Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 663 - 679)




  663. Good afternoon, Mr Davies and Mr Thorpe. It is good of you to give us such a comprehensive paper and also the time when we know how busy you are. We have been similarly engaged. We were voting at 10.30 last night on the Bill that we are handling. I would like to go straight into questions, if that is all right with you, talk about change in the first instance and ask you to give us an insight into how you feel e-commerce will bring about radical changes to the financial services industry and the consequences of that?

  (Mr Davies) I think the simple point, in answer to your question, is yes, it will bring about radical change. I think over the last 12 months we have seen an accelerating pace of change with a number of new entrants demonstrating that it is possible to build a new business quite quickly on the Internet. The Prudential with its Egg bank, for example, has built a large number of clients, the Co-op bank with SMILE now has 120,000 customers on the Internet in a period of just a very small number of months. So the ability to build a business on the Internet is now demonstrated, which it was not even 12 months ago. As far as the general impact of change is concerned, I think what it does is offer some interesting challenges and opportunities for the industry. The opportunities are clear in that it is possible to access consumers much more cheaply than before, and it is possible to re-engineer the business and re-engineer costs out of it. It is also possible to offer consumers a broader range of choice in a very easy to access form. On the other hand, it reduces barriers to entry in the business quite significantly, such that people who thought that they had well protected business positions based on large branch networks, or a somewhat inert consumer base, now find that those positions are under some threat. My own personal view is that it is an appreciation of the growing competition in this area that has caused some market reassessment of the share prices of banks over the last six months or so. That is inevitably somewhat speculative, but we would see the competition in retail financial services accelerating sharply. As far as the wholesale side is concerned, there is an added interest in that this makes cross-border dealing much easier. It does on the retail sector too, but I think at the moment there has been a relatively modest amount of that. It creates potentially quite interesting issues for us, but it has not been huge yet. On the wholesale side, of course, you can have exchanges if you put screens in each other's jurisdictions, and sometimes one wonders whether people are totally aware of where it is they are actually trading, depending on what screen they are operating on. They may have one screen with lots of different exchanges offering prices on it. The wholesale market is contributing to a globalisation of business. In the retail market it is lowering the barriers to entry in a big way.

Lord Woolmer of Leeds

  664. One thing that has been in the papers lately has been the potential merger between the London Stock Exchange and Frankfurt and some talk about, if that went ahead, Frankfurt dealing with new technology listings and the Stock Exchange in London dealing with the old economy. Why might such a division as that occur? Why will that make any kind of sense, and what implication would that have for our own financial markets?
  (Mr Davies) This question puts me in some difficulty, Mr Chairman. My understanding of the formal position is that in July 1998 the London and Frankfurt exchanges announced that they were working towards some kind of alliance of the two exchanges, possibly involving an eventual merger which might involve other exchanges also as part of a pan-European exchange. What the two exchanges have said is that they have a series of working parties looking into the various elements that would lie behind such an alliance/merger. The most recent press stories have been, as I understand it, just that, and there is no announcement, of which I am aware, from either Frankfurt or London Stock Exchanges, about the terms of such a merger, were one to be under investigation at the moment. It is quite clear to me that the issues that you raise would be commercially very sensitive questions and I have nothing on the record on which to base any comments, so I think all I could offer you on this is one or two thoughts about the trends that are driving discussions across Europe and I would like to emphasise firmly that I will not be commenting on anything in particular in relation to London/Frankfurt, because I believe there are commercial issues there which are not---


