Joint Committee on Financial Services and Markets Minutes of Evidence



Examination of witnesses (Questions 360 - 376)

TUESDAY 13 APRIL 1999

MS BARBARA SAUNDERS, DR OONAGH MCDONALD, CBE, MR PHILIP TELFORD and MS FRANCESCA ARCIDIACO

Viscount Trenchard

  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 board—be 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 backgrounds—the consumer movement, the voluntary sector, market research, from Northern Ireland and Scotland, from advice agencies—so 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.

Chairman

  361.  There are two issues you raised at the beginning about securing the independence of this panel—both 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.

Mr Plaskitt

  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 again?
  (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 sold—say, the introduction of ISAs—or 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 in—particularly 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.

Chairman

  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 certain questions.
  (Ms Saunders)  I do not have a view.

  365.  Is there anything pressing anyone wants to say?
  (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.

Chairman

  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.

Mr Sheerman

  368.  Is that unanimous amongst the witnesses?
  (Dr McDonald)  No. I really think you have to bear in mind—and perhaps like St Augustine it should definitely be not yet—the 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.

Chairman

  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 as well.

Mr Plaskitt

  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.

Chairman

  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 say—particularly 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 witnesses.
  (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.

  375.  David?
  (Mr Roe)  Nothing.

Mr Sheerman

  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 very much.


 
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