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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 606-xviii
HOUSE OF COMMONS
HOUSE OF LORDS
TAKEN BEFORE THE
PARLIAMENTARY COMMISSION ON BANKING STANDARDS
TUESDAY 8 JANUARY 2013
PROFESSOR SIR PETER RUBIN, VERNON SOARE and ANTONY TOWNSEND
Evidence heard in Public
Questions 1781 - 1865
USE OF THE TRANSCRIPT
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Taken before the Joint Committee
on Tuesday 8 January 2013
Mr Andrew Tyrie (Chair)
The Lord Bishop of Durham
Lord Lawson of Blaby
Mr Andrew Love
Mr Pat McFadden
Lord McFall of Alcluith
Examination of Witnesses
Witnesses: Professor Sir Peter Rubin, Chairman, General Medical Council, Vernon Soare, Executive Director, Professional Standards, Institute of Chartered Accountants in England and Wales (ICAEW),and Antony Townsend, Chief Executive, Solicitors Regulation Authority, gave evidence.
Q1781 Chair: Thank you very much for coming to give evidence this afternoon. I am sorry that there was a slight delay while we conducted our private discussions.
Mr Soare, you say in written evidence to us that we "should challenge the banking sector to develop an effective model of professional standards", and that "government or independent regulation may become a backstop". However, you also say that "it may take a generation to achieve this". Why is it going to take a generation, by which I presume you mean 20 years plus?
Vernon Soare: Yes, Chair, medium to long term. I think that that remark was made in the context, from our perspective, of instilling a culture of professionalism within those working in the banking industry. It is not a quick win. Drawing on our own experience, the way that we instil a professional culture in chartered accountants starts with education, training and supervised work experience, and then continues throughout their careers with complete continuing professional development. These things are internally generated within the profession and do take quite a lot of preparing. That is the context of that remark.
Q1782 Chair: It is pretty depressing, isn’t it?
Vernon Soare: In one sense, perhaps, but we start from where we are-I think that that’s probably the comment.
Q1783 Chair: Sir Peter, yours is pretty much a self-regulating body, playing an extremely important role, and you have a very powerful tool: to strike off people and deny them their livelihoods. In banking, historically the Government have not waited for the bankers themselves to do this, but have introduced a supervisory form of regulation. Do you think that it is possible to have a professional body sitting alongside a supervisory body that does not have accountability to that supervisory body?
Professor Sir Peter Rubin: I think it is very hard to combine different roles. I think I would use the term "independent" rather than "self-regulating" for the GMC as it is now, because the non-medical representation on the council, and fitness to practice panels and so on, is so very strong. But we are independent and accountable only to Parliament for our actions, and we report to the Health Committee every year. We are not a doctors’ representative body-that is what the BMA does; it is what the trade union does. We are established by statute to protect the interests of patients.
Chair: We shall come on to that distinction in a moment.
Professor Sir Peter Rubin: I think that you have to be clear about what a body does. We do patient safety, because that is what we are there for, and we are very focused on that.
Chair: Would you speak up? I am sorry, some of us are having difficulty hearing.
Professor Sir Peter Rubin: I was having some difficulty hearing you as well, so I wonder if there is a volume problem around the room. But, yes, I will certainly speak up.
Q1784 Chair: I am very sorry to have to ask you to do this, but would you repeat the answer that you just gave? In case you did not fully hear the question: is it reasonable for the banking profession to create its own professional body to monitor standards, while at the same time having sitting alongside it a statutorily created supervisory body, unless that professional body has a line of accountability to the supervisory body?
Professor Sir Peter Rubin: It would be very challenging to do that. I think that professional self-regulation in a number of professions has failed over many years-and sometimes failed spectacularly. In my own profession, for example, the Bristol heart surgery scandal was the defining moment when it was clear that professional self-regulation was not working. Bad things were happening; doctors were doing bad things and other doctors looked the other way-it was one of those watershed moments. There is still a role for professional self-regulation within teams and organisations but, in my view, and certainly as far as my profession is concerned, there has to be a statutory backstop that can oversee the whole process.
Chair: We will go into this further with questions from colleagues.
Q1785 Lord McFall of Alcluith: What are the distinctive features of your professional bodies? What are you trying to achieve? Regarding the Bristol heart incident, what catharsis did that generate in the organisation? What was different in your organisation pre and post the Bristol heart incident?
Professor Sir Peter Rubin: Before the Bristol heart scandal, the GMC had been a very reactive organisation. It had waited for things to happen and then tried to do something about it. It was an organisation that had been dominated by the medical profession and had been very rooted in the past. The Bristol heart surgery scandal was a dramatic wake-up call. It was one of those moments when an organisation has either to change or die, basically. The GMC changed; quite painfully, but it changed.
Q1786 Lord McFall of Alcluith: What is your organisation about? You mentioned culture and ethics in your submission, and these are issues I agree with, but there is a bit of a marshmallow effect with culture and ethics. What is culture and what are ethics?
Vernon Soare: These are deep questions. If we put it into context, the ICAEW is perhaps an interesting example of a body that has statutory regulatory responsibilities under the Companies Act, the Insolvency Act and others, but it is also a professional body at the same time, with a representative function. The Commission might want to ask about how we ring fence those activities. Essentially, the ethics and professionalism have been part of the institute since our royal charter back in 1880. Those things, if you like, are generated from within the profession-the bottom-up approach. We are overseen, though-this is a change. Our equivalent of the Bristol incident was perhaps Enron, and subsequent to Enron, the powers and responsibilities of the Financial Reporting Council were widened so that it has responsibilities now for public interest entities, defined broadly as the listed sector, large private companies’ pension funds. It looks after that area, but it also oversees what a body like the ICAEW does, so when we carry out our regulatory role under statute, we are overseen by the Financial Reporting Council or the Insolvency Service, or in some instances the Financial Services Authority. I would describe our set-up as independent regulation, but overseen. It is not self-regulation in the classic sense.
Q1787 Lord McFall of Alcluith: Some would say that in the financial crisis the auditors have not been scrutinised sufficiently, apart from through the House of Lords report involving Lord Lawson and others. Given Sir Peter’s point about being on the front foot on the issue of culture and ethics, as a body, are you looking at this issue with regard to auditors and the relationship with companies-particularly who have written the banks’ accounts-the relationship with the regulator and others, and the position of auditors? Is that a live issue for you?
Vernon Soare: Yes, it definitely is a live issue with us, in association with the Financial Reporting Council, which has primary responsibility, for example, for monitoring the auditing of banks. We do not deal with that, but because we have members who work in the audit firms and financial services industries, we do have dialogue with the regulators, and we have issued a number of papers post the banking crisis. An example is where we recommended that dialogue between auditors and the regulatory authorities, which had actually died out for some reason, should be reinstated. We do take a big interest in this. We are very conscious that the audit profession needs to improve and to be continually improving.
Q1788 Lord McFall of Alcluith: Do you have an institutional view on the issue of auditing and consultancy?
Vernon Soare: A lot of those issues have surfaced before.
Q1789 Lord McFall of Alcluith: Yes, but have they been attended to?
Vernon Soare: They have been attended to in the sense that ethical standards for auditors now actually prohibit firms that audit listed entities from providing a vast number of non-audit services to that same audited entity. Those things have come in post Enron.
Q1790 Lord McFall of Alcluith Are you saying that an audit firm that audits a company cannot do consultancy work for that same company?
Vernon Soare: If it is a listed entity, there is prohibition on certain types of so-called non-audit services. That is a very wide net.
Q1791 Lord McFall of Alcluith: I wonder if you could you share with the Commission what the prohibitions are, because it would be interesting for us to know if you are on the front foot.
Vernon Soare: I think there has been a lot of focus on tax planning and aggressive avoidance, for example, which we have been quite clear on in our public pronouncements.
Q1792 Lord McFall of Alcluith I am asking if you could you share as much information on that as you can with us? Exactly what is included and what is excluded, because there is no clear answer to the question?
Vernon Soare: The issue of how you define a non-audit service is quite complex. I have to say, through the Chairman, that I cannot give you an exposition now, but I am happy to provide that exposition to the Commission to help out.
Q1793 Lord McFall of Alcluith: I hope you appreciate the reason for my question. It is because you have been so strong on the concepts of culture and ethics.
Vernon Soare: Yes.
