Examination of Witnesses (Questions 235-273)
Q235 Chair: Thank
you very much for coming before us this morning. Again, as with
the last session, we have a lot to cover in a short space of time.
As I also said, if there are things—and I expect there will
be—that occur to you in the course of the hearing that you
don't think you've been able to cover fully, please write to us.
We're receptive to written evidence.
Could I ask you, Mr Saunders, to what extent the
people you represent may generate systemic risk?
Mr Saunders: To
a relatively pretty low extent. The reason for that is that fund
managers, investment managers, do not carry customer funds on
their balance sheet. So while the investment management industry
in the UK manages over £3 trillion of assets on behalf of
its clients, which is an awful lot of money, if any one of those
firms were to go down those assets are held separately by a completely
separate custodian or depository and, therefore, would not be
at risk in that situation. So the firms themselves do not carry
systemic risk, which is reflected in the fact that, rather than
being regulated by the prudential regulatory authority, as banks
and insurers are, they will fall to be regulated by the CPMA.
Q236 Chair: Could
I turn to another even more sensitive issue, which is the bonus
culture? Do you think that these bonuses are justifiable and do
you think that the cause of them is structural—that is,
a lack of competition—or some other cause?
Mr Saunders: Are
you referring, Chairman, to bonuses in the investment management
industry or elsewhere in the financial services industry?
Chair: I think it would
be helpful for you to comment on both because they are quite distinct.
Mr Saunders: Yes,
if I could take the investment management industry first. As I
have already said, the investment management industry is rather
different from other parts of the financial services sector, so
that the question of bonuses does not raise the same sort of systemic
stability issues.
In relation to the firms themselves, yes, there are
high bonuses paid to high performers in the fund management industry.
It is reasonable for that industry to have a high proportion of
remuneration in variable form. Why do I say that? It's because
the fund management industry's revenues are essentially determined
by a percentage of the assets that are managed, and therefore
a firm's revenues are quite highly geared to the capital markets.
So, for example, in the six months after the Lehman crash, the
equity markets, stock markets, fell by around 40% and that impact
went straight through to the topline revenues of fund management
firms. And they were able to deal with that by reducing or deferring
bonuses, rather than having to sack large numbers of people, and
so that's an illustration of the sort of flexibility that that
gives you in an industry that is very highly geared to the market.
If I may turn then to banking, as shareholders,
the investment managers only have a role in relation to remuneration
at board level, which is obviously a very small part of the remuneration
and bonuses within banks. So shareholders are not in a position
to influence that. So coming to the question, are bonuses potentially
destabilising, I think—and we saw this during the crisis—that
the incentives on individuals within banks can clearly cause them
to act in ways that can destabilise the system. As such, I think
it is a regulatory issue, and therefore it is correct that it
is being tackled as a regulatory issue through the European legislation
that is now being implemented by the FSA.
Q237 <Chair:
Why can't the boards deal with it? Why are bank boards so pusillanimous
in handling this? After all, it's the risk to the shareholders
they are supposed to be representing that they should be concerned
about.
Mr Saunders: Well,
I think the experience of the last two to three years is that
they didn't do that.
Q238 <Chair:
Yes. Why?
Mr Saunders: This
takes us into a very broad question, which is, if you like, in
the remit of the new commission on banking that's been set up.
I think what I would consider happened in banks during the last
three years was that proprietary trading became the be all and
end all of activity within a number of banks. I think there was
perhaps a loss of sight around what banks are for in terms in
serving the broader economy and they became too focused on, as
it were, not the outcomes of their activity, but in terms of rent
extraction from the rest of the economy, which is a much broader
question than simply remuneration, but remuneration was one of
the ingredients in that.
Chair:> Okay.
Well, thanks for those helpful introductory questions and answers.
Andrea Leadsom.
Q239 <Andrea
Leadsom: Richard, you and I worked together in
the past on matters of corporate governance when I was in the
funds management industry, just to put that on the record.
