Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)


14 DECEMBER 2005

  Q40  Jim Cousins: Commissioner McCreevy in the recent White Paper clearly identified the ability of regulators to control shareholdings in banks, and indeed in insurance companies as being one of the obstacles he wanted to deal with. Do you think we are on course to deal with it?

  Mr Mullen: To the extent that Commissioner McCreevy has the powers to deal with it, he is on target, but I would say that it is more Commissioner Kroes in Competition who holds the key to unlocking the ability to acquire across markets; and indeed DG Competition is in the first stage of addressing this through studies on the marketplace that they have commissioned in retail banking, in cards and in general insurance.

  Q41  Jim Cousins: Your submission is the only one to mention the issue of accounting standards. I wondered whether you had any comments on the proposed International Financial Reporting Standards 3, which does indeed deal with this issue of mergers.

  Mr Mullen: The banking concern as far as the International Accounting Standards are concerned is primarily in dealing with the derivatives market and the way in which banks, particularly the retail banks, are able to use derivatives in managing their retail deposits. This is an issue particularly in those countries where banks do not pay interest on retail deposits, on current account deposits; but it is an issue for us as well where we do pay interest on retail deposits. There is a propensity for the American view of fair value accounting and we in Europe feel that the bias towards full value accounting within International Accounting Standards and with their board has gone too far, hence the reason for the carve-out that was agreed with the International Accounting Standards Board. It is a temporary solution and the deeper problem needs addressing, and it is a major issue for the industry.

  Q42  Jim Cousins: I am conscious, Chair, that I have directed my questions to the British Bankers' Association. Would you like to give other people the opportunity to comment? Do not feel obliged to if you do not want to.

  Mr Sklaroff: Despite the fact that it was not flagged up as a particular issue in our submission, the whole debate around International Accounting Standards is hugely important and it is closely related in my industry and others to the debate on capital adequacy, because the issue of what numbers you use to describe each side of your balance sheet on the one hand and then what the rules say your balance sheet should look like on the other, are intimately connected. It would be very easy in this rather complex and not always terribly clear debate to get something quite badly wrong, so we are very concerned that we get the right kinds of accounting standards for both sides of the balance sheet, and that that fits with what the European Commission eventually comes forward with in terms of capital adequacy regulations.

  Ms Knight: And the fact that those standards have been created largely without proper consultation, or in some instances consultation of any type, and they are going on a timetable of their own, so they cut across some of the other regulatory timetables. The whole thing has been quite complicated for all our firms.

  Q43  Susan Kramer: IMA: in your submission, you noted that there was an alarming lack of awareness in the IMA about the implications of MiFID in other European countries, the implication being that the UK was competitively better placed. Do you think that that applies to the retail as well as to the wholesale? I am somewhat mindful that at the time of enlargement there was great confidence amongst British industry that it would be at the forefront of taking advantage of enlargement, and it has been very significantly outflanked by most other European countries. Is there a chance of complacency in this area?

  Ms Nicoll: I think in making that comment it was more to do with the welcoming fact that the UK is very focused on MiFID and the implementation of MiFID, but being concerned that we were going to be over zealous or more zealous than other Member States. It was not so much to do with being complacent about this, but more to do with the fact that we are taking MiFID very seriously and we are not finding quite that same seriousness elsewhere in Europe. I was discussing concerns about MiFID with some colleagues recently, and they said "We do not know anything about it; we do not know if it is going to affect our firms." It is very firmly going to affect their firms. We are concerned that we are very happy to be ahead of the game, but we want others to catch up with us as quickly as possible.

  Q44  Susan Kramer: Are you saying there is a real risk that the British financial services industry may be focused on the restraints of MiFID whilst the rest are focused on it as an opportunity?

  Ms Nicoll: No. I think it is just the risk that we will be very careful about implementing MiFID properly. The danger is that we restrain ourselves through that implementation in a way that other Member States do not feel similarly constrained.

  Q45  Susan Kramer: Continuing with the retail side, one of the groups that is not particularly represented in the evidence we have today are the IFAs. I think you will agree that for retail to work effectively, advice is critical. How do you see the role of the IFA evolving to work hand-in-hand with your side of industry and take advantage of the sort of pan-European options?

  Ms Knight: The IFAs are mostly outside MiFID, as you are aware.

  Q46  Susan Kramer: Not entirely. It is not entirely clear, is it?