Q1794 Lord McFall of Alcluith On the issue of self-regulation, Mr Townsend, is it the best form of regulation or do you need some form of statutory banking? Given that we are focusing on the banking industry, should we be emphasising the latter rather than the former?
Antony Townsend: I would very much echo what Sir Peter has said. In fact, I previously worked at the General Medical Council and the General Dental Council and all regulators are facing quite similar issues. What we are trying to do as independent regulators of a profession is harness the best of the professional ethics and the professional pride, which in its best sense can be a driver for excellence. However, both for reasons of public confidence and because we have to be effective, we have independent regulation which is not captured by the profession. The majority of my board are actually now lay members, not solicitors. So we have independent regulation to ensure that what we hope are deep-rooted ethics deliver the goods for clients, patients and customers, however one looks at it.
A lot of our effort at the Solicitors Regulation Authority over the past two to three years has been about stripping away the rule book, really getting down to the firm ethical principles, underlining public interest-it is not just about serving your client, there is a broader public interest that solicitors must focus upon-and, increasingly, looking at the organisational dynamics in which professionals operate. Traditional professional regulation has tended to look at individuals simply as if they were either bad or good, whereas many of the problems that we face as a regulator are as much to do with organisational dynamics as individual culpability.
Q1795 Lord McFall of Alcluith We are coming to these issues later, but would you agree that if there is to be an independent body, the concepts of standards, registration, deterrence and qualifications would be at least four components of it?
Antony Townsend: Yes, I would say that the fundamental building blocks of any decent regulatory system are, first, the ethical principles that drive everything, then the gatekeeper role-making sure that key people are competent and their character and suitability are all right. The third element is a proper assessment of risk, so you are putting your regulatory resources on the things that matter. We have spent a lot of time at the SRA getting, I hope, better at identifying risk. The final element is proper deterrence. We have completely overhauled our sanctions. Under the regime previously, the most you could fine a law firm for one transgression was £5,000. That was peanuts. There are now unlimited fines and public reprimands, so you have an effective sanctions regime.
Q1796 Lord McFall of Alcluith Sorry, I missed a question. Given that we are looking at banking, can a professional body function effectively if it does not have some form of regulatory oversight over the institutions in which its professional members work?
Vernon Soare: There has to be a relationship and our example of how the accountancy profession is regulated is a way it could be done. As I mentioned, we are overseen by the Financial Reporting Council as to how we carry out our statutory responsibilities. In that sense, we, as the profession, regulate our members and firms, and, in turn, we are overseen by the Financial Reporting Council, which publishes Secretary of State reports.
Antony Townsend: If I could just add, in the law and probably in most other professions now, we would not see the professional body as the regulator. We would talk about independent regulation that has major professional input. You may also have other institutions, which may vary from medical royal colleges through to various other institutions that are also helping to drive up standards, but we would not see the regulator as being the professional body.
Q1797 Mr Love: May I look more closely at the whole issue of independence and various aspects of it? How do we ensure that this standards body is independent of the profession for which they are the standards body? Perhaps I can start with Sir Peter, because you have touched on Bristol and its the impact. How do we ensure that your body is independent?
Professor Sir Peter Rubin: You’re starting from the assumption that there would be a standards body. We might want to discuss this a little later on, because I think there is a difference between regulating banks and trying to regulate bankers. I think the two are rather different, but perhaps we can dissect that later.
Q1798 Mr Love: Some of us will come onto that, but I want to look specifically at the issue of independence.
Professor Sir Peter Rubin: There are a number of issues about being independent. One is that we are established by Parliament, and accountable through Parliament, so every year I appear before the Select Committee on Health and am held personally accountable for what happens at the GMC. Transparency is incredibly important; we are the most transparent medical regulator in the world. Everything we do is on the website; the hearings and the findings against doctors are on the website, so transparency is hugely important.
We are funded by the medical profession, and you may therefore ask, "Well, how can you possibly be independent?" I think that arrangement makes us more independent than if we were funded by taxation. If you are funded through taxation, you are always at the mercy of the Government of the day, but we are not accountable to the Government of the day and we can say very unpopular things. We are accountable to Parliament. In our experience, particularly having gone through the evolution that we went through post-Bristol, you can be independent and be funded by the medical profession provided you have got the transparency and the independent accountability-in our case, through a Select Committee.
Q1799 Mr Love: I may come back to you but I want to move on to the other two witnesses. Your membership of the council is appointed by the Appointments Commission, which is independent.
Professor Sir Peter Rubin: No, by the Privy Council. The Appointments Commission has been abolished. The Privy Council makes the appointments.
Q1800 Mr Love: Appointments-what is the best way of getting your membership to ensure independence?
Vernon Soare: If we are starting from the assumption that we are talking about a banking standards board and what is the equivalent within the accountancy profession, I would say first of all that yes, it is necessary that those who set the standards are independent from the profession. Let me come on to how you exercise that. The example in the accountancy profession is that the international financial reporting standards and the auditing standards according to which all the large firms and all other auditors work are set independently from the profession. If you go back in history, they were set by the ICAEW but that is about 30 years. There is an independent body that actually set the standards to which our members have to work.
The corollary of that is that we also set our own standards which would not necessarily be in the domain of regulators, but we have a set of our own as well. How you get independence comes down largely to funding. If you can ring-fence or insulate the funding, it comes down to the proper governance arrangements and a strong independent regulatory board.
Q1801 Mr Love: I notice that the Solicitors Regulation Authority has moved to having a majority of lay membership. You touched on that, and that is very specifically a move that you have made in order to reassure the public.
Antony Townsend: That is part of a move across the legal services sector. In terms of independence of regulation, first you need a proper board, appointed independently with a very large proportion-it does not necessarily need to be a majority-of strong lay membership. That is important both for appearances and for really concentrating on the function.
Secondly, to echo my colleague’s point, there needs to be a reasonable assurance of funding. You need to have the funding to undertake your role, and, for the decisions you are making, you must not be accountable to a representative body. In the past there have been professional bodies where, in effect, the regulator reports to an elected council. I do not think that is an acceptable model any longer.
So you need an independent, strong board that is properly financed. Our board, for its regulatory functions, although there is an element of accountability to the Law Society council for legal reasons, is in practice accountable to the Legal Services Board, which is the overarching regulator for the profession. Through that our board is accountable to the Ministry of Justice and Parliament.
Q1802 Mr Love: I know that the GMC has an equal number of lay and medical professionals. Has there been any discussion about whether that is appropriate or whether, to reassure the public, you should move towards the system for solicitors, with a majority lay membership?
Professor Sir Peter Rubin: It was discussed extensively about eight or nine years ago. For a variety of reasons-some political, some pragmatic-we ended up with 50:50. I have chaired the GMC for four years and there has never been a moment when the council has divided on medical and lay lines. They do not agree with each other-when you put a bunch of bright people in a room, they will not agree with each other-but it has never been divided along medical and lay lines.
Q1803 Mr Love: Can I ask how your disciplinary committees are comprised in terms of lay and industry representatives?
Vernon Soare: ICAEW disciplinary committees are chaired by lay persons. Currently, we have a minimum requirement for 25% lay members. In practice, that usually goes up to about a third. As I said in my submission, this year we are undertaking a review of our regulatory governance, partly pressed by the fact that we are applying to become a legal services regulator under the Legal Services Act, and the requirements there are different. The issue of the proportion of lay members will become central to that review.
Q1804 Mr Love: Solicitors have gone through a torrid time, if I may put it that way. Without wishing to get into it, how do you address the disciplinary issues in terms of lay membership? Does the same majority principle apply?
Antony Townsend: It is essentially the same principle. It is a different set-up in that the Solicitors Disciplinary Tribunal is totally separate from the SRA. We have no say in its composition; we are simply the prosecutor before the tribunal. They have a mixture of lay and professional members. I do not have the figures to hand, but I could provide them to the Commission if that would help.
Mr Love: That would be helpful.
Professor Sir Peter Rubin: We have recently undergone a further change in the way that we run our disciplinary procedures. Following the Shipman inquiry, it was pointed out to the GMC by Dame Janet Smith that our previous arrangements, whereby we were the police, the Crown Prosecution Service, the judge, the jury and everything else, was incompatible with Article 6 of the Human Rights Act. Essentially, no one should be a judge in their own cause. So last year we hived off our adjudication processes, by which cases against doctors are heard, to a separate body in a separate building. It is funded by us but, crucially, it is run by a judge. They now run the adjudication process. The final bit of the jigsaw is we are asking Parliament to give us the power to appeal when we do not agree with one of its findings. That would really get the complete separation going.
