel very seriously indeed. On the issue of the budget I think with a new organisation, albeit one that is building upon the old foundations, it may be quite difficult to decide in the first instance what the appropriate level of budget is. I am sure that is a matter on which the Consumer Panel itself will be putting forward views, but if there are suggestions for a clearer basis for that budget to be set I am sure Howard Davies in particular would want to look at them very sympathetically. In terms of the FSA staff, I have met and been very impressed by several of the staff in the consumer affairs section of the FSA. Were you suggesting they should all be employed by the Panel rather than the Authority?

  86.  Those who are working, as it were, for the Panel are employed by this statutory body, the Panel.
  (Ms Hewitt)  That is something that I would need to look at. I would not want the Panel to have to set itself up as an employer with some additional, almost bureaucratic administrative requirements there. I suspect it is much easier if their secretariat and their office is provided by the FSA but if there are concerns there from members of the Panel I would be very happy to look at them. The next issue was to do with the Ombudsmen and also the related question of whether consumers will know where to go. I think this is very important and one of the difficulties, it seems to me, with the old system of financial regulation that we inherited was that there were nine different regulators and a large number of different Ombudsman people and compensation schemes and all the rest of it and the ordinary consumer found it extremely bewildering. I believe that with a single Ombudsman and with the publicity and concentration of resources that we are establishing with a single regulator consumers will find it much easier to know where to go and of course the advertising campaign that the Financial Services Authority has itself been sponsoring this year to launch phase two of the personal pensions review has helped to publicise it as a very active body that is out there looking after consumer interests.

  87.  Where will they go? Do they go to the FSA or do they go to the Ombudsman? Will the Ombudsman people be advertising? Where do they go to? Do they go to the FSA to respond to all the fears and worries and questions they have? I am not talking about selling products or anything like that.
  (Ms Hewitt)  The FSA is going to put in place and is already creating a single helpline for consumers behind which they will develop a call centre with trained staff. People who phone into that will be able to get information about financial services and about products. They will be able to get hold of leaflets and information and so on. Some of it of course is in pursuit of the FSA's objective of raising financial awareness. If what the person writes or phones to the FSA about is a particular complaint about a particular financial services organisation then the FSA will be able to advise them on the appropriate complaints process. If they have gone through that complaints process and they are not happy then they will go to the Ombudsman. If they happen to ring the FSA helpline at the point where they need to go to the Ombudsman then the FSA will direct them to the Ombudsman but, as I understand it, although the company that will operate the Ombudsman is only now being established, the Ombudsman him or herself will wish to publicise their existence so that a consumer who has gone through a complaint without satisfaction against a provider will know where to go.

Lord Montague of Oxford:  Perhaps we can sort this out even tighter than you have so helpfully explained.

Lord Poole

  88.  Could I preface my question by just asserting, so that there should be no misunderstanding, that I hugely support and would have chosen it back in the 1980s the establishment of a central regulator, but I am very concerned that the steps taken to make the FSA in general and its chairman and chief executive in particular accountable will prove inadequate. I say that because listening to you and hearing you talk about accountability through you to Parliament, I find it rather less impressive and persuasive than I suspect that you do. I feel that something more is required than that. There are two ways of doing more it seems to me. One is what sort of reporting takes place, annually or bi-annually, what sort of follow-up there is for the things they do and, secondly, what constraints can be placed upon their discretion to implement. I do not think in either of those cases that enough is there. Why do I mind? I operate in this market and I and 1,000 people who work for me and their livelihoods will quite properly be subject to this organisation. We will be looking at enforcement and discipline later but I personally would be interested to know whether you would be prepared to listen to suggestions that would make something much more clear about Howard Davies being answerable for how he runs it in a more public way and for the decisions that they make in terms of the rules?
  (Ms Hewitt)  Thank you because I am, of course, extremely aware of your expertise in this area and I am appreciative of the fact that you, like many others, welcome the creation of a single regulator. Of course, I will look at further suggestions to strengthen lines of accountability. What I would say is it is obviously not for the Government to dictate to Parliament how it fulfils its part of the accountability process, but it does seem to me that if publication by the Minister to Parliament of the annual report were to be followed by a Treasury Select Committee or Joint Committee or whatever, by a Parliamentary Committee hearing that took place annually on the basis of the annual report where the chairman and chief executive were held to account by Parliament, and were quizzed on what was in the report and what further action was going to be taken on points of concern and so on, then that would be immensely important. I know as a Minister appearing before scrutiny committees it is a very powerful form of scrutiny for those of us who hold executive positions. As I say, I am not sure that is something we could properly specify in the Bill but I think it is a very important part of the process. In terms of action on recommendations, for instance recommendations that might come out of the Treasury commissioned inquiry into how they are operating financially and whether they are actually operating efficiently, we would obviously expect the FSA and its board and its chairman to be implementing the recommendations of such an inquiry and of course the fact the Treasury appoints the board and can disappoint the board is a rather powerful sanction in terms of ensuring that recommendations and concerns are properly followed up and acted on.

