Financial Services Bill

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Q198Mr. Breed: Before we go on to so-called living wills, do I take it from what you have said that you would prefer the current split of responsibilities between the OFT and the FSA to be reconciled in one body or the other?
Adrian Coles: It is certainly confusing at the moment. I think that it either needs to be formalised, so that it is very clear what the respective responsibilities of the two bodies are or, preferably, we should move towards what the objective of the legislation was in 1997: a single regulator. At the moment there are three regulators in the consumer space in financial services. The ombudsman is clearly a regulator through the decisions that it takes. The OFT is clearly a regulator on credit, and it is very odd to have one regulator on credit and a different regulator on deposits—in the example I just indicated.
Angela Knight: It certainly needs to be rethought. There is not actually an easy and simple answer, because credit is granted in a very plural way in the UK. It is granted by entities that are not financially regulated, for example. If you buy your car from a second-hand car salesman, you may well take out a loan to do so, but you are taking it out through the auspices of that garage, rather than directly with a financially regulated organisation.
Adrian Coles: If I could briefly interrupt, if you buy insurance from that second-hand garage or seller, the insurance is regulated by the FSA. The credit would be regulated by the OFT.
Mr. Breed: There is real consumer confusion.
Angela Knight: There is indeed. And there is confusion by us. If I was going to say, “Where do you start?”, you start by putting together all the regulations surrounding consumers for those financial institutions that are already regulated by the FSA. That is where you would start, but it may not be where you conclude. Meanwhile, consumer credit anywhere in the UK—there is a lot of law surrounding that, a lot of it coming from Europe. That is not necessarily obviously meshed together, so you cannot simply pick up from one body and put into another body.
But, having said that it is not simple and having said that wherever we go it is quite difficult to see that you can get total coherence, what we certainly need to do is to start looking at a change. We cannot just leave it like that. Firms get confused; advisers get confused. It is not surprising the poor public therefore gets very confused.
Adrian Coles: To add a final point to that, there are seven different fairness regimes imposed by different regulators on UK financial services institutions. We have just published for our members a 100-plus page book explaining how they need to comply with all those different sets of regulations on how to be fair.
Mr. Breed: And people still feel that they are treated unfairly.
Angela Knight: Absolutely.
Adrian Coles: Absolutely.
Q199Mr. Breed: Can we move on to these three recovery and resolution plans? I have to say that I am not necessarily a great supporter of the whole concept. I am finding it difficult to see how this will work in practice without some quite serious repercussions. First, can I get your general view as to the need for them as such? If there is a need, how does that work on companies operating in international markets, where those international markets might not be participating in anything like the so-called living wills regimes, yet they could actually have repercussions on the business that they do in those countries?
Adrian Coles: My members do not operate internationally, so I will not comment on that particular point.
Angela Knight: Living wills—recovery and resolution plans is the name for them—are the hot topic of the day in the international forums. You do not, by the way, need to have a law to implement them. Perhaps I should also say that to put a statutory duty into a piece of legislation for the FSA to produce something, where they and we have not decided what it is, and where the requirements anyway will start to flow from the international authorities, strikes me as premature at the very least.
The main proponent of the scope and detail of what will ultimately be meant by a recovery and resolution plan will come from the Financial Stability Board charged with that responsibility by the G20. And yes, it is quite correct that we will ultimately implement here in the UK for all those entities who operate here, whether you consider them UK companies or not. What a recovery and resolution plan can be is anything from a 20-page booklet, which gives an indication of the interconnectedness of the various parts of that organisation and what actions they would take should a problem arise, through to something immensely complex, which would have the effect of that organisation and its component parts almost having to operate, capitalise and provide liquidity as though they were separate stand-alone entities.
There is obviously a gut instinctive view, which I share, which says that you have to have as an organisation a good idea of what your plans are should some big event arise, which seriously affects your model, such as we have had with the world financial system coming to a halt, but that is very much at the aggressive end. There will be other things as well, and I subscribe to that. But there is such a range of options, such a huge diversity of firms, and such a lot of clear thinking that needs to be done, because there will be consequences for the real economy. Clear thinking will be done anyway by regulators, and it must take place internationally. To place in clause 12 responsibility on the FSA to go away and do it is probably inappropriate, if I may say, and certainly very much more advanced than we should be at this stage, particularly considering the international market that operates here. We may well frighten the horses rather than do what we all need to do, which is to give coherence, stability and a very strong message out from the UK that we are a good place to live, work and do business.
Matthew Fell: I absolutely recognise Adrian’s comments around proportionality. Overall, we certainly think that living wills can have a place in the toolkit to manage systemically important firms. If the idea is to say, “Can you have something that helps arrange an orderly shutdown of either a part or a whole of an institution without it contaminating the rest?” that would be a laudable aim. I have three notes of caution on this. One would be some of the comments Angela was alluding to. If the UK front-runs what happens internationally we could be in danger of setting up either conflicting or contradictory requirements on UK-based firms or putting in place more prescriptive or onerous measures for the UK than is the case internationally. That would be damaging to our overall competitiveness. Secondly, there would be a danger if this serves to create a uniform business model. That does not seem a very sensible place to end up; if every institution is thinking exactly the same and this sort of drives everything down one road, that would not be a very good idea in terms of managing risk and diversification. Thirdly, as people have alluded to, the timing of this—creating a statutory duty on the FSA before we have even nailed down what the objectives are—would seem premature. That is a phasing in and timing issue.
