Financial Services Authority Annual Report 2008-09 - Treasury Contents

Examination of Witnesses (Question Numbers 1-19)


25 NOVEMBER 2009

  Q1 Chairman: Good afternoon and welcome to this evidence session on the FSA Annual Report. Would you introduce yourselves formally for the record, please.

  Lord Turner of Ecchinswell: Adair Turner, Chairman of the FSA.

  Mr Sants: Hector Sants, Chief Executive of the FSA.

  Q2  Chairman: For the first 20 minutes, I want to focus on comments about HBOS and bank charges and then we will move on to the other aspects, if you do not mind. On the issue of bank charges, as we know, the Supreme Court this morning seemed to have found in favour of the banks and I wonder what you think will happen next. We were discussing with the OFT about whether you should continue to use the courts as a way to challenge bank charges or whether other approaches may be more productive.

  Lord Turner of Ecchinswell: Obviously, the Supreme Court has found in favour of the banks' arguments this morning that the overdraft charges are not assessable for fairness under the Unfair Terms in Consumer Contracts Regulations 1999 and that effectively means that people do not have a basis of complaint on the grounds that these charges are unfairly high. One immediate consequence of that from the FSA point of view is that the FSA had put in place a waiver for firms so that they did not have to deal with complaints about unauthorised overdraft charges in the time specified under our dispute resolution rules. We had been doing that because we felt that there was no purpose in a flow of complaints before there was legal certainty one way or another as to what the situation was, but that waiver has effectively ceased today; it was clearly linked to this decision and the moment that there was legal clarity that falls away. Looking forward, I think that it is obviously important that we have a regime where people are clearly informed and clearly understand the nature of these charges. The attitude of the Supreme Court is that it is reasonable for the banks to see the thing as a total package. The OFT will be clearly thinking about its next steps and we will have to wait to see what they intend to do. It is the case, of course, at the moment that the law in relation to the responsibility for things which are in an overdraft position gives responsibility to that to the OFT because that forms a consumer credit product of which we are not the direct regulator. We are in the slightly odd position of being the regulator of deposit taking but not the regulator of credit extension.

  Q3  Chairman: Should we just write off past bank charges and focus on the future then?

  Lord Turner of Ecchinswell: I think it is not the case that there can be no basis for complaints from the past and individuals may have to look at this because, for instance, if they think they were misinformed in the past, then that may be the basis of a complaint, but I think that it is clearly the case that the argument about whether these charges in the past can be deemed to be unfair, which is probably the basis of most of the complaints that have been brought forward, has been definitively resolved by the Supreme Court and I think that probably the priority for the authorities and the priority for society is to get a basis going forward which is seen as a good product, clearly explained and well understood by consumers.

  Q4  Chairman: The Government have said that they will work with the OFT and yourselves so that a new framework for fairer bank charges can be implemented going forward. I would like to know what timescale you think there could be for that and will you be looking at the way in which bank charges are structured as part of your treating customers fairly procedures?

  Lord Turner of Ecchinswell: As I say, the actual structure of bank charges, particularly as they relate to a credit extended, any category of unsecured credit actually falls to the OFT rather than us. Since we took on a statutory responsibility for deposit taking conduct of business—we have been responsible for that since 1 November—the credit extension side sits with the OFT. Clearly, we do however have a responsibility for making sure that complaints are fairly dealt with. I think this is an area where we will have to see how the OFT wants to proceed.

  Q5  Chairman: Do you think that you could assume responsibility for credit? Do you feel that it is in your interests?

  Lord Turner of Ecchinswell: I think we have always said that there is an issue about the appropriate divide in responsibility in relation to credit products. We have always been wary of suggesting that the FSA should be responsible for all consumer credit because, of course, that extends to things which are not extended by financial institutions to the whole of, for instance, in-store credit. On the other hand, clearly there is an issue where you have one product which the Supreme Court has decided from a pricing point of view ought to be seen as a total package where, if somebody goes from being £5 in credit to £5 in debit, at the moment, the way in which the law works, the responsibility for making sure that the terms and conditions are reasonably explained et cetera switches from us to the OFT and that clearly is a boundary which is not all that clear.

  Q6  Chairman: I understand. So, we will wait for the OFT and we will see what they say when they contact us. I want to spend 20 minutes on the HBOS and Lloyds issue. When was it determined that RBS and HBOS would need ELA support?

