Examination of Witnesses (Questions 20
- 29)
TUESDAY 10 MARCH 2009
SIR WILLIAM
SARGENT AND
MR JITINDER
KOHLI
Q20 Dr Naysmith:
You think there are adequate attempts to assess the effect of
newer regulations over the last few years in terms of impact assessments?
Sir William Sargent: The simplification
plan approach which, as you know, the departments publish every
year, is the point at which departments have to sit down and understand
the territory that they are occupying, and whether there is anything
that they can do in that space. That is quite new and unique.
The admin burdens logic took us into that space which then widened
into, "Well, is there anything else you guys could be looking
at?" If you allied that to the fact that when people are
bringing out new pieces of legislation in a space, they are encouraged,
and the guidance encourages them, to look at the overall space
that they are in so that they do not just bring out a law in a
space that already has 15 laws in it already without looking at
the totality of it, that is when we begin to get into a healthier
space and you can see whether you can consolidate areas.
Mr Kohli: I think we are getting
better at ensuring that when we bring new regulations forward
they are genuinely ones which are needed and have been through
the proper impact assessment process. I would not want to say
that everyone in Whitehall is doing it perfectly because I just
do not think that is true, and, indeed, the National Audit Office
recently published a report on the quality of impact assessment,
which broadly gave the message that progress was being made but
we are on a journey, and I think that is a fair way of putting
it. In terms of the stock of regulation, we have also seen a bit
of a step change really in that people are genuinely focusing
on how they can ensure that regulations do not cost businesses
and others on the ground any more than they need to. That is a
change in Whitehall. A few years ago people just did not have
the incentives to think about those kinds of questions in the
way that the simplification approach and the admin targets have
led to. I suppose one criticism you might make—and I am
being devil's advocate on purpose in this—is that by asking
departments to focus on admin burdens and in giving them a target,
whilst also at the same time saying worry about policy and look
at what you could do in that area but not giving them a target
(it is much harder to give them a target on policy and we have
not found the methodology to achieve it, but nevertheless say
that you could) maybe we have encouraged people to look really
hard in the admin basket because there is a target and look in
the policy basket slightly in passing. There is a question there
for the future which is can we get people to focus as much on
policy as they have on admin? What I did not mean to say, or what
I did not mean to communicate, and if I have done then I have
failed, is that we are not focusing on policy. We are focusing
on policy more now than we were five years ago. We are also focusing
significantly more on admin than we are on policy now. Maybe the
world would be a better place if we were more balanced in that.
I think that is a fair next step of the journey for us.
Q21 John Hemming:
I am going to start out for reasons of transparency by declaring
my interests that are associated with this area. I chair a company
and I am a partner in a company JHC plc, which is a software company
that provides settlement systems in the financial services sector.
I am also a shareholder in an organisation called OMX Securities
LLP which is a joint venture between NASDAQ and the Swedish Stock
Exchange and JHC providing settlement services, and is therefore
a regulated entity under the Financial Services Act. I do not
think there is any conflict of interest but for reasons of transparency
I need to make that declaration of interest. Would more intrusive
regulation require greater resources? Do regulators need to undertake
more audit, improving their ability to collect, understand and
act on evidence?
Sir William Sargent: Do you want
to do it in two bits?
Q22 John Hemming:
The first bit is do we need more resources for more intrusive
regulation?
Sir William Sargent: Not necessarily
because again it comes back to what are you using your resources
for. If we take the FSA internal audit, the identification there
was that some of the resources were not necessarily focused in
the right place or on the right skills-set at times, so it is
about who you have and where you are applying them and are you
applying them in the right place. That is the first thing you
have got to do before you decide that you need more resources.
If you look at the credentials side of the Financial Services
Authority that is something that I am certain they are currently
looking at: who do they need, do they need more people. The skills-set
will be different so it does not automatically follow that more
resources lead us to better enforcement. The observation I would
make is whether it is the right mix in the first place. That applies
to any of the regulators that are out there in the world.
Q23 John Hemming:
The other question is do regulators need to undertake more audit,
improving their ability to collect, understand and act on evidence?
Sir William Sargent: Audit it
themselves you mean?
Q24 John Hemming:
Audit the people they are regulating, I presume.
Sir William Sargent: Presuming
the process of regulating in the case of a certain sector, they
use a lot of techniques and they analyse the risk. I think probably
a better question to focus on is auditing themselves and their
own processes and questioning what they do. That is probably the
part of the question that personally I would focus on. Obviously
they have three forms of being held to account at the moment.
They have their own boards, and therefore what arrangements their
boards have put in place, including the non-executives, is something
that is important for them to look at and question whether they
have got the right structures. They then obviously have a sponsoring
department normally, which again has a role in auditing both themselves
and the department. Then they have a select committee normally
in the space occupying that. Then the National Audit Office is
acting on behalf of Parliament, which is traditionally auditing
people. Do we need more? I do not think myself or Jitinder are
qualified to comment on that, unless you think different.