Q1805 Mr Love: Finally, do you do any work on reassuring your body that it has the confidence and trust of the public? I am interested because, at the end of the day, public trust will determine how well you are acting. Do you measure it in any way?
Antony Townsend: We have done some limited surveys of public recognition of the SRA. We are still a relatively new body. We were set up in 2007. More people have probably heard of the Law Society than of the SRA. It gets rather less publicity than some other tribunals. Occasionally, tribunal hearings get publicity. We have done one bit of baselining and we are going to do some more, because we have a consumer engagement strategy to look at precisely what the public want. Again, I could share that with the Commission if that would be helpful.
Vernon Soare: As for complaints against chartered accountants and firms, we survey the complainant at the end of the process to understand how they thought the process went. They do not necessarily agree with the outcome. It is the process that we ask them about particularly. I reiterate that the very big cases-the ones that hit the headlines regarding the accountancy profession-are not dealt with by us. They go to the Financial Reporting Council. Before that, they went to the joint disciplinary scheme. Since about 1990, we have not dealt with the public interest cases.
On transparency, as with the other bodies, all our professional disciplinary hearings are open to the public, and we publish results on our website and in a magazine, so it is as open as it can be.
Q1806 Mark Garnier: Can I turn to the question of fees and-if you like-a slight conflict of interest with your members? As I understand it, all your running costs are paid for by subscription fees and, in the case of the ICAEW, in part by fines as well when levied. Is that the best way of funding it? Is that the only way that you can fund your organisations?
Professor Sir Peter Rubin: I have chaired an organisation that was funded by the taxpayer and I have chaired an organisation funded entirely by the profession, and I would go for the latter any time because of independence from the Government of the day. Health is very political. The GMC is a high-profile regulator. I have personal experience of a different regulator: the very fact that the Government of the day was providing them with money meant that they had leverage over them that is not necessarily-
Q1807 Lord Lawson of Blaby: Where was that?
Professor Sir Peter Rubin: The Postgraduate Medical Education and Training Board, which is now subsumed within the GMC. It is not necessarily healthy, if you want to have an independent regulator, and I think independence goes to the heart of effective regulation. If you want to be independent, there has to be a way of being independent, yet the money has to come from somewhere.
Vernon Soare: Our regulatory activities are funded by those we regulate. It would be nice if somebody else would want to pay, but there are not many takers for that. In the early days of the expanded Financial Reporting Council, interestingly, the funding was shared a third, a third, a third, between the Government, the profession and business. Due to various circumstances, the Government proportion of that is virtually nil now. It is just a token contribution.
There is always a perception that those who are paying for regulation may in some way be able to influence it. However, if you had sufficient safeguards in terms of governance and oversight-each year the Financial Reporting Council comes in, as does the Insolvency Service, and looks at what we have done in terms of regulating and disciplining our members. I think that they would be quite perceptive if they thought that there was some sort of payback going on for payment of the regulatory fee.
Antony Townsend: I would agree with my two colleagues. The best answer is to have a strong, independent regulatory board levying the profession. The dangerous position-this was the case going back 10 years in the law-is where the regulatory levy is over-influenced by a representative council that is looking to its members and is elected by its members. If you have a strong, independent regulatory board accounting for how it is spending its money, but levying its money in the public interest, that is the best way of getting robust, independent regulation.
Q1808 Mark Garnier: Is it a key point that within your organisations you are also representing the interests of the professional organisation? I completely accept your strict internal measures to try to separate the two things, but ultimately your members will expect you to work on their behalf, and that can include lobbying Government. How do you rationalise that conflict?
Antony Townsend: As far as the SRA is concerned, we do not have members and we do not lobby.
Mark Garnier: You made that point earlier.
Antony Townsend: That is the Law Society’s job. We are part of the same legal entity, but we are absolutely clear that we are a public interest regulator and our job is to protect the public interest.
Q1809 Mark Garnier: So the Law Society could be lobbying quite hard.
Antony Townsend: Absolutely, and they lobby us quite hard, of course, as the regulator. Sometimes, they do not like what we do, and that is healthy and as it should be.
Q1810 Mark Garnier: None the less, the SRA is being financed by members.
Antony Townsend: It is being financed by those we regulate, so it is a levy on our registrants-as the GMC places a levy upon doctors.
Q1811 Mark Garnier: And the ICAEW?
Vernon Soare: The ICAEW is different. As I explained at the beginning, we are a professional body, so we have a representative function, but we also have statutory regulatory obligations under the Companies Act and so on. For us, the danger of the representative side influencing a regulation is uppermost in our mind. It comes down to good, strong governance procedures and the oversight provided by the Financial Reporting Council.
In terms of our relationship with our members, the perception often is that there must be some cosying going on. I remember the first day in my job a few years ago being virtually hair-dryered by a managing partner of one of the firms who took exception to some of our disciplinary action. That is the sort of thing that is not seen in public. That is how we operate currently.
Q1812 Mark Garnier: But how do you lobby Parliament if, on the one hand you are being regulated by the Companies Act but, at the same time, you may want to change the Companies Act?
Vernon Soare: The position for us is that our membership is not uniformly auditors. The minority work for audit firms and the majority work in business, the public sector and the charitable sector. When we are making representations on policy or whatever, we have to cover quite a large base because there will not be a unanimous view within our organisation on particular issues. The classic one for us is the audit threshold. Every time the audit threshold goes up, the firms would say, "This is a bad thing", and our business members would say, "Three cheers". It is not a monolithic organisation in that sense. We have very many different strands to manage ourselves.
Q1813 Mark Garnier: And the GMC?
Professor Sir Peter Rubin: Can I draw a distinction between lobbying, which we do-we have a large public affairs group, some of whose members are sitting in the Public Gallery-and lobbying on behalf of the profession, which we do not do? For example, we feel very strongly that we, the GMC, should have the power to test the English language skills of any doctor coming out of the European Union, which we do not have. We have been shamelessly lobbying Parliament about this for a couple of years. We think that that is our job, and we do it in the public interest. The British Medical Association lobbies for the medical profession, and we are not infrequently in conflict with them and often very publicly in conflict with them. The two are quite different functions.
Q1814 Mr McFadden: Can I ask you about sanctions? You mentioned fines, Mr Townsend. It is generally accepted that bodies like yours are effective only if you have a stick when things go wrong. I want to find out exactly how that works in very basic terms. Talk us through a case where someone reports misconduct or makes a complaint about a solicitor. How might that work? What sanctions are available to you, and how do you deal with a complaint like that?
Antony Townsend: Can I answer that in two bits? I hope that that is helpful. First, to explain what has changed, the position now is of individual consumer complaints where the consumer is looking, in effect, for a resolution. It might be a refund. It might be the work to be done again or even just an apology. Those go to the legal ombudsman who is completely separate from us.
We are effectively looking at evidence that calls into question the licence either of an individual or of a firm. Every month, we receive about 1,000 pieces of information, some of which might be complaints and some of which might be tip-offs from the police. It could be a whole range of things. They are screened to see whether or not, first, there appears to be anything in it and whether it is of sufficient significance so there is actually a kind of risk assessment. It is looked at in the context of other information we have about the individual or the firm, because sometimes an individual bit of evidence may not be sufficient of itself, but it may be suggestive of a pattern if you look at other bits of evidence. Assuming we take it forward, we then have a whole range of options. In some cases, one of our supervisors will simply pick up the phone or go and talk to the firm to investigate whether or not there is a problem. It may simply be a process problem within the firm which can readily be put right.
Let us assume that it goes beyond that: we then have a range of possibilities. One is to issue a letter of advice. We can then go up to a reprimand, which can now be public. In the past they were private. Interestingly, the fact that we were going to make some reprimands public caused an enormous stir, which is indicative of the fact that publication is quite a powerful weapon in the regulatory armoury. If we are going beyond a reprimand we can impose fines ourselves up to £2,000. We sometimes impose what we call regulatory settlement agreements, which is when the firm agrees to publication of a statement and agrees to put certain things right. We have had cases where we have effectively said, "You need to go and refund a group of clients some money." The final sanction is to go to the Solicitors Disciplinary Tribunal, which is reserved for the most serious cases. That is where there is the possibility of a higher fine or an unlimited fine; a reprimand or a striking off could also occur. Increasingly, because we are regulating firms, we can place sanctions on firms, so there is quite a wide range.
