Examination of Witnesses (Question Numbers
25 NOVEMBER 2009
Q80 Jim Cousins: In the Daily
Mr Sants: It may have been reported
in the Daily Mail; they were referring to a speech I made
on 9 November.
Q81 Jim Cousins: Yes, there we are.
We realise that the banks have got considerable refinancing problems
ahead of them over the next few years. The Bank of England has
made that clear. Can we anticipate that there is a similar range
of issues for the insurance industry?
Mr Sants: I think, as we commented
before, three points. First of all, as you know, the overall prudential
regime of the insurance company was modernised post the 2000 period,
post the concerns that occurred with a number of the life companies
at that time, this has proved to be an effective prudential regime,
which is being further modernised by Solvency II. This prudential
regime brought in in the last few years in the insurance sector
has, clearly, been very beneficial to them in the current crisis.
The second observation: as you well know, the inherent characteristics
of insurance companies, particularly with regard to liquidity
risk, are very different. The third observation: I think, in general,
I would say that our insurance sector is not particularly homogeneous
and each individual company tends to have its own characteristics.
I do not think that people should think that the risk to the insurance
sector is of the same nature as has affected the banking sector
over the last couple of years, so, no, I think the risk issues
for insurance are very different to the risk issues for banking.
Of course, we are in a situation where financial markets are much
more stable than they have been, and insurance companies are also
a beneficiary of that as well as the banks. I think it would be
wrong to take the view that because we have not had a crisis in
insurance we are going to. I think that would not be a fair analysis
of events. What is important that we do is that we make sure our
supervisory lessons that we have learned primarily as a result
of the events in the banking sector over the last couple of years
are, where relevant, carried across to the insurers. We are working
to ensure that is happening and, in particular, putting in place
a new approach to stress-testing in the insurers which draws on
our experiences in banking and is utilising the same pool of technical
specialists that we have now hired. We have hired something over
a 100 or so new technical specialists to equip ourselves to take
our own views on risk, on balance sheet risk and stress-testing
risk. We will be carrying across those lessons to the insurers,
which I am sure will be a further strengthening of the regime.
Q82 Jim Cousins: Did you want to
Lord Turner of Ecchinswell: I
think Hector has said everything, unless you wanted to follow
up. As Hector said, we continue to look very carefully at all
sectors, but I think insurance is a very different category because
it does not tend to face the same refinancing risk as banks because
it does not have liabilities that roll off. The fundamental difference
of insurance is it is not doing the maturity transformation of
short-term liabilities and long-term assets, which is the very
particular risk of a banking system, but it does not mean it does
not have other risks, and we are watching them very carefully.
Q83 Jim Cousins: Mortgages: would
you like to have a similar power of regulation over second charge
mortgages as you have over first charge mortgages?
Lord Turner of Ecchinswell: I
think it would be a logical tidying up of the system. Obviously,
the position which people are in, in terms of affordability, relates
to the combination of their mortgages and in our latest mortgage
review, which we put out in mid-October, we have talked about
a regulatory requirement for lenders to meet an affordability
requirement, and it will be more difficult for us to police whether
they are truly working out affordability if we have absolutely
no control over a second mortgage which can change the affordability.
In general, we think it might be a logical tidying up of the existing
Q84 Jim Cousins: That is helpful.
When we turn to the affordability requirements that you have laid
down, I think you would both recognise that at the moment there
is a requirement for very high deposits and substantial arrangement
fees and there is not a great availability of mortgages other
than on a quite restrictive loan-to-income and loan-to-value basis.
I am aware of the fact that none of your requirements have laid
down specific figures for loan-to-value, loan-to-income, and so
on, but you will be aware that, for example, the Council of Mortgage
Lenders feels that your affordability requirements will inhibit
the availability of mortgages, particularly to the less well off,
who do not start out in life with the bank of mum and dad behind
Lord Turner of Ecchinswell: This
was a set of considerations of which we are well aware and I think
are clearly expressed in the mortgage market review that we put
out, that there is a very careful trade-off to be struck here,
and that is why we deliberately made that a discussion paper and
why we would like as many people as possible to be involved in
this debate, because it is a social trade-off. If we place any
sort of limit, any requirement for affordability, then it is almost
certainly the case that somebody somewhere will be restricted
from getting a mortgage who might have been able to pay it off
and for whom it might have been a good mortgage. There is no ability
of any regulator to get it absolutely right. On the other hand,
if we do not in some way regulate this market, I think we will
go back to the other form of customer detriment, which is not
failing to get a mortgage but ending up with a mortgage which
is unaffordable. What we tried in the mortgage review was to say,
okay, given that balance, what is the intelligent way forward?