Just following up on what the Chairman was asking
you, I feel—and I wonder if you do—that there is a
role to play in a corporate governance sense for large institutional
fund managers to force upon the boards of banks better management
of the compensation culture. Would you agree with that?
Mr Saunders: Yes,
I would. I agree up to a point. There is a limit to what shareholders
can do in relation to the companies in which they invest. Shareholders
have no access to information over and above that which is available
to the rest of the market. They aren't in a position to manage
banks, but what they do need to do is to hold to account the boards
of companies, which in turn oversee the management of those institutions.
They have a direct role, as I've said, in relation to remuneration
at board level. I think it's more difficult for shareholders to
take a view about the amount of compensation that's being paid
to individuals within an organisation. That I think is properly
a matter for management and for boards.
Q240 <Andrea
Leadsom: Yes. If I may, not so much remuneration
sub-board level, at individual level, but more in the sense of
holding boards to account on the level of quantitative compensation
planning that they have versus these very sort of subjective and
quite enormous bonuses, do you think that that is something that
the industry could support as institutional shareholders?
Mr Saunders: I
think the industry certainly needs to address the whole issues
around the stability of the banking system, which I think the
last three years showed was—left a lot to be desired. The
existing structures we had, the way the banks are structured,
the way they're regulated, didn't work. Remuneration is part of
it, but I think it's only part of it, and I'm not sure I'd want
to pull that out as the main issue. I think there are issues around
competition in banking. You could argue that the levels of remuneration
in banks in some areas, in investment banking in particular, reflect
a lack of competition, and so there's excess rent extraction going
on. But these, as I say, are quite deep-seated structural issues
and I think that very high, excessive levels of bonus—and
excessive levels are paid, which do exist in some areas, I think
that's absolutely correct—are more a symptom of a problem
rather than the cause of it.
Q241 <Andrea
Leadsom: Okay, thank you. Turning, if I may, to
a slightly different topic, Mr Vipond, with the new European regulatory
structures coming into place that are rather somewhat inadvertently
misaligned with the new regulatory structures in the UK, do you
anticipate problems, new challenges for the insurance industry
that have not been seen hitherto? Do you expect this to be positive
or negative?
Mr Vipond: Positive
or negative, it's certainly going to happen from 1 January next
year, and the misalignment is, I think, probably more at the margins
than fundamentally.
For both banks and insurers, the most important core
regulation will either be to, in our case, what's called CEIOPS
at the moment—what will be the European Insurance and Occupational
Pensions Authority—and a similar body for the banks, and
so I think there's a good deal of alignment there.
I think there will be issues in the consumer regulation
space, in the conduct of business space, because most of that
will go to the European Securities and Markets Association, and
that regulation will affect banks and insurance companies. So
there is some misalignment, but it is undoubtedly the case that
we have a European architecture of an importance and a significance
that we haven't known before, effective pretty well now. Certainly
next year they will be recruiting and operating. I think we need
to think of the UK as fitting into a new European framework that
is emerging, whether we like it or not, and we need to make that
work. So that's put an onus on the industry to be effective, working
with the UK authorities in making representations to those bodies,
and realising that in future UK regulators, including the Bank
of England, will be subject to a great rule-setting process that
is essentially not of their making and not entirely within their
control.
Q242 <Andrea
Leadsom: Do you see that as creating new barriers
to entry, new problems for your members wanting to expand or indeed
to come into the business for the first time?
Mr Vipond: I think
there are two parts to that question. For our members and for
big European insurance and banking groups, this is broadly good
news, because it does mean there will be an alignment of the way
they are supervised in Germany, in the UK, in Spain, in Poland
and it does mean that the rulebook on which they operate will
be much the same. In other words, there will be—harmonisation
isn't always a loved word—an integration of the supervisory
structures and the way it's done, albeit that supervision will
itself continue at the national level. So I think that is good
news for competition, good news for the single market and good
news for our major members.
