Examination of witnesses (Questions 400
TUESDAY 13 APRIL 1999
BOLEAT and MS
400. My colleague is going to deal with
complaints. I know you say if there is statutory immunity the
complaints system needs to be robust and independent and have
the power to award compensation but I will leave that to my colleague.
Can I move on to the recognised investment exchanges where the
Bill proposes a narrower statutory immunity but the exchanges
are arguing that they should have the same one as the FSA. What
is your view on that argument?
(Mr Herrington) That is quite a difficult one.
The exchanges do not have it at the moment and it was considered
inappropriate. The question is what is the role of the exchange?
Is the exchange going to have a regulatory role? Essentially it
is a market providing a facility for others to do business by
and I think at the moment it is unclear in the way the FSA policy
is working out how much regulatory responsibility is going to
lie with the exchanges. Kit is shaking his head and it would be
interesting to know why. I think it is not necessarily an inconsistent
position to say that you would have one without the other but
I suspect a degree of symmetry is going to be considered desirable
here between the two bodies.
401. Not by the Government in the Progress
Report who say they stand by the more limited statutory immunity
for the RIEs despite the RIEs arguing they should have the same
as the FSA. Kit Farrow has got a different view. Can we hear it.
(Mr Farrow) Can I first declare an interest as
a board member of an RIE and I suspect the only person in the
room who as an unpaid director of a recognised exchange had to
go home and say actually we were in receipt of the threat of personal
litigation in response to regulatory activity which I had been
party to, given the regulatory responsibilities put on exchanges
to maintain clean, open, fair, proper markets. It seemed to me
quite inappropriate that whereas the other parts of the regulatory
regime which are discharging very similar regulatory responsibilities
were not open to personal suit for discharging those responsibilities
but I was. I do disagree very strongly with what Tim just said
in saying that it is not clear what regulatory responsibility
exchanges will have in the new regime. They are very clearly specified.
There are duties to maintain a proper market which are going to
be spelt out in substantially greater detail. The exchanges periodically
have to take regulatory decisions which have very big financial
implications not merely for the members of the market but for
the users of the market. In the case that I referred to it was
not a member of the market who was unhappy at the regulatory decision,
it was a customer whose activities had been interfered with. I
wish to make my point of view known. Could I just say one thing
further. I do believe that both for the exchanges and for the
FSA that the immunity should not apply in the event of negligence
Chairman: What I heard
you all saying was although you had some doubts about statutory
immunity, if statutory immunity was there you wanted to make sure
that you had a very good complaints procedure which would back
it up from the other direction.
Lord Fraser of Carmyllie
402. Just a question on statutory immunity.
We have had one legal opinion submitted to us that even if the
Government or Parliament wishes to confer statutory immunity on
the FSA, under human rights requirements those will be set aside.
What is not clear to me is whether that is a rogue view or whether
you would share it?
(Mr Herrington) I am aware of it and it is a respectable
legal view certainly. There is also a European issue, as I understand
it. I believe there are issues on the European front as to whether
it is appropriate for statutory immunity to continue for regulators.
That would be a debate that we could have all afternoon I suspect.
403. What kinds of arrangements do you see
would be most appropriate for dealing with independent investigation
of complaints against the FSA? In particular, do you believe that
the Parliamentary Commissioner for Administration could have a
role in such arrangements?
(Mr Herrington) Yes. I mentioned that as a possibility
this afternoon in my opening remarks. What struck me was that
I suddenly thought of something that said that the Government
has brought into the ambit of the Ombudsman a large number of
quasi-governmental bodies and non-departmental governmental organisations
or whatever, a very large list, and I thought if it is good enough
for the Competition Commission, as it is now called, why is this
not something that has been thought of in the context of the FSA?
One of the criticisms you might have of the proposals that are
in the draft Bill, even as proposed to be strengthened, is that
there is perhaps no real independence of this investigator, he
is appointed by the FSA, and should we have somebody who is clearly
independent of the FSA to carry out this task?
404. You are seeing the Parliamentary Commissioner
as being the sole investigator of complaints?
