Examination of witnesses (Questions 360
TUESDAY 13 APRIL 1999
and MS FRANCESCA
360. I would like to talk about the membership
of the panels but, just before I do, I understand well why Ms
Saunders thinks that it is important that the members of the consumer
panel probably should not be the same people as the consumer representatives
on the board because it might compromise their independence; nevertheless
I still think there may be some confusion in the purpose and I
am not quite clear myself whether the purpose of the consumer
panel is inherently different from the purpose of having a representative
element of consumer people on the boardbe they executives
or be they non-executives. I am still not quite clear about that.
Moving on to the question of the membership of the panels, however,
how would you select these people? You have said they have to
be as representative as possible but which organisations would
you look to to put people forward? How would you select them?
How would this process be free and fair?
(Ms Saunders) I am very happy to answer that.
The process we went through in appointing the current FSA panel,
which I think was sound, was openly to advertise using Nolan principles.
We had 320 applications from all over the UK and from a wide range
of interests and we selected them against clear criteria. The
panel was then appointed by the FSA board but I, as chairman designate
of the FSA panel, was involved throughout the selection procedure.
The panel members come from a wide range of backgroundsthe
consumer movement, the voluntary sector, market research, from
Northern Ireland and Scotland, from advice agenciesso it
is a broadly based panel and has credibility for that. In terms
of the difference in the panel's role from that of board members,
it seems to me the panel is there to some extent to redress the
balance of power. The fact of the matter is that consumer interest
outside regulation is diffuse: individual consumers have very
little power in relation to the firms from which they buy and
consumer organisations resources can be counted on the fingers
of one hand in terms of full time officials working on financial
services in general. It is very important that there is a properly
resourced panel which can actually research the market, identify
the issues the public are concerned about and look at their experiences
and represent those in an articulate and informed way. The difference
between that role and the role of board members is that board
members need to look at the statutory objectives across the piece
and deliver regulation as Dr McDonald said at the beginning, which
is seen to meet, at times, conflicting objectives.
361. There are two issues you raised at
the beginning about securing the independence of this panelboth
in terms of the appointment and in terms of the budget. We have
seen that the Government has moved to make the panels statutory.
Would you like to see some strengthening of the way the appointments
are made and the budget?This could be either in terms of
having them approved by the Treasury or in some other way particularly
in relation to the appointment of the chairman and the budget?
What do you have in mind?
(Ms Saunders) It could be helpful to have a separate
procedure for the appointment of the chairman from that of panel
members and it may well be that that would be another of the checks
and balances so that the FSA was not seen to appoint all of them.
Also it could be helpful in the future either for the consumer
panel itself to have a member involved in the appointment of future
members and chairs or, indeed, for someone from the external consumer
movement to be nominated to be involved in that process. As far
as the budget itself is concerned, the best source of resources
for the consumer panel has to be regulated firms and what research
has been done in the past illustrates that consumers are prepared
to pay for regulation where they see it is effective and in their
interests to do so. For a small proportion of the total budget
to be allocated to that consumer research and consumer panel's
work is very important. As to whether there should be some external
process involved in the negotiation of the budget, I do not have
a strong view on that. It is important that the panel identifies
its work priorities and can justify a budget based on those priorities.
(Ms Arcidiaco) Perhaps I can also reinforce this
point. We feel quite strongly that the chairman of the consumer
panel should be appointed by the Treasury and not by the FSA.
We would further wish that this be done according to an open and
public procedure. Of course, Nolan principles would apply but
we would add, for example, an invitation by the Treasury for a
consumer organisation to present nominees or candidates, who would
not necessarily be members of the organisation but be "certified",
in a way, consumer advocates. It does seem a trivial point but
it is very difficult to find people with very good experience
in consumer advocacy and often, as the point was made before,
there is a confusion between the upholding of public interest
principles and consumer interest principles. We would also like
to make a point regarding the reinforcement of the independence
of the panel by the definition of a formula which would set the
budget for the panel. We do not have any problems about the level
of funding which has been defined for the present panel but we
feel that, in view of further possible increases in inflation
or as a way of calculating future allocations, a formula would
be very helpful.
362. That leads me to the area I want to
ask you about. You sound relaxed about the £420,000 budget
but I would like to ask all witnesses whether they feel as relaxed
about it as you do. I would like to hear more about how that budget
should in future be determined. You have just talked about a formula.