  665. I apologise. We may have produced these questions late in the day.
  (Mr Davies) I think even if it was a long while before, my answer would probably have been the same. If I might comment generally on the issue, if you talk to the user community, the major brokers and in particular the major finance intermediaries, what they say is that they would like to see some kind of pan-European trading mechanism developed, because they believe that there would be considerable advantages in terms of the cost of trading and the bringing together of pools of liquidity were it possible to link the markets of the different countries of the European Union, and that increasingly the market is looking at the Eurotop 300 as a sort of asset class. They would like to be able to trade those stocks more cheaply and more flexibly and create more liquid markets within them. That is what the user community and the intermediary community will tell you, and the big institutional investors will tell you something quite similar, that they would like to be able to trade more cheaply and more easily across an integrated market. Precisely how that would be achieved is something in which there are as many opinions as there are brokers in the City, and there are quite a lot. People have talked about one pan-European exchange merging all of them; people have talked about two or three because there may be some benefit in having some competition; NASDAQ from the United States have come and said they would like to be an exchange in Europe and offer that service as well; some have pointed to the Neue Markt as an example of how you can create a linkage between markets for new stocks around Europe—at the moment that has been an SME type stock market—but, frankly, the way in which this will eventually play out I am afraid is not clear to me at this point, except that I believe that looking three to five years ahead I am pretty clear there will be exchange linkages and new trading systems linking these pools of liquidity around Europe. I think it will happen, but I really could not say in precisely what part of the jigsaw it will happen because there are a lot of competing commercial and national interests here that need to be brokered in the equation.

Baroness O'Cathain

  666. Mr Davies, would you subscribe to the view that we are all thinking miles ahead and trying to out bet each other on how e-commerce is going to affect our lives and affect everything that we do? It is marvellous to have this blue skies view that e-commerce is going to solve all the problems and we do not have to get up in the morning, we can do all our business and the lot by just typing in a few things and not even bothering with that, but do you think in your responsibility for the systems, if you like, backing up the financial world or the financial activities, that the hardware that is being developed and the training that is going on with the people who are dealing with the basic systems is adequate to keep up with the aspirational views of people like us who think we can do everything with e-commerce? In other words, following the shock we had a couple of weeks ago when the stock market went down for eight hours, or thereabouts, do you think there is a basic frailty in that area of technology that we do not understand and we could actually have a problem?
  (Mr Davies) I will ask Phillip to comment on that. I will make a couple of observations. The Stock Exchange's technical failure, which is being investigated currently and on which we have said that we want to see a report from the Stock Exchange and agreed terms of reference for that, was not, as I understand it, an Internet e-commerce failure. It is a big piece of software, but it is really what you might call old fashioned, it is a current rather than a future technology processing system. There is "e" element in it. It is a massive software programme that clears trades in the Stock Exchange and then delivers the prices for the next day. For reasons that the Stock Exchange still do not fully understand it did not complete its processing in the normal time and, therefore, did not deliver the prices for the next day. They took the absolutely right decision in those circumstances that they could not open for trading because they could not guarantee fair prices, which is quite right and they did the right thing faced with that problem. On your general point, there is a danger of two types, and we would certainly see that. One is of business getting ahead with clever marketing approaches to e-commerce without being sure that they have got the back-up systems and particularly the security systems in place to make that safe trading, and that is something that we are looking at particularly on the e-banking front. We have done some work internally on the challenges created by Internet-based banking and what banks need to do to be safe in this market. That is certainly an area that we are worried about. I guess the area that worries us most, because we are not primarily here to protect the institutions and to organise their trading programmes for them, is whether the consumers understand what is going on and the consumers understand the risks that they run in dealing with e-commerce. So it is more education of the consumer that is our big aim.
  (Mr Thorpe) I would like to offer a few thoughts on the consumer side of it. There are two or three small points to that. The Stock Exchange is undertaking a review and while we have a first view of what went wrong, I would not suggest for a moment that we are in a position to know the answers with great certainty or, indeed, that they are. That review will hopefully draw some conclusions about whether things are robust enough. Another technical point, I suppose, is the business about not having sufficient robustness to deal with this exciting new world. It is probably worth remembering that this is a state of affairs that as regulators we have seen for as long as there have been regulations. It usually happens on an annual basis, just before the close of the tax year, when everybody wants to sell what they can to investors, usually without thinking about having in place the structure to handle the volume of business, and it has been a regular source of income and occasional amusement. It is not purely a technology issue, it is a good business issue. That is where we come in. Our concern in looking at firms is the strength of their systems of control, the strength of their management. Are they preparing adequately in their business to deal with whatever new risks emerge? The Internet and e-based trading is certainly a new source of risk, but the solutions tend to be, for us, lodged very firmly in familiar territory. I would add also that we have been concerned about broker capacity as a particular matter over the last few months as the market has roared ahead, and we have been undertaking a series of checks on brokers to see that they do have sufficiently robust systems. I would not suggest that we are the world's greatest experts on the hardware and software involved; if we were, we would probably be doing something else and be immensely rich. We can, however, ask questions of the management and demand to see evidence that they have been asking the right questions themselves. The final element, however, is that we are increasingly convinced that in dealing with this new medium one of the best protections will come out of having consumers asking the right questions at the right time. They should be demanding from those who seek to provide them with profitable services assurances about the way in which the business is going to be delivered, assurances about the safety of their transactions, assurances about the compensation arrangements, and a lot of our effort at the moment is going towards building up a consumer awareness capacity within this new environment.

