Examination of witnesses (Questions 420
TUESDAY 13 APRIL 1999
BOLEAT and MS
420. Do it in Hong Kong or wherever, that
(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
(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.
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!
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
(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!
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
(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.
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
(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
(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!
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
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
(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.
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.
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.