Mr Kohli: Again slightly going
back to an answer that we gave earlier, this is about better and
not more or less. Thinking that just doubling the amount of inspection
or audit of regulated companies will improve regulation is just
not true. You have to go in and ask the right questions in order
to check whether the risks are being adequately managed in any
organisation. You can go in every day of the year and ask the
wrong questions every time and you will not be in a good regulation
place. You could go in once every year, once every two years or
once every five years and ask the right questions, and occasionally
collect a bit of information to check that things are being done
correctly, and that would be a better place to be. The challenge
then is for the regulator to always be thinking about whether
it is working. If that means more audit and more thinking constantly
about how to improve the way they go about their business, to
check constantly whether what they are doing is working and to
constantly improve it, I think I am in favour of that. Good organisations
do that anyway. I am not saying it as a criticism, but a good
organisation will always be thinking about what outcome am I trying
to achieve, and what are the things that I need to do to achieve
those outcomes? What are the things I am currently doing and are
they the same as the things I need to do, and are they genuinely
working? What feedback am I getting from people? What am I hearing
from people on the ground and what does that tell me about my
future strategy? Any good organisation would do that and lots
of regulators do that all the time. I think that constant improvement
is really important. That is not the same as to say that inspecting
a business every day of the year is going to make regulation better,
if you are asking the wrong questions.
Sir William Sargent: If I come
back to the comment made earlier about auditors. My own experience
in business is that traditionally the people who audit you do
not understand the business and, by definition, they cannot. If
you are a specialist in these businesses it is very difficult
to get auditors that are perfectly qualified to do that. It comes
back to the right question and the right training of those auditors.
That is the area that I would go looking in, and working out whether
people had the right capability, because one of your questions
was do they have the capabilities, and the question there is I
do not know if they have the right capabilities, although it is
clear from the variety of performance that clearly in some cases
they do not, and then the question is how do you build that capability.
Quite often you build it by training people, selecting the right
people in the first place, designing the questions, and having
a risk register that is actually meaningful for that particular
regulator is important.
Q25 John Hemming:
The area which I think all of this misses is the other two aspects
perhaps. You have got audit and checking what people are doing
and asking them to fill in monthly reports. There are two other
areas potentially where we need to improve regulation, and I would
like your comments on this. One is transparency. That is transparency
of what people are doing because if you look at how the SEC managed
to fail to prevent Madoff making off with $50 billion, that is
a question of transparency. The question is quis custodiet
ipsos custodes? How do you know that the regulators are
actually monitoring these things if you have not got transparency
in the system? Do you see there is a greater requirement for transparency?
Sir William Sargent: I think in
one word the answer is yes. As a citizen, certainly when I look
back relatively simplistically, trying to understand the totality
of what has gone wrong in financial services, transparency is
one of the biggest flaws, that people did not understand. If you
had your money in a Madoff account you could not go on-line and
look it up and check that it actually existed and so forth. The
answer is yes.
Q26 John Hemming:
It is finding out what was on the other side. You have got the
credit on one side but the problem for Madoff was that it was
a Ponzi. Ponzi was actually more secure because at the start he
actually had something; it was just there was a limit to how much
return you could get. The second area that is very often missed—and
I would like your comments on this—is whether we should
have more regulation that prevents conflicts of interest, particularly
in the financial services sector where you have the distinction
between deposit-taking and investment banking, one of which is
pretty well plodding but is secure, and the other one which is
higher risk but has potentially higher returns. Do you think there
is a role for more regulatory requirements that actually ban conflicts
of interest in the same entity?
Sir William Sargent: Let me answer
that by pointing back. I have been very encouraged by my conversations
with Lord Turner and his speech back in January and his evidence
at the Committee recently in terms of his understanding of the
nature of the problem and the inter-linking of the system, both
within banks as well as elsewhere. I am very encouraged that he
has a clear view of issues such as you have just identified, how
do you deal with conflicts, how do you deal with lack of clarity,
lack of who is doing what, when, and what are the unintended consequences,
for example, if you have remuneration systems that focus on short-term
gains which are mis-pricing risk in the first place. I think the
simplest answer, and I am slightly avoiding answering it, is by
saying that I am very encouraged that Lord Turner has got himself
into this space and has more capability than I have to address
exactly and properly the question that you are asking.
Mr Kohli: If I may go back to
the transparency question for a moment, as you know, one of the
principles of better regulation is transparency. We have enshrined
into law in the Legislative and Regulatory Reform Act that regulators
must take account of transparency when they go about their business.
It is getting greater prominence than it has done in the past.
