Examination of Witnesses (Questions 1-19)
MS ANGELA
KNIGHT, MR
IAN MULLEN,
MR MICHAEL
COOGAN, MS
SHEILA NICOLL
AND MR
STEPHEN SKLAROFF
14 DECEMBER 2005
Q1 Chairman: Good afternoon. Welcome
to the first evidence session on European Financial Services
Regulation. We are trying to find our way through the fog
of information on European financial services. People tell us
anecdotally that there are problems with it, but when we ask for
evidence we do not get as sharp a focus as we would like, so if
you can tell us about the problems that would be wonderful; and
even more wonderful would be pointing us in the way forward on
this issue so that we can bring more simplicity and clarity to
the whole issue in order to benefit government and industry. I
will start off with the issue of the desirability of a single
market, because all European action is posited on the notion that
a European single market in financial services is desirable. As
an institution do you consider that it is desirable and are you
committed to it, and do you believe that a single market will
lead to benefits overall for Britain? We would appreciate a short
answer to that.
Mr Mullen: First of all, there
is the matrix that you could use, and as a Committee you may wish
to refer to that, certainly I will and my colleagues will; and
that is the distinction between wholesale and retail, which is
fairly obvious, but also the distinction between prudential regulation
and conduct of business. That is an important distinction, not
least because, as you may be aware, under its previous administration
the FSA had a prudential regulation/conduct of business split,
in the way in which they were managed at a high level, and that
has now changed to a wholesale/retail split under this current
Chairman and Chief Executive. With regard to the Financial Services
Action Plan, often lauded as some 42 measuresin fact many
of these were enabling directives and there were arguably 26 that
had teeth. In addition to that, the Capital Requirements Directive,
which is outside of the Financial Services Action Plan, is a major
challenge for all industry and particularly for the banking industry.
Also, we have International Accounting Standards and the way in
which they would be implemented within Europe. I would say that
over the last five years, 80% of the UK's law on regulation in
financial services has come by way of directive or regulation
for us from Brussels. Within that context, and answering your
question directly, from a wholesale standpoint and from a prudential
regulatory standpoint, the various initiatives that have been
made by the European Union and by the Commission with the support
of Parliament have been mostly positive. We are of course in the
implementing stage of the Capital Requirements Directive, and
I would say that with the International Accounting Standards,
whilst by no means fully put to bedwe are in a better place
than we were heretofore. With regard to retail, we are now moving
to the retail agenda. As you know, the Financial Services Action
Plan was predominantly a wholesale initiative; and indeed one
might say that there was a wholesale bias towards much of what
was involved in the Markets in Financial Instruments Directive.
However, now we are moving in Europe to a more retail-biased agenda,
and in that case there is not a natural consensus in Europe. Being
retail, it is also more of a conduct of business bias. This is
exemplified by the European Banking Federation, which is a federation
of all the National Associations of the 25 EU states. With the
Financial Services Action Plan, overwhelmingly the members of
the Association represent virtually the whole of the industry
in Europe. The Commission and the Parliament would therefore listen
intently to the views of the pan-European industry voice because
from a wholesale standpoint that is what we were. Now, commercial
banks in Europe are only about 45% of the European banks, and
therefore there is a difficulty, and one might say an extreme
difficulty, in meeting a consensus amongst the co-operative banks,
the savings banks and the commercial banks. This means that from
a process standpoint it is very difficult to move forward. The
structure that is mirrored by the existence of these three entities
makes the move towards a pan-European retail market far more problematic.
Q2 Chairman: I have to exercise my
Chairman's privilege and ask you for shorter answers to questions.
That was fascinating, but we have an hour to go through everything.
Mr Coogan: My simple answer is
that a single market is desirable, but we do not think it necessarily
would be delivered by conduct of business regulations. Commissioner
McCreevy last week described opening up an EU mortgage credit
market as their flagship, and the key thing we have been seeking
to show is that you can make improvements without routinely going
to consumer protection rules as your first step. In terms of how
this will impact on the UK, we have relatively few internationally
active banks that would be looking to go overseas. A number already
are overseas. For the vast majority of members that are locally
basedbuilding societies being the obvious examplethere
is nothing that they would be looking to do in terms of operating
in other Member States going forward. There are as many threats
as there are opportunities, but the single market as a concept
is certainly worth pursuing.
Ms Knight: I agree: the single
market is desirable for financial services. Any firm that operates
in more than one country knows that there are different rules,
different requirements, as well as different law and different
tax in those different countries. Does it make sense to remove
some of those differences where possible? The answer is "yes"
because it then becomes cheaper for those firms to operate, and
that means that things like raising the cost of capital by companies
becomes cheaper. However most of this relates to wholesale business.