  Ms Knight: I think you will find that the decision that may not yet have been finally made but which is the proposal which is on the table is that the overwhelming number of IFAs within the UK will be exempted from MiFID and only about 200 will come within MiFID. It will be dependent upon how they operate their business model, obviously, and there will no doubt be some business decisions to be made. In effect, they have very much a tangential role, or tangential changes as a consequence. The point at which their involvement will be is that clearly, if they have access to greater pan-European funds for example, then they have greater opportunities and choices which, if they consider them to be suitable, they can then discuss in conjunction with their customers and clients. There will be greater opportunities of choice from their view. I think that is the best way of describing it.

  Mr Coogan: In terms of mortgages, one of the questions in the Green Paper was whether there should be a duty to advise, and clearly, if there were, that would be different for many countries' IFAs. But in our view that would be an over reaction in terms of trying to have integration of the European market. More important is the broader question, which is: how do you distribute products as a lender operating internationally? One way is by approaching a local bank; another way is looking for distributors in the local country. There are many countries that do not have active intermediary markets where there are IFAs or credit intermediaries. If they were there, there would be more opportunities for cross-border. One of the reasons why Ireland is an example where the market has opened up, and there have been a number of UK lenders that have gone into southern Ireland, is because of the intermediary sector there having increased its impact in terms of the market. Distribution, as a feature of trying to get integration in the retail market, is key. The problem is that in many countries it is not there.

  Ms Knight: A warning, if I may, on the terminology: an IFA, as we call it in the UK is not the same as in another European country. We mean a particular type of firm and a particular type of advisor; but generally speaking in Continental Europe an IFA is what we would call a portfolio manager in the UK. That is a firm that gives advice on a variety of products and investments and looks after the portfolio of the client. For a UK IFA that tends not to be the case. We have a confusion of terminology, as we do in many other areas actually.

  Ms Nicoll: To follow up on Michael's comment, it is worth noting that advice is going to be regulated for the first time in a lot of countries under MiFID, so in many ways MiFID will, one would hope, bring the Continental European levels up closer to the UK levels. As Michael says, the fact that the advice will be regulated should provide opportunities for UK-based houses. Generally in Continental Europe distribution is dominated by the banks selling their own products. Once advice is authorised and regulated, they will have to give more justification of why they are selling their own product and not, for example, a better-performing product that is provided by one of our members.

  Mr Mullen: We are waiting for implementing measures and they have been delayed, sadly. I think it will be more like the end of January before we have those. The initiatives that Angela mentioned of MiFID Connect, where you have eight trade associations working in unison to interact with the FSA to ensure proper guidance, is a major step forward. It may be that there should be more dialogue between us as these implementing measures become certain. In the way in which we will deal with them at the moment there is an element of conjecture.

  Q47  Lorely Burt: My question is centred around mortgages, which have had quite a lot of exposure already so I will be very brief and address my comments to Mr Coogan and Mr Mullen. When we went to Brussels we learnt from some people that we took evidence from there that in Italy it can take six years to get a mortgage. I am sure Angela Knight's experience was not quite that awful, but it does echo the fact that in Europe there are so many opportunities. I am probably the only member of this Committee that was a qualified CMAP mortgage advisor in a previous life. The UK mortgage market is vibrant and hugely competitive, and yet Mr Coogan commented on the Green Paper on 20 July that he was expecting integration to provide benefits such as lower cost mortgages, improved products and innovation, higher levels of consumer protection, improved access to mortgages for sub-prime borrowers, better economies of scale, et cetera. You then said: "There is little obvious benefit for UK lenders or consumers from these proposals. The UK already has a highly competitive and well-regulated mortgage market." Without going over the ground we have covered before, it seems to me that it is a case of, "get stuck in there, boys"! What is stopping you from exploiting this market? We are obviously pretty good at it.