(Mr Herrington) That could be the vehicle through
which it operates, yes.
405. I wonder if other members of the panel
would like to comment on the question.
(Mr Boleat) We would certainly see a role for
the Parliamentary Commissioner.
406. What particular arrangements would
you foresee before you reach those heights?
(Mr Boleat) Whether it is the only arrangement
or additional is a second order question. I think it is important
that there is that additional safeguard.
(Mr Challen) I agree with that. I take it we are
talking about arrangements which actually could result in compensation
in cases where recklessness or negligence have resulted in loss
to either individuals or firms?
(Mr Herrington) The law allows the recommendation
of compensation to be made but I think it is almost invariable
practice for people to comply with the recommendations.
(Mr Farrow) If there is such a power to award
compensation it should not be paid by the FSA out of fees that
it has collected from the industry, it is inherent in the situation
that it should be a charge on public funds.
(Mr Wanless) In the first instance it is important
that the FSA organises itself internally in terms of the appeal
system, as I said in the introductory remarks I made, and how
in particular it keeps close to the various markets that it operates
in and separates out the disciplinary proceedings for adjudicating.
After that when those processes are exhausted then it is appropriate
for the Parliamentary Commissioner to be involved.
407. If that process was strengthened and
it was of the nature that you are describing then you feel that
you could sleep easier with the whole subject of statutory immunity?
(Ms Knight) No. I think we would still wish to
see statutory immunity removed under certain circumstances, such
408. There is a lot of international experience
here. The question we do not often get the chance to ask is here
we have had a range of questions asked this afternoon but are
there competitor markets that do it better? Are we missing something
that we could change at this late stage of our consultation? We
have tried to get more international information but some of us
accept this is probably where we have been most limited. Is there
international experience from the global companies that you are
involved with to suggest that we are missing some aspect of it?
(Mr Challen) I am told, but I am afraid I cannot
vouch for it, that the SEC do not have statutory immunity.
409. They do not have?
(Mr Challen) I am told not.
410. Do you not accept the inhibiting effect
there will be?
(Mr Challen) I do understand that.
411. If there is no statutory immunity there
will be a great aversion to risk taking and a great deal of people
looking over their shoulders rather than proceeding with things
that ought to be proceeded with.
(Mr Challen) I understand that connection.
(Ms Knight) That is why you actually limit the
areas from which statutory immunity is removed. We do recognise
that potentially if statutory immunity was removed altogether
there could be that concern which you raise, yes. There are certain
circumstances where, for example, the FSA could potentially act
negligently, somebody or a firm's livelihood being severely impaired
or removed, they have acted negligently and there is no recourse.
That does seem to us to be significantly unfair. That is why,
recognising that there are difficulties, we still believe that
in certain circumstances immunity ought to be removed.
412. Can I just follow that up. Sometimes
it seems that we are trying to regulate a national market in this
Bill but actually we are regulating an international market which
happens to transact in London or the United Kingdom. I am interested
in the sensitivity of this market to the regulatory regime. Presumably
a good bit of legislation will act as a magnet for customers and
suppliers but bad regulation, arbitrary or ambiguous regulation,
might act as a deterrent. I would be interested if any of our
witnesses have got a feel for how and whether these wholesale
markets are sensitive to both the cost and what one might call
the regulatory culture we are developing here.
(Mr Challen) Extremely sensitive.
(Mr Farrow) If I might suggest one of the great
concerns of my association is the fear of the combination of uncertainty
in the definition of offences allied to very stringent penalties.
It has been part of the accepted wisdom that it is very important
that the market should be flexible to adapt to new circumstances
and to be innovative. If you are subject to a regime which says
in the most general terms "you must not do anything which
is not proper or which is not of high standard" that is such
a vague requirement that if you find some innovative opportunity
there is a danger that you will be worried that viewed after the
event somebody may decide that you were not working to a high
enough standard. You create a worry that people will not, in fact,
innovate without actually going to the regulator and saying "look,
I am thinking of doing things differently, is that all right?"
