Examination of Witnesses (Question Numbers
25 NOVEMBER 2009
Q100 Mr Todd: One of the tools is
investment in improving financial capability amongst consumers.
When Hector said about commonsense, it is making sure that commonsense
can be applied in an informed way to a range of products that
a consumer has in front of him. I glanced at Appendix 7 in your
Annual Report, which touches on how you have addressed financial
capability. If you have a look at that, could you point me to
an area where there has been any qualitative research on what
the numbers of packages delivered has actually meant? I have to
say that I think some of this is rather misleading, by the way,
because I am assuming that when it says "742,500 children
were reached by the project in England" that is simply a
multiplication of the 3,274 schools and the number of pupils that
are in them. That sort of rather primitive methodology is what
I am hinting at, which is that we do not appear to be looking
too hard and just distributing packages and, I have to say, in
my experience on that particular one, not terribly effectively,
that that says "target exceeded".
Lord Turner of Ecchinswell: I
absolutely agree with you that we need to ask searching questions
around this. We have been asked by Parliament to pursue a financial
capability agenda. The amounts of money put into it in the past
were relatively small. There is now a desire to have a national
money guidance approach, which will go to a whole different level
of scale and professionalism as we do that. This is a set of questions
which the Board has asked the Executive almost as precisely as
you are putting forward to us. We seem to be able to measure the
Q101 Mr Todd: So what was their answer?
Lord Turner of Ecchinswell: The
answer is that we are going to have to design better tools, because
I do not think at the moment we can answer that. I do not think
at the moment we have the ability to say have we not only done
the input but do we know that people have greater capability and
these are some of the tools which we will have to do, but, again,
I would say we are in the sort of ramparts of professionalism.
Perhaps Hector can respond.
Mr Sants: The Chairman is, of
course, right, that we can improve our tools, but we have been
deploying some tools and I very much agree with you that it is
important we do that. Up to now the way I would look at it is
as follows. We did do, of course (and I recall discussing this
at an earlier Committee) a baseline survey, if you recall, of
a wide spectrum of consumers in the community to have a basic
understanding of their financial knowledge, and the intention,
of course, is to repeat that baseline survey at periodic intervals
in order to see what the overall effect of the programme has been
on the relevant individuals in the community. On each individual
programme, you are right in saying that primarily the earlier
targets were in terms of accessthe number of people reachedand,
of course, in itself that is not telling you too much other than
the delivery mechanism is working.
Q102 Mr Todd: It just means that
a piece of paper arrived in their hands.
Mr Sants: Quite so. What we are
seeking to do in terms of then following up the impact of that
delivery is qualitative work on talking to those individuals who
have been reached with the services to see whether they feel they
are better equipped; and in the Report and Accounts we do refer
specifically to the work we did there on the marketing guide and
making the most of your money, where 69% felt more confident after
having read the guide. So the programmes generally are supported
by qualitative assessments of consumer response.
Q103 Mr Todd: I think you have pulled
out one of only two examples of that.
Mr Sants: Quite so, but the critical
programme, of course, is the national money guidance service,
which is not in the accounts here because we have been working
on that during the year, but, just to reassure you, in terms of
the set of tools that have been put in place to assess the effectiveness
of the money guidance programme, which is obviously the central
part of the intended new CFEB agenda, we are doing that type of
testing to check that the satisfaction levels are being achieved.
We have had some interim work done by an independent evaluator,
Professor Kempson. The initial feedback from that is positive,
but there is no question that a full evaluation of the success
of the money guidance pilot, which needs to be done and will be
done and is scheduled to be done, has to include that type of
Q104 Mr Todd: Just to tie this one
up, you now do have some serious money to spend.
Mr Sants: We do.
Q105 Mr Todd: And, I have to say,
from the examples I have seen of it, some of it is misspent on
product which is poorly focused and may well arrive somewhere
but no-one ever looks at it. What I am looking for is some critical
testing of the quality of the material and its functionality in
terms of delivering something useful to either an adult or a child.
Mr Sants: I agree with you, and
I think it is absolutely critical, before this ambitious programme
the Government has set out for money guidance is taken forward,
that that full testing is done, and that full testing has yet
to be done on the money guidance pilot.