  89.  I think that would be another issue of some concern to quite a lot of us here as well as outsiders because there is something terribly cosy about a Treasury that appoints the people in the Financial Services Authority and the board. I suspect we may be coming back to you on that when we have had a chance to take other evidence. I believe that the transparency of how this is made to be the world's leading regulatory environment will be critical to the survival in London of the financial services business that has been built up over the last century or so.
  (Ms Hewitt)  I completely agree with that. What is increasingly clear is that in the modern world regulation is a vital source of competitive advantage providing you get it right; it is a source of competitive disadvantage if you do not. On the appointments, I would just underline all appointments to the board will be in line with the Nolan procedures. They will be completely consistent with the principle of ministerial accountability for appointments that were set out in the first report of the Nolan Committee and all those procedures will be properly followed.

Lord Eatwell

  90.  Can I follow on from something you said in your answer to Lord Poole. It is genuinely regarded these days as very bad governance practice to have the chairman and the chief executive being the same person. I am rather puzzled that in the design of this organisation you have committed that sin against good governance.
  (Ms Hewitt)  The Financial Services Authority is not, I think, entirely equivalent to a private company producing goods and services, although its output is obviously rules and regulatory judgments. In the interests of accountability it seems to me that there is a good case for having one person who fulfils the functions of both chairman of the board and chief executive of the Authority and he is the person with whom the buck stops. If you or others consider that there is merit in separating those functions then of course we will have a look at that but I am not aware that it is an issue on which there was any great comment in the consultation.


  91.  Your proposal is to have the position of vice chairman as the senior non-executive who has particular responsibilities with regard to scrutiny?
  (Ms Hewitt)  That is perfectly true. The board itself we have decided, and it is certainly proposed for the Bill, should have a majority of non-executives so it is not a question of the board being dominated by the executives with the chief executive also being the chairman. The majority of the board are non-executives.

Lord Poole

  92.  I think it is fair to say that you may not have received it as a component of representation but there is a growing concern that he can set the agendas of meetings, for example, and we all know this is the single most powerful thing that anyone can do. A lot of the issues and the worries about accountability could perhaps be greatly modified by taking Lord Eatwell's point.
  (Ms Hewitt)  I would be very grateful if the Committee were to pursue this point further. I think the test has to be whether separating the two functions enhances accountability or whether it weakens it.


  93.  Could I take the example which came up the other day. Suppose we were going through a process of consultation and suppose that the FSA, having listened to the consultation, decided to take little notice of the consultation and decided to head on as it originally thought. What is the response to this? The Treasury has deliberately not taken the power to instruct. After the event, several months after the event, there may be a Treasury Committee hearing in which they criticise or raise questions of the chairman. One can imagine circumstances where people could begin to feel quite frustrated that they have the power to say things and they have the power to comment but in the end the Authority just do as they wish.
  (Ms Hewitt)  What we have tried to do is build into the Bill, strengthened by the proposals summarised in the Progress Report, a number of duties upon the FSA so that for any rules that they make or wish to amend they have to publish drafts, they have to consult, they have to publish the results of the consultation, they have to undertake and publish cost benefit analysis and make the methodology as well as the conclusions of the cost benefit analysis open to public scrutiny. We are really seeking to put in place here a very, very transparent process. We are also putting in place a board that in the ways I have described is accountable to Government, and through Government to Parliament, that will have statutory duties, statutory objectives, to fulfil. If the Authority starts riding roughshod over the overwhelming views of the industry or substantial concerns raised within Parliament I think they will find their position completely untenable. It is always possible in a sense to come up with a nightmare scenario here but I have to say if the FSA ran amok then rather drastic action would be taken and the powers to take drastic action are there in the Bill.

