Joint Committee on Financial Services and Markets Minutes of Evidence



Examination of witnesses (Questions 420 - 432)

TUESDAY 13 APRIL 1999

MR DAVID CHALLEN, MR TIM HERRINGTON, MR KIT FARROW, MR DEREK WANLESS, MR MARK BOLEAT and MS ANGELA KNIGHT

  420.  Do it in Hong Kong or wherever, that is true.
  (Mr Boleat)  Could I add a point on that. The retail markets also hope that the costs of regulating the wholesale markets do not spill over to them. In terms of innovation the retail markets are also important. I would take motor insurance as an example. I have recently been able to look at that in Japan. The British market is the most innovative, the most competitive whereas the Japanese market consists of 28 companies all doing exactly the same business charging the same agreed premiums. Thus the consumer can benefit very substantially through a competitive market. International competitiveness is important for a number of reasons but so is the competitiveness of the market important for consumers within Britain.
  (Mr Wanless)  I was going to make a point that one aspect of the regulated regime that has been most destructive in the terms of innovation in the consumer market is polarisation which has inhibited organisations from looking at what they say to customers, how they say it and how they present a product.
  (Ms Knight)  The first safeguard to the consumer is not winding up the regulation which winds down the choice available, it is actually the education of the consumer.

Mr Sheerman

  421.  Anyone who has looked at the last four crises in financial institutions will see that what we have got that is probably a greater problem than any other financial centre is a press that, if there is a glitch, another mini scandal, will tell the world that this is an unsafe place to operate and invest in. We have got a unique press for that. Post-Barings they said it was the end of London as a place to do business. We have got to be very careful when what I call building a market of integrity many of us on this Committee will err a little bit on one side rather than the other because we know what the ramifications could be for this very important industry to get it slightly wrong and the press comments on it in the way they do in this country.
  (Mr Boleat)  Brave comment!
  (Ms Knight)  We are not here to argue regulation of the press!

Chairman

  422.  I am about to ask for responses from the Treasury and the FSA. There are just two things I would like to put to you very briefly before that. One of the interesting things I have found sitting in this Committee which is a change from my previous role is the way that people come forward and suddenly want the Treasury to take on tasks. In my former position people were always saying why can you not stop the Treasury doing this? First of all, we had the experience of people volunteering that the fines should come to the Treasury rather than be returned to the industry. Then we had the suggestion that the NAO might be brought into this. Then, thirdly, that the Treasury should have some reserve powers whereby if they did not like something that the FSA was doing it could intervene. In my previous role the case that was put to me was "How are you going to stop the Treasury second guessing". Some of this is a surprise, as I sit here, hearing a suggestion that the Treasury should get more and more involved in these issues. To what extent this is a collective view or are they this just thoughts from some of the individuals?
  (Mr Boleat)  It is our view that the Treasury should be more involved. It is not because there has been a change of management recently. At the end of the day if something is going wrong the accountability ends with Parliament. That is the fact of the matter. If a regulatory body wishes to be extremely awkward it can be awkward and unless you have got the ability to go to a Minister through an MP or directly then I think you have a serious problem. We have certainly had cases where we have found the Treasury to be extremely helpful on matters that regulators have been dealing with because the Treasury officials, who we regard very highly under both existing and previous management, have an extremely wide knowledge and wide vision. I am grovelling enough!