We looked very carefully at whether loan losses, inability to
pay and, therefore, problems for the provider as well were closely
linked with loan-to-value ratios or loan-to-income ratios and
we found that although there was a correlation, it was not an
extremely tight correlation. There are some relatively high loan-to-value
ratiosin fact manywhich are effectively paid off
by people, so you want to be wary of limiting that, and similarly
with loan-to-income rations. We found, for instance, that whether
or not a loan was self-certified income was a much better predictor
of getting into trouble than whether it was high loan-to-value
or loan-to-income ratio. We put out a discussion paper that says
that our present proposal is to go forward with a ban on the self-certification
of income, not to have across the board LTV or LTI limits, to
explore whether there are, as it were, toxic combinations of LTV
or LTIcombinations where you say, if it is more than this
LTV and more than this LTI, you really are doing something very
dangerousand place a requirement on providers and intermediaries
to go through a process which checks that this is affordable,
and I think that that is a reasonable balance. What we have been
trying to do there is to strike a balance and not go as far as
saying you cannot have a loan-to-value of more than 80%, or 90%,
or whatever, well aware that there are some high loan-to-value
ratios which are affordable and which, as you say, are very important
for access for precisely those people who are not fortunate enough
to have parents who can give them the deposit to get them going.
Mr Sants: We are trying to drive
home a message of good common sense. Surely, good common sense
is not to take on mortgages that you cannot afford. That is a
good starting point to open up a debate. People do not want to
take out mortgages that they regret and they cannot afford in
Q85 Chairman: I think one of the
comments that Jon Pain mentioned to me when I was talking to him
was that nearly 50% of mortgages in the market have no proof of
Mr Sants: 45%.
Q86 Chairman: 45%. That is quite
a high figure, and I think we need to be careful.
Lord Turner of Ecchinswell: That
exploded in the ten years running up to the crisis, and the mortgage
market review that we sent out in October illustrates that this
is one of the best single predictors you can get of whether you
are going to have problems with repayment. It is a much more powerful
predictor than the LTV or the LTI level.
Mr Sants: It is not just a consumer
protection issue; it is a prudential issue. There is an integrated
risk issue here. Something of the order of one-third of lenders
are not assessing affordability. We would think, and you would
think, I am sure, as well, that the lenders should be assessing
affordability rather than just looking at simple loan-to-income
ratios. We want a more sophisticated approach to affordability
assessment for prudential purposes as well as for consumer protection
Jim Cousins: You obviously recognise
that at a time like the present, if you are trying to operate
a flexible labour market, which might be in the wider economic
interests, to have onerous requirements to predict income many
years in advance may be quite unreasonable.
Q87 Chairman: Focus on affordabilitywe
did that. So we are at one with you in the sense of affordability.
Lord Turner of Ecchinswell: We
are well aware of the balance that you are suggesting we need
to strike, and we have tried within what we have proposed to strike
that balance between alternative considerations.
Mr Sants: A lot of people in the
lower income groups get involved in interest-only mortgages, and
actually interest-only mortgages can often lock them in, in times
of falling house prices, so it makes it more difficult to move
around. I think we also need to bear that consideration in mind.
Jim Cousins: Mr Sants, in this company
to talk of interest-only mortgages is to raise a very delicate
Q88 Sir Peter Viggers: Consumer protection
is one of your key objectives, yet top management time must have
been diverted into the banking crisis over the last year or so.
Can you tell us a word about your consumer protection approach?
Does it permeate everything you do, or is it segregated into separate
departments, and what are your priorities for the coming year?