Q1815 Mr McFadden: Can you shut down a firm?
Antony Townsend: We can de-recognise a firm. We can shut down a firm for two reasons. First, we can shut them down because we think that clients’ money is at risk. That is called intervention. We do that about once a week. We can effectively march in and take over a firm. If that is not the issue, we can ultimately either place conditions on a firm’s licence or remove a licence. That is quite a new power. We have not as yet de-recognised a firm in those circumstances, but that is now one of the powers available to us.
Q1816 Mr McFadden: Just on scale, and I am going to move on to your two colleagues in a second, you said you received-
Antony Townsend: A thousand bits of information a month.
Q1817 Mr McFadden: How many solicitors a year are struck off?
Antony Townsend: I don’t have the figures in front of me. I think it is between 50 and 100. It is that kind of number. About 200 to 300 go to the tribunal every year. But then, of course, quite a lot of sanctions in the lower category do not get as far as the tribunal.
Q1818 Mr McFadden: Finally, what do you do in the most serious cases where it isn’t just misconduct or really bad service but it looks like criminal activity? When you get to that boundary how do you handle that?
Antony Townsend: We handle that effectively by going to the police. In the most serious cases often, by the nature of the things, one of the things that goes wrong in solicitors’ practices is that money goes missing. If we are getting to criminality we work with the police. We have very close liaison with the police, particularly the City of London police because they are the lead fraud authority. If it is going to be a criminal case, usually the position is that we put in place holding arrangements while the criminal sanctions go forward because they generally take precedence.
Mr McFadden: Mr S-I have forgotten how to pronounce your name.
Vernon Soare: It is "Soare". I could never have become a doctor.
Q1819 Mr McFadden: Mr Soare, could you take us through that in the same way?
Vernon Soare: As far as we are concerned, there are similarities. If you think about it as a hopper principle we receive, prima facie, about 1,500 complaints a year. They can come externally from the public, from clients. They can come from chartered accountants, either self-reporting or under our ethics code, reporting colleagues. We also get disciplinary complaints from our monitoring procedures. We visit our firms on a fairly regular basis, particularly the higher-risk ones. We also have complaints that come in from other regulators. For example, in the financial services area, where a large number of our members work, the Financial Services Authority is the lead regulator. We liaise with them when they have particular issues, whether it is within the banking sector or the auditors of banks, so there are a large number of potential sources.
On the hopper principle, we look at them. We do a first sift. If it looks like a public interest matter it gets referred up to the FRC, because those complaints are completely insulated from the institute to encourage public confidence in the system. Then we go through a process of case investigation and recommendations to an investigation committee. We can give a range of penalties at that stage.
Q1820 Mr McFadden: Can you take us through the penalties?
Vernon Soare: We can give various levels of reprimand. We can give a consent order, which is a fine and an admission of wrongdoing. Those are published. If it is a serious matter, a consent order is probably not appropriate, so it goes through to our full disciplinary committee, a tribunal of which will hear the case in public. The outcome can be unlimited fines with exclusion from membership for a period. We cannot finally exclude because of the Human Rights Act; there is a sense in which we have to set a period after which somebody can come back to us and ask for readmission, and their case will be looked at on its merits.
On the other side of the fence, in terms of licensing, this is where we get to the statutory parts. If we have licensed somebody for audit-in the parlance, a "responsible individual" who is licensed to sign off on company audits-our sanctions go right up to taking away the licence from the individual and de-registering the firm, but there are various conditions we can place on their licence and fines as well. There is quite a range of penalties that we can introduce.
Q1821 Mr McFadden: Your relationship to firms is surely different from the Solicitors Regulation Authority, in the sense that you are dealing with three or four massive firms. Is it realistic to expect you to be able to shut one of them down?
Vernon Soare: In broad terms, we have about 13,000 firms, but, yes, there is a very obvious big four or big six. That is the reason why, for quite a long period now, where there is a fundamental issue with a large firm-one of the big four or the big six-that is taken out of the institute and taken up a level to the FRC, so that the David and Goliath thing is mitigated a little bit. Where it is not a public interest matter, we do discipline the big four and the big six firms, and the episode I referred to a little earlier happened in such circumstances. I think it is good that from time to time we have some stand-offs, because it demonstrates to our firms that we are serious about discharging our statutory role.
Q1822 Mr McFadden: Can you give us an idea, at the more serious end of your sanctions-what I might call your sin bin powers, where you can strike people off for a limited period or withdraw a licence-of how many a year would be in that bracket?
Vernon Soare: I can give you the figures, which appear in the written submission we gave in paragraph 11. Exclusions from membership for individuals will run somewhere at an average of about 20 or 25 a year-that is individuals. In terms of withdrawing audit licences, about 20 licences are withdrawn per year.
Q1823 Mr McFadden: Sir Peter, do you want to take us through how this works?
Professor Sir Peter Rubin: We have a range of powers, which include the power to stop a doctor practising immediately if there is a prima facie case while we are waiting for the case to be heard. Then we have got powers to give letters of advice, letters of warning, conditions on practice and either to suspend from the medical register or to erase from the register. As you have heard, under the Human Rights Act there has always got to be the right of appeal at some point down the line. Every year, just under 100 doctors would be erased from the register, but a good deal more than that-the numbers are in the submission-would have conditions put on their practice or have letters of warning. All those sanctions, down to and including letters of warning, are on our website. They are public. Anybody can get into our register and see whether a doctor has had a letter of warning and why they had that letter of warning, or see whether they have been erased from the register. When we do that, we also let every medical regulator in the world know, on a monthly basis, that we have taken action against that doctor.
Q1824 Lord Lawson of Blaby: I would like to focus my question chiefly on Mr Soare, because the accountancy profession is closer to banking than either doctors or solicitors are, even though bankers obviously need both doctors and solicitors; I do not deny that for a moment. If any of the others want to chip in, please feel free to do so.
I would like to start with the question of the dual responsibility for standards. Lord McFall referred incidentally to the report by the House of Lords Economic Affairs Committee on the big four accountancy firms, which no doubt you will have read. That report found-I do not think that there can be any question about this-that although the accountancy firms may have served the banks that paid their fees, they certainly did not serve the public interest. However, that was due not to a lack of ethical standards but a mixture of incompetence and complacency. I would like you to try to tell us how that may have arisen.
You have suggested that you are not alone in this; there is also the Financial Reporting Council, which-I know this will shock Sir Peter-is funded by the taxpayer. It seems that it might be possible that things fall in the gap between the two stools. It is not here to defend itself, but the Financial Reporting Council may have thought that it was up to your institute to discipline your members when they require discipline. You may have felt that it was really a matter for the Financial Reporting Council.
It seems that there is a problem here when we are looking at banking: what are we looking at? On the one hand, there is the suggestion that some professional body should be responsible, which is what we are exploring, but the Bank of England is also responsible. How do you solve the problem of shared responsibility, in which each leaves it to the other to do the dirty work? Do you have a system whereby, for example, it is accepted that in your case you have a duty to report to the Financial Reporting Council anything that you find amiss, and it takes appropriate action, or do you pursue an independent path, or what?
Vernon Soare: I will try to be succinct. The way it works is that when complaints come to us, where there is, in our view, a potential public interest matter, we take that to our investigation committee, which is chaired by a lay person-probably about 30% of the members are lay-with the recommendation that it goes up to the Financial Reporting Council. The Financial Reporting Council has an override written into its modus operandi, in that if we fail to report something that it estimates to be a public interest matter, it can call that in. As you would hope, we have some quite close dialogue with the Financial Reporting Council. Particularly with issues that come into the media and are of great concern, we are always talking to them, asking, "Is this a public interest matter? Are you going to do the investigation?" I think I can say pretty categorically that we have not had the type of falling between two stools for which there is potential.
In the banking sector-we have commented on this-in your Committee, and long before that, you have advocated dialogue between regulators and the professional body and the firms.