The one caveat I would make to that is that there is sometimes
a risk that the state requires a very large amount of information
to be given, particularly to consumers, and consumers struggle
to make sense of that information, so transparency that makes
too much noise in the system can do quite a lot of harm. I think
there is a role for either regulators or for other intermediaries
to help make sense of that information so that it genuinely works.
On this account I might refer you to a report that we wrote a
little while ago which we will have shown you before, which was
done jointly with the National Consumer Council. It is probably
the best front cover of any report we have ever published, warning:
"Too much information can harm (and can fail to help consumers
to make choices and can impose costs on business, despite the
fact ... ") and it keeps going. The title almost make the
point more clearly than anything else. Whilst transparency is
really, really important, and I would not for a minute give you
the impression that we do not think it is absolutely fundamental,
it is also important that what you do not create is so much noise
that nobody can make any sense of it and they cannot do anything
with the transparency, so it has to work as well.
Q27 John Hemming:
A good specific example is I asked the Financial Services Authority
whether they had published the tier one and tier two capital ratios
for all the financial institutions that they regulate and they
sort of refused and then did a little bit work on it. If we are
talking about stability of financial institutions, the key measure
is the Basle II capital ratios and the question as to transparency,
in your view, should the FSA publish them?
Sir William Sargent: I think the
thing that is emerging from the whole financial services space
is the interconnectiveness of where the debt lies and so forth.
I am not an expert in this so I am slightly in a space that I
am not an expert in here. My understanding is that the method
by which off balance sheet liabilities were placed was such that
they would not be picked up by this publishing. You could have
been transparent by publishing one thing but, in fact, if you
go back two or three years, that would not have captured the entire
financial position accurately worldwide of that particular institution.
It comes back to the comment I made earlier and applies in regulation,
the problem quite often lies in the design of the system how you
achieve that transparency. Just publishing the tier one and tier
two might not have created the level of transparency that, with
hindsight, might have been useful.
John Hemming: I think we agree to disagree.
Q28 Chairman:
In paragraph 2.2 of your memorandum to us, in the paragraph headed
"Simplifying and modernising regulations", you set out
some impressive statistics. In December 2008 the departments have
now delivered over 240 simplification measures, taking the total
admin burden savings to date to about £1.9 billion annually.
The Government is on track to achieve its target to reduce the
admin burdens faced by business, public and the third sector by
£3.4 billion annually by 2010. They are very impressive statistics.
It is going to be interesting to see how much of that feeds through
into responses in, for example, the NAO's annual survey. In the
current economic climate, and we cannot really escape from that,
does the regulatory reform agenda need to adapt its focus? What
are the biggest challenges to achieving the Government's objectives?
Sir William Sargent: The challenge
is to carry on being good and better at regulation. The challenge
always lies in working out what you want to try to achieve and
the right way to go about it. That is a constant challenge, particularly
in an environment where there is pressure economically to do things
properly, so you start with the overall challenge in the first
place that regulating properly and effectively is something that
is not easy. We have the tools in place to generally assist people
to do that now. I think if you come back to your observation about
the figures that we have achieved, one of the things that we felt
was a challenge was people understanding the progress that was
being made, and so you need to bring validity to the numbers.
For example, we brought together an external validation panel
made up of a number of business groups, plus the Trades Union
Congress, to verify whether they felt, together with us, that
the numbers were effective. One of the challenges that we found
was if you, for example, save a million and a half employers five
hours a year, I would suspect, well, I know because I have not
had a single letter from a single employer saying, "Thank
you very much for the five hours that I have achieved this year,"
because, frankly, they have just gone on and done something else
with their time, hopefully on productive stuff. The big challenge
is to bring to people's minds the collection, in the case of the
work to date, of 240+ initiatives delivered, all of which add
up to £50 here and £100 there and five hours there and
so forth. If you think of the reverse, most of you will have heard
from constituents over the years, "I do not have a problem
with a single piece of legislation; I have a problem with the
collection of tiny little things that add up to an overall burden."
When we are trying to unpick the unnecessary cost, the same applies
in reverse, that what we are achieving in the hundreds, in fact
500+ initiatives which have been identified, collectively adds
up to a significant enhancement, but getting that through to citizens
as well as businesses is the biggest challenge, and therefore
for the agenda and energy levels to remain we need that to become
something that people perceive and support. That is a challenge
that I have.