Lord Poole

  423.  Are you looking for a new job?
  (Mr Boleat)  From 7 June I am available! That is not a job application! I do think that the Treasury is often able to look at issues in a wider context than a regulatory body in the same way that I think, for example, the DTI can compared with the Office of Fair Trading. It is in the nature of regulatory bodies that they are more narrowly focused than government departments.
  (Mr Wanless)  The issues in terms of confidence in the UK financial markets, whether it is about the consumer market or about the international competitiveness of London, are so important that the Treasury should have reserve powers.
  (Ms Knight)  I agree, Chairman, I was absolutely amazed at these calls for reserve powers to be given to the Treasury. I think one has to recognise that people will believe the Treasury to have responsibility for something and whether the Treasury has or has not people will deem that it ought to have that responsibility. So whether the Treasury has reserve powers or not it will still be heavily involved. The problems, if there are any, that are associated will be heavily debated on the floor of the House of Commons, MPs will have 300 people lining up outside their constituencies, so I do not think we can see this as necessary on one side or other. The point that actually concerns me is that if we get to a position where the Treasury has to step in and use its reserve powers to order the FSA to go down route A rather than route B then I think the FSA has failed and regulation has failed in the UK. I am not sure that leaving reserve powers with the Treasury actually is going to do any good or bring any benefit in practical terms.
  (Mr Farrow)  Could I disabuse you of one of the reasons why people might want to reserve powers, my Lord, and that is if there are overt powers for the Treasury to intervene then there is a prospect that their intervention will be overt. There is quite often a suspicion that they intervene where they have no powers but they do so covertly.

Chairman

  424.  I do not think I will join in this debate other than to say that all of the time we had the ability for the Treasury to give instructions to the Bank of England, although this was a power that was never used, it nevertheless was present in the background of most of the discussions that took place. We normally make more use of our witnesses from the Treasury and the FSA. I think the time has come for them to comment on what has been said as we move to the end of this session. I would like you both to have an opportunity to respond, particularly on the question of statutory immunity. I think we have an outstanding question which is just how is it limited under the proposals and how could it be limited? How far, when you begin to limit it, does it take away the power that is there? Also I would ask you if there are any other issues you would like to comment on as well.
  (Mr Roe)  Thank you. Yes, statutory immunity is limited of course to exclude action in bad faith which reflects the existing position. I do think it is instructive to look at comparisons with bodies which are performing similar functions in other countries. That has been suggested today and the FSA at a previous hearing produced a list of countries where there are comparable arrangements. I think that is a very important point. I think it is also worth stressing that the arrangements for statutory immunity reflect existing arrangements. Again, I think that is very important. On the question of the complaints investigation arrangements, we do not believe that the FSA is a body of the type that falls within the remit of the Parliamentary Ombudsman. However, what we are doing is to provide in the Bill for there to be arrangements for the investigation of complaints which are specific to this particular structure with the investigator being able to publish reports and also to publish FSA responses to his reports. I think this is an opportunity to tailor the arrangements to the particular needs of the circumstances that we are all looking at at the moment and, indeed, one of the improvements which was made recently was to require the FSA to consult publicly on the arrangements it is putting in place. I think we should see the issue very much in that context. I do not think I particularly felt I needed to say anything else except on the point of having a Treasury power to issue directions. I think we should really ask ourselves whether it would be in anybody's interests were the Treasury in a position where it was constantly being asked to second guess decisions which the FSA was making. It seems to us that would not actually be desirable in terms of having an effective regulator not does it seem necessary given all the other things we are doing to build a successful, effective accountability structure.

  425.  Andrew?
  (Mr Whittaker)  Could I just pick up, Chairman, on one outstanding point. Obviously I agree with what David said!

Lord Poole:  I think all is revealed now!

Chairman

  426.  But he has not directed you!
  (Mr Whittaker)  The one outstanding point that I wanted to pick up on was the reference to the idea that an independent complaints commission might have the power to award compensation. I can see why the Committee is attracted to that. I think the scepticism I would have is one that parallels some of the earlier scepticism and whether in fact it would be practical to arrange that so that the costs of paying compensation fell on the Treasury rather than, as I suspect is more likely, on the industry.

  427.  Do any of the panel or any members of the Committee wish to ask any more questions?
  (Mr Challen)  You raised a clutch of issues about Treasury involvement and you only got answers about reserve powers. I would not want you to think therefore that there was universal support for the idea of fines going to the Treasury. I do not think there is any support for that on the Practitioners Forum. We think fines should go to mitigate the costs of regulation but as at present the accounting systems of the FSA should make it quite transparent and not make it a budgetary incentive to find fault.

