Select Committee on Treasury Minutes of Evidence

Examination of Witness (Question 60-64)



  60. Mr Brydon, all the examples that you have quoted have been in the form of complaint against the FSA or keeping the FSA off the industry's back, yet one of your functions in this report is to communicate to the FSA issues of general concern to regulated businesses about regulation in practice. I understand that those points you have made are matters of concern, but are there none where you would go to the FSA in a reverse way and say, "There is some concern in the industry here that people are getting away with these sorts of things, which could bring the industry into disrepute. Don't you think you ought to have look at them?"
  (Mr Brydon) When we have had FSA executives in front of us discussing individual issues, we have talked a lot about where the risks are, and indeed, at our last meeting we had a long session on the ARROW project, which you will be familiar with, in terms of risk-based regulation. I think it is fair to say also in the development of the themes work that the FSA has done that they exposed their thoughts on that very early in a totally open way to us. As we have gone through that work, I hope we have influenced some of their thinking, because we have repeatedly been saying that one of the major issues for the FSA is the consequences of low inflation and what happens when consumers adjust to the idea that 3 per cent might be a good return, when in their heads it has always been 10 per cent or some larger number. What do they do when you get to the stage where people start hunting for yield but do not understand that they are taking a lot of risk in the process? The FSA ought to focus on that as a major area of risk. We have also spent quite a lot of time pointing out to them the issues surrounding e-commerce. The regulatory issues surrounding e-commerce are complex and difficult, as you will know. I think there is a real issue for the UK in developing regulations for e-commerce which take our regime and spread it through the internet to British firms operating in other places, when the firms in other countries are not themselves subject to quite the same degree of regulation. E-commerce intersects all the time with the rest of commerce, because a person may start off by tapping in and buying something on the internet, but 8 times out of 10 or whatever it is there is a phone call somewhere in the process, and the moment there is a phone call, it is out of the e-commerce regulations and into the rest of the regulations. We do not think the balance is right. Europe is rushing down the track of creating the virtual market, and Britain is hurrying to implement regulations behind that, and we have expressed concern about that, because we do not think every other country is doing the same thing. We want to make sure that what is a successful industry here can be successful on a wider stage also. That affects the way people behave in their day-to-day businesses. We have also pointed out other practical risks. We have on the Panel someone from Credit Lyonnais who is specifically focussed on derivatives and we have talked about the issues on derivatives to make sure that those are in the forefront of the themes work that the FSA is carrying through. So I think we have been active in the way you say, in trying to point out areas where we think the next problem might come. We are encouraged all the time that Howard repeats that he is not trying to run a "no failure" regime; he is trying to run a regime in which consumers can have the best of that framework that they need to make sensible decisions.

  61. But in the last 12 months there have been one or two notable issues that have exposed potential weaknesses in the regulation. The question of auditors is not just dependent on the Enron case but there have been several occasions on which it has been asked whether audit is adequate when a company is shown to be in difficulty. Likewise, we have heard evidence about Equitable, the insurance company, which brought out statements that what went on in Equitable was quite widely practised throughout the life insurance industry, and questions about the way in which bonuses are calculated in the insurance industry. Why has your Panel not been warning the FSA about these sorts of issues that are now coming up? Things have come to such a pass that they are almost national scandals.
  (Mr Brydon) It is an interesting challenge. If I knew all the things that were wrong with other people's companies I guess we would know what to say. It is a fair challenge. I will go away and think about it.


  62. You mentioned the Financial Times and you went to Paris and the comments that have been made. I have noticed myself over the past few months that the FSA have come out with a lot of press releases and comments. They are running a commentary on the financial environment. Do you think that that has its drawbacks? Is that what you are saying?
  (Mr Brydon) No, it is not so much that. I think frankly that commentary is very helpful, because the commentary is generally talking about the broad environment in which consumers are making decisions, and I think the FSA is performing an excellent role in heightening awareness of the sort of issues we have just been talking about. That commentary is good. I think they have to be a bit careful that when they generate research which is controversial that, because it is the FSA and they hammer the point out in public, it is a great headline, but it may not be the whole story, and each time that happens, it can damage our industry.

  63. So they are good at talking the talk, but are they walking the walk?
  (Mr Brydon) They are very good at talking the talk, and to be fair, they have done a fantastic job of communicating what they are about. As to whether they can walk the talk, we will find out, but we are reasonably optimistic that they are trying in the right direction, given the framework they were given to operate in. There is one small point I would just add. We are slightly worried that as their powers have now been extended to general insurance as well, just when a very big organisation was beginning to start to create its own culture and get through all the managerial issues through all the mergers, they are going to have another great wave of increased people, increased responsibility, and increased things to do. Generally, when I am investing, unless they have fantastic management, I tend to avoid companies that are continuously acquiring, because eventually they find there is an indigestion in that process. We will say this also publicly. Any more responsibilities being put on the FSA before it has proved itself would be quite a dangerous route to go down.

  64. Finally, to what extent do you work together with the Consumer Panel on issues of mutual concern and how many joint meetings have you had over the past year?
  (Mr Brydon) We have had one full joint meeting in the past year, but I had met the Chairman of the panel since I became Chairman once already, or twice if you include this morning. What we have done is to expose to each other where we are coming from, but at the end of the day, as I said earlier, happy consumers mean good business. It is not as though there ought to be two interests; we have a common interest to make the whole economy successful, and then we all win. So we are quite prepared to talk to them. I know my predecessor had significant discussions with Colin Brown about that, how to operate the section11 issue, in terms of at what stage do you decide an issue is so important that you have to write a letter and demand a response and so on. That has been a practical way of cooperating. I have just been on an exercise since becoming Chairman to go round all my members to ask them how they think we are performing, how they see the Panel now evolving as we are going into a different world of operations as opposed to rule building, and one of the questions that has arisen there is how best we interface with the Consumer Panel. Colin Brown and I have been discussing whether it would not be a wise move to set up a sub-group of us to meet each other more regularly to keep each other informed of anxieties and issues that are emerging between us, and I think that will come as we move into a world where there are real problems as opposed to theoretical problems.

  Chairman: Thank you. It is good to know that we help in bringing people together. Mr Brydon, can I thank you for your very helpful remarks.

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