Mr Plaskitt

  94.  Can I turn to the Treasury's power to commission these independent reports and first of all put a little group of practical questions together. You described these as "periodic" and I wonder if you could expand on that, whether they will follow a simple timetable or whether they could be triggered by some particular issue or concern and you think that is a sufficient reason to go in and commission an independent report on that subject and who would do them? The second question following that arises from a small discussion we had on the Progress Report, paragraph 3.10. A number of respondents have raised the statutory immunity issue and suggested that should be removed. In your response to that you cite the fact that you can have these independent reports as adequate cover for not doing that. I wonder if you really think that is so given, as I understand it, it is only the Treasury that can initiate that independent report?
  (Ms Hewitt)  On the independent report specifically, that is really to reinforce the duty that we are giving to the non-executive directors to have a particular focus upon the efficiency of the FSA's own operation. Rather than commit ourselves to an annual or a three yearly independent audit process, as it were, we think it is more useful for the Treasury to have the power to commission an independent report as and when it is needed. That could be triggered by concerns expressed by the non-executive directors, it could be triggered by concerns expressed within the industry or concerns that officials within the Treasury or perhaps even the Bank of England were having, a whole variety of things. I think it would be a pity to pin ourselves down at this stage to an annual review that might not be needed when something less frequent or more frequent may turn out to be of more use. On the issue of immunity, this is a matter that I know has aroused considerable concern and has been the focus of some press attention. I wonder if I could just say a bit about this, Chairman. Perhaps I should start by saying that I suspect many, if not all, members of the Committee will have seen the piece by Anthony Hilton in a recent issue of the Evening Standard which is inaccurate in almost every respect. I am glad to say that the General Counsel to the Board of the FSA has now sent off a correction letter which I hope will shortly appear. The first point is that immunity from actions for negligence, provided that there is good faith on the part of the FSA, has existed since 1986. It is part of the regime that was put in place by the 1986 Act which was supported and endorsed by Parliament at the time and specifically endorsed by Lord Denning himself, amongst others. Immunity also exists for the SEC and the Commodities and Futures Trading Commission in the USA. There is no immunity for FSA staff or the FSA as an entity from criminal prosecution. If an FSA staff member commits a criminal offence they will be prosecuted in the usual way. There is no immunity for negligence that involves bad faith. If an FSA staff member were maliciously to pursue some firm within the marketplace and make their lives a misery that would clearly be a bad faith action and a negligence action could result. There will be no immunity for actions brought under the Human Rights Act where it is alleged that the FSA or its staff has acted in breach of the European Human Rights Convention. The scenario Mr Hilton describes where some hapless firm is driven into bankruptcy by the actions of some ill-tempered or ill-advised or ill-educated FSA staff member is frankly inconceivable because the FSA enforcement process requires not only that the FSA officer discloses evidence and causes of action to the firm or individual under investigation but also that the matter be referred to the enforcement committee of the FSA itself, a committee appointed by the board and acting in its name. The Bill provides that where the firm is unhappy with the proposed course of action it can have the matter dealt with in the first instance by the tribunal, an independent, judicial body established by the Lord Chancellor. I have spelt that out at some length because it is a matter of such importance that I do not wish this misunderstanding to take root.

Mr Loughton

  95.  You have stolen my thunder there. The phrase that Anthony Hilton uses—and I do not take his side—is "the most maladjusted inadequate who slips through the selection procedure can exercise all the powers granted to the body and behave with impunity". The provisos that you describe do not include incompetence and there is a scenario that says the biggest booming industry in the City at the moment is in compliance officers. There is a scenario that says that duff compliance officers will be queuing up to get jobs at the FSA because it is the one place where they will not be prosecuted. So there is a possibility of incompetent new staff. We know the problems that the FSA have had with the haemorrhaging of staff and the problem of getting decent compliance staff for City firms anyway because of the enormous amount of extra work they have to do, they are in short supply and certainly the awards available through the FSA are not nearly as attractive to staff as they are in commercial firms. So there is the scenario, by your own definition Minister, that incompetence of compliance officer recruitees could cause serious problems with firms and be immune from prosecution.
  (Ms Hewitt)  That is a very interesting point. The FSA itself, and Howard Davies in particular, as I am sure you have discussed with him, is making enormous efforts to ensure that they can recruit and train and retain first-rate staff because clearly the quality of our regulatory system depends upon the quality of individual regulators and compliance officers. I would be very surprised indeed if the FSA, located in the City with a board with very considerable expertise, never mind the expertise of its senior staff, were to appoint somebody who was notorious for being a duff compliance officer within a regular authorised firm. There will be the usual high standard of personnel recruitment and human resource practices within the FSA. But assume that somebody slips through the net who is not very good and the training does not make him better, even then the firm that is the object of that individual's attention can still ensure that the matter goes not only to the enforcement committee but also to the tribunal. If they believe, let's say, before the matter even goes to the enforcement committee that they are being messed around, handled incompetently or given conflicting instructions, whatever, then of course they can go directly to the chairman and chief executive. They can draw the matter directly to the attention of ministers. They can draw the matter directly to the attention of their own Member of Parliament or Members of either House who are known to have an interest in this subject. I think it is most improbable that incompetence on the part of an FSA officer would go unnoted for long either by senior staff or outsiders.