Mr Sants: The serious question
is have we set up the organisation effectively: ie do we have
an organisation that is properly able to discharge our obligation
to both look at conduct as well as prudential issues? I think
we have done that, and we have done that through the changes we
have made to our supervisory practices in the last two years and
the reorganisation that we put in place on 1 October. As you know,
in terms of a process now, we have one integrated single supervisory
division under Jon Pain so they can make integrated risk assessments,
which I think is the best way of judging forward-looking risk,
both prudential and conduct, but the specialists who support those
supervisors are themselves specialists in conduct and prudential
issues. Specifically we have set up a new conduct and prudential
risk department. The specialists' job is to make sure that the
supervisors are properly assessing both sets of risk, so we have
created that oversight mechanism, if you will, over supervision
to extract the maximum benefit from integrated risk assessment
but combined with an oversight mechanism of specialists to ensure
that the right level of balanced is achieved. In terms of the
actual activity of the supervisors over the last 12 months, we
are a risk-based organisation. We have a finite level of resources,
albeit significantly expanded from some years ago for the larger
firms, and we do have to make judgments, and it is the case, as
you would expect with the very large banks, that in the last 12
months the majority of supervisors' time has been addressing prudential
issues and I think that rightly reflects the fact that at the
end of the day prudential and conduct are both issues of relevance
to customers. If a bank fails, I think it is obviously relevant
to the customers. So we do now also track with effective Management
Information, what our supervisors are doing, and so, yes, I can
say in the last 12 months the predominance of time on the large
banks has been on the prudential issues, but as we move forward
(and we will be setting that out in our outline of the business
plan in January with the fee proposal) it is clear our forward
book of work will see more of a balance returning between conduct
and prudential issues.
Lord Turner of Ecchinswell: Can
I add one point which is when Hector and I earlier this year were
discussing potential changes to the organisation structure, one
of the things that I was very keen on (and Hector was as well)
was that we ended up with some organisational groups which were
dedicated to prudential risk and to prudential policy and to conduct
risk and conduct policy, and the way I would put it is we want
to make sure that there are people who care about conduct risk
when the rest of the world is only focusing on prudential risk
and the people whose job is to care about prudential risks when,
as I think was broadly the case three or four years ago, the world,
including probably this Committee, was primarily focused on conduct
risk. One of the great dangers in running a large organisation
is that you do switch your focus entirely to the issue of the
day, and we have deliberately created an organisational structure
where there will be people who are caring about the things which
are not right at the top of the public agenda at that time.
Q89 Mr Fallon: Mr Sants, can I ask
you about the Retail Distribution Review in box 11 on the Annual
Report, a matter on which I have written to you, about what appears
to be a requirement on investment advisers to take time off to
pass qualifications that they may not have passed or even taken
20 years or so before? How many advisers are affected?
Mr Sants: In total, across the
board of the industry, there is something of the order of 60,000.
How many within that are employed in stockbroking, I am not sure
I can immediately tell you.
Q90 Mr Fallon: How many are likely to
have to retake exams that they might not have passed when they
first qualified 15 or 20 years ago? You described that number
to me as significant originally.
Mr Sants: It is certainly the
case that if people already have credible and acceptable qualifications
which are equivalent to the level that we have asked for, then
that would be an acceptable set of qualifications. If they have
passed exams of an acceptable level, then they are not being asked
to retake them.
Q91 Mr Fallon: How many are being
asked to pass exams that they have not passed before? How many
people are being affected by this? Is it hundreds?
Mr Sants: As I said, I will have
to come back to you with an estimate. It will obviously be a subset
of that 60,000. I would imagine it would be a few thousand, but
I do not have the precise number to hand. It would only affect
those who have not got any existing qualifications which are appropriate,
and I think this Committee in the past has shown general support
for the concept that it is right that people providing an advisory
service should be appropriately qualified.
Q92 Mr Fallon: Have you any estimate
of the proportion of advisers in particular firms that might be
Mr Sants: Within the stockbroking
community alone, as I said to you, I do not have that figure to
hand. I am happy to supply it to you. I have some estimates, as
I say, of the overall numbers, which would be a significant proportion
of that 60,000, but that covers the rest of the advisory community.