Where I think there is in reality a problem is that
the costs of being a regulated business go on rising. It becomes
harder and harder to meet the business costs and the solvency
costs, above all. And so I think it's a brave group that comes
into that market, though of course in the UK we continue to see
new authorisations, new insurance companies and new banks.
Q243 <Andrea
Leadsom: Thank you. Mr Saunders, can you comment
on the asset management industry in the same regard: how do you
think European regulation coming in is going to impact on the
British funds management industry?
Mr Saunders: A
large part of the regulation which the industry now has to deal
with comes from Europe, and that is simply a fact. Like Peter,
I think the establishment of a stronger European Securities and
Markets Authority is good news for the industry, because many
firms, particularly larger firms, operate on a pan-European basis.
They operate in all European markets and so the inconsistencies
in regulation between those different markets is a problem. If
ESMA can operate effectively to iron those out, it will enable
firms to operate at scale with greater efficiency. There are loose
edges—sorry, loose ends. The UK has only one seat at each
regulator, so the CPMA will take up, for example, a seat at ESMA.
That is one reason, I think, why—as I say in the paper—we
think it would be a great mistake to peel off the UK Listing Authority
from the CPMA, because that would then further fragment the UK's
representation at the European level. But on the whole, I think
the changes at the European level don't, in and of themselves,
raise big issues for the industry and on the whole it's positive.
Andrea Leadsom:>
Thank you.
Chair:> Andy
Love.
Q244 <Mr
Love: One of the objectives of the Financial Policy
Committee is to spot and control asset bubbles. To do this, it
has been given—or it would appear it has been given—some
macro-prudential tools. Is that an appropriate thing for it to
have? Perhaps I could get a comment from both of you, one at a
time.
Mr Saunders: Okay,
I'll go first. I think broadly speaking, yes. I think it certainly
ought to be an objective for it. I think the $64,000 question
is whether it will succeed in that objective. Spotting bubbles
when you're in them is extremely difficult, because on the whole,
people get carried away in the bubble, and we saw this in the
run-up to the credit crisis. So I think yes, it should have it,
but the key then to this—and I think the key to this whole
structure—you can devise blueprints, draw regulatory organisation
charts until you're blue in the face, but what is going to matter
and what's going to determine whether it works is the quality
of the people involved and the way in which they work together.
I think that softer end of it is what will determine whether those
objectives are met effectively.
Q245 <Mr
Love: In responding, perhaps you could also respond
to Lord Turner in his speech at the Mansion House who said they
won't always be popular, exercising these macro-prudential tools.
Will it be popular with your members?
Mr Vipond: Well,
it will be popular with our members if we can maintain macro-prudential
stability in the United Kingdom and more broadly because that's
just good news for a long-term business like insurance, and bad
news if it doesn't happen, and it's good news for our consumers,
if they do it at one level. But I think what Lord Turner might
have been saying, and it's one of the reasons why it may merit
further consideration as to who are the people involved in this
process, and what is the involvement of Her Majesty's Treasury
in this process, rather than just the Bank of England, because
some of the tools they are going to have to make use of will not
be easy and will not be comfortable. The institutional structure
looks in the right sort of place, but it's a little bit top down.
The people, as Richard says, are very important.
It's important that they're not just central bankers. They must
come from across the financial services industry, they must be
based not on people who are sort of quasi-academics and have lived
their life in the Bank of England, and they must be capable of
making decisions about how you not just spot those bubbles, but
manage them. Then things do get very difficult and they get very
political, because what you're talking about in some form or another
is policy instruments, about things such as the control of credit
in the economy; determining how many people will get a mortgage;
determining how much money people must put down if they want to
buy something; determining how much banks can lend, even when
they tell you they want to lend a different amount. Those are
all tough decisions. They are profoundly important macro decisions
for the UK economy, and it's important that the FPC has the policy
instruments to make them.
Q246 <Mr
Love: Sorry, Mr Saunders, but let me pursue just
a second—you can comment yourself on this. You've thrown
up a number of issues there, but let's start with the first one,
and that is the role of the Treasury. At the moment, they are
going to have a non-voting member. You clearly don't think that's
sufficient. What would be sufficient?