  Lord Turner of Ecchinswell: The decision on providing ELA support was made by the Bank of England. We were aware in the course of the first few weeks of October of the very significantly deteriorating positions throughout the money markets both in the UK and globally with a collapse of the maturities of which banks would lend to each other and then an increasing unwillingness of some banks to lend to other banks and because we, as part of our supervisory process, receive daily liquidity reports on the banks which clearly show where they are getting their funding from, we were aware, as it occurred, that they were reliant on very significant lending from the Bank of England.

  Q7  Chairman: Could you be more specific. You mentioned the first few weeks in October but—

  Lord Turner of Ecchinswell: The Governor's letter made clear that the HBOS was 1 October which I think was a Wednesday and the RBS was the next Tuesday, Tuesday the seventh.

  Q8  Chairman: But you had not known in advance to that?

  Lord Turner of Ecchinswell: What we would know was day by day what the situation was. We were well aware that the Bank of England was monitoring very carefully and they informed us of their careful monitoring of the funding position of the banks. We were aware each day of the amount of lending which was occurring whether, within the existing schemes, the standard schemes, a discount window, a normal operations SLS, which was already in place by that time, and we would have been aware that we had reached the stage where they were using a special non-standard approach. The definition of emergency liquidity assistance is essentially forms of assistance which fall outside the pre-existing categories of acceptable collateral.

  Mr Sants: The choice of instrument for providing liquidity is a matter for the bank.

  Q9  Chairman: Of course.

  Mr Sants: We were interested in whether they had sufficient liquidity and whether that would be available.

  Q10  Chairman: Can I just get it precise. You were aware that this provision was going on, but in terms of specific provision for HBOS on 1 October and RBS on 7 October you did not have advance information or did not know on those particular dates?

  Lord Turner of Ecchinswell: We did not have advance information; we would not have needed to. We were well aware that—

  Q11  Chairman: Did you know on one of those dates? Did you know on the date of 1 October?

  Lord Turner of Ecchinswell: We certainly knew the total amount each day of the lending from the Bank of England to those and I am pretty sure we would have known that the point had been passed where they had moved to emergency procedures. We were well aware that was an option which was available to the Bank of England. After all, it had been explicitly discussed by yourselves in your previous reports and by the Banking Act. It is a core function of a central bank that it does that. Whether on that precise day I was highly aware that they had gone over the line to emergency liquidity assistance I cannot remember, but certainly in general we were aware that it was an option and, once they were into that option, we were aware that they were there.

  Mr Sants: We also need to keep track of their collateral provision, so we understand the mix of instruments being used to secure funding as part of our overall monitoring of the balance sheet. So, we understood the ingredients of the funding package.

  Q12  Chairman: Did HBOS, Lloyds or RBS register any concern about the support being provided in a covert manner?

  Lord Turner of Ecchinswell: They did not in the sense of suggesting to us that they needed to issue a disclosure and we would not have expected them to do that because, following the discussions which had occurred the previous year and in your own deliberations about the possible disconnect between the Market Abuse Directive and the desire to be able to have a central bank provide ELA in a covert fashion, we had already then issued a consultation paper which explicitly said that an issuer may have a legitimate interest to delay disclosing inside information concerning the provision of liquidity support by the Bank of England. So, one has to remember that this was against the quite overt discussed background among all the authorities and, indeed, by that stage by Parliament within the Banking Bill that it was both appropriate for the central bank to provide covert liquidity support and that, in those circumstances, it was appropriate for an issuer not to immediately disclose the fact that they had received such support.

  Q13  Chairman: Was there unanimous agreement in the TPA that this information was kept secret until yesterday or did that have everything to do with the Bank of England and little to do with yourselves?

  Lord Turner of Ecchinswell: The decision to release the information yesterday was essentially made by the Bank of England and I think it was reasonable for them so to do.

  Mr Sants: They did consult with us as to whether or not they considered the release of the information would have any systemic implications. We concurred with their judgment that it would not and I would say that the share price movements subsequent to the announcement support that judgment. They consulted with us in respect of taking advice from us on market implications of their announcement.

  Q14  Chairman: Would the emergency funding provided to HBOS and RBS normally be considered material to shareholders of HBOS, RBS or Lloyds TSB shareholders in the merger?