Lord Chadlington

  667. I should specifically declare an interest—I am a director of Halifax and I chair the Risk Committee of Halifax which deals with this particular problem. As Mr Davies has pointed out, it is certainly true that what drives it in our case is enormously reduced costs, income ratios and the enormous pace with which you can build up brand loyalty in the market place. If I could just raise two issues that seem to me to be central to this change, the first is, is it fair to say that the FSA and the institutions are learning together what control should be in place and that this is such a new market that every day when we look at a new thing it is as new to the FSA as it is to us? The second question is, do you think there are specific things which banking institutions are reluctant to do which you would like them to do—a reluctance perhaps because of the way in which, historically, banking businesses have been built?
  (Mr Davies) Could I say firstly that as a Halifax customer I am very pleased to know that you are the Chairman of the Risk Committee and I hope you do not spend too much time on this Committee and too little in looking after my interests. You say two points, the first is, are we learning together? Yes, I think that is completely fair. The one thing that I would say, which I often say to our staff, is that the one competitive advantage that the FSA has over the institutions it regulates is that we do know what you are all doing and so we are able to compare and contrast. I think that when things work well we do perform quite a useful bee function going from one institution to another and attempting a kind of cross pollination of good practice in risk management. Obviously we have to do that in a sensitive way, because we are not seeking to take commercial secrets from one place to another, but undoubtedly in the kind of work we do, for example, on risk models or risk management systems, we seek to identify emerging best practice in the market and seek to spread that best practice in risk management. Undoubtedly, in the case of Internet banking, that is precisely what we are doing. We put a little team in to look at the different Internet banking services that were currently available in the market, looking at how they were dealing with the operational risks and the security risks, and then put together a paper, and that has been translated into a speech cum paper by our Director of Banking, Banks and Building Societies Supervision, Carol Sergeant, who set out a number of issues that we thought banks should be looking at. This leads onto your second point, what are people not doing perhaps as well as they might do? One thing that we have found is a degree of dislocation between the marketing and the systems function. In a sense, this is the same sort of point I was making earlier. People have launched great initiatives and have in some cases been somewhat surprised by the speed in which they have taken off and have then discovered that the processing ability has been taking a little bit of time to catch up. So that is one issue that people, in an attempt to get the sort of 30 per cent share price up-lift that you get if you announce some kind of initiative, have been announcing and trying to get ahead of them before all of the elements have been lined up to support the business. Of course the investment in security systems sounds a less exciting proposition than the investment in your advertising and PR to get the initiative launched. Really it has been making sure that you have systems with adequate capability and that can be scaled up to cope with increases in business if business volumes grow more rapidly. That has been the single biggest issue. Connected to that, however, is that because banks have found it difficult to build these systems, they have tended to out-source and there are some risks involved in out-sourcing systems, and sometimes people have out-sourced in a way which does not include the sort of risk management controls that we would like to see. So we have alerted people to that and we have also alerted people to the need to have sufficient staff, give information, security, expertise and all of that. We have actually set this out very recently—a week or so ago—in a set of principles which were articulated for controlled Internet banking, which we hope are not designed to make it more difficult, because that is not what we want to do because we can see the strong consumer advantages which are designed to make it a safer business initiative.
  (Mr Thorpe) I have just a couple of additional points. We do try and benefit from the misery of others at every opportunity and accordingly do watch what is happening in other markets. Our advantage is not only in being able to look at all institutions within our own, but it extends to being able to talk to other regulators in other jurisdictions. It is a fact that our counterpart regulators in the US have had a number of these issues on their plate for some time. We are doing what we can to try to extract as much from their experience as we can. The other fact, of course, is the reputational issue here. There is an incentive for institutions to understand that if they go forth with these initiatives and fall over, there may not be an easy second chance available. We try and help with an understanding of that point.