In your case, perhaps you could expand a bit on that and perhaps
the other witnesses could say how they would like to see the budget
determined in the future. It looks as if it is determined by the
FSA at that point but should it be? Should you have more self-determination
over the budget, whether it should be some sort of formula or
constraint over lines of accountability and, if so, what?
(Ms Saunders) You are absolutely right: in the
first instance the budget of £420,000 was agreed by the FSA
board on the advice of its consumer relations division just about
the time when the panel was established but that amount does not
take account of the staff support that we get which is very significant
and I would not want to see the degree of involvement between
staff from across the FSA compromised by arguments over how much
we should pay for that. However, I do think as a point of principle
in the future the panel would wish to identify its own budget
and negotiate that with the FSA. The FSA, after all, will have
the resources to deliver. On the question whether or not a formula
would be helpful, we can always argue for more money but it is
very important that priorities against expenditure are clear.
If someone could come up with a formula that said "This is
an appropriate level of expenditure on consumer protection and
an identifiable one", I would be very happy to consider it.
At the moment the amount we have is a quarter of one per cent.
That seems to me intuitively to be quite low but it is early days
and we have to identify the work programme in the context of the
FSA's much wider remit before, in a sense, plucking figures out
of the air.
363. How soon after this moves on to a statutory
basis and this Bill becomes an Act would you like to see the budget
reviewed? There has been an indication of willingness to review.
How far down the road do you want to go before it is looked at
(Ms Saunders) I would say not more than another
six months. I am not waiting for N2; I shall be wanting to review
this in the third quarter of this year before the FSA sets its
fee structure for next year.
(Dr McDonald) When looking at budgetary matters
one must also bear in mind the need for flexibility. There will
be occasions on which the consumer panel might want to commission
far more research in one year than it would in another. For example,
I mentioned that I chaired the consumer panel on the pensions
review where, of course, a great deal of work needed to be done
to make sure, or to try to make sure, that consumers understood
the need for a pensions review and that the documentation sent
to them was comprehensible and so forth. On other occasions disclosure
was introduced for the first time. So I can see that when there
are major changes, either in the type of products which are going
to be soldsay, the introduction of ISAsor some major
review is taking place, that a consumer panel should be in a position
to say, "X was our budget last year but in this particular
year we are going to need to commission a good deal of consumer
survey work and it would have, clearly, a beneficial impact on
the way the FSA wishes to develop its policy in this matter".
It is important, therefore, not to go for too rigid a formula
that is going to exclude such possibilities and it is important
not to build that inparticularly into a Bill.
(Mr Telford) We are relaxed about that budget
as a starting point and we will see how that goes. It is a point
well taken: to put an actual formula into the Bill probably is
not the way forward, but the formula should be seen as a transparency
and we can then decide whether a quarter of one per cent is enough
and, if it does not look enough, we can build on that if required.
364. For this session there is just one
other group of questions I would like to put to you. This is the
question of the role of the non-executive committee. Are you happy
with the balance of those tasks which have been given specifically
to the non-executives as opposed to the tasks that go to the whole
board or should the non-executives themselves as a committee have
a wider or narrower remit?
(Dr McDonald) I am happy with the tasks that have
been assigned to the role of the non-executive committee at the
present time but it is very important, as I said before, to make
sure that the board is in a position to review a wide range of
matters as a board and to come to a consensus view as a board.
It is very important, therefore, not to keep restricting things
too much to a non-executive committee.
(Mr Telford) Likewise, we are happy with the particular
duties given to them but, in the spirit of having a questioning
board, we would like them to ask questions on whatever they want
and not be restricted by statute or even by practice not to ask
(Ms Saunders) I do not have a view.
365. Is there anything pressing anyone wants
(Dr McDonald) I do not think so.
Lord Fraser of Carmyllie
366. Perhaps I can ask this and if you have
a view on it you might let us know some time. The Delegated Powers
and Deregulation Committee are uncomfortable with the idea that
the FSA should be given powers to determine who is a private person
for the right to sue. It does seem rather an extraordinary power
to give to the FSA. If the consumer panel has any view about that,
it might be helpful.
(Dr McDonald) I have no view.
367. We will invite your comments in writing
on that. Are there any other points anyone wants to raise?
(Mr Telford) The only point I would like to make
is please put mortgages in the scope of the Bill.
