Examination of Witness (Question 40-59)|
TUESDAY 5 FEBRUARY 2002
40. Why does that say what it says? It makes
you look stupid.
(Mr Brydon) I did not write those words.
41. This is your organisation's report. There
is no point in denying what is being said.
(Mr Brydon) I am not. If you are seeking information,
let me explain how we work. We work by trying to gather in the
views of practitioners in all sorts of practical ways, making
sure that if there is a really big issue or there is a major issue
of international competitiveness arising, or whatever, that there
are channels available for the FSA to hear this in a way that
is as detached and impartial as we can do, given that we are by
definition partial as practitioners. If we are going to have successful
channels which open up that sort of dialogue in an effective way,
we are not going to do it by sending in Exocets towards the FSA,
and it is quite a reasonable thing for us to develop our own agendas
in our meetings, and at the same time to ask the FSA to synthesise
the issues that they see as important going forward so that we
can prepare and think about the things they are going to bring
to us in the next 12 months or so.
42. I am just glad that we do not do that in
parliament, ask the government to do a summary of what they think
is important. Never mind. The final point is page 7, the statement
under (e): "We were consulted on the various elements of
the FSA's budgets and are satisfied that costs are being carefully
controlled." First, who did you consult on the various elements
of the FSA's budget and second, can you explain to this Committee
what steps you went through specifically to come to the conclusion
that the costs are being carefully controlled?
(Mr Brydon) The FSA bring to us draft budgets at an
early stage, first of all in broad outline, and then in increasing
detail until we see almost the final versionand the difference
between almost final and final is totally trivial. We have had
the opportunity to comment all the way through that on the build-up
of costs, the extent to which they have been achieving synergies,
and so on. We have had a sequence of meetings with Paul Boyle,
who is the COO
now, to understand how the budget has been developed. We are not
trying to establish that £182.6 million is exactly the right
number and £182.5 million would be better; what we are trying
to establish is that there are good procedures in place to make
sure that the amounts in broad terms are reasonable, given the
things that the FSA was given to do. So we have undertaken that
again recently with the current budget to try and get a broad
shape. If you are asking me a different question, which is would
we all like less, the answer is obviously yes.
43. I did not ask that question. Finally, page
8. How are members of the Panel appointed? Does someone ring you
up and say, "Look, old boy, we would quite like you to be
on this FSA Panel" or is it openly advertised, or do they
ask for volunteers? How is someone asked to be on the Panel?
(Mr Brydon) In the early stages of its formation I
was not at the heart of that, but I understand the process to
have been that there was wide consultation with all the sort of
people you would expect, together with leaders of the trade associations.
44. Who are the people I might expect?
(Mr Brydon) The Bank of England, the Treasury, the
FSA itself, the trade associationsall those who had a direct
interest in the issue. I know that my own nomination to the Panel
came because the Fund Managers Association, as it was then, was
asked to recommendnot nominatesomeone to the Panel,
and I was then asked if I would be willing to do it. That is how
I ended up on the Panel, and I think that is how most members
did. I think it is wise of us not to make this a one-to-one relationship
in a delegate sense from the trade associations, partly because
there are lots of other tiny interests. We would have a gigantic
panel if every trade association was represented. What we are
trying to find is a balance to produce the right mixture of people,
who will gain respect from their peers and be able to be above
the battle, and look across and represent the interests of other
parts of the industry as well. For my part, I was "Nolanised"
in the process of becoming Chairman, and therefore it was a recommendation
of the FSA, but endorsed by the Chancellor of the Exchequer.
45. Do you find it satisfactory that the FSA
appoint the members of the Board and appear to appoint the Chairman?
(Mr Brydon) It is the same answer as to many other
questions. For the moment, it is fine and it works, and it is
one of those things that is not broken so I would not change it.
You could envisage a situation where, if there was a deterioration
in relationships and if practitioners in general thought it was
not satisfactory, we would hear a big groundswell and we would
do something about it. At this stage I do not think it is a problem.
46. When I glance at the Consumer Panel, that
seems to be appointed differently.
(Mr Brydon) One of the reasons why the Consumer Panel
is differentalthough Colin Brown will no doubt speak for
himselfis there are not trade associations, natural blocks
of constituencies, from which leaders have already emerged.
47. What we are actually saying is this is a
Practitioner Panel set up and chosen by the regulator.
(Mr Brydon) To advise the regulator.
48. Yes. It seems a bit strange.
(Mr Brydon) Maybe, but it works.
49. Of course, you cannot answer this, but coming
from the north, I have a view that when I come down south, Londoners
rule everything. You are an elite. You either get in the House
of Lords or you get on the Practitioner Panel. At least on the
Consumer Panel there seem to be some Scots represented, but yours
seems solidly City.