  668. Could I follow through the point on the United States. We have been out to Washington recently and e-commerce generally tends to favour light regulation and self-regulation preferably by the industry rather than by the Government. Is this also true in the financial services industry?
  (Mr Davies) Yes. I think that the principle that we would adopt is that if there is a case for regulating the transaction and regulating the conduct of business in a traditional sense, then there is probably a case for regulating it through this new delivery mechanism as well. If there is not, then there is not. So we would say that in terms of whether there is a justification for regulating it, then the same principles apply to old style delivery as to new style delivery. In financial services we believe that if you are offering advice to people on the Internet—web based advice services—which leads to investment in long-term savings products like personal pensions or a life insurance policy where there is an asymmetry of information between the consumer and the firm, because the consumer cannot see clearly what the returns are going to be in the long run, if there was a case for a regulatory environment around that on a face-to-face transaction, then there is similarly a case on an Internet-based transaction if essentially the same thing is being done. That is the principle that we adopt. If there is not a case, such as putting a deposit in a Halifax 90 day extra account which is not a regulated activity, we hope that Halifax is prudentially sound so that if you put your money in there is some reasonable chance of getting it out, but we do not say that this is an advice transaction or there needs to be a set of rules around "know your customer" and "key facts" and all of that kind of thing. We do not regulate that face-to-face and we do not regulate it on the Internet either. I think those are the principles. Obviously, the Internet does change some aspects of this and we do have to think very carefully about when a web-based system is actually offering advice or when it is just offering an execution-based system. That is where the tricky area emerges. In prudential services we think that the same principles should apply whether it is web-based, or on the phone or through brown envelopes.

Lord Faulkner of Worcester

  669. In your evidence you seem to be stressing quite a lot the importance of host country regulation. Can I ask you whether you think there are likely to be problems with the difference between home and host countries in the context of European-wide developments and the fact that there will presumably be movement towards European regulation in the future?
  (Mr Davies) I think we may not have been as clear in our evidence on this point as we should have been. Let me try and unpick it a little bit. First of all, the case of non-EEA institutions. If it is a non-EEA institution and it wishes to offer investment products or investment advice in the United Kingdom, it should be seeking authorisation here, and then we will treat it as the branch of Citygroup or whatever it is and we will regulate it according to host country rules. With an institution from a non-EEA country that was seeking to offer investment products in the United Kingdom through a website which was targeted at United Kingdom consumers, we have a series of things which we try to go through to see whether a website is targeted—in other words, is it offering a sterling facility and is it clearly aimed at United Kingdom consumers? If it is doing that and it is not authorised, then that is wrong and we would clearly say on our website that it is not authorised; we would approach the home country regulator to say that they are doing something that they should not do and they should be seeking authorisation. If it is non-EEA, that is roughly the way it is. In order to do it here they have to have authorisation from us. If it is EEA, then they can passport into here on a home country basis and we would regard, in principle, the right way to go as home-country-based supervision, because we think it would not be conducive to the development of the single market. If an investment firm here, which wanted to offer unit trusts on a website basis to the famous Belgian dentist, has no physical existence and no authorisation in Belgium, it should not have to offer that through Belgian business rules; it should say, "We are authorised by the FSA, we follow FSA rules and we are offering that around Europe." We would say that, however, with two provisos. One is that we think there is a need for some minimum standards around Europe of authorisation for investment business. We do have some nervousness about the fact that there are some gaps in the regime at the moment where there are some activities that we would regard as unauthorisable and quite risky, which in some countries are not regarded as unauthorised. There are some countries where you could offer commodity derivatives without actually being authorised. We are anxious about the idea that United Kingdom retail consumers should be offered commodity derivatives by a totally unregulated institution which is regulated nowhere in the Union. Secondly, we think it is important that there should be an appropriate consumer protection, particularly consumer compensation schemes, and we would certainly say that our consumer compensation schemes related to an institution we authorised here would be accessible to a non-United Kingdom consumer elsewhere in the EEA if that firm fell over. We think it is very important that that should be the case on a symmetrical basis. Of those two provisos we would favour home-state-based regulations.