  Lord Turner of Ecchinswell: It could depend on the amount of it. There was within the merger very significant disclosure of the fact that there was significant liquidity support being provided and there were many caveats set out in the relevant documents which I have here which clearly alerted people to the fact that both HBOS and, therefore, the combined group were dependent upon liquidity support by the Bank of England and also in very clear terms alerted them to the fact that, if that support were ever removed, there could be a threat to the solvency and sustainability of the groups. Of course, the actual situation in relation to Lloyds is that the emergency liquidity assistance was actually paid back just a few days before the merger went ahead, so that the combined group was always operating under the defined and publicly declared facilities.

  Q15  Chairman: What is the legal position as to whether this was a material fact that should be present in the Lloyds, TSB and HBOS prospectuses for the merger and Lloyds TSB rights issue?

  Lord Turner of Ecchinswell: I will ask Hector to respond to that.

  Mr Sants: We might helpfully back up for a second here and remind ourselves that there are two different directives in play. There is the Market Abuse Directive which potentially could have placed an obligation on a company/an issuer to make a disclosure to the market of a material event. That was the fact that was discussed at the time of Northern Rock and the requirement not to make such a disclosure, to which the Chairman has just referred, had by then been clarified. That refers to the obligation to a firm to make an announcement to the market about any material event affecting its circumstances. Separately, as you allude to or as you are referring to, are the obligations under the Prospectus Directive in terms of disclosure in documents in relation to transactions such as capital raising or class one circulars. In this case, as you say, there was a class one circular issued to the Lloyds shareholders and there was a series of documents including capital raising. There was capital raising in relation to Lloyds but also capital raising in relation to HBOS. There is indeed a requirement to make clear explicitly, material risks which are relevant to the transaction that the shareholders are being asked to make a judgment on. We can certainly read those out to you, but I think you probably have them in front of you. As well as the various risk warnings in the prospectuses in relation to that matter, it is completely clear, that it was made abundantly clear that without central bank funding, HBOS was not a solvent business, and that risk warning was clear. As the Chairman has already made clear of course, they were not intending and they had already agreed with the Bank of England that the combined new group would not be availing itself of ELA and therefore, from the Lloyds shareholders point of view, the fact that ELA was currently being provided to HBOS was not a fact that was going to be carried over into the new group. This had already been discussed between Bank of England officials and the Lloyds executives, so Lloyds executives were fully aware of the circumstances of HBOS.

  Q16  Chairman: At the time of Northern Rock, the Governor explained to this Committee that there were legal obstacles to conducting covert operations particularly in regard to Europe. What has changed since Northern Rock that allowed a covert operation to occur in this case, and I am thinking particularly Europe?

  Mr Sants: The original discussion about the Market Abuse Directive publication requirements which refers to that ongoing obligation to keep the market properly informed which, as I have mentioned before, is different from the prospectus requirements, as we have said, I think it was always debatable as to whether or not the Northern Rock circumstances were not discloseable. There was a particular set of circumstances pertaining to Northern Rock, notably in relation to earlier statements the company had made to the market, which arguably meant that disclosure under the Market Abuse Directive was required and that it would have been misleading to delay the disclosure. I am not necessarily convinced that was the case, but it clearly needed clarification, which I think I described at a previous TSC meeting. We then issued clarification of our rules which had already been published by the time that this ELA matter occurred.

  Lord Turner of Ecchinswell: I think you yourselves as a committee reported in your report on Northern Rock that you had learnt on your visit to Brussels that it was certainly not believed there that preventing the covert operations by a central bank was the intention of the Directive.

  Q17  Chairman: We had a long discussion about that, Lord Turner.

  Lord Turner of Ecchinswell: So, it was never clear that it was disallowed by the Directive and I think one of the crucial things that we did in 2008, by the thing that I quoted earlier, was to clarify that we did not believe it did.

  Q18  Chairman: Was the take-over panel informed of the support being provided to HBOS prior to the announcement of the new terms of the Lloyds TSB offer?

  Mr Sants: It would not have been a matter for the FSA to disclose to the Takeover Panel. Obviously, disclosure obligations sit with the issuer, so with Lloyds and HBOS. I suspect that the answer is not but I would have to clarify that and give you an answer.

  Q19  Chairman: We have Lloyds coming in January.

  Mr Sants: But it would be an obligation on the company to make a disclosure if necessary, but I doubt if they had to.

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