(Mr Brydon) All the guys in my office yesterday said
I lost my voice at Murrayfield, so I qualify, and Ian Harley of
Abbey National is a Scot.
50. The membership has changed because you have
added the Stock Exchange, etc, but there are other exchanges,
are there not?
(Mr Brydon) We were asked to bring in a representative
of exchanges. Clara Furse does not represent or is not a delegate
of the London Stock Exchange. She is there because she has a knowledge
of stock exchanges.
51. It just ties in with how you raise things:
a quiet word with the Chairman is the preferred method of the
(Mr Brydon) It is a very effective way of making sure
that the organisation knows.
52. It is not so good for us from outside, wondering
what the hell is going on and what conversations are taking place.
It sounds very much like an old boys' network, southern-dominated,
appointed by the FSA, whose methods of regulation you are looking
at, all from the people who probably lunch and dine together.
It sounds absolutely cosy. Would you accept that?
(Mr Brydon) You started by saying this was a question
I probably cannot answer. I think what you have got to think of
is that this is an embryonic organisation that has been working
to try and help make the process a little bit better than it would
otherwise have been. One of the interesting questions we ask ourselves
in terms of measuring our own performance is: does the fact that
all the executives in the FSA know that they have to come and
present what they are thinking of doing to us mean that they do
things slightly differently than they otherwise would, because
we make them think harder about the issue, because they do not
want to look silly if they come with an obvious point they have
not thought through? The process at the moment is in its early
stages. So far it has proved an effective channel to get the views
of the financial sector through. It is not clear how effective
yet, because we will only know that when this whole regime is
in full-blooded implementation. We will continue to do the surveys,
so we will create an independent benchmark of how the FSA is performing.
I am not sure they would have done that for themselves.
53. After N2, non-executive directors become
jointly and severally liable for a whole range of failures of
their firms. This is significant in the context of Enron. Have
you had any representations to you that this may lead to people
being fearful to take on such directorships and to try and find
ways round the rules, particularly in relation to the structure
of domestically owned subsidiaries of firms whose parent operates
outside the regulated zone?
(Mr Brydon) The straightforward answer is no, in terms
of any formal representations, but in terms of the issue itself,
I think it is an issue that is going to be on the agenda; it is
a new risk in the system, if you like, which needs to be monitored
and thought through very carefully, and watched for precisely
the reasons you are saying.
54. I do not mean this in any way as a personal
comment, but I keep in touch with some of the regulated community.
I have articulated two of the quite major concerns that they have
come forward to me with. These are common currency in the industry,
I think, both the ones I have mentioned, yet neither of them have
ended up with you in any capacity, even though you are aware of
them. What worries me is that here we have a body whose specific
task is to make these sorts of representations, which is not considered
important enough, or for some other reasonI do not know
whatfinds itself having had no representations to pass
on to the FSA.
(Mr Brydon) I take you back to the way in which we
operate. There is no evidence that that view is not being well
communicated and well debated with the FSA through the trade associations.
I am sure it is. That is how I know about it. You asked me a specific
question, which was have we had direct representation. No, we
have not. Do we know about it because trade associations discuss
it with us? Yes. Are they discussing it with the FSA? Yes. Is
there a dialogue and an understanding of the issue going on? Yes.
Does that mean that we all understand and like the answer? Not
necessarily, but there is no formal breakdown in process. Where
we can really help is if there is a breakdown in process. That
may come, and this issue may become more attenuated in due course.
Then I think our role would become much bigger. But I think if
we went and got ourselves deeply involved in every single issueand
there are lots and lots of issues at this level at the wrong stage,
I think we would end up building ourselves into a great big organisation,
the expectations of which would grow disproportionately to its
ability to deliver.
55. These are big issues, quite fundamental
(Mr Brydon) They could be.
56. The third issue I want to take you to in
your report here is " . . . we spent a good deal of time
[on] the interaction of the market abuse provisions of the Act
and the functions of the Takeover Panel. We supported the arguments
of the Takeover Panel that the Bill should be amended to preserve
its position as the sole arbiter in takeover disputes." The
FSA was brought into being to overcome the inadequacies of self-regulation
through nine different bodies. It seems strange therefore that
your Panel should see a self-regulating, voluntary body as something
which should be able to overcome or replace the word of a statutory
(Mr Brydon) I think the Panel on Takeovers and Mergers
is in a somewhat different position to the old self-regulatory
bodies in the sense that it regulates a specific activity at a
specific moment. It is not a standing regulatory framework for
the day-to-day behaviour of businesses throughout the course of
their activity; it is a very narrow activity, and, notwithstanding
the occasional time when it has not been perfect, it has a fantastic
record of having succeeded in resolving without the use of the
courts very complex issues at very short notice in great turmoil.