368. Is that unanimous amongst the witnesses?
(Dr McDonald) No. I really think you have to bear
in mindand perhaps like St Augustine it should definitely
be not yetthe enormous scope of that. It would be approximately
another 20,000 mortgage intermediaries of various kinds; it is
about mortgage advisory firms; between 40-60,000 mortgage advisers
have not yet fully benefited from a training and competence regime
which one would certainly want to put in place as part of the
regulations; and it would mean enormous staff commitment on the
part of the FSA. Let it set itself up, get itself going and then
look at taking on new tasks. It is a bit soon.
369. You would not want primary legislation
necessarily to extend these powers, or would you?
(Dr McDonald) The FSA under the Bill already has
the power or its remit could be extended but, if you leave it
like that, it is the best way to do it.
370. There are two approaches to this which
have been suggested to us. One is that the powers are in the Bill
and then the Treasury does an assessment at some stage in the
future as to how the present system is working and decides whether
or not there should be changes. The other approach we have had
put to us is that this is too important an issue to be left to
that process; it is a question of principle and it should be decided
as a question of principle and it is the issue of the timing that
could be left to another day. It is this is not something which
should just be taken argued as a supplementary matter but is so
key to the whole question of having a single regulator that the
decision should be made as part of the Bill, and the question
of timing could be left to another stage.
(Ms Saunders) Could I just interject and say that
I think your second observation is absolutely right and that there
is plenty of scope within the Bill for differing levels of regulation
and a different approach to regulation for different sectors of
the market. The issue of principle, however, is so important in
terms of consumer understanding of what a financial services regulator
is and should be that the problems for the FSA, if mortgages are
left out, will be greater than the problems and the challenges
of how the mortgage market is regulated.
371. Mr Telford?
(Mr Telford) Exactly. The point of the one-stop
shop is vital and the principle should be established. We do not
want to hear that mortgage advisers may not be trained or competent,
they are out there selling mortgages so they should be and there
can be different levels of regulation. There is already a code
of practice out there and that can be used as the basis of regulation.
It would give the statutory clout of having the FSA in charge
of regulating mortgages.
(Dr McDonald) I am still dubious about these extensions.
Mr Plaskitt: But do
you agree with the point of principle?
Lord Montague of Oxford
372. It is a matter of timing, is it not?
(Dr McDonald) I think there are difficulties involved
in extending the principle to mortgages because then it seems
to me one would have to extend it to all kinds of consumer credit
373. When you spoke before you spoke about
needing a delay before implementation which implied that you did
not have an objection.
(Dr McDonald) That was from the point of view
really of if Parliament imposes the obligation to regulate mortgages
on the FSA then it needs to understand very well that it is a
huge task that the FSA would have to undertake in addition to
its current tasks.
374. In wrapping this session up I would
like as usual to ask representatives of the Treasury and the FSA
if there is anything they would like to sayparticularly
on what we have been hearing about just now or anything else that
has come up in this session before we move to the next set of
(Mr Whittaker) Chairman, could I say a few words
first of all about accountability and governance. I think we take
the position that accountability should be clearly fixed. It should
be accountability in the public interest to Parliament through
Ministers. We think that governance is a slightly different matter,
that governance can change over time according to the circumstances
in which you are operating. The optimal governance structure does
not need to be fixed for all time. It is interesting, for example,
to note that the governance structure in America for the SEC,
which is one we have not discussed at all this afternoon, is one
which has a full-time Chairman and five full-time commissioners
each with their own areas of responsibility. So it is not necessarily
the case that any one governance structure that one would adopt
now would be the right one for all time. The right approach we
would advocate is flexibility in relation to governance and clarity
in relation to accountability. As far as the role of the Consumer
Panel is concerned, and indeed the Practitioners Panel too, our
position is that their value to us lies in their independence.
Neither of these organisations will be of any value to us if it
appears that they are merely poodles of the organisation we operate.
I think that certainly the Consumer Panel has already demonstrated
its independence not least in their submissions to this Committee
which in a number of respects do not mirror our own submissions
to you. In terms of the accountability structure for those two
panels our position would be that it is really a question of balance
and how you secure the necessary level of independence without
increasing bureaucracy and rigidity in the Bill but rather maintain
consistency with the Bill principle that accountability should
be to Parliament through Ministers. So we see that as being something
where there may be some room for further enhancement but within
those safeguards. That is all I wanted to say in relation to the
main subject of the debate. I think our position in relation to
mortgages has already been made clear.
(Mr Roe) Nothing.
376. We have had two views on this. Can
the Bill as presently drafted be modified over time? Is it flexible
enough to take in mortgages at a later date?
(Mr Roe) Yes.
Chairman: Thank you