In that way we could bring to the UK the regulatory tradition
that in other markets has basically prohibited anything that has
not been explicitly endorsed.
413. It occurred to us that it is a very
fine balance, is it not? We have your side coming here and they
say we have got to be a competitive market and this is a global
business. We understand that and all of us in this Committee want
London and the United Kingdom to continue as a competitive place
to do this sort of business. On the other hand, we have consumers
coming in saying we need much more regulation and protection.
What seems to be missing is surely what this Bill must deliver
is a culture of integrity where business can be done and one knows
it is an honest business with the right parameters and that the
culture is right. I do not hear that word either from your side
or from their side and it is important, is it not?
(Mr Farrow) I absolutely agree with you. In our
earlier discussion one of the points we debated was the absence
of any reference to "intent" in some of these very broad
criteria about you must have high standards and if I disagree
with you about what is high in a particular circumstance or proper
in a particular circumstance, it would be an enormous help if
there were some notion that behaviour that was innocent in intent
was not at the same time criminal or subject to unlimited fines
or whatever. I was very encouraged by our previous meeting because
Andrew Whittaker indicated that the question of intent was not
a yes/no thing. There is very relevant US experience where intent
is an element of the offence but proving it is not as difficult
as it might seem.
(Ms Knight) Because the need to balance good regulation
against the competitiveness of the financial industry is a very
sensitive issue, we believe that it ought to be an issue which
is given prominent importance and the non-executive committee
reporting on it annually we felt was a good way. Not only does
one have to recognise that business of a wholesale nature could
be lost out of the United Kingdom if we do not get this right
but potentially business of a retail nature could be lost out
of the United Kingdom and therefore the desire that consumers
have which is to have a far more perfect regime, for want of a
better description, than the one we have at the moment could well
have the effect of moving the business out of the United Kingdom,
using the passport regime back in. With all due respect, I have
to say it would be much harder for Mrs Jones in Bognor South to
get compensation from a Greek firm quartered in Piraeus because
the business had moved out there than it would be if that business
were kept within the United Kingdom. So we have to be very careful
in balancing the cost of regulation, the certainty of regulation
and the needs of consumers, which is what is of benefit to the
United Kingdom's financial industry, and the problems that could
be associated if we regulated ourselves out of the current scenario.
(Mr Boleat) May I support that, my Lord Chairman.
It is more important for the wholesale markets but for the retail
markets, particularly with a single passport, regulation is capable
of pushing business outside the United Kingdom. In the last evidence
I gave I mentioned Ireland as an example. At the moment I do not
regard it as a problem but it could be.
414. There has been a great deal of assertion
that business can be moved out of the United Kingdom because of
the mechanisms or the pressures of regulation. This is the first
time that cost has been mentioned. I have circulated around the
Committee responses from quite a large number of banks and others
involved in the securities industry. Practically nobody could
tell us in any meaningful way what the cost of compliance was
to them and, furthermore, they find it very difficult, they said,
to distinguish between the cost of compliance and what would have
been proper management in any event. With only one or two exceptions
people were not even prepared to try in great detail. I do not
think it would be fair to name them because it was not a public
correspondence but it has been shared with my colleagues. It ill
becomes the industry to bang on too much about cost unless it
is going to stand up and say, "Excuse me, we would like to
present you with some really well thought through numbers on this
because we are beginning to be extremely concerned about what
is happening." I would just say that I am sure the Committee
would find it very helpful were you able to go away and come back
with something even if it were only from your area of the world
to justify the assertion that these costs would be so great that
they would risk pushing the business elsewhere because that is
not what the correspondence delivered.
(Ms Knight) Chair, if I may respond. I think that
is a perfectly valid question as is the point that has been made.