I do not have the figures to hand of the specific numbers, which
is what I took to be your question, of the stockbroking community.
I do not have that figure to hand.
Q93 Mr Fallon: Do you have any estimate
of what proportion it could be inside individual firms?
Mr Sants: I would not myself want
to hazard a guess at the moment. I would rather give it to you
in writing. As I say, if they are already appropriately qualified,
we are not requiring them to re-qualify. We would only be asking
those people who have not got demonstrable qualifications to achieve
them, and I think that is a position which we all thought was
a very reasonable one to take; that it is an important task and
that people should be properly qualified, and demonstrably so.
Q94 Mr Fallon: Lord Turner, could
I ask you about the current European proposals on the European
Banking Authority. Have you seen this Committee's report?
Lord Turner of Ecchinswell: I
have read the summary of it, yes.
Q95 Mr Fallon: Do you share our concern
about the application of the so-called fiscal safeguard?
Lord Turner of Ecchinswell: I
think one of the difficulties is that the term "fiscal safeguard",
which was put in at an early stage of this, is still very vague
as to what it is referring, and I do not think there has been
a high degree of specificity from anybody as to what precisely
is the fiscal safeguard that we are trying to achieve. I think
it is very difficult to debate this without getting down to: this
is the very specific instance of something that could have a fiscal
knock-on. I think you are generally right, though, in the Committee,
to say that there are dangers at the speed at which we are progressing
in Europe on this and that we need really to go through the details
of it, but whenever I have read concerns about the fiscal safeguard
I have always wanted to know precisely what are we talking about;
but I think that is the level of detail that we need to get to
in order to know how to write these rules in a way which really
does address the legitimate concerns. I think the phrase is sometimes
used in a very general fashion.
Q96 Mr Fallon: If it is a specific
fiscal consequence, are you content that it can only be appealed
by the Member State affected to a majority vote?
Lord Turner of Ecchinswell: It
is not clear to me that there is anything that they are doing
in the intention of the European Banking Authority which would
impinge the fiscal autonomy of particular countries.
Q97 Mr Fallon: But if it did, are
you content that the Member State affected could only appeal to
a majority vote?
Lord Turner of Ecchinswell: I
would like to come back to you on that specific issue. It is not
an issue which I have thoughts on precisely at the moment. This
is a very complicated thing which is continuing to evolve.
Q98 Mr Fallon: Do you share the Committee's
view that the Article 21 powers could also have fiscal consequences?
Lord Turner of Ecchinswell: Again,
I will have to come back to you on that. That is not something
that I am closely familiar with.
Q99 Mr Todd: Can I cover two areas, the
first of which is consumer protection. The Council of Mortgage
Lenders' Chairman said, "I have a sneaking suspicion that
regulators see consumers as wanton children who have a tendency
to want what is not necessarily good for them." I have to
say, when he refers to "wanton children" I was not quite
sure which side of the consumer bargain he might have been talking
about, bearing in mind the experience that we have had. How do
you place yourselves in relation to consumers? Do you believe
that they are unable to make their own decisions in an informed
Lord Turner of Ecchinswell: I
think this is a very important debate and I think we have moved
into a sort of nuanced halfway position, but we are aware that
there is a whole spectrum of possibilities here and we need to
think about exactly how we locate along it. I think it was our
past, fairly clear philosophy that we believed that provided one
provided adequate information one should not be, for instance,
in any way limiting the terms of a mortgage and saying you cannot
buy a mortgage of that category, that there was a caveat emptor
provided that there was information clearly provided. I think
the awareness of the difficulties that consumers have in making
sensible decisionswhich I have to say was something I became
very aware of when I did the work on the Pension Commission, which
is why I ended up and our Commission ended up proposing an inertia
mechanism that switched round the inertial decision from opting
in to opting outthose whole insights of behavioural economics
are important and, once you realise that, one is willing to be
a bit more interventionist to defend consumers against making
actions that they will regret. On the other hand, I think we have
to be very, very careful of then leaping through to a highly paternalistic
point of view, and the trouble is there is a point along the spectrum
here and the Mortgage Market Review was trying to suggest a particular
point on that spectrum.
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