Mr Vipond:
I think there needs to be some political accountability and ministerial
involvement, because if the analysis is right that this is such
a profoundly important body and the decisions it's taking are
going to affect the lives of citizens across the United Kingdom—frankly,
more than anything the CPMA or PRA will do, important as they
are—it's very important there's a link to the political
process and that Government Ministers are involved in that more
directly than just as observers. How you make that happen I think
needs some further thought, because clearly this body has to be
able to bring to Ministers difficult decisions.
Q247 <Mr
Love: Mr Saunders, have you given it any further
thought? Would you like to put on record today how you think the
Treasury and Ministers therefore should be involved in this process
or more closely involved in it?
Mr Saunders: I
don't have a proposal to offer today, I'm afraid, except that
I would broadly agree with what Peter has said. I think it was
evident in the run-up to the crisis that the tripartite arrangement
wasn't working effectively, that too many things fell between
stools and it wasn't sufficiently joined up.
Q248 <Mr
Love: Can I move you on then? There's been some
discussion, and we've heard it at the Committee, about whether
or not the FPC should consult in some way, when it is thinking,
to signal in some form for the market whether or not it is going
to make use of some of these levers. We've heard opposing views,
shall we say, on that matter. How do you think the FPC should
take the markets or the industry with it when it seeks to introduce
these? You have already mentioned how difficult it is to measure
when a bubble occurs. There's great controversy over that, therefore
there will be great controversy—how can we minimise that
controversy?
Mr Saunders: Well,
I think it's very important that the FPC should be open to receiving
views from all quarters. This is a particular hobbyhorse of mine.
It needs to ensure particularly that it gets views from what one
would call the buy side of the market, which is investors. My
observation from dealing particularly with the Bank of England
during the early stages of the credit crisis was that they were
talking a lot to the, as it were, sell side of the market, which
is the market intermediaries, the investment banks. They were
getting one message, which was a more reassuring message about
what was going on in the credit markets than we were hearing from
our members, who were saying that conditions were absolutely terrible,
"We cannot do any business at all". And I remember having
a conversation with a very senior person at the Bank of England
at one point, who said to me, "Conditions are getting better"
and we said, "Well, no, they are getting worse". Indeed
they did, and we had Lehman later on and so on. So I think it's
going to be very important for the FPC to reach out, not just
to a narrow group.
Q249 <Mr
Love: Let me ask Mr Vipond how you would reach
out, because of course the classic case about consultation or
signals is that the market will respond and react to it, and that
could dissipate the benefit that could be received. So tell me
what kind of structure would the industry like to see that would
satisfy it, but would still allow the FPC to make use of these
instruments to the benefit of stability and financial markets?
Mr Vipond: I think,
to get to the nub of your question, it must consult more widely
with stakeholders in the UK and internationally, because the sorts
of crisis we now have are not UK-specific, for the most part.
It must be more open; it must have a kind of expertise on its
board and in its staff that's different from the past. But let's
be very clear: it must have the right to act out of a clear blue
sky with no notice and no particular stakeholder involvement.
In other words, if it's required to act without telling the markets
what it's going to do in advance, it must be absolutely clear
that it has that right and there's no question about that.
I think in that regard that the FPC's position is
different from the PRA's position—which I know you weren't
asking about directly. It seems to me, with the PRA, that we need
to carry on with the benefits that the FSA has introduced about
clear and formal consultation and appeal on everything it does.
That's something we need to bring into the Bank of England for
the first time.
Q250 <Mr
Love: I take your point about the PRA. Let me press
both of you on the wider membership of the committee. We've touched
upon it. How could we ensure that there is industry confidence
in the Financial Policy Committee in terms of that wider membership?
We've talked about the Treasury being more formally represented.
What other ways? Who is it they need to involve? You've made the
case about not using too many academics, but do we want to staff
it entirely with industry people? How do we get a sensible balance?
