Select Committee on Constitution Minutes of Evidence


Examination of Witnesses (760-773)

WEDNESDAY 25 JUNE 2003

MR P SMEE, RT HON J GUMMER MP AND MR R SANDERS, ASSOCIATION OF INDEPENDENT FINANCIAL ADVISERS

Lord Jauncey of Tullichettle

  760. We are here discussing the accountability of the regulator. May I ask you in that context questions on two matters? First of all, the proliferation of consultation papers. You have mentioned various numbers. In paragraph 6 you mention 45 over 12 months and you have given us some up-to-date figures. Are all these necessary?

  (Mr Gummer) The answer must be no. The answer must also be that one could avoid a number of them if different bodies were prepared to consult on one thing together. It is like the road which is dug up by one utility and then filled in and then another utility comes along. There is a need for—I think the phrase is—joined-up consultation here and that would be very helpful.

  761. When you say "others", what sort of others do you have in mind? Organisations like yours?
  (Mr Gummer) No. If the Department for Work and Pensions wished to consult on pensions it would be quite helpful if that came out at the same time or things were worked together with someone else who was consulting, at least in part, on that subject. This is not always possible and like the holes in the road you will always get each of the utilities saying we really cannot do that and we do not have the arrangements, but there must be ways of making this more efficient.

  762. Presumably the whole purpose of consultation is to give the persons affected—I believe we now have to call them stakeholders—the opportunity of making representations before a final decision is made.
  (Mr Gummer) I would add an extra thing to that. One of my own businesses is in the business of consultation, so I try to help large companies improve their environmental, health and safety and human rights attitudes. It is no good simply consulting with them. You have to get them to feel that they take ownership of the ideas you have. It is no good them doing it and then saying they have to do this because the law says so or because that nice Mr Gummer comes along and tells them how to do it. They have to realise why it matters, why it is worthwhile, so that they do it, not because you tell them to do it, not because the law tells them to do it, but because they realise that is how you run a good business. The thing which worries us about all this is that if you get overload of this kind, it is not just that they do not have the opportunity to respond properly, it is that they begin to feel that they are outwith the system, that it all works over there, and every now and again a whole lot of stuff comes to them, that they have to obey it because that is what the law says, so they do that because they have to. They do not think of it as a business-transforming activity, that they are doing this because this is part of how they become better at doing business, that they give a better service, that they have a better reputation, they have a more professional role—all those things which are ideally what I and my committee want them to do.

  763. What you do, but is that what the FSA wants them to do? They are the originators of the consultation documents.
  (Mr Gummer) I am not sure, certainly at the medium and lower levels, that that is the culture at all. The culture is much more a regulatory culture, "let us get this sound, let us lay them down, that is what it should be".

  764. If you bury them in 250 pages, as I see happens in Less is More in your paragraph 6, then you are almost bound to win, are you not because nobody will read the 250 pages?
  (Mr Gummer) Yes.

  765. The other matter I was going to ask you about on the same question of accountability was the ombudsman's position and rights of appeal. At the moment you have no right of appeal to the ombudsman obviously as an association. Individuals who are affected by a decision of the FSA are entitled to appeal to the ombudsman, are they?
  (Mr Gummer) There is a different system of appeals for that which Paul will explain.
  (Mr Smee) It is important to draw a distinction. Firstly, the appeal process to the ombudsman is there for members of the public, who feel that they have been poorly advised or have bought an inappropriate product, to claim against the provider or the adviser for negligence or whatever; but within the terms of the FSA regulating firms, there is an appeals process, namely the appeals tribunal, which is held in open forum, where firms or approved individuals within chose firms, can have right of appeal if they feel they have been treated unjustly.

  766. That is an FSA appeals tribunal is it?
  (Mr Smee) Yes, it is. Sitting at one side is the complaints commissioner as well, who makes sure that the FSA is playing to the rules. She has just published her report.

  767. Is there any right of appeal from the FSA appeals tribunal or not? Any right to the courts?
  (Mr Smee) Other than, I would imagine—

  768. Judicial review.
  (Mr Smee) Yes.
  (Mr Gummer) There is judicial review and there is no appeal on those occasions when the ombudsman makes a decision, which has much further ramifications. That is the big issue. So we believe the memorandum of understanding between the ombudsman and the FSA has helped significantly, but we still see this as a particular worry because that is a way in which things could be done, and have on occasion been done, without any of the normal protections for those who in the end are affected.

  769. Do you see any need for any further fora for appeal from the decisions of the regulator, or not?
  (Mr Gummer) Not from the decisions of the regulator and I would hope that by proper administrative relationships between the ombudsman and the FSA we could get rid of the dangers which arise in the ombudsman process. If we have too many of these appeal things we will never get any decisions made at all. There is a need just to make the system work.

Lord Fellowes

  770. Lord Jauncey has asked part of my question so this is really a very quick one. I have to declare an interest, by the way, as an employee of a bank, indeed I once took the FSA exam, a very elementary one. The disciplinary process—what one might call the sharp end of the FSA—do those who come up against that find it quick, do they find it efficient, do they find it fair? Can you give me some impressions rather than details of process? What is the feeling?