  Baroness O'Cathain: That was more or less the view we got in the United States. It does seem the most logical way of looking after it.


  670. Could we ask you whether there are particular issues arising from the FSA in the growth of private day traders and the private margin traders trading on the Internet? Can you regulate in this area? Do you have the powers? Would you like some powers? Are you concerned?
  (Mr Davies) I am hesitant to turn down the offer of some powers.

  Chairman: You authorised the question.

Baroness O'Cathain

  671. I said you had too many powers.
  (Mr Davies) That, Baroness, is a point that I would not agree with for many, many reasons which I can go on about until 11.20, if you like. I do not think, however, that I could say that there were any new powers that we required for private day trading. There is a certain amount of day trading going on in the United Kingdom, but not as much as in the US. One reason for that, which many people in the City would not regard as a particularly good reason, is the existence of stamp duty and, of course, with half a per cent each way that does increase the amount of gain that you need to make in order to make day trading justified. That certainly has a moderating effect on the kind of inter-day churning. Also, I think many people do understand that most day traders do not make any money. A survey done in the United States suggested that 70 per cent of day traders lost money. Where there is day trading we issued, at a very early stage, an investor alert alerting people to one of those basic difficulties of making money in this business, and secondly, alerting firms to the kind of controls they should have on trading activity by day traders and, particularly, the obligation on firms to ensure that people did not take on too much credit. We have rules about the credit assessment of the traders who are using your facilities. I would say that so far we have not had many problems emerging in this area.
  (Mr Thorpe) We have not, and I do not want to sound like a broken record, but there is a parallel here too with conditions that existed about 10 years ago in the futures and commodities market, where there was a lot of high pressure selling. Some of us may remember the names of a number of firms that were in the headlines at the time. We have, as a result of that activity, a number of powers relating to abusive practice in respect of clients, and that is where our concern comes in. Is the interest of relatively innocent people in day trading causing firms to think there is a way to make an undue profit by churning the account, by trading ahead of the customer, or by providing facilities at an exorbitant cost? We do have sets of rules that contain or prohibit the sort of behaviour that would cause concern and we have been looking at the firms that provide the services in that context. Again, with our Chairman's rider that no doubt something will have just gone wrong now, we have not seen the growth of day traders throw up any new issues, and we have yet to see a return of the sort of abusive practice that was around towards the end of the `80s.

Baroness O'Cathain

  672. I wondered, Mr Davies, whether you thought there was any quite specific European or Government legislation that would help in this area which is not there already?
  (Mr Davies) The Financial Services Action Plan proposed by the European Commission earlier this year in outline includes some quite helpful measures in a generally liberalising direction to try to make the single market in financial services work better. We are generally supportive of the directions of change in the Financial Services Action Plan, and we are also generally supportive of the e-money Institutions Directive and the e-commerce Directive et cetera. So I think that things are moving forward in the right sort of way. I think, however, we are going to need to watch very carefully the way in which equity trading in particular develops. I currently chair a group of securities regulators in Europe in the context of something called FESCO, which is the Forum of European Securities Commissions, looking at the growth of alternative trading systems and the way in which that impacts on the regulatory system, and we are only part way through that work at the moment, but it may be that some changes are needed to the way in which we define an exchange and the way in which we define a broker, to take account of these rather different kinds of trading systems. Frankly, we are not quite at the point where we can see how those changes should be made, because so far in Europe, as opposed to the US, the alternative trading systems have, in the equity markets, taken, so far, a very small proportion of the market. There are 12 in London and six or seven elsewhere in Europe, but they are below one per cent of equity trading collectively so far. It is difficult to see whether we do need a change. That is an area which I think one should watch quite carefully.