Lord Lawson of Blaby: I wrote it into the 1987 Act, yes.
Vernon Soare: That lapsed, for various reasons, but it has now been reinstated. My view is that, in the end, it all actually comes down to structured dialogue between those who hold the regulatory responsibility.
Q1825 Lord Lawson of Blaby: May I ask a very practical question? Sanctions are particularly important. They are important everywhere, but I suppose that they are particularly important in the case of banking, because as we have seen with, for example, the LIBOR scandal, the financial incentive for wrongdoing is of a greater order of magnitude in the case of bankers than it is in the other professions-the professions that you all represent. There are incentives for wrongdoing, always, but nothing like those in banking. How are we going to deal with this? Can you tell us what sanctions, in the past five years, you have imposed on-and made publicly known-any of the big four accountancy firms, their partners or their senior employees?
Vernon Soare: On any type of matter, or matters related to banking or financial services?
Q1826 Lord Lawson of Blaby: Matters relating to wrongful behaviour.
Vernon Soare: I cannot give you a figure, but we have done it, though it is not in the public interest entity sphere. We have done it, but I have not got the figures to hand. We do publish regulatory action against big four firms.
Q1827 Lord Lawson of Blaby: And against individuals?
Vernon Soare: And against individuals, yes.
Q1828 Lord Lawson of Blaby: Subject to the Chairman’s views, could you let us have a note on those sanctions that you have imposed in the past five years on big four accountancy firms or senior individuals, whether they are partners in those firms or not? Could you let us have that information?
Vernon Soare: Yes, I can let you have that. With your leave, I did say that where we get into the banking sector, of course, the fining and the penalties are down to other bodies. I can give one example that is on public record, so it is not a confidential matter. In the case of JP Morgan failing to separate out client assets, the bank was fined I think about £30 million, based on the fining regime of the FSA. The auditors took a fine, plus costs awarded by the Financial Reporting Council of around £2 million.
Q1829 Lord Lawson of Blaby: Against the firm?
Vernon Soare: Against the firm, yes.
Q1830 Lord Lawson of Blaby: I am particularly interested in sanctions against individuals, because it may well be that those are more effective than sanctions against firms; unless those firms are partnerships, which very few banks are these days, the shareholders bear the burden, not the people who are culpable.
Vernon Soare: Individuals are fined, both by the Financial Reporting Council and ourselves, but we will provide the note.
Q1831 Lord Lawson of Blaby: Could you please? Thank you. Do you wish to add anything at all?
Antony Townsend: Just a brief point. One of the new features in our regime-some of the law firms we are dealing with are pretty big, but they are nothing on the scale of banks-is that it explicitly gives us the option to deal with the entity, individuals, or both. I think that is precisely to deal with the kind of issues behind your question.
Q1832 The Lord Bishop of Durham: Sir Peter, some minutes ago you distinguished between regulating individuals and entities. I wonder if you would like to expand on that a bit.
Professor Sir Peter Rubin: I gave this some thought when I knew I was going to appear before you. I tried to draw analogies between regulating doctors and regulating bankers-individual people. I can see the superficial attraction, obviously, but when you get into the detail it gets a bit more challenging.
First of all, what is a banker? Is the chief economist at an investment bank a banker or not? Defining a banker is the first step. We know what a doctor is. A doctor is somebody who has attended a medical school that we regulate, has passed exams that we regulate and goes on to our register. That is one issue.
The second issue flows from what I have just said. We as the regulator have an enormous influence on a doctor from their very first day as a medical student. They go into a medical school that we have approved; they do a course that we have determined-we determine the content and outcome of their course-and they take exams that we regulate. At every stage of the game we influence what they learn and how they learn it. We have an impact not just on their knowledge and skills but on the behaviours and attitudes that they acquire during their education and training. By the time they get to an independent position we, as the regulator, have already had an enormous influence on them.
As for banking, you can come into banking from a different career, at different ages, without any of that prior influence. It begins to get challenging to see how a regulator would have the necessary formative positive influence.
On the other hand, there are, of course, many things that you would want to have in common between a banker and a doctor or solicitor, or whoever, and personal accountability has to be one of them. If you get into regulating individuals, personal accountability has to go to the heart of what you are looking for, because it seems to me that one of the issues around the banking crises is that individuals, driven by the prospect of significant financial reward, were taking enormous risks with somebody else’s money, knowing that they would not be personally accountable at the end of the day. That is a challenge that has to be engaged with if you get into regulating individuals. The superficial reaction of saying "Let’s have a GMC for bankers" gets a bit more complex when you get into the detail, I think.
Q1833 The Lord Bishop of Durham: It would be fair to say, would it not, that, historically, it took you some time, if not several centuries, to work out exactly what a doctor was?
Professor Sir Peter Rubin: Oh yes, and one of the reasons why the GMC was established in 1858 was to try to determine what a doctor was, because so many people were saying they were doctors who were not, and so many organisations, including the Archbishop of Canterbury, had the right to give a medical degree-and you will have that right, in fact; you will have the right to give a Lambeth medical degree. I bet you didn’t know that.
The Lord Bishop of Durham: I may well exercise it.
Professor Sir Peter Rubin: The GMC was established to help define what a doctor was. A doctor was defined through the education and training that they went through.
Q1834 The Lord Bishop of Durham: Is there, in your opinion, any reason why the accumulated wisdom of your several centuries-skipping the Archbishop of Canterbury for the moment-should not be used to apply to bankers in some way?
Professor Sir Peter Rubin: The accumulated wisdom would be that having an impact on the evolution of the end product, through education and training, is an enormously important aspect of our ability to regulate the profession. That does not mean you cannot do it, but it is much more challenging to do it when people are coming in at different ages and different stages, with different backgrounds.
Q1835 The Lord Bishop of Durham: Is it correct to say that the GMC does not regulate entities?
Professor Sir Peter Rubin: We regulate doctors. We regulate individuals.
Q1836 The Lord Bishop of Durham: Yet would it not also be fair to say that in certain, fairly well-known, scandals-you have mentioned Bristol, but Stafford might be another one-the culture of an entity can have a very significant impact on the performance of an individual?
Professor Sir Peter Rubin: It is hugely important. If the culture of the organisation is wrong, then a lot of things will go wrong within that organisation, and the individuals will start behaving in a way they may not have done, had the culture been right.
Q1837 The Lord Bishop of Durham: How much does the GMC take that into account?
Professor Sir Peter Rubin: We take it into account increasingly, through a process we have just introduced called revalidation, whereby-better late than never-every doctor has to show, every five years, that they are up to date and fit to practise. That is being attested to by what we are calling a responsible officer, who is the medical director of the organisation. The one requirement that we are putting on that person is that they are on our register, so we are able to hold to account the doctor who is confirming to us that all the doctors in their organisation are up to date and fit to practise. That is quite a powerful tool.
Q1838 The Lord Bishop of Durham: It is a very powerful tool. Moving on to the issue of codes of conduct, and perhaps to Mr Soare, someone has talked about the "three Ps" approach to codes of conduct: you print a code of conduct, you post it on the wall and you pray that somebody reads it. Would it not be fair to say that that is how it works with accountants?
Vernon Soare: I think it would be quite unfair to describe it in that way. We have a code of ethics, and we regulate the individual, and the firm as well, on that basis. The code of ethics is a published code that forms part of our disciplinary regulations. For example, on competence and due care, the ethical code says that you should not do work as a chartered accountant that you are not capable of and trained to do, and when you do work you should do it diligently and not keep your client waiting, as it were. Those are examples where the ethics code feeds into our disciplinary practice.
How we police it, which I think is a different P, is that we have a monitoring system, so that all of our 12,000-plus firms are visited on a cycle of a maximum of six years-many firms are visited more frequently than that-and we will do a sample check of files and work. For our members who are not in practice, but working in commerce, industry and the public sector, the other way that we police this is through our continuing professional development scheme, so that members have to undertake continuous training, relevant to the role that they are in, and we will review a sample of that work. Members are required to make an annual declaration that they have done sufficient and targeted continuing professional development. Not to do it, or to declare that falsely, is a disciplinary matter. That is the way, in a sense, that we try to carry it out.