Mr Kohli: Thinking about the economic
climate that we are now in and the impact that will have on the
agenda, the first point really that I would want to make is that
we absolutely need to deliver. We have made a series of promises
around reducing the administrative burden by 25%. I am very proud
that we are on track but we are not there yet. We absolutely need
to deliver and we must not allow ourselves to get distracted by
the very real economic issues that the country faces. Indeed,
at this time it is more important that we deliver because business
needs all the support and all the help that it can get right now
when it is under significant pressure. I think it is equally important
that on the flow of regulation, on new regulatory ideas, that
government departments and ministers think harder about whether
now is the right time. Even when the benefit/cost ratio for a
new regulatory proposal could be very good, actually this may
not be the right time to do it because of the cumulative effect
that William referred to that business is currently feeling. To
give you a concrete example of that on tobacco, we made the decision
that it is a right decision to ban the public display of tobacco
in shops because smoking is a very real issue for our country,
and therefore anything we can do to address that where the cost/benefit
ratio is good is the right thing to do. We also made the decision
that now is not the right time to do it, and so we are delaying
implementation of that to 2011 for large shops and 2013 for small
retailers, and that is sensitive to the very real economic issues
that are out there at the moment. In normal economic times we
might have done that faster. Indeed, I am sure we would have done
that faster, so delaying implementation sensitive to the economic
issues is one of the things that we are trying to do.
Q29 Chairman:
My final question is to ask you perhaps to get your crystal ball
out and look at what you think the future of the regulatory reform
agenda will look like. When is the decision going to be taken
on regulatory budgets? If the decision is not to proceed, what
will happen instead?
Sir William Sargent: I think the
decision is something that the Government is currently considering.
We have obviously done the work and provided the material to ministers
so I think that is probably a question better put to ministers
from that point of view. The consultation only finished at the
back end of 2008, as you know, and it is an incredibly complex
concept—and we are the first people in the world to even
consider how you might do that—so that at the moment is
a matter for the Government to give a response on.
Mr Kohli: In terms of the future
of the regulatory reform agenda, one of the things that we talked
about earlier was around policy. I think it is important that
the progress we have made on administrative burdens is reflected
into the policy arena too in some form. It is much more difficult
to do in that arena and we have got to be careful that we do not
harm real social protections in our society. Another really important
theme for the future is getting the message across more clearly
than we have managed to do to date. While I am heartened that
the National Audit Office survey seems to show a positive shift
in business perceptions towards regulation, it also shows that
there is a long way to go before businesses feel good about regulation.
More businesses feel okay about where we are at the moment, but
we have to make more progress in that arena, too. There are some
ideas there that will form part of the future but, as always,
we will eagerly await your report because, as you will know, last
year's report helped us define a great deal of what we did over
the last 12 months, and a number of ways in which we have taken
forward the regulatory reform agenda respond directly to the recommendations
in your report, so we are always on the look-out for ideas and
this is a Committee where we are very heartened by the recommendations
we receive from the Committee.
Sir William Sargent: If I can
draw it together, we felt that the agenda when we came on board
a little over three years ago was a long-term agenda. It was not
something that you just did in three years and that was it and
you moved on to the next. This is something which, if I look in
my crystal ball, I would like to feel the energy and focus was
still there five years down the line. I am hoping for more of
the same and business as usual from the point of view of the work
that we are doing. The bit that we have not spoken about at all
today, but something that is very close to my heart, is the public
sector work that we are doing. As citizens we all want more services
from the police, from nurses, from school teachers, and so forth,
and it is generally felt that somewhere around a third of their
time is spent with administrative duties. Public sector workers
are very happy with the concept of administration. You need to
keep medical records and school records and all sorts of stuff.
However, if we can take away 10% of their time spent and got it
down to a fifth, suddenly that is four to five hours a week of
teaching, policing and nursing which is not available at the moment.
That is a very powerful vision as far as I am concerned. That
is an area which I think maybe next time will be worth exploring
and discussing. In terms of Europe, people always say that Europe
is coming up with lots of legislation. In spaces where you can
originate regulation across the entire European economy, because
it is our key trading partner, it is a positive and useful thing.
We have been very active in these past three years—again
something we have not spoken about much about today—in engaging
Europe and persuading them to adopt the techniques that we are
doing here. For example, in March 2007, the Commission and the
member states took on the 25% admin target as well. With hindsight,
I feel that has been a very culturally powerful driver of change
and the fact that we now have it embedded in Europe at Commission
level is important. On impact assessments they are on that journey.
They are obviously not where we are in terms of the UK, but in
terms of the challenge functions, they have begun that journey.
In terms of how we engage, if you look at a lot of the process
that people are negotiating at the moment in Europe, it is the
techniques that we have laid done down at the BRE, together with
departments. I feel that when I look out five years, ideally the
energy levels will be the same as they are at the moment and the
focus will be as strong as it is at the moment. The public sector
work that we are doing is delivering significantly more time on
the ground, so to speak, and in Europe it is an incredibly effective
place consulting with people, identifying the issues, and identifying
the things that genuinely cost across the economy. We are already
seeing that. The recent exemption of micro firms from accounting
requirements would not have been possible two years ago. That
is very much something that we have pushed very hard, so that
is part of the vision for going forward.
Chairman: Thank you very much for your
time, gentlemen. I think that it has been a very constructive
session.
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