  673. I got the impression from reading your paper that perhaps the resourcing at EU level with some of the activities was not quite as skilled as you would wish to it be. Did I misread that?
  (Mr Thorpe) Perhaps you are also referring back to the comment we made before. It is about implementation as much as enabling legislation. We have had pieces of legislation in place for some time and in this country we have worked quite hard to meet our commitments under those Directives. Other countries are slightly more variable in their approach to the resourcing of their "on the ground" regulatory efforts. The legislation does allow for some flexibility in the way interpretation occurs, and very frequently that interpretation matches the style of the market place. Those are the sort of issues that seem to be more inhibiting in terms of growth. To try and push the problem into someone else's patch, if I may, frequently the issue of where business goes is not a conducive set of regulatory requirements so much as domestic tax requirements or other industry protection issues that have very little to do with the business of financial regulation.

  674. It was just your final point; the use of expert services of the Commission and European Parliament. We were getting a number of complaints from people who have given evidence to us, particularly from industry, that the mechanisms are not as good as they could be for getting their views in, and we are wondering if you are content with the liaison arrangements you have with the kind of people you deal with and whether you might say something on that?
  (Mr Davies) I would be prepared to say that I think the Commission, DG MARKT, as it now is in the Commission, is quite thinly resourced and they do depend quite heavily on other people doing work for them. We seconded people in there, and FESCO regulators do quite a lot of work between ourselves. I think probably if they were to need to do a major overhaul of the current ISD—Investment Services Directive—which might become necessary as the markets change, then I think as they start they will have a lot of difficulty doing that. Also, the process of developing community legislation is quite slow and goes backwards and forwards. That is quite difficult in this area where the markets move extremely quickly, which is, of course, why the Financial Services and Markets Bill has the character of a Framework Bill which gives the FSA the ability, subject to certain consultation requirements et cetera, to amend rules and regulations to take account of changes in the market place. In our view that is a very sensible approach, given the liquidity of change in the markets, and that kind of change is more difficult at European level.

  675. You are facing massive changes yourself. Do you feel that you are adequately resourced to face those challenges and needs?
  (Mr Davies) If we are not, it is our own fault.

  676. Not withstanding you are occasionally seconding people?
  (Mr Davies) If we are not, it is essentially our own fault because it is up to us to determine, in negotiations with the industry, what we need. We propose our budget to the industry and we know we have to justify our fees and our staffing levels and, therefore, by definition at the moment I feel that what we have judged is about right. We are not completely fully staffed. The market is a very lively market at the moment in the city, as you know, and it is always a bit of a struggle to keep our staffing levels and out expertise levels up, because the industry poaches people away very regularly. It is not, in our case, as it in most other parts of Europe, an issue of then going and competing for resources against the Health Service, as it were. In our case it is dialogue with the markets about what an appropriate balance of regulation is and whether the market is prepared to pay for more. At the moment I think the balance is reasonably comfortable. We proposed a budget for this year which was accepted in the market widely. We had almost no criticisms of it. Maybe that suggests it was too low. That is a matter for us to judge, which I think is the right place, and at the moment I would have to say that since we have just judged our budget for next year we think we have more or less what we need.