Indeed, regulation is not just a burden, it is also part of operating
a business in a proper and businesslike manner. However, where
costs start to really cause a problem is rule changes, additional
rules and in an incremental nature. We actually published, as
an association, the results of a survey that we did of our members
three months ago about the costs to them of a particular regulatory
change that they were having to make. I made the information available
to the FSA and I made the information available in the public
domain and in fact it was quite widely reported. On a quarterly
basis we are now surveying all of our members, we are listing
whatever is the latest regulatory change which will impact upon
themobviously not all will impact upon thembecause
that enables us to get a cost against these specific items rather
than in the areas of generality which I do not think would be
helpful for the Committee in order to be able to form a proper
view of what is the reasonable cost of regulation and where it
is that it really starts to cause an adverse effect and a problem
upon firms and consequentially to their customers.
(Mr Boleat) I think I said that I do not regard
this as a problem at present. It is very difficult to produce
general figures. It is not going to happen that an institution
is going to say "we have had enough, we are going over there";
it is far more a business looking at expanding and it may be a
British institution that is looking at expanding and it is looking
at a range of issuesthe regulatory environment, what might
happen to it in the futureand as a result of this is it
going to locate in London or Edinburgh or Dublin or Piraeus. It
is very difficult to pin down. I am not certain that for competitive
reasons an institution would necessarily say it is for this reason.
I understand what you say, it would be helpful to have nice, solid
figures but when we have tried to look at this it is very difficult
to differentiate out what a company should be doing for itself
and what the regulators require it to be doing.
415. If the wholesalers find that the cost
of regulation is too onerous, is it possible for them to remain
in London yet operate in another jurisdiction?
(Mr Farrow) Yes indeed. The more IT improves,
the easier it is to have people who represent the British, the
French, the Japanese and the German subsidiaries all actually
sitting in the same office and deciding, as circumstances permit,
which of those national companies is actually to be designated
as the person who conducted the business. We have been discussing
this in terms of companies but we are moving to a world in which
competition between exchanges is becoming much more real. The
cost of doing a transaction on one exchange is extremely easily
compared with the cost of doing the same transaction on another
exchange. I believe cost competitiveness in international competition
between exchanges is something that we do need to be quite alert
416. We have heard an awful lot about cost
competitiveness in this respect. There must also be a price if
the regulations are so lax that integrity is eroded and the reputation
(Ms Knight) Absolutely.
417. We do not seem to hear the same emphasis
on that side of that argument.
(Ms Knight) With all due respect, we have all
said that we need a balance. It is that balance that we are seeking
to achieve, be it practitioners, be it yourselves as the Committee
and I am sure the Government itself.
418. You have talked about the need to maintain
the international competitiveness of London because that is clearly
crucially important, and it has also been acknowledged that too
much regulation will stifle innovation and put major international
players off doing business here. On the other hand, the consumer
representatives in the main are arguing for enhanced regulation
in certain respects. Obviously it is a balance, but do you think
in fact that the end consumer has gained from the relatively free
atmosphere that has existed in London and restricting regulation
in the long term is of benefit to the consumer because it encourages
innovation which leads to a wider range of products? Whilst there
may be dangers there may also be more to choose from? Obviously
you need safeguards. Do you mind very much that the need to maintain
the international competitiveness of London is not included as
one of the statutory objectives of the Bill? Do you think if it
were it would actually be in the interests not only of practitioners
but also of consumers?
(Mr Farrow) If I might reply, could I recall that
my earliest remark was that regulation needed to be appropriate
for the particular area that was regulated. I think there is a
very sharp distinction to be drawn between inter-professional
markets and retail markets so that the costs that are properly
put on the regulation of a retail market do not spill over to
be subscribed to by people who are transacting in an international
market which could just as easily be in another country but happens
to be to our benefit located at the moment in this country. If
I might comment from your own experience, my Lord, you have a
lot of experience of the Japanese market and I think you will
have seen there that stifling regulation can be a very, very considerable
burden on competitiveness.
419. I would say that in Japan that is absolutely
so and that whenever one sought advice from the regulator as to
whether one could introduce some innovation or some new product,
one never ever got a clear answer and the result was that one
was so frightened that one did not do it and one told one's head
office you cannot do it.
(Mr Farrow) You cannot do it here, it would be
better to arrange it somewhere else.