Examination of Witnesses (Questions 40-59)
SIR CALLUM
MCCARTHY
AND MR
JOHN TINER
8 NOVEMBER 2005
Q40 Kerry McCarthy: I turn to Europe
now, in particular the Commission's Green Paper, The Financial
Services Policy. In that you express some concern about the
proposed consolidation exercise that has been flagged up in the
Green Paper. Could you comment on that?
Sir Callum McCarthy: This was
the proposal that there should be a consolidated rule book. I
think that that would be a huge diversion of resources. I think
the scale of the task has been deeply underestimated. To do it
would take at least a decade, and I do not believe it is the sensible
way of approaching the real issue, that of establishing a single
market in financial services products in Europe. I am not sure
how strongly the Commission is wedded to the idea. I hope that
when there is eventually a White Paper that idea will have been
withdrawn, because I do not think it has been supported extensively,
if at all, in consultation and from the comments they have received
on their Green Paper.
Q41 Kerry McCarthy: Do you still
believe that a single European market in financial services products
is achievable?
Sir Callum McCarthy: I think that
it is more readily achievable in the wholesale market than in
the retail market because the retail market is affected much more
by a series of questions of law, of tax and also of cultural differences
than the wholesale market.
Q42 Kerry McCarthy: Achieving a retail
single market you think would be achievable without a complete
change to things like company law and insolvency law?
Sir Callum McCarthy: As for the
realities about achieving the single retail market, the biggest
difference and the biggest obstacle is the difference in the tax
treatment. The questions that were raised earlier about the interaction
between tax benefits and investment in the retail market are absolutely
real questions and they apply Member State by Member State. That
is the real underlying problem in terms of creating a single retail
market, not the absence of a single rule book across Europe.
Q43 Kerry McCarthy: Generally speaking,
all policy making is subject to fairly rigorous cross-benefit
analysis, whereas European policy is not subject to the same treatment.
What do you think is the impact of that?
Sir Callum McCarthy: I think it
is deeply harmful. One of the things in the Green Paper that we
strongly supported and one of the initiatives that Commissioner
McCreevy has taken is to say that he wants not only the Commission
initiative but also amendments to it either by finance ministers,
the Council of Ministers or the European Parliament, all to be
subject to cost-benefit analysis. We very strongly support that
because it is a deeply problematic position to find, for example,
a directive which is going to have the pervasive effect of the
Markets in Financial Instruments Directive (MiFID) that has not
been subject to that sort of assessment.
Q44 Kerry McCarthy: On MiFID, the
Chair of your Practitioner Panel has said that the costs of MiFID
will far outweigh the benefits to the UK. Do you agree with that?
Sir Callum McCarthy: I do not
know. There are a number of reasons why I do not know. One is
that MiFID has not yet been defined. There are still a number
of really important questions—defining things like the ability
of people to outsource, what is meant by investment advice and
some basic questions—which are still unresolved. Until we
understand those and what is going to come out of it, it is very
difficult to establish the costs and benefits. It is the case
that the costs are likely to fall particularly on the UK as the
major wholesale market in Europe. Whether the benefits for Europe
as a whole outweigh those costs, it is impossible to say because
no proper exercise has been done. That is why, in answer to your
first question, I think it is deeply unsatisfactory that we should
be in that position.
Q45 Kerry McCarthy: The FSA is carrying
out its own cost-benefit analysis.
Sir Callum McCarthy: We will carry
out our own cost-benefit analysis once we have the definition
of what it is we are talking about. The reason we cannot do more
at the moment is that that has not yet been defined. We hope to
do it on the assumption that the relevant committee chaired by
the Commission and composed of the finance ministries of the Member
States manages to come up with a definition this side of Christmas.
We would hope to be able to do a cost-benefit analysis for the
UK in the first quarter of next year.
Q46 Kerry McCarthy: Presumably, if
you are not put in a position where you can do a cost-benefit
analysis, you would have serous concerns about the directive going
ahead?
Sir Callum McCarthy: We have always
said that we regard it as unattractive that something of this
importance has been done without a cost-benefit analysis.
Q47 Jim Cousins: Do you see some
contradiction between the provisions in the solvency directives
that apply to life insurance funds and the Government's decisions
on proposals to tax life insurance funds?
Mr Tiner: No, I think that the
solvency requirements, as they are established (and they are being
re-written at the moment, as you may know, in something called
Solvency 2) we believe will put solvency of life insurance
companies on to a much more risk-based approach as we indeed currently
have here. That is all about ensuring that life insurers carry
enough capital, enough solvency, to support the liabilities that
they write and the risk they run in their assets. Our interest
is in making sure that the UK life industry in aggregate, and
indeed for individual players, meets all those capital tests.
Our understanding from the Inland Revenue's proposals for the
additional taxes of life insurance companies would be that that
solvency is not threatened by that and in that context is not
an issue really for us; it is a question of tax policy with the
taxpayers.