Our anxiety at that time was that if you dragged this into a more
statutory, more structured, more bureaucratic frameworkand
we had all those fears that were referred to earlier about the
regime that was coming down the road towards usthen you
might lose that very flexibility which makes the market work so
much better in the UK than in most other countries. So far there
is no evidence that that has happened, because, as I said at he
beginning, Howard Davies has taken a very sensible line and a
practical way of trying to find a balance between those difficult
issues. But again, as I have said with several of these things,
we will not know how this regime will work until it is tested
to a stress point, and that stress point has not arrived yet.
57. What are the other principal issues that
have concerned you since this report was published?
(Mr Brydon) If I give you a preview of one or two
things we will say, we are a little troubled, but not to the point
of writingthis is really in answer to Mr Ruffley's question
« that the governance of the research process in the FSA
has not been as rigorous as we might have expected if policy were
to be built out of that research, and we have made that comment.
In fact, since we made the comments to the FSA, they have restructured
the way in which they govern the research, the commissioning,
the shape of the questions and how the responses are analysed,
so we have been successful with that, but we will continue to
refer to it. We have an issue about materiality and complaints.
We are anxious that the FSAand we will say sofocus
on those issues that are truly material and do not get bogged
down in making up lists of complaints, because somebody came into
the branch of a building society and found they did not like the
colour of the carpets. There is an issue on the way in which complaints
procedures are established today which would say you have to have
a process for handling every complaint. The question is, is a
remark about the colour of the carpets a complaint or not? When
does a complaint start to be a complaint and when is it not? From
our point of view, we have a coincidence of interests with the
customers; they are the people who help us to exist and our objective
is to serve them, so we want, as practitioners, to stimulate complaints
because complaints help you to make your business better. What
would not be helpful would be if we then started to have lots
and lots of trivial complaints which all of us in this room with
half an hour's discussion could probably agree are below the parapet,
being trapped into a ticking regime which would have the wrong
emphasis. I know that Howard does not want that to happen, but
he still has this problem of being at the top of a very big organisation,
and if you pull a lever here, you cannot be certain that the guy
seven layers down is doing it in exactly the way you want to.
The third concern is around international competitiveness. I spend
part of every week in Paris, and I have sat in a meeting in Paris
and heard people say when reading from the Financial Times,
"They just rip people off all the time in England."
That is because the FSA keeps pointing to small issues where something
has not been perfect, and I am not pretending things were right,
but we do have a habit of self-flagellating as a result of this
process, which is much harsher than in almost every country, and
it is a wonderful competitive weapon when you are marketing against
Britain. We need to be careful that the balance is right. That
is not to say we should ask the FSA to hold back on things that
are wrong, but we need to be careful to put things in context.
In the same context, part of the savings industry, which is probably
by any standards one of the most successful industries in the
world, is subject to Deanne Julius, Penrose, the FSA,
and these inquiries come in all the time. Every inquiry is bound
to find something that could be better. It is a continuous drip,
drip, drip in the City about the UK financial services industry.
That does not happen in France, Germany or any of our competitors.
58. Are you not in favour of having inadequacies
(Mr Brydon) No, I am in favour of having inadequacies
exposed, but we need to do it in a coordinated and thoughtful
way to make sure that in the process we do not damage UK plc and
the employment prospects and so on here. One small issue which
we are troubled by and do not know how to solve, and at the moment
I think it would be fair to say the FSA do not, but they are willing
to examine it with us is, how do those who are regulated give
effective feedback on their regulator, their individual regulator?
If you have a man coming to see you who is the head of your own
regulation for your firm, and you think he is being disproportionate,
unfair, has got an agenda or whateverlet us just say he
is a bad manager and he is not doing it properlyif you
complain about him to his boss, unless you are sure of the result,
the guy is going to come back to regulate you next week and he
is not going to be any more sympathetic than he was last weekprobably
a lot less sympathetic. It is complex issue to work out how you
can achieve effective feedback on the performance of the regulators
in the front line.
59. Is it not the Panel's job to feed those
sort of things back?
(Mr Brydon) Yes, but you can only do it in generalities.
It is not quite as simple as that. If you imagine Mr X coming
to regulate me, and I have problems with Mr X and I go to the
Panel and say, "I've got problems with Mr X" the Panel
in the first instance does not know whether that is because I
am trying to duck a difficult inspection because I did something
wrong or because the regulator is bad, and I think it would be
unwise to get the Panel put in the position of being a judge and
jury of who is a good regulator and who is not. That is the job
of management in the FSA, to manage the regulators. The question
is how to get sufficiently anonymised feedback about individual
people in the FSA back to their management in such a way that
it does not infect the process of subsequent regulation. It is
a genuine managerial problem. The FSA understand it. Howard understands
it. It is simply a question of working out a way of doing it.
Neither of us have yet found a satisfactory suggestion.
3 Chief Operations Officer. Back
Note by Witness: I added "Myners and Sandler". Back