  (Mr Smee) I have never come up against it, but anecdotally I have never heard it accused of being unfair. It can be lengthy and some smaller firms have said they felt intimidated by the grandeur, or rather the scale; it is something beyond their experience.
  (Mr Sanders) It is the Regulatory Decisions committee which has outsiders sitting as well as practitioners who are specialists in that particular area. It is run as a quasi court and it can be offputting for individuals; you are only allowed one friend as a representative rather than legal representation at that level. It can be very unnerving.

  771. You are not allowed legal representation?
  (Mr Sanders) No, not at that level, only at the appeals tribunal.[1] This is internal and is the first step along the road of trying to address a problem.

Lord Holme of Cheltenham

  772. Ultimately our interest is in accountability, particularly parliamentary accountability. You refer in your memorandum at various points to accountability in a way which might imply that it was the same as consultation, the same as information; you used the multi-stakeholder model that you have stakeholders, but my question is as follows. I should be interested in Mr Gummer's view with his ministerial and parliamentary experience. Is there a special form of accountability to Parliament which has established the regulator who regulates your industry? Is that different in kind from the other forms of accountability which you mention in your memorandum? Could I press your chairman? Are there ways in your opinion that the accountability of the FSA to Parliament could be improved, either on the parliamentary side or on the side of the Financial Services Authority itself?

  (Mr Gummer) There are some ways in which the FSA could present its own performance so that its accountability, not just to Parliament but to everyone else, would be clearer. If I give a single example. There is a great deal of discussion about cost benefit analysis. I just find it impossible to understand why, when you have done the cost benefit analysis and you have gone through the process, you do not check up and find out whether your cost benefit analysis was right; you ought to publish that so you can see whether you had it right or not. In Parliament you would not learn anything from the present situation because that is never done. You need to be much clearer about measuring the benefits and you also need to be more honest when you get the costs wrong. There is always a tendency to reduce the costs because that is convenient, increase the benefits because that also fits. I take that single example. My real concern about accountability is that there is a whole series of areas like that where, with greater simplicity and greater clarity the general accountability of the FSA would be much easier. If you say, should there be other more formal ways in which Parliament held the FSA accountable, I doubt whether that would be cost effective both in terms of resources and time. What we need is a greater clarity and transparency in the presentation of what happens, what it costs, what the benefit is, so that not only Parliament but people in general can see. In the end this is at the heart of the issue of risk. We are dealing here with risk and the difficulty is when a risk becomes intolerable generally and when a risk becomes too great for a particular person. These are the two areas which are most difficult in financial advice. We are dealing with risk and we do not ever have a situation in which there is no risk. The explanation of what you do in order to keep risks within reasonable and acceptable bounds is very important. I think that at the moment this very large report by the FSA would be pretty difficult to use as a mechanism for accountability, and if Parliament had a role to play here perhaps it would be—and perhaps that is what this Committee might do, if I may dare to say that—to ask why the FSA does not present what it does in these ways which would make it easier both for you and for us and for the public and indeed for Parliament as a whole to judge it.

  773. If I may say so, your point about risk is extremely well taken. It is exactly right and perhaps the parliamentary, let alone the public understanding about it, is not very profound. What I think you are telling us is that Parliament has no special role to play in this, it is just one of many stakeholders and the FSA should do better. Is that what you are telling me?
  (Mr Gummer) I am not sure I would put it in quite such an abrupt way, but I cannot see a mechanism which suits the parliamentary structure, which would give more benefit than it would give disbenefit. That is all that I am saying. It may be because I have just not seen one and someone may come up with one and I would be happy to welcome it. I am not opposed to it for some philosophic reason at all. The point about risk is very important because it is the most difficult issue on so many fronts, in trying to get people to understand that everything is risky; that what you are trying to regulate against is a risk which has been inordinate either to all classes of people or to the particular person whom the adviser ought to have recognised was not in the market for that kind of risk. Those are two areas and they are both very difficult because the press tend to present all these things as "You ought not to have risked it. You ought never to lose". You cannot do this job in circumstances in which you can guarantee that you never lose. Because of that, there almost has to be a caveat emptor element. The question is: how reasonable should it be, how wide should that be? If we are going to say that if with hindsight we recognise that a particular decision was wrong and therefore the person who made it must in all circumstances pay up in one form or another, frankly we make this whole business impossible, like in so many other areas—medicine, food, almost everything else.

  Chairman: Thank you. I was going to ask whether there was a mechanism missing, in light of your evidence, but the point has been well made in response to Lord Holme. It is not so much adding a mechanism as taking the existing process, refining it, clarifying it, ensuring that there are clear priorities within it. That is clear. Thank you very much indeed. I hope we have prioritised our questions today. You have certainly answered them with great clarity. We are extremely grateful to all three of you, both for your paper and for being with us this afternoon. It has been extremely valuable to us. Thank you very much indeed.





1   Note by the witness: A firm may, in fact, appoint a representative who can be legally qualified. Back


 
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