Mr Vipond: I think
there must be a case for some people on that group who are, for
example, chief executives and chairmen of major city institutions,
insurance companies, life and general, of course, and investment
banks and others. They would be in a position where they would
be, in compliance terms, beyond the wall—they wouldn't necessarily
be able to go back to their firm and talk about any of the conversations
they've had—but that would bring you a kind of market sensitivity
at the highest levels. It would bring you a credibility and engagement
and that has to happen, and it has to happen lower down. One of
the failings of the consultation paper is it's all about what
great men and women as chief executives will do. We've seen with
the tripartite structures that that doesn't work if you don't
engage people at middle and senior management in those companies
and regulators as well.
Mr Saunders: I
would agree with that. I trust that the FPC will carry on the
present practice of the Bank of England with its excellent financial
stability reviews that it publishes every six months. I think
that it needs to set in place formal consultation mechanisms with
different participants in the market. I think one of the striking
things about—drifting off again on to the PRA—the
PRA relative to the CPMA is that it does not have a practitioner
or a consumer panel, which the FSA currently does and the CPMA
will do. But I think some sort of body of that sort, where the
FPC can consult the different participants in the market, buy
side and sell side, would, I think, be advantageous.
Q251 <Mr
Love: Finally, can I just ask you, these are all
matters of judgment which are of course difficult to lay down
in guidance, rules or legislation, but is there any sort of framework
that you can see—and I'm thinking about the comparison with
the Monetary Policy Committee—that would help to ensure
the confidence of the industry that the FPC was working within
that framework and therefore it would be more satisfied that it
was doing its job as objectively as possible? If the answer is
no—I think most people would say that you can't set up a
framework—then just say no, but I wondered whether you had
any views on that.
Mr Vipond: I would
very much stress, as Richard has stressed, this issue about the
quality of staff and about the policy instruments as much as the
institutional structure, and that needs to be where the focus
of that expertise is.
Mr Love:> Okay,
thank you.
Chair:> Chuka
Umunna.
Q252 <Mr
Umunna: One of the things that is exercising me
quite a lot is what's happening in Europe. We have a lot of people
appear in front of us talking to us about these issues, yet so
much of it seems to be affected by what's going on in Brussels.
What do you think our new bodies, the authorities, the tripartites'
position should be, or their priority should be in their negotiations
with the European bodies active in these areas over the next two
or three years?
Mr Saunders: I
think the priority is to get stuck right in. There is a very large
regulatory agenda coming from Brussels. I think that we cannot
assume that the motives behind what comes out are always going
to be aligned with the interests of the UK and it's very important
for all UK parties to take this very seriously. As trade bodies,
at least as much of our efforts now are focused on Europe, as
opposed to the domestic authorities, and we try to work very closely
with both the FSA and Treasury. On the current negotiations around
the alternative investment fund managers' directive, for example,
the Treasury has put an enormous amount of effort into reaching
out to the industry and finding out what people think about different
aspects of it, and that's the way we're going to have to operate
going forward.
In relation to the new bodies, it is very important
that the FSA should, at this point in time, be getting right into
the establishment of ESMA and making sure that it has people in
there; that there's the right sort of degree of UK participation
in that. The UK—
Q253 <Mr
Umunna: Our reforms aren't going to be completed
until what, 2012, and obviously with the FSA as it is, there's
going to be a churn of staff. This is an incredibly unsettling
period for the staff who work within that body. Do you think there
is a danger that they will be taking their eyes off the ball as
they look at the post-2012 scenario?
Mr Saunders: Absolutely
there's that danger.
Q254 <Mr
Umunna: What do you think they can do about that?
Mr Saunders: I
think they have to focus laser-like on Europe and not fall into
the trap of taking their eye off that ball. It is something that
people like us say to them all the time.
Q255 <Mr
Umunna: So it means you have to keep nagging?
Mr Saunders: Yes.
Q256 <Mr
Umunna: Mr Vipond, do you have anything to add
to that?
Mr Vipond: To be
fair to the FSA