Q1839 The Lord Bishop of Durham: You have your code of ethics, and you monitor it through the ways you describe, which is very helpful. The trouble with codes of ethics is that they get left behind by changes such as the development in banking of new financial instruments which required complex and different approaches to valuation by accountants, as we have learned from Deutsche Bank in recent weeks. In a rapidly changing profession, how do you avoid your standards chasing the scandals, rather than preventing them?
Vernon Soare: I understand. The attempt to do it-of course, nothing is perfect here-involves the fact that the code of ethics is principles-based, and it is quite a large document; we are not talking about just a few paragraphs. For example, if our members working in the banking sector were getting into developing very advanced products, the ethical code would say that you must have the competence to design those products, and that they must be designed not just to make money for the bank, but with a public interest issue at their heart.
We are not, in a sense, rules-based. Generally, the United States is an example of lots of rules, and they are always behind. As a principles-based professional, you have to make a judgment as to how you apply that ethical principle in the area in which you are working. Of course, chartered accountants work in many different spheres, including Parliament.
Q1840 The Lord Bishop of Durham: I think, from some work that we were doing earlier today, that there are further questions to ask, but there is not time at the moment. Mr Townsend, this is the last question from me: you operate a system where you have a vast range of different sorts of firms, from the major City firms with hundreds of partners and operations in numerous countries, through to small practices with perhaps one or two partners. How realistic is it to create and administer a tiered system of professional standards linked to roles, seniority and responsibility?
Antony Townsend: We have been trying to tackle this issue in several ways. There is a very strong drive to keep a single set of ethical principles that apply right across legal services as almost the conscience and driver of the profession. When we radically slimmed down our code of conduct to make it much more principles-based and focused on outcomes for clients in the public interest, it was surprisingly easy, actually, to produce those outcomes that worked across that very wide swathe of the profession, from the sole practitioner on the high street right through to Clifford Chance or one of the other "magic circle" firms. Where the differential occurs, I think, is really in governance.
We are tackling a very different kind of legal services sector now. This picks up some of Lord Lawson’s points in a strange way; we have liberalisation of the sector, and now we have owners and managers of law firms who are not solicitors; they have not been though the cradle-to-grave kind of education for doctors that Sir Peter was explaining, which applies also to solicitors. We have been attempting to evolve a system where the ethical drivers apply right across this very wide range of not only types of firm, but owners and managers. In order to try to effect that, as of 1 January this year we have required every firm to have a compliance officer for legal practice and a compliance officer for finance and administration who is not the solely responsible person, but the focal point for making sure that the ethical principles and outcomes are actually delivered. We have just put that in place, but that is our attempt to answer that question in a very diverse sector.
Q1841 Baroness Kramer: Let me go back a moment to a fairly direct question. You talked of sanctions that play a significant role in providing discipline within the sectors. What evidence would you say you have that those sanctions have changed behaviour? Are some more successful than others?
Antony Townsend: One of the most important things in changing or putting in place a regulatory system is trying to identify what the drivers are that aid compliance with principles. In 2011, we published a little bit of research; we have been to those we regulate to say, "Why are you doing various things? What difference do we make?" Within the next month, we will do a follow-up 12 months later, partly to see whether our outcomes-focused approach is beginning to percolate through the profession.
The evidence we have is that those we regulate do look at sanctions. As in many areas of life, I think there is almost a prurient interest in looking at what has gone wrong. The risk of public identification and, of course, ultimately, loss of livelihood, is a very powerful sanction. There is an element of regulation being an act of faith, but the research we have-I am happy to share it with the Committee-suggests that those we are regulating see the existence of the sanctions regime as an important part of being in a regulated profession, almost driving professional pride.
Q1842 Baroness Kramer: What you are describing is almost the extreme end of sanctions that have that kind of impact-being struck off, losing your livelihood, or being shamed in a public way that you are aware of. Would that be true in the other areas? Do we have to look at sanctions on that scale?
Professor Sir Peter Rubin: I am not convinced that it is. This goes back to the point I was making earlier about having an influence on the end product from a very early stage. That includes selection into medical school. A certain type of person wants to go to medical school to be a doctor. Most doctors in this country are really good, not because they are afraid of the GMC coming down on them like a tonne of bricks, but because they are really good. Their professional pride drives them to be really good.
The GMC’s influence is more in terms of positive engagement, and our standards and ethics, which are inculcated into students at medical school and beyond. That is the positive aspect of what we do. Obviously, we have draconian powers if we need to use them, but I genuinely do not think that it is the fear of being struck off that makes most doctors good. They are good because they want to be good; they are driven to be good.
Q1843 Baroness Kramer: Perhaps you could comment on that, Mr Soare, because you are more like bankers, in that revenue generation is the test of how good you are within a large swathe of that industry, and that would be true within your profession as well. Does that change the parameters?
Vernon Soare: I would probably like to concur with Sir Peter on this. Sanctions are kind of the end process, but we hope that not many of our members get there, in that training, both in an academic sense and in terms of supervised training in a firm or a large corporation, inculcates into them an ethical, professional way of working. I think the vast majority of our members would have the same kind of motivation.
Sanctions are there-because the accountancy profession employs from the common run of humanity, in one sense-for the relatively small number who need them. That proportion is very small, and we do not see individual members coming back time and again with the same issue. If they do it two or three times, the sanction is to deprive them of their membership. I would say that sanctions are not designed to be a deterrent in themselves, but to deal with a very small minority who, for whatever reason, do not carry through their training and ethics into practice.
Antony Townsend: Could I add one point because I answered your question on the effectiveness of sanctions quite narrowly? I completely agree with what my colleagues have said, which is that for the vast majority of solicitors-and the research that I referred to bears this out-the driver is professional pride; it is wanting to do a good job. They accept that part of that package is making sure that everyone else in the profession is motivated in the same way and that where there are people who are not doing it, there is a system for dealing with it.
Q1844 Baroness Kramer: I think that we all accept that most people in any profession have good intentions and integrity, but it is detecting when it goes wrong. You have talked of an audit system as a mechanism in some cases, and individual training in another. Who do you ultimately see as primarily responsible for professional standards? Is it you as the body? Is it the employer, the employee or the client who should follow "caveat emptor"? Where does the primary responsibility lie?
Professor Sir Peter Rubin: May I have a go at answering that from our standpoint, but what I say may be generally applicable? At the end of the day, the GMC, the regulator, is the ultimate custodian of professional standards, but we take a four-layered approach to regulation, beginning with the individual doctor, the individual professional, who is driven by professional pride. Then there is the team within which that doctor works, and this is hugely important. This is where professional self-regulation is very powerful; this is where the checks and balances and the role models are. Then there is the organisation within which that team works. That is where the culture and the leadership come in. Finally, there is the regulator, the GMC. It is the individual, the team and the organisation that are the primary drivers to ensure maintenance of professional standards.
Q1845 Baroness Kramer: May I press you on that? In some of the evidence that we have taken, particularly at panel level, it is very evident within the banking system that everyone is responsible so no one is responsible. How do you avoid that particular set of issues?
Professor Sir Peter Rubin: We are getting to the heart of whether you regulate bankers-or banks as it is here. What was it that stopped an individual saying, "Actually this is wrong. I should not be doing this"? Not enough people stopped and thought that. Too many thought, "I can get away with this." I do not know enough about this to know whether it was the culture in too many firms or whether there was not the fear that it could be a career-ending experience, as doctors have if they go beyond the pale. But there was something that did not stop these people from taking the risks that they did and knowing they would not be personally accountable.
Vernon Soare: May I just attempt an answer on this one? If we think about the banking industry-my own view is that there is not in one sense a banking profession. We can go back to the definition that Lord Benson gave in the debate in the House of Lords in 1992. Lord Benson was one of our past presidents who quite succinctly gave several characteristics of a profession. I do not think at the moment that you can look at the banking industry and say that it is a profession. The interesting thing from our point of view as chartered accountants is that the answer to your question about who drives professional standards is that we actually do. When we have one of our members working in a firm or an entity, what we are attempting to do is instil in them a kind of ethical stance that will sometimes mean that they have to cut across or be at odds with their employer-and that does happen.
I do not think that we currently see that sort of influence within the banking industry. It does not always work, and we are not saying that it is foolproof, but an individual who is a member of our institute has a loyalty that they owe to their employer. Sometimes the ethics will say that they have to override it and we get into the realms of whistleblowing and so on. That would be my view on that particular question.