  Mr Coogan: I think the UK lenders have a huge potential opportunity if markets across Europe were opened up because of the development of products for different people at different stages in their lives, lifetime mortgages and equity release as an example, and sub-prime for those who have had past debt problems. Ian touched upon this earlier; we have barriers if you do not have the information about the customer. In France they see it as an invasion of privacy if you give positive data to the database, whereas we would see it as responsible lending to have a record if people use a credit card. In the context of the Italian experience I think it is seven years to get a house repossessed but you need the family's approval apparently! That court procedure is not efficient and encourages fraud. We have looked to the Commission to encourage those national markets that are poor to improve their efficiencies. On top of the two examples quoted there is the Land Registry, which would also be an important thing if you are looking to have a register of the mortgage; and of course you want a valuer that you can rely on to get the valuation correct. There are infrastructure issues that are important and which would open up opportunities. The simple answer to the question of intervention from the EU is that there are huge threats that the good things in the UK could be undermined if they intervene in the wrong way. The initial comments after the hearing by Commissioner McCreevy last week indicated that they were not going to rush into legislation; but at the same time on Monday the Commission published the Financial Services White Paper, suggesting the White Paper on mortgages was the end of next year; by Wednesday it was the middle of next year; and privately we have been told it is April. I do hope that rushing it forward does not indicate that they think legislation is the answer.

  Mr Mullen: Michael is the Chair of the European Mortgage Board.

  Mr Coogan: There will be a discussion between the industry and the Commission going forward. From 1 January I will take over the European Banking Industry Committee group, so I hope to continue to carry on going to Brussels regularly—he said with a smile on his face!

  Q48  Jim Cousins: Mr Mullen, the Commission has decided that it wants to break down barriers to retail financial services, and in particular to put a standard format to bank accounts and make it a lot easier to open up cross-border bank accounts. Do you welcome that? Do you see the need for more competition in that way?

  Mr Mullen: Generally within Europe banks are cautious on the particular issue of standard format bank accounts. We would need want to see a convincing cost-benefit analysis, including the impact of disruption to business and consumers throughout Europe. There is an element of Brussels-phobia in this in that those who work in Brussels who are employed there—it is an issue for them because you have so many people who are from foreign countries and therefore the idea of a passport for a bank account is something that would be attractive to them; but they are a tiny minority of the overall European population. The vast majority of Europeans are content, and indeed do not seek a cross-border passport in bank accounts. The cost of this would be enormous to the industry. I think that the industry would need a very convincing argument to support such an initiative.

  Q49  Jim Cousins: You do not think it would lead to more transparency of charges for example?

  Mr Mullen: I think the charges are currently transparent. If charges need to be made more transparent, then the industry would co-operate, but the answer I do not think is a cross-border passport.

  Q50  Jim Cousins: You are not suggesting in that last remark that this is an initiative, because in the context of the White Paper that has just been published it is generally pretty passive, but this is an area where it is quite active, and it has committed itself to a timetable to deliver the framework of a standard bank account and easier cross-border accounts. You used the word "co-operate"; are you suggesting that you will not co-operate with that initiative?

  Mr Mullen: No, I said that we would co-operate but the first thing that is required is the cost-benefit analysis. In addition, you have the single European payments area, where you have both the Commission and the European Central Bank anxious to have a payments capability across euroland.

  Q51  Jim Cousins: Your evidence to the Committee is very negative about that as well.

  Mr Mullen: The reason being that, again, some 5% or 4.5% of all the European payments are cross-border, and of that 4.5%, 50% of that is within the Benelux countries. What the industry is saying is that we, by 2008, will put in place an enhanced capability for cross-border payments for those who wish to use them. We would hope that the incidence of cross-border usage will increase, and we will put in the infrastructure to allow that, but it does not make economic sense to build an infrastructure to allow cross-border payments for 70% of the population, when only a projected 7% or 8% will use it.

  Jim Cousins: I do find your attitude to this really quite extraordinary—forgive me! We have a situation in which allegedly 10% of the population of Normandy is British, and entire villages in southern Spain are apparently occupied by our fellow citizens—

  Chairman: All divorcees!

  Q52  Jim Cousins: Let us all speak from the basis of knowledge we have. Mine, I am afraid, is less extensive than our Chairman's!

  Mr Mullen: I can empathise with your position; I am one of them!

  Q53  Jim Cousins: This is a very serious issue. Surely there is going to be a serious, considered market demand for the ability to operate these financial services cross-border and to minimise the charges that go with this. Commissioner McCreevy, who is generally adopting an approach of consolidation, has identified these areas as the areas where he is going to take initiatives. You are indicating that you will block it.

  Mr Mullen: No, not blocking it. I am saying that what we want is a measured approach to this. We do not want to go beyond that which our surveys tell us is the demand of our customers. To put in a payments capability on a pan-European basis would cost billions of euros. We want to be sure that that is a progressive approach, rather than building a capability that is far beyond that which is required by the population of Europe for many decades.