Q106 Mr Todd: You very honestly said
that the Treating Customers Fairly programme had not delivered
the outcome that consumers deserved. A slightly under-stated remark.
Why do you think that was?
Mr Sants: I think it comes back
to the comments I made to this Committee before. I think that
the regulatory approach, the supervisory approach
Q107 Mr Todd: Was this a sort of
Mr Sants: I think the regulatory
approach, the supervisory approach of the old FSA was intellectually
flawed in terms of getting a good result. The focus on the Treating
Customers Fairly programme was a focus on making sure management
had equipped themselves with the right management information
but not on actually testing whether consumers were getting good
outcomes, through mystery shopping, investigations, intensive
supervisory engagement and strong credible deterrents. I think
the historic supervisory approach in the conduct area was flawed.
Q108 Mr Todd: So how are we going
to know whether your new model FSA is delivering if the opposition
parties allow you to do that, of course, to work out that outcome?
Mr Sants: I think on the conduct
side you have got two potential ways of testing it. One, of course,
is in terms of the amount of effective credible deterrents that
we are delivering, and we are certainly intervening more proactively
and more decisively in the market place.
Q109 Mr Todd: Is it not partly the
qualitative test which you actually just touched on there, the
Mr Sants: Quite so. It is the
consumer experience, and we need to outcomes test much more effectively
our regulatory approach as well as our educational approach.
Q110 Mr Todd: I have a last unrelated
question on AIFM and the European venture into regulating that
sector. We are hearing encouraging noises of a change in approach
and adaptations to the representations made. Where has the FSA
stood in this process?
Mr Sants: The FSA certainly thoroughly
agreed with the concerns that had been raised by large parts of
the community, including the industry and a number of politicians.
We certainly believe that the initial drafting of the Directive
was faulty in construction, it was far too hasty, it was not adequately
consulted on and that there was not a proper cost-benefit analysis
done. As you know, we have subsequently done one which shows it,
in its original form, to be expensive and we have serious concerns
that a number of the measures proposed would be detrimental to
the European financial market place and users. A large number,
but not all, of our concerns have been addressed, so I would say
that the current Directive as being sponsored
Q111 Mr Todd: So direction of travel
good, but more to do?
Mr Sants: But more to do. However,
I fear that it will be very difficult for more to be done.
Mr Todd: It would be helpful, but perhaps
separately because we are pressed for time, if you dropped us
a note on what more ought to be done and your reason for gloom
with regard to whether it can be done.
Q112 Chairman: We do hope to look at
the RDR in the New Year, and that would be helpful. I have to
say, going back to our report of 2004-05, Restoring confidence
in long-term savings, it was the FSA that established Treating
Customers Fairly and it has taken industry along, however bumpy
that road has been, so I think you deserve congratulations for
that issue. Lord Turner, you were quoted at the second Financial
Services Authority conference as saying, "It is important
for the end destination in terms of banking regulation to be clear."