The goal that I think we should be aiming for is for firms to
operate cross-border. People do not necessarily need to operate
cross-border, they will tend to stay within their own country
because they understand how the system works in that countrythe
same language, the protections and how to get hold of information.
There are benefits in a single market, but we need to be very
careful about what those benefits are and how we approach the
changes.
Mr Sklaroff: Like my colleagues,
the ABI believes that the single market is a desirable objective.
Clearly, a great deal of progress has been made in the wholesale
area. We need to be careful when applying it in the retail market
to take account of both market realities and actual consumer needs
and wants, which is something that has been a little bit missing
in the FSAP in the past. For those reasons we very much welcome
the Commission's recent White Paper, which lays stress on, for
example, a more consistent approach to implementation and enforcement
of the existing legislative framework; and for us there is a big
challenge there because there are still many inconsistencies across
the market which we would like to see sorted out. Like many other
sectors, the big challenge for our industry is the new capital
adequacy legislation, which is currently being discussed in Brussels,
called Solvency II for the insurance sector. There is a great
deal to be done there to streamline the system.
Ms Nicoll: We are very, very firmly
committed to a working single market in Europe. We represent institutional
business, managers who manage pension funds, insurance funds and
so on. Generally, that single market works well. The other area
we represent is that of investment funds, in euro-speak UCITS,
units for collective investment and transferable securities. The
issue there is that our members are very, very interested. They
are given a passport under that directive, and have since 1985.
This has created a certain amount of frustration because the UK
is the largest asset management centre in Europe, which means
that UK houses are very interested in developing cross-border
business. They represent a very large portion of that existing
business, but as they move into the single market they find a
lot of barriers and frustrations to doing business on a cross-border
basis. There are benefits for the UK, as an industry, but also
the benefits that we very seriously see are those of economies
of scale, and the increased competitiveness of the market, which
should mean lower costs for investors.
Q3 Chairman: This question is to
the ABI representative. During our recent visit to Brussels we
met with Commissioner McCreevy and we also had the opportunity
to speak to the European Federation of National Insurance Associations,
which indicated very clearly that many insurers were not actually
that keen on a single European market, and preferred to hold onto
a stronger competitive position in their own national market,
rather than accept a weaker competitive position in an albeit
larger European market. How excited are UK insurers about commercial
opportunities resulting from a single European market?
Mr Sklaroff: I think the answer
is that they are very excited. A large number of our member companies
are UK-based member companies that are doing business in a wide
variety of other EU markets, and very successful business.
Q4 Chairman: Why did the European
Federation tell us that very clearly?
Mr Sklaroff: I am guessing here,
but they probably may have had two things in mind. One is that
the enthusiasm that we have from the UK market perspective is
not always shared in other parts of the EU. I think that would
be a fair observation, and I suspect that the European Federation
sees that in different emphasis than they get from different national
associations which are their members. However, perhaps, more importantly,
this is related to one of the points that we were all making earlier,
which is that when you come to look at the retail markets, that
is individual people buying insurance products, the tendency isI
put it no stronger than thatfor people to want to buy those
products in their own home markets from people that they can identify
as familiar and with a redress process behind that which they
understand. Therefore, the objective of a single market is not
necessarily in the retail markets a large volume of cross-border
trade with individuals for retail products; it is more the kind
of thing that Sheila was talking about, which is getting the back
office consolidated and therefore reducing costs.
Q5 Chairman: Give me an example of
your members who have got on their bike and gone in there and
worked in the retail market.
Mr Sklaroff: We have member companies
that are very active in the motor insurance markets in Spain and
in Italy. We have member companies that are active in the life
insurance markets in Poland and other parts of eastern Europe.
We have many members who are active in the French and German markets
in both general insurance and savings products.
Q6 Chairman: Can you send us a list
of those?
Mr Sklaroff: Of course.
Q7 Chairman: The names of these companies.
Mr Sklaroff: Absolutely.
Q8 Chairman: Because this is a very
bright, sparkly presentation here and the reality when we take
evidence on that.
Mr Sklaroff: We will send you
a note on that.[1]
Q9 Chairman: I think your former boss,
Lady Francis, when she came before our committee in November 2003,
said that the UK's industry efficiency compared extremely well
with costs in most other countries' insurance industries, including
Continental Europe.
Mr Sklaroff: Yes
Q10 Chairman: If there is such a
competitive position and the costs are much lower, then there
should be more of a drive towards retail financial services. Let
me tell you at the outset that the evidence that has been given
to the Committee is that the areas of enthusiasm are for the wholesale
market but the retail market"just let us keep our
position". Is that right? So therefore what Stephen is telling
us here is a bit of Christmas glitter!