  Q54  Peter Viggers: This is a known problem. I think it is accepted that cross-border settlements of payments are slow and expensive, and it has been identified by Commissioner McCreevy. The Association of Private Client Investment Managers and Stockbrokers said in a memorandum that it does not like the idea of a directive. I would like to draw also on a memorandum sent to me by the London Investment Banking Association, which says that it would like to see industry solutions come forward. We would like to hear I, think, enthusiasm for improvement and change. Is there likely to be an industry solution to this accepted problem?

  Mr Mullen: I am surprised at the attitude you are taking here because I believe that the relationship that we have with the Commission on this question is one where we are attempting to negotiate a sensible solution. I remain hopeful that that will be the case. We wish to be co-operative.

  Ms Knight: The directive to which we refer is not that directive; ours is clearing and settlement, which is in the securities field. The reason why we said that we are not in favour of another directive is because we have got so much change at the moment and because there are some very deep-seated differences in different countries and some real commercial issues involved. I stand to be corrected on this, but our view is that a Directive will probably mean the industry changes from one set of compromises to another set of compromises, and that is not a particularly appropriate way forward. That is why we think that in clearing and settlement there are quite a few other things that are worth doing first—getting some common standards in place; getting some ventilation of the charging issues; getting a greater harmony in corporate actions, because, after all, the major corporate advisers are the same whichever European country a company operates in. If we can get improvements there, then we start to get that big cost reduction, which is the big win in all this, but without going through a legislative process where what we get out may well not be what we want to get out; and the costs involved in that change could be very significant indeed.

  Q55  Chairman: Commissioner McCreevy mentioned it to us in the meeting and said that the securities claim remains very expensive, up to six times the cost of domestic transactions. In a speech in Dublin in September he made the point in a different context that the amounts which heads of state and government are wrangling over in the EU budget negotiations are dwarfed by the potential savings that could be achieved by making progress in this area. This is a huge area and the feelings of my colleagues here are that it does not seem as if there is a commensurate response from industry to get this right. People are losing out massively.

  Ms Knight: I think there is a desire for the industry to get this right. We are not running away from that. The question you have got to ask is how to get this area right. The legislation and the legislative processes that we have all been involved with, and the discussions that we have all been part of in Brussels on the area of clearing and settlement leads one to have some very big question marks in one's mind as to whether actually creating a directive is going to bring the benefits that we all seek. A lot of the costs associated with cross-border clearing and settlement are (1) the fact that the clearing settlement systems do not use the same system; they do not use the same messaging. If we achieved harmonised messaging and the different systems are plugging together the arrangements in one country then conform better with the arrangements in another, and you get a big chunk of cost reduction; and (2) the current charging structures. We are quite open in our charging structures in the UK, but in much of Continental Europe there are different and closed charging structures so users are paying for things that they are not necessarily requiring. Open up that charging structure—and that is a competition issue—and this also starts to bring down the costs.

  Q56  Chairman: We are looking for urgency here.

  Ms Nicoll: It brings out a general point, which is one of concern that legislative initiatives need to be very closely targeted. The difficulty is that we have experienced for example MiFID, which has gone way beyond what was originally intended. A lot of the concern that Angela is expressing is that if a legislative initiative is taken it could get out of control. One very clear message that we would like to put forward is that where there are areas where legislative change needs to be made we make a very strong plea for that legislative change to be very carefully focused and targeted.

  Q57  Chairman: I can imagine political pressure coming on with a directive, but nothing is happening yet, and this is the issue.

  Ms Knight: If you have got 25 countries involved, you have got 25 different views and 25 compromises.

  Mr Mullen: Also, MiFID is protean in its reach and is a huge directive. We are not sure, as I mentioned earlier—we have yet to have the implementing measures; they will not be out until January. We do not know to what extent MiFID may change the market and how it might affect the clearing and settlement arrangements. Until we see that knock-on effect it would not be timely for either the Commission or ourselves to act.

  Q58  Chairman: It certainly does not come from Commissioner McCreevy; he did not tie it up to MiFID; he just focused on this and said there was a problem here.

  Mr Mullen: I think he said, with respect to him, that there is a problem here and if there is not a market solution we may have to come in with a directive. But I think he sees the requirement and that it is best dealt with by a market solution.

  Ms Knight: That is right.

  Q59  Chairman: But he did not give us the feeling, with respect to yourself, of a laid-back approach which you have indicated to Jim Cousins.

  Mr Mullen: I was speaking to Mr Cousins on payments.

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