What worries me, and maybe my colleagues, is how are you going
to ensure adequate capital liquidity regimes operate now to prevent
future crises when international agreements, such as Basel II,
occurred, not over months, but decades? How are we going to get
Lord Turner of Ecchinswell: I
would say two things. First, there is a challenge to try and make
sure that what is effectively Basel III, but a much more extensive
redesign than Basel II was, occurs not over decades but, hopefully,
over the next 12-15 months. There are very strong commitments
which have been made from the Financial Stability Board to the
G20 financial ministers and leaders that we will drive through
by October next year, but all the major decisions about the redesign
of international agreements on the capital and liquidity (and
there is an immense amount of work to do in that) either fall
into the FSB or to the Basel Committee or other groups, and that
is very, very high priority for me personally and for many people
in the FSA over the next year to make sure we get there. Having
said that, when those agreements are made they will then have
to be phased in over a number of years in order to make sure that
we are not hitting the banking industry of the world with such
high capital liquidity requirements that we are stymieing the
recovery from recession, so what we come up with will have to
be both a new set of regulations and a transition path. However,
it is also the case that we can begin to anticipate some of those
things already. For instance, we have already put in place significant
changes to the trading book capital regime in particular areas
to do with a stressed value at risk approach and a re-securitisation
approach which are already agreed will come in from 1 January
2011; so we are already in discussion with the major banks to
say, "This is what you will have to meet by then. Are you
on a path to build up your capital towards that level?" and
that is, for instance, part of the debate which goes on about
the aggregate level of bonuses that they pay out. The aggregate
level of bonuses they pay out has to be consistent with the build-up
to get to that capital level there. There are also things to do
with the definition of capital which have already received in-principle
support by the governing body of the Basel Committee and, therefore,
we are already telling banks that they have to build towards a
higher level of capital, and, of course, we already have our own
interim capital regime or 6% Core Tier 1 and 4% Stress Core Tier
1, which is already a much more severe regime than that which
formally exists under Basel II. What we are trying to do here
is simultaneously run the process of designing what the long-term
global system is while taking a set of steps which are already
requiring a build up of capital. For instance, the Lloyds rights
issue and the fact that Lloyds has been able to go ahead with
that and not go through to the APS is based on a very rigorous
stress-test which requires of it a level of capital significantly
above what applied on the formal rules which existed before the
crisis. We think we are balancing the challenge of heading towards
where we want to be over the long-term, not doing so it fast that
it harms the economy, but also making sure that we are steadily
building up the robustness of capital and liquidity in the banking
system so that it is already in a much better position than it
was before the crisis.
Q113 Chairman: A recent article stated
that the FSA's enforcement office "aims to bring roughly
five criminal cases a year". If that is the case, how was
that figure decided on? The FSA's aim for enforcement is stated
as "a credible deterrent without consuming inordinate amounts
of manpower". Surely, the aim should be to punish wrongdoing.
Why is it not?
Mr Sants: It is. I think that
the quote that you have mentioned was a description of the amount
of capacity we currently have. In the context of our normal workload
on enforcement in other areas, we currently have enough capacity
to handle roughly five, or six, or so complex criminal cases in
12 months, but that capacity is being put in place to deal with
expected demand from the supervisors. We are not, to your point,
choking off. We do not have cases sitting there that we would
like to prosecute that we are not prosecuting because we do not
have enough capacity in our integrated enforcement area. I think
they were just reflecting roughly what we have there, and that
reflects roughly what we currently expect to be our workload over
the coming 12 months or so. Obviously, that is a significant increase.
I remind you that two or three years ago we were not doing criminal
prosecutions of insider dealing at all. To date on our building
but, as we have acknowledged, small track record, we have been
successful. We expect that number to rise and we have a number
of cases in the pipeline.
Q114 Chairman: You and I have spoken
about plea bargaining in the future. You have the Coroners and
Justice Bill, which gives you power for immunity to whistleblowers.
Have you got all the power that you want or do you still need
to push in that area?
Mr Sants: I think, broadly speaking,
we do now have all the powers we need and we are very determined
to make sure that they are fully utilisedplea bargaining
being a key one. As we have observed here before, when you look
around the world, plea bargaining is a vital ingredient of success
in insider dealing cases and that power will make a visible difference
to our ability to deliver credible deterrence. Insider dealing
prosecutions are a very specialised area. We have built up a strong
team now and we expect to see a steady stream of cases coming
through the court of ever greater complexity. We acknowledge that
true deterrence is going to require successful prosecutions of
complex cases, with the judges, hopefully, delivering a strong
message through the sentencing process, and we would expect that
Q115 Chairman: We never usually talk
about the finances of the FSA, but looking at your Annual Report
it would appear to be an organisation under financial strain.
You have just recruited a significant number of people, your remit
appears to be widening and you had a deficit last year, I note,
of £23 million. Are you concerned about your financial position
and will you need to increase your cost to businesses just at
a time when financial firms' profits have been hit? I note that
you had to borrow £2 million last year. Is that the first
time you have had to use your borrowing facilities?
Mr Sants: There are two separate
points there. There is the explanation of why we had a deficit
and then there is the question of what are the forward-looking
prospects in terms of the cost base and the consequences for fees.