Mr Heathcoat-Amory

  428.  It seems to me that there is a good intention to reduce the cost of regulation by offsetting the fine income against the fees but in practice over time the budget of the FSA will also become dependent on fine income, whatever the original intention. Is it not objectionable in principle that a fining agency and decider of legal cases should have a financial interest, however indirect, in the outcome? This seems to be an abuse.
  (Mr Challen)  I am surprised by your assertion that the fine income will be the predominant source of revenue.

  429.  Obviously not the predominant source but it will become significant. Fines in America are very substantial.
  (Mr Challen)  Are you suggesting that we should follow that route?

  430.  We are legislating here for a long period of time. We have to look at the possibility that there should be some very large fines. I am concerned that the people deciding on those fines should have an indirect interest in the outcome. I think this is a curious arrangement. I am not a lawyer. I think it needs defending rather than simply appealing to a precedent.
  (Mr Challen)  I think the defence is that it is reasonable for the regulated industry to have the costs of regulation reduced by those who have transgressed, presumably therefore increasing indirectly the costs falling on the others. As I have said before it seems to me that the present arrangements of keeping the fine income transparently separate will enable those who scrutinise the FSA, and I include the Practitioners Forum and obviously Parliament, to ensure that is not abused. I can see no reason whatsoever for the Treasury to get their hands on it.
  (Mr Herrington)  The half-way house that we suggested was that the fines should go perhaps to the compensation scheme, or the Ombudsman scheme, that keeps it within the system so that the cost of regulation as a whole is reduced but it does not go directly into the FSA's pocket.
  (Mr Farrow)  May I remind you that I earlier suggested that the fines should go to meet the costs of representation of individuals who are subject to disciplinary procedures. I think you are very familiar with some past cases where the individuals have been at risk of enormous costs as a result of exercising their right to have an independent hearing of their case. The income from fines could be used to meet those costs of representation.
  (Ms Knight)  We believe that the fines should be kept within the system. The important thing there is that there is a public record of that, it is in, it is reported on an annual basis, because that actually does keep a check on a ratcheting up of fines for the sake of ratcheting up, whether they are going to Kit Farrow's good cause or whether they are going to keep down the fees of the regulated firms, whichever it may be. We do need to know precisely what is happening and it is part of accountability that should be there and made public.

Chairman

  431.  There have, of course, been three lots of transactions that have now been raised. One is the question of what happens to the fines on the industry, the question of who should pay for compensation to people through the complaints procedure and then there is the issue of Legal Aid, which is what you are referring to, which in one sense could get the Treasury involved in each of those transactions or some or all of them could be kept within the industry and in a sense accounted for.
  (Mr Wanless)  My preference would be for the fees to be abated. I think the key issue is the total cost of regulation which is the transparency point basically, that there ought to be a look at the total cost of operating the FSA, the issue of the small amount coming from fines and what the licence fees are separate issues and should be seen as separate issues. It should not be a same year issue, it should be a future year mechanism.

Lord Fraser of Carmyllie:  That is tied up with the issue of costs as well. It is not unknown sometimes for fines to be relatively small but the costs to be very significant. It might seem somewhat bizarre to have all costs going to the FSA and a relatively small amount of fines going to the Treasury.

Mr Sheerman

  432.  The mark of a successful FSA will surely be a low fine income?
  (Mr Boleat)  Transparency is the most important point. There must be no hint that fining is done to increase revenue. How that is achieved is secondary. I thought for one moment you were leading us down the road of using the fines to pay the compensation by the FSA, a circular process.

Chairman:  Thank you very much for coming here this afternoon and giving us the benefit of your experience. It has been very useful. Thank you very much.


 
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