Ms Knight: That is absolutely
right.
Mr Sklaroff: No, I think it is
more than glitter. Our member companies are active, but the distinction
I am making
Q11 Chairman: I will take Angela
because that is terrific, what you have told us already.
Ms Knight: The point is entirely
right. We look at the single market from a UK perspective. We
grumble about some of the changes, especially some of the detail
that is coming along, and we are concerned about what is going
to happen here. However, the reality is the greatest amount of
change will take place in other European countries. That is the
first concern they have got- their change is greater. The second
is that, broadly speaking we have got more or less the most competitive
industry right now as we have got a large open market place, whether
it is for, banks, insurers, private client brokers, mortgage lenders
or others. We are already being competitive. Elsewhere in other
European countries the market is arranged so that there are protections
in place within that country for these different types of business.
Some of those barriers are going to open up, and they are worried
about what is going to happen to their business. Are the Brits
going to walk in and take it? So, the third is that they are afraid
of loosing business. I recently had to take out a mortgage in
France. There are two things that are always difficult in this
world; one is getting divorced and the other is taking out a mortgage,
and I have done both! I have to say that it was easier to get
divorced in the UK than to take out a mortgage in France! I am
not surprised that they are getting worried that some of these
barriers are coming down.
Q12 Chairman: There are two stories
here: the story for the wholesale market and the story for the
retail market. Is that right?
Mr Mullen: For different reasons.
Q13 Chairman: Michael, in our visit
to Brussels we learnt that German firms have benefited from selling
mortgage products into new eastern European countries such as
Poland. Are UK mortgage firms interested in lending overseas?
Mr Coogan: Frustratingly, not.
The simple answer has been that the UK market has continued to
grow very strongly over the last few years, and although it is
more mature than most in Europe they still see the business opportunities
here than elsewhere; but we get a regular drip-feed of people
coming in, whether it is eastern Europeand Turkey is another
countryand outside of Europe, asking for our assistance.
The UK lenders are too focused on doing what they are doing well
here. I share Angela's view, which is that those who have gone
overseas want to do more of it. They are seeing that there are
barriers in the local markets elsewhere. Some of them are driven
by the national legislators and some by supervisors and the rules
that apply there; and some by the market infrastructure not being
as developed as it is in the UK. All of those things mean that
when they make comparative decisions about where to invest and
where to look for their next business opportunity, they are not
looking into Europe as much as they could do.
Q14 Peter Viggers: My personal experience
is that local markets in Europe can be local, parochial and rather
old-fashioned, and that there is a big opportunity here for British
interests, where we are much more open to the world. Looking at
wholesale financial services first, do you think we are close
to a European single market, and are benefits beginning to flow?
Ms Nicoll: The asset management
world struggles with the two. We do not actually recognise the
distinction between wholesale and retail. The reality of what
happens with us is that we have a retail product but it is sold
in a wholesale way. Cross-border business tends to be business-to-business.
As far as asset management is concerned, it is a pretty open market.
Our concerns in that context are the UK approach tends to be that
institutional business can look after itself, but that is not
necessarily the approach in a lot of other European countries.
The danger that we feel is the concern that we will find some
of the protections that are much more appropriate to retail investors
being applied to institutional business, which could potentially
hold back UK business.
Q15 Peter Viggers: Perhaps we could
have a banker's perspective!
Mr Mullen: London, as we all know,
is, if not the largest international banking sector, certainly
one of the two largest. Some 22-25% of all international banking
by volume is conducted through London, which is amazing considering
that we have less than 1% of the total world population. We are
a major player globally, and the industry is hugely important
to this country and its GDP. Therefore, we have a strong position,
in some markets a dominant position, and we are attempting to
defend that. There are threats and opportunities coming with the
pan-European market in financial services on the wholesale side.
Obviously, economies of scale and scope are there and should be
welcomed and the opportunities taken. However, from a law and
regulation standpoint, the phrase that I use is: "London
is `markets optimistic' whereas Continental Europe is `policy
optimistic'." The single most competitive element that London
has is the fact that it has its own self-regulation in the wholesale
markets; and that regulation could come under threat through the
more policy-optimistic tendency of Continental Europe. There are
advantages, but there are challenges.
Q16 Peter Viggers: We have been accused
of Wimbledon-isation, have we not? We provide the place where
people play but we do not have good players!
Mr Mullen: I am not so sure that
"accusation" is the word. I think that we take advantage
of the openness of the UK economy, practices and policies. It
is to our considerable advantage that we have London as a financial
centre and the rest of the world comes to compete in London. It
should be seen as a European asset in the world, not so much a
UK assetLondon as a UK asset.