  96.  That does beggar the question that firms would not wish to draw attention to themselves and incur the wrath of the FSA who may pursue them slightly more aggressively than if they had rolled over and had their tummies tickled. I am afraid I do not share your enthusiasm about a great flood of potential compliance officers queuing up to be recruited by the FSA because there is an enormous shortage along with millennium bug type experts as well. What I want to draw out from you is to ask for your definition of "practitioner". You have used the term a lot and Howard Davies used the term a lot. It is related to a question I will ask in a minute. What is your definition of practitioner?
  (Ms Hewitt)  I am not sure I have a neat little definition for you. I assumed that we were talking about authorised individuals and firms practising within the financial markets but people also not necessarily authorised but who are practising and operating within the financial markets.

  97.  The point I am trying to challenge you on is that by practitioners Howard Davies includes an awful lot of compliance officers, and people who are categorised as practitioners are in fact not people at the sharp end who have done the business of selling financial products and making money but people who have been specifically recruited to institute rule books that just happen to be in the City in this case. It may not be through incompetence that firms have their business impinged upon but through a rather slavish dedication to a rule book where on practical implications and impacts on business they are entirely inadequate or entirely wrong and that is where some of the problems may occur. My fear is that compliance officers and practitioners are two entirely different things.
  (Ms Hewitt)  I think that is an important point but what the Financial Services Authority needs to do and is seeking to do is to ensure that within its staff, and this is also true of the board, we have what you might term "real" practitioners, people who have actually worked within the financial markets through the financial services industry in a variety of roles, not simply as compliance officers (although I would be less scornful of the role of compliance officers than you are implying) but have advised real clients and handled the money and done the business in a serious way. I think despite its recruitment difficulties the FSA has got some very good staff with precisely that kind of experience. If you look at the board of the Authority and also at the Practitioners Panel, again you will see people with real hands-on experience.

Lord Eatwell

  98.  I just wanted to follow up really and it is a point I put to Mr Davies as well, Minister, which is this: one of the most striking characteristics of the Board of Banking Supervision's report into the Baring's affair was that Bank of England staff, high quality and talented though they are, did not understand the business they were regulating. The attempt to acquire good staff has got it seems to me two good models. One is the SEC model where very bright young lawyers know that having worked for the SEC on their curriculum vitae they have a good chance of an illustrious career later in life. There is also the model of using practitioners as decision makers where you get very talented people working for you for free because they come in and make decisions, which works with the SRO structure, I think with reasonable success. We seem to have opted in this Bill for the model that has failed and that is the life-long bureaucrat model which is the Bank of England model and it is the model of people making a career of being regulators who actually run too far behind the industry. I think that is the staff fear which is reverberating around this Committee.
  (Ms Hewitt)  I must say I am surprised to hear you say that about what we are doing with this Bill and with our Authority. I do not think that there is anything in the Bill at all to say that the FSA has to follow perhaps the traditional public service model of a lifetime career. Not at all. The Financial Services Authority, and some have commented on this, is a private company. It is a private company, it is situated in Canary Wharf, it is not part of the public sector in that sense or part of a public service organisation and, in any case, I would say public service organisations are changing pretty rapidly and the lifetime career model, as I think perhaps the Chairman is aware, is not as common as it used to be. The Financial Services Authority, if the board and the chief executive wish, will be pursuing something much closer to the model you described of the SEC where it will become a normal part of a successful career in financial services to spend some time within the regulatory authority. That may be at the start of a career, it may be later, I do not think we need to be prescriptive about that. But, of course, the Enforcement Committee itself, which has an important role in this whole process, might well include, as indeed the tribunal might, very senior practitioners or recently retired practitioners who bring that expertise and that ability to make peer judgments without at that point expecting very large sums of money in return for doing it.

Mr Beard

  99.  It is unusual for enforcement authorities to receive the income from fines. Could you say what has caused you to adopt this in this particular case? Could you also say where there are precedents for it elsewhere?
  (Ms Hewitt)  The thinking behind this, and I have to say we did not design it on the basis of precedent, we looked at what we thought would be right for financial services regulation, the principle is that the people who breach the rules should help to pay the regulatory costs of those who abide by the rules. Therefore, the effect of allowing the Authority to keep the funds is that the fees that it will charge to authorised firms will be less than they would be if the fines were not available to offset and defray the costs of the Authority. It has certainly been suggested that by allowing the Authority to keep the fines we will be giving them a perverse incentive to impose fines unnecessarily and to an excessive extent. I think our feeling was that the transparency and the consultation that the Bill requires around the FSA's budget, the annual report, the consultation around levels of fees, the whole line of accountability to the industry, would ensure that in fact that perverse incentive, although it might exist in theory, would not exist in fact in reality. If there are alternative suggestions that the Committee would like to put forward then of course I will very happily look at them. One suggestion that was made in consultation was that the fines income should go into the new compensation fund so that one could see very clearly that the fines paid by transgressors were helping in the generality of cases to compensate the victims. In terms of precedents there are some, for example local authorities are now entitled to keep parking fines, but as I say it was not really precedent that we were concerned about but the fitness for this purpose.

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