In terms of the trailing year, that entry in the accounts attracted
a little bit of publicity in the newspapers and so forth, but
actually, when you think about it, it is entirely understandable
if you look at what happened. What happened was that, in the normal
way of the FSA operating, we set a budget at the beginning of
the year and we raised fees against that budget and, therefore,
we would expect to operate in a matched fashion, assuming there
are no issues with collecting the fees and assuming we run to
budget. We do run to budget unless we make a conscious decision,
caused by circumstances, to overspend, and last year we made a
conscious decision, with the Board's support, to invest in the
enhanced supervisory agenda, the SEP programme, part way through
the year and, therefore, spent more money than we had originally
budgeted for, but only after the Board's support and approval.
Since we only raise fees once a year, it follows that that has
had the effect of creating a small deficit in the year in question,
which, of course, we then take into account when we raise fees
for the next year. It is a perfectly controlled and managed situation
and does not in any way suggest that our finances are not being
properly managed. Yes, normally we are in credit as fees come
in during the year, but, yes, we did, obviously, borrow to finance
that conscious overspending that we had in the year in question.
When we go into our next year, however, of course, we take into
account our run rate of expenditure and lay out our budget plans.
We are going through that process with the Board at the moment.
We are presenting our final budget to the Board in the December
Board meeting. It would be wrong for me to anticipate that final
discussion with the Board, unless the Chairman wants to make any
comment, but we have already said publicly that it is inevitable
because we have been building up resources last year, which are
now in place for a full year going forward, that there will be
some further increases in fees, but we would expect that to be
at a lower rate than in the past. We are extremely conscious of
the economic climate that our firms are working in, we are conscious
that the number of firms authorised has modestly declined. But
the other feature I would draw to your attention is that we are
currently consulting on a new way of calculating our fees which
more fairly, in my view, reflects the activity that we as a regulator
actually carry out in relation to the firms that are paying our
fees. We are going to a far more effective activity-based allocation
of fees which, I hope, will be much more transparent, particularly
to the smaller firms who, rightly, in the past raised concerns
around whether they are paying the right share of the cake. We
are consulting on that at the momentand that will mean,
I hope, that a significant number, if not the majority, but certainly
a significant number (it depends on our final budget) of firms
actually see a decrease next year. Certainly we would not expect
any fee increases for the smaller firms. Of course, last year
we did freeze the fees for the very small firms and for next year
we have this concept of a new £1,000 minimum fee for the
Lord Turner of Ecchinswell: Can
I add one point? I think the FSA over the last 18 months has been
moving towards a much more intensive style of supervision. Quite
a lot of that was in hand when I joined as Chairman through the
Supervisory Enhancement Programme that Hector had put in place.
Over the last year we have taken on a whole series of additional
functions. If you look at the intensity of the stress-tests that
we are now running on banks and the intensity and the detail we
go into, it was simply something that the FSA was not doing before.
The remuneration stuff is new; a lot of the interviews of significant
influence functions are new; the level of detail that we are getting
into in the comparison of the accounting treatments are new; and
the liquidity regime has required an extra level of a specialist
resource. The Board is very, very aware of the need, as it does,
to try and work out what is the correct amount of this extra intensity,
and one of the difficulties, of course, is that there is no model
of this. Throughout the world the way that supervision is done
is very different. I think if you talk to Santander you will find
that Banco de Espana has about 70 people permanently on site at
Santander. John Mack at Morgan Stanley, the other day, was saying
how much he welcomed the 30 or 40 people from the Fed who are
now permanently on site at Morgan Stanley. We have not gone to
that direction. We have very significantly intensified what we
do with a very significant element of specialist support to the
firms facing supervisors, but it is something which at the last
Board meeting, the Board away-day in fact, we devoted almost two
days to very, very carefully debating what is the level of intensity
of supervision that makes sense, particularly for the large very
important firms, and I think one of the challenges in regulation
is what is the balance between a small number of easily enforceable
across-the-board rules, like very high capital, which in themselves
have disadvantages, versus intense supervision, which also has
costs, and it is a debate that we are continually consciously
Q116 Chairman: Can I thank you very
much for your very interesting exchanges this afternoon, and we
will continue that debate. We take your points about banking and
the wider debate seriously, so thank you very much.
Lord Turner of Ecchinswell: Thank
Mr Sants: Thank you.
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