Q1846 Chair: Can I just come back to a point that was made earlier where you were all saying that the most powerful sanction that you have is to withdraw the opportunity to practise, which is very much a last resort? Are there cases in your profession, Sir Peter, where people have tried to set up and practise in other jurisdictions?
Professor Sir Peter Rubin: Oh, yes. One of our beefs with the European Union is that we can strike a doctor off the register, but there was the highly publicised case in the public domain of Dr Ubani, who flew in one weekend, killed a patient here and flew back to Germany again. We struck him off the register in the UK, and he is still practising in Germany. As I said, we tell every medical regulator in the world when we have taken action against a doctor’s registration, but it is up to them what they do with that information. Sadly, too many of them do nothing with that information.
Q1847 Chair: This could turn out to be true in banking, couldn’t it?
Professor Sir Peter Rubin: To be honest, when I was musing earlier on the difference between bankers and doctors, I was thinking about what I would do if I wanted to get round the regulation. Well, I would move my banker somewhere else, wouldn’t I? I would move my banker to a different jurisdiction, where the regulation is not as strict as it is in the UK.
Q1848 Chair: Or he would move somewhere else.
Professor Sir Peter Rubin: Yes.
Q1849 Lord Turnbull: It would be very interesting to pursue with you the various rogue problems that you have, but we now have to try to draw some lessons as to what is translatable from your experience into banking, which is largely a void at the moment.
One thing strikes me. Am I right in saying that there are three slightly different models, but that they have something in common? The GMC has a complete separation between the representative body and the regulatory body. The SRA is a subset of the Law Society, but has been set up in a way which makes it pretty independent. The ICAEW is one body-less separated, it seems to me-but you have this practice of handling the really big cases. Is that a reasonable summary of the differences?
Antony Townsend: Yes.
Vernon Soare: Yes.
Q1850 Lord Turnbull: One thing, if you are looking for lessons, is that we have two bodies-we have the Chartered Banker Institute, which is a representative body of bankers, and we have the BBA, which is a representative body of banks. It seems to me that neither of these provides a foundation on which we could build this new edifice, so we have to start somewhere else.
Professor Sir Peter Rubin: My personal view is that representation and regulation do not sit easily together. I think that the two have to be separate, and the regulator has to be very clearly acting in the public interest. I would, however, also say-in case there is not another opportunity to say this-that if you are minded to recommend some change in the regulatory framework, you have to be clear why you are doing it. Clearly, if there is a change in regulation, it has to be for the public interest, for the public good.
Going back to what I said earlier about most doctors being really, really good, you have to be sure that whatever regulatory framework you might be minded to recommend does not stop bankers being really, really good when they are really, really good. The worst thing that we could do, for example, as a medical regulator is to stop doctors taking reasonable risks if that is the best chance the patient has. Bankers clearly have to take risks, don’t they? They have to take risks, and it is defining the boundaries of those risks which will be the challenge. Regulation has to be separate from representation, but you have to be clear what you are regulating for.
Q1851 Lord Turnbull: If you are looking for another difference, it is that all of you have the power to stop people practising. In the case of the GMC, one very powerful thing is that they cannot even start without you. In the case of solicitors, you can go and give advice on the law-you do not have to be a solicitor to do it-but are there some transactions that you can only do if you are a solicitor?
Antony Townsend: There are reserved legal activities. Anyone can give legal advice, so long as they do not hold themselves out to be a solicitor. Indeed, one of the complications of, if you like, modern practice is that lots of legal services, even within the firms that we are regulating, are being delivered by non-solicitors. In fact, we are not simply regulating a profession; we are regulating services which are being delivered by a mixture of people who are recognisably our professional community, but also other employees of the organisation.
Q1852 Lord Turnbull: In the case of banking, we are miles from this because, far from its being a profession that you start in at the beginning of your career and then maintain your professional credentials, you can join it at any time. You could start somewhere else and become a banker or work for a bank. Do you think that we can make that leap to regulating who practises as a banker?
Antony Townsend: In the field of banking, you have to start from a slightly different point. You might want to create a profession, but there is an issue to do with certain ethical and public interest standards and the organisations that deliver them, which, if you share the analysis, have to be regulated in some way. That may need to be put in place while you are putting in place longer-term professional regulation as well, if you think that is both desirable and possible.
Q1853 Lord Turnbull: There is a different approach, which is to say that a bank cannot employ a person who does not subscribe to certain principles. For example, a clause was tabled for the Financial Services Bill requiring people working in financial services to serve the best interests of their customers or have a duty of care. Shamefully, it was voted down by both Houses. That would be another approach, would it not?
Antony Townsend: Our code of conduct now explicitly applies to all people delivering legal services in organisations we regulate, and that includes non-solicitors. The duty to uphold the public interest goes wider than simply the solicitors whom we recognise as solicitors.
Q1854 Lord Turnbull: In each of your organisations, you have a process when a complaint is made. I think you, Sir Peter, indicated a quite clear separation between the people who investigate the case, the people who decide whether to prosecute it and the person or forum in which it is heard. Is it true of all three of you that that three-part separation is made?
Vernon Soare: Yes.
Antony Townsend: It is, although there is a certain degree of overlap. We undertake quite a lot of thematic inspections, so we are looking, for example, at particularly vulnerable clients and how they are treated by law firms. If we come across certain kinds of activity during those investigations, it does not necessarily go all the way through the sanctions regime and it may be that a relatively mild sanction is put in place without going through every stage.
Q1855 Lord Turnbull: But, as the accountant, do you have that three-part separation?
Vernon Soare: We do, and I wonder, Chairman, whether I can answer briefly the issue you raised about the application to the banking sector? The common thing we share across the professions is that some of the activities-in the case of doctors, I think it is virtually all, but some in the case of chartered accountants-our members carry out are reserved by statute, and we have a very powerful way of regulating as a result. Much of what is done in the financial sectors-for example, tax-are not regulated service activities. Anybody can set themselves up as a tax consultant; you do not need any training at all. Our members do it in a regulated environment that we impose on them, but there are many other people working in that sphere who are not overseen by anyone. The issue when you translate it into the banking sector is, is it advisable or helpful to think about reserving by statute some activities that individuals-
Q1856 Lord Turnbull: Some activities, such as deposit taking and lending, are regulated, but the people who the banks employ to do it are pretty much completely unregulated until you get to the approved persons regime at the top.
Vernon Soare: Yes, and the issue there is, would you want to extend that reservation down to the individual and licence them. Then the sanction is to take away the licence, so they cannot do that particular function. That is quite a big issue. As I say, only a certain amount of what chartered accountants do is reserved, much of it is not.
Q1857 Lord Turnbull: You can’t take away from someone something that they never required permission to do in the first place.
Vernon Soare: Indeed. You are left saying, when you look at what a banking profession would look like, it would start with a much broader base qualification. Currently a lot of the qualifications are very specialist. You start there.
Q1858 Lord Turnbull: Can I ask each of you something? We will get proposals and scrutinise them with a pretty sceptical eye. What are the real questions we should be asking? Sir Peter.
Professor Sir Peter Rubin: I think the question is, what would it be that would have prevented bankers from behaving in the way that they did, leading to the well-publicised crisis? What would it be that would be harmful if you were to introduce it? Those are two different things. The more I have thought about trying to regulate individual bankers, I have become concerned about the unintended consequences that could stop those people who are doing their job really well continuing to do so. There could be an imposition of rules that have the best of intentions but which actually inhibit people from doing their job as effectively as they can.
Lord Turnbull: People go into shadow banking or overseas banking.
Professor Sir Peter Rubin: Yes, but equally, something went seriously wrong and people felt that they could behave in a way that has been shown to be completely unacceptable.
Vernon Soare: On a similar line, given that much of what is carried out in the banking industry at the moment is what I would characterise as top-down regulation, the question that I would ask of representatives of the banking industry is, why would it not be possible to develop a banking profession that has the hallmarks listed by Lord Benson and that promotes a very strong-I use the word self-regulatory in this context-internal driver within both the individuals who are working in the banking sector and the banks that they work for? Why should there not be an equivalent type of profession which, from a bottom-up process and top-down regulation, could actually make sure that people are working in a sense self-driven by the right motivation?