Lord Chadlington

  677. Part of this, Mr Davies, in these institutions is about culture change, is it not? To what extent, in these circumstances, are the current laws and the regulations really enforceable? What can you do to force us to do something about which you and an institution disagree?
  (Mr Davies) We obviously cannot force you to change your culture, if you like, so we could not force you to go in and dress-down the Halifax Risk Committee and appear to be more friendly, but I think that we do have sufficient powers to do what we think regulators should do. We think, therefore, that we have the powers to impose appropriate training and competence requirements on the people who are interfacing with customers and helping customers make decisions, and we think that is appropriate. We think we have adequate powers to require you to hold the right amount of capital. I think we have adequate powers to require you to have the right kind of risk management systems, because ultimately if we did not believe that you were safely managed in that sense we could ultimately de-authorise you. I think we probably do have enough powers for our regulatory purposes. I would emphasise again that we are not in the position of solving all the institution's problems for them, we cannot solve your corporate strategy for you or you efficiency over delivery mechanisms, we are not there to make sure that your costs are fine, we are just there to make sure that there is an adequate degree of security to maintain market confidence on the one hand and investment protection on the other. My view is that for those purposes we have an adequate suite of powers. Lastly I would say, most of the time, for the kinds of issues that we have been talking about today, which have been essentially risk management in a new business area, it is not a question of having to wave a big stick, because for most of the time the institutions concerned are quite interested to know what our supervisors think, they are quite interested to have advice and they are typically rather enthusiastic about taking it because they know that they are at the leading edge of a difficult business area as well. So for the moment I would not say, in the areas that we are talking about, it is a question of our reaching for the rule book or enforcement department in these areas. That would be an unusual thing to have to do.


  678. It is good to hear that they are so co-operative. We heard that what the banks are prepared to do on behalf of credit cards in this country is less than the kind of guarantees and underwriting that similar institutions offer in the United States. Where should the responsibility for that lie? Have you an interest in that?
  (Mr Thorpe) Not a direct interest in that, unless it is coincidental to a more conventional banking supervisory relationship. But it generally falls outside our remit. Without in any way suggesting a contradiction with what Mr Davies was mentioning; he, of course, has been lulled into a euphoric state of believing that we have legislation which we have yet to acquire. The picture is slightly more complex. There are a variety of sources of authority. In some areas we have quite a substantial ability to act and direct and to occasionally twist arms rather forcibly. In other areas we have limited powers. It is one of the reasons that we are keen to see this mixed picture consolidated and new legislation in place; because it will give us the ability to apply far more evenly, than has been the case in the past, a set of powers to deliver the kind of results that Mr Davies was talking about.
  (Mr Davies) On the credit card point, just to be clear, we do not regulate the credit card sales or credit card conditions, so the only involvement we have really is with a bank with a large credit card operation. We would be checking that it had the appropriate controls in place and that it had the appropriate capital to back that business, but it is not a regulated business, nor is it straightforward borrowing.

  679. What would you like Europe to do to make life better and easier for you?
  (Mr Davies) One final point from my point of view is that we think very strongly that consumer education is absolutely crucial in this area and we have a new responsibility in our new legislation to promote public understanding of the financial system. We think that is a very important dimension of this, because there is no possibility in an Internet world of including every health warning on every page of every site in such a way that you cosset consumers. They are going to need to know more about financial services. That is why we think it is logical that we should have that kind of duty and we will be devoting some resources to that. So far the industry has been very supportive of that and well informed consumers tend to be, on the whole, good for an industry and tend to buy more as a matter of fact. That kind of culture is much less evident elsewhere in the European Union and elsewhere in the European Union there tends to be a kind of search for the magic Directive which would solve this problem. On the whole we are doubtful that there is an "Internet Financial Services Reduction of All Risk Directive" which could be drafted and would solve this. We think that we need a reasonable framework of rules and regulations to cope with the big consumer risks, but then you need a big campaign of consumer education in order to get people to understand better what their choices are and what the up sides and down sides are and what the good sites of the Internet are. It makes it quite easy for us to deliver advice to people. We have a brand-new consumer help website up and running—which you might like to look at or get your Clerk to look at—which does give people a huge amount of more objective information about financial services and the choices people have than has been available to them before. We think it is that kind of thing that is going to make as much of a difference as searching for the magic Directive.

  Chairman: That is a very helpful piece of advice for you to conclude on and something for us to cogitate on and see whether we might not suggest it to other quarters when we come to write our report. Thank you very much for your time.

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