Q48 Jim Cousins: Let me understand
what you have just said. Are you suggesting, with the benefit
of the information that you have, that any provisions that life
insurers are required to make as a result of the solvency directive,
any additional provisions they are likely to make, will not be
subjected to the Government's proposals to tax life insurance
funds?
Mr Tiner: I am not sure, as I
understand the Government's proposals, that there is a direct
linkage between hereditary capital requirements and the basis
on which the tax is being charged.
Q49 Jim Cousins: Exactly, and that
does open the possibility that life insurers will be required
by the Directive to make additional provisions which then become
subject to tax.
Mr Tiner: It would imply that
the tax liabilities themselves would be reducing the solvency
of the life insurance industry, but I think that the items that
would be subject to tax, as I understand the Revenue proposals—and
they are immensely complicated—is that it is really the
market valuation of assets against historic costs which would
generate the potential tax benefits, and if tax charges are generated
from that then those provisions would go against their solvency,
and clearly we would have a financial stability concern if the
magnitude of that was such to threaten the solvency of life insurers.
But our current understanding—but I understand that the
Revenue are still talking to the industry about this—is
that that would not be under threat.
Q50 Jim Cousins: Could you keep the
Committee informed about that?
Mr Tiner: Certainly. Chairman:
Can I thank you for the paper that you have provided us on
the current issues relating to financial services? It has been
very helpful to us, and in particular in advance of our meeting
with Commissioner McCreadie; we will take up a number of themes
that you have intimated here.
Q51 Ms Keeble: The new basic advice
regime for the sale of stakeholder products has been in force
now for over six months. What early indications have you received
about this and how the new process is functioning?
Sir Callum McCarthy: I think there
are two concerns that need to be separated. One is, is this as
a regime being extensively used, to which the answer is no, it
is being used by relatively 200 people, and there may be very
many reasons for that.* The particular responsibility for the FSA
is to try and establish whether the strip-down regime that we
established to enable these simplified products to be sold, in
a way which still provides appropriate consumer protection, is
actually working. So far that looks as if it is working perfectly
reasonably, in the sense that there is no evidence that there
has been abuse of that strip-down regime, and one of the things
that we will want to do, as we have always made clear that we
want to do, is if this strip-down regime works for a particular
a group of products that were originally defined by the government,
most of which we thought were appropriate for the strip-down regime
(though not all), we will want to see whether that strip-down
regime can be applied more widely, and that is something that
we will investigate once we have had more experience in the actual
practice.
*Correction from Witness: One is, is the regime being extensively used, to which the answer is no; it is being used by relatively few people,
Q52 Ms Keeble: Could you just help
us with what that assessment is based on? Have you done a study
or a survey or is it just feedback that you have had through the
industry that it is working properly?
Sir Callum McCarthy: The initial
work was a lot of empirical work to see what would actually provide
appropriate consumer protection in terms of degrees of relaxing
our normal requirement. At the moment, because this is in the
early stages and a limited number of cases, it is basically anecdotal
rather than detailed empirical work, which is why we cannot yet
decide what we should do; we have to wait until there are more
cases and then we will do the same sort of empirical research
that we did before. But basically it is to make sure that the
question of suitability was properly tackled.
Q53 Ms Keeble: When do you expect
to be doing more detailed follow-up work?
Sir Callum McCarthy: It will not
be until at least a year, simply because we will not have enough
instances to test and investigate.
Q54 Ms Keeble: If you talking about
applying that regime to a wider range of products what kind of
products would you be looking at?
Sir Callum McCarthy: Other simpler
products. Other products that have lower risk associated with
them.
Q55 Ms Keeble: You would not want
to name any of them?
Sir Callum McCarthy: No, because
there are a great variety of them.
Q56 Ms Keeble: You are currently
consulting on the removal of rule RU64, Which? has said
that this would make it easier for providers to recommend higher
charging for quality products. How do you respond to the Which?
criticism and the Which? comments?
Sir Callum McCarthy: One of the
concerns that we have is not to try and control prices but to
try and establish an efficient market so that people can make
choices, and it is entirely in keeping with that that we try and
ensure that the market works effectively but do not try to control
particular commissions or charges.
Mr Tiner: I think that is right.
RU64 was a rule that was written by the PIA a long time ago and
I think that we are quite keen not to have detailed rules that
prescribe pricing but have a system of disclosure. So that is
why we are consulting on removing RU64.
Q57 Ms Keeble: You mentioned previously
the empirical evidence about the way in which the new system was
working. What type of empirical evidence is that? What appears
to you to be happening?
Sir Callum McCarthy: I say, more
than anything else, absence of complaints. If there had been abuses
we would have expected to have found out and had some early indication
of abuses.
Q58 Ms Keeble: What kind of abuses
would you have thought might occur?
Sir Callum McCarthy: The normal
sort of question of suitability, which was the central question
associated with these products: are people being put into products
which are unsuitable relative to their financial circumstances?
Q59 Ms Keeble: So mis-selling basically?
Sir Callum McCarthy: Yes.
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