Antony Townsend: To repeat what I have said before-and I agree with both those analyses-it has got to address not only the individuals, which is quite a long-term process, for the reasons that Peter has given, but also the organisational culture. You also have to find hooks on which you can hang regulation. Across all the three professions that we are regulating, the regulatory regime has been built up by finding hooks and new ways of dealing with it. Our compliance officer regime is a new way of trying to deal with some of these organisational issues. So it cannot simply be a question of, do you create a profession? It has got to be a question of, what is the mischief that you are trying to deal with and what are the various tools that might address it? This is likely to be an incremental process.
Q1859 John Thurso: May I, to a certain extent, go over some of the same ground? If you read back through all the evidence that we have had, particularly the early evidence, the analysis of the problem is lack of culture or the wrong culture. From the banks themselves through everyone else, the early evidence is all about that what needs to happen is to have a professional culture. I do not mean to ask you a question about that because I think that is agreed.
The second point is that banks and banking are hugely regulated, and we are adding to that as fast as our little legs can carry us. We have lots of institutions now-the Bank of England and everyone-involved, so there is a massive amount of regulation. In the chartered accountants’ first submission to us, I think, you make that point, that there is too much regulation and that we should get away from it and back more to principles. It seems to me that it is not about doing the regulation that you do, which is to regulate your profession, it is about finding some way of inculcating the good professional culture in the people who work in banking, rather than about regulating banking itself. Really the question is, what do we want out of this particular institute that we want to design? It is, what and who? May I start with the who? Perhaps I will start with you, Vernon, because it goes back to many of the comments you were making-you, for example, have chartered accountants who are finance directors of companies, working all over. You would expect them to operate to your professional standards. Who in a bank has a specific professional conduct role that requires that kind of professional standard and that should be regulated, because it cannot be everybody?
Vernon Soare: I am not completely on top of the detail on this. I know that there is the "approved persons" concept, but I think that can be quite wide. Outside of the "approved persons", I am not entirely clear as to where the statutory responsibilities actually lie in terms of management-
Q1860 John Thurso: I am asking you a different question. Take my professional body, the Institute of Hospitality, of which I am a fellow and very proud. Nobody is suggesting that hotel managers get booted out if they give you a bad meal, or whatever. However, we have professional training and continuous professional development; we are proud of our qualifications and we would be deeply upset if we were ever chucked out; and generally the better companies look to hire the people with those qualification.
However, those qualifications are for managers at quite a senior level. You would not expect the operational practitioners to do those exams and those qualifications until they were rising into management. So my question is this: we cannot possibly be asking retail banking staff to be on the same qualification as the manager or regional manager who is running them, so to get this effective, we have to decide who we targeting it at, but who are we targeting this professional conduct regulation-or whatever it is-at?
Vernon Soare: I would say that it is those who are accountable to, for example, the board, but I would go down probably a couple of layers beneath that. Obviously, where you draw the line between staff who are mainly operational and who do not have any involvement in the strategy of the organisation or anything of that sort is an issue. But it is quite difficult to say, not knowing the banking sector intimately. However, something similar happens in accountancy practices. You will not have everybody in an accountancy practice qualified as a chartered accountant; there will be a level below which a different sort of training is accepted.
Q1861 John Thurso: I have a follow-up question. Many solicitors are company secretaries, and both of you-Mr Townsend and Mr Soare-would not want your practitioners in your particular profession who happened to be working in banks to have a new qualification required of them in banking that would supersede, or seem to supersede, the qualification that you think is more important. Again, what is it from your point of view that you think the banks need to deal with that is not dealt with by others?
Antony Townsend: I think it goes to the governance of the organisation. We have a similar sort of situation actually in solicitors’ firms, where you might have a solicitor’s firm with one solicitor and a very large number of paralegals who might not be qualified at all, and the issue is at what point does that cease to be a professional firm? There is not a pat answer, but we sometimes challenge firms and actually say, "You have not got a structure in place where you can safeguard standards and the professional values."
In addressing your question about a bank, the question to the people at the top-the board or whoever it is-would be how can you be assured that the agreed principles, which I assume have been defined, are being adequately delivered throughout your organisation? You might want to turn that question on to the organisation to answer rather than trying to answer it yourself. How can you be assured that there are enough people signed up to those values?
Q1862 John Thurso: For example, one of the things about banks is that-as we have seen, repeatedly-a trader can lose billions in a very short time, and some of them have even managed to do it completely within the actual operating rules of the bank that they were working for. That is not something that can be done in many other areas.
However, whether or not that trader is the person who should have a qualification, and whether the qualification that trader should have is the same as the qualification of the manager whose job it was to stop that type of loss from happening, it seems to me that that is where we have a difficulty in what we will ultimately have to recommend. If we just say that anybody who is in banking must have a qualification, we will end up with a very weak qualification and a fuzzy code of ethics on the "pin up and pray" model; we would not have made any progress. We need to be able to drill into what we can say so that we can recommend to the FSA, or whoever, "These are the people you must target, and these are the things you must get them to do."
I put my question to all of you: who and what should we be concentrating on?
Professor Sir Peter Rubin: I wonder whether I can have a stab at this from the stand-point of personal accountability. A lot of this, whether or not there are new qualifications and a banking profession, is personal accountability. It seems to me that a lack of personal accountability went to the heart of many of the problems. Those young people knew they could get away with it and profit very significantly in the process. A framework where personal accountability is much more clearly defined and where such rewards as there are, which could still be substantial, are deferred until it is clear whether a deal is good or bad may be a more pragmatic and readily achievable approach than creating a whole new banking profession, particularly if we try to do that in isolation from the rest of the world.
Q1863 John Thurso: In your second submission to us, I think you said that we need to get away from and scrap the current bodies in banking and look at something quite different. I may be traducing what you said, but broadly it was, "It must go much further than what is on offer."
Vernon Soare: Yes. It comes back to the issue of having a broader-based banking exam than currently. I will attempt this from the point of view of competencies. If you think about the training of a chartered accountant, it gives that chartered accountant various competencies in a general sense. If that chartered accountant wants to become a statutory auditor or an insolvency practitioner, or if they want to give independent financial advice, he or she has to choose to do further competence-based qualifications. Perhaps one way of approaching this would be to say that, if competencies are defined for particular roles at particular levels in a bank, people may come into the bank with a chartered accountancy qualification: "On a competence basis, maybe you have covered 80% of what that particular role will require, but you would be required, in a sense, to do something additional where your training or experience have not covered that extra piece." That happens with chartered accountants now, so maybe if you approach it on that basis you could get over this issue of people who are already professionally qualified having to go right back to the beginning.
Q1864 John Thurso: Professional bodies, as you have all pointed out, are much more about training and support; the sanction at the end is there because it has to be, but it is not the important bit. Should we concentrate on looking to have an institute of banking, or whatever it might be, with a solid grounding in training, a meaningful qualification at the right level, whatever that level might be, and continuous professional development, which would allow the regulator to say, "Your firm must have people with those qualifications at that level"? Is that a basic approach we should take?
Antony Townsend: That is one approach. The question is whether you combine those two functions, because you could combine those two functions. My view is that it would be a fool’s errand to go too far in asking how many people are needed with a particular qualification in a particular organisation. We are already in a position of being a long-established profession with the possibility of an alternative business structure that has only one solicitor and lots of other people. There is a need to define certain competencies. There is a very clear need to define the outcomes and principles you want to abide by, but the question of how many you need at a particular level in any organisation almost needs to be looked at on a case-by-case basis. That is about assuring yourself that the risk is not too great.
Q1865 John Thurso: Could each of you, in one simple phrase, tell me the key thing I should be doing or persuading the Commission to do?
Vernon Soare: I would say education, ethics and monitoring. Those are the things that I would pick out.
Professor Sir Peter Rubin: I would say to be cautious about any action that might prevent the best bankers from doing their job properly.
Antony Townsend: I would echo both those points, and I would say to be absolutely clear about what outcomes you are looking for in terms of the fundamental principles. You can have fundamental principles for the delivery of a service, which can be established and then rolled out through a profession. You don’t have to wait.
John Thurso: Thank you.
Chair: We have picked up some suggestions this afternoon, but we have also elucidated just how complex it will be to make a success of anything in the standards field. We will carry on working on it. We are very grateful to you for coming along to give evidence. If you have further thoughts over the next few weeks, please put them on paper and get them to us. Thank you very much.