Angela Knight: Don’t forget it is recovery and resolution, not just resolution; there is a difference. Can I, as a large financial entity that hits a real problem, recover from that, or do I have to go into the resolution regime that flowed from the Banking Act of earlier this year? There are two different things; they are not the same.
Adrian Coles mentioned the cost-benefit analysis that is necessary. We need a wider economy impact analysis in this area and many other areas, because there is an increasing assumption that more regulation and more costs can be absorbed somehow, amorphously, by an institution with apparently no external effect or impact whatever. That is not correct. If you increase the cost of operation of anything, that ultimately increases the costs of the goods and services provided to the customers, limits the goods and services provided to customers, or does both. It is the same in the financial world as it is anywhere else. Impacts on real economy from many of these changes are essential, anyway. It is just that we are so far from even starting discussions on what the international authorities—let alone the local authorities—are thinking about recovery resolution that this is seriously premature.
Adrian Coles: Just picking up on Angela’s point on recovery, the FSA already requires building societies—and, I am sure, banks as well—to have contingency plans in place for a very wide range of possible occurrences. We have held a number of conferences for our members, taking them through what to do if you get a run, if you run out of liquidity, or if adverse media comments that are untrue affect your institution. Many of these things are already covered. To go back to Angela’s final point, we need to be careful of just building layers of regulation on top of what already happens. The question is, “Does this actually add anything?” That was a point we started off the session with.
Q200Mr. Breed: There are two other R’s that might come before recovery and resolution. Will these plans make potential risk more transparent, and will they make the institutions potentially more resilient?
Angela Knight: I would say that if you start off with just a plan, and that plan sets out the various aspects of involvement and potential interconnectedness of the business that you undertake—don’t forget that Chinese walls mean that sometimes that interconnectedness is viewed at a higher rather than a lower level, and has to be viewed that way by requirement—and, as is happening elsewhere, there are both greater responsibilities placed on risk officers and a much greater focus on risk from the board downwards, inevitably as you start to draw up that plan there will be changes to what you do and how to do it that may well flow much earlier. That is simply because, as you rightly say, you have greater transparency and understanding, perhaps, of some of the ways in which different arms of your operation are working and connect together. That is the important aspect. That is the thing with which we all agree. We are talking about the high-level, gut-instinct view of what these things need to be.
Resilience is a mixture of understanding your risks, and of providing sensible and coherent mechanisms for addressing those risks. The question is “Does that flow?”, and the answer is “Yes, in part”. But what I have just said in answer to your question is not what is written in the Bill, and it is not what we know—or do not know—about how the international authorities are developing in this area. Therefore the nature, extent, breadth and depth of what is going to be required in the recovery and resolution plans remains, at this stage, unknown. That is something that is of concern to the industry, and it can be very costly. We do have various mechanisms in place. Is it going to be necessary? Probably, but on the depth, we need to wait and consult. We need to be very careful that it is not just an additional overlap, but that it does the things that we want it to do, which is to enable better concentration on the risks that an organisation is running.
Q201Mr. Hoban: May I follow on from this line of questioning? This debate has focused on resolution and recovery plans for banks and building societies, but of course the scope of the Bill can potentially go beyond that. It says that the regulations must cover authorised persons subject to part 1 of the Banking Act 2009—that is, banks and building societies—but that potentially means that other organisations in the financial services sector could be covered. Matthew, the CBI represents a broader swathe of people than either Angela or Adrian does. What are your members’ comments on, say, insurance companies or asset managers being required to set up these plans?
Matthew Fell: Well, it is absolutely the same message that Adrian was talking about: there should be a sort of proportionality test. The members would absolutely say that. If we had an insurer represented on the panel here today, one of the first things they would say is “Insurance isn’t banking, so make sure that what you put in place is fit for purpose for all, and that you are not just designing something for one component part of the overall system.” They would absolutely share those concerns.
Q202Mr. Hoban: Is it your expectation, though, that these plans will be rolled out to insurers, asset managers and other financial services businesses?
Matthew Fell: As we see the text in front of us today, that is absolutely a possibility. If the question was, “Is that the intention?” or “Is that appropriate?”, we would have a different answer. That comes back to the systemic risk test, which is about the whole interconnectedness of institutions and the ripple effect that they have through the entire economy. That seems to be where we should be focusing our efforts: where do you draw the line to get the appropriate balance that is required for them?
Angela Knight: Of course, in the UK, you have banks that own insurers, and in continental Europe, you have not only that, but insurers that own banks. Suppose you have an insurer that, in the EU, owns a bank that operates as either a branch or subsidiary in the UK. Whatever we have done here becomes a bit immaterial if they have not done it over there. That is why I harp on about the issue of internationality.
Q203Mr. Breed: The Treasury Committee visited three capitals in Europe last week, and it certainly looks as if they are not going down that particular route—at least not at the moment.
Angela Knight: There are some countries that are very strongly against this. They say that it is unnecessary, and they are not going to require their industry to do it. Some of the countries that have said that are very big countries and are important to the UK.
Q204Mr. Hoban: Which countries are they?
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Prepared 11 December 2009