Q17 Peter Viggers: To the Association
of British Insurers, in your submission you said this: "Europe's
retail insurance markets remain largely local for deep-rooted
reasons relating to consumer preference, the local nature of risk,
and national tax and security systems." I endorse that from
my own experience. How feasible is a single European market for
retail insurance products?
Mr Sklaroff: I think the issue
is what one means by a single market. If we mean a completely
uniform market for retail products, so the same product of the
same design at very similar prices, sold to people right across
the EUthat is not a realistic objective. What is a realistic
objective is a genuinely open and contestable set of local markets;
in other words there should be no artificial barriers to companies
from any part of the EU coming in to a local market and competing
in that local market to sell products that are sensible for the
people in that market.
Q18 Peter Viggers: The idea has been
floated of a so-called 26th regime, which is a regime that is
European but without being rooted in any particular Member State
of the European Union. What is your attitude to that? Scepticism
has been expressed about this, so can I ask each of you very briefly
to comment on whether you think this is the way ahead or whether
it is a cul-de-sac.
Mr Sklaroff: It is something that
is certainly worth exploring. One has to be very careful about
what part of the market it would work for, and one has to think
through what the consequences would be. If you create a 26th regime,
you create something that, by definition, runs in parallel to
existing regulatory structures, and there is a whole series of
issues about how that works if a consumer has a problem with a
product that has been sold under a parallel regime. We do not
dismiss it out of hand, but it would be fair to say that we share
a little bit of the scepticism about practicality.
Ms Knight: I think that a 26th
regime is looking at things the wrong way round. Instead of having
a new regime, it is necessary to consider what are the problems
we have got can they be resolved by other means or is it really
necessary for a directive or new regime to resolve them. I do
not think it is possible to say "yes" to all that and
so instigate a 26th regime. Are we getting a better single market
at the moment? It is too early to judge because of all the legislation
that we have been discussing with respect to the Financial Services
Action Plan and so forth the main directives have not yet been
implemented, so we are not going to know whether we have got a
better market and whether we can solve a lot of the problems both
for easy access for wholesale and also for the individual to have
a better choice safely, until we have got through the implementation
stage. I consider that the 26th regime is one of those matters
which should be parked with those who discuss policy, as the practitioners
will all say, "no, there are other ways probably of getting
there. A 26th regime is a last resort, and certainly we are not
there by any manner of means".
Mr Coogan: From the mortgage perspective
we flagged up in our response on the Green Paper that there may
be merit in the funding group that the Commission is setting up,
looking at how the covered bond legislation is operating across
Europe. There have been discussions as a result of the fact that
the UK does not have its own legislation. We have been able to
enter that market strongly without legislation. In other countries,
they may feel that they would like to address that weakness. I
suspect that the 26th state approach may not get to the finishing
line, but there is still some debate to be had in some areas in
the next few months, certainly in funding in the mortgage market.
Q19 Peter Viggers: The European Commission
has promised a better regulation agenda. Have you seen results
of this? Do you think that in practice they will be able to avoid
legislation where there might be a better alternative available?
Mr Coogan: Perhaps I could start
off, having lived through 18 months of this better regulation
agenda, which they called the Forum Group on Mortgage Credit.
It is very important before launching into new initiatives that
you get the views of all the stakeholders, and that initiative
has worked very well from the point of view of bringing the industry,
consumer bodies and other interested bodies together over a series
of months to talk about a lot of issues. This led to 48 recommendations
to the Commission and the Green Paper that it has just received
responses on. It was not an easy process because even after 18
months, groups of the organisations could not agree on the way
forward, so there were differences of approach particularly in
consumer protection areas between the different organisations.
That is reflected in the Green Paper. As a way of identifying
obstacles and trying to get priorities for the Commission to take
forward, and also to flesh out the obstacles that others may be
able to take forward through improved market efficiencies, it
has a lot of merit. How easy it would be to replicate in other
areas, others may wish to judge; but on the retail side we would
not wish to be rushed into new initiatives without that level
of detail and over a period.
Ms Nicoll: In the world of asset
management, the Commission is, one would hope, presaging a new
approach. Recently the Commission produced a Green Paper on Enhancement
of the EU Framework for Investment Funds. It was a very good
piece of analysis, based very much on wanting to understand how
the market operates. We very much welcome that approach. As a
result of that, there is now very broad consensus in the industry
about what should be done to go forward. The one thing we would
say is that whilst we fully support the need for very close analysis,
we sense that we may be about to enter a world of analysis paralysis,
that sometimes such analysis can be an excuse for not taking action.
As an industry we have been discussing a number of these things
for two years. You have to remember that timescales in Europe
are much longer than timescales in business, and it will be important
to do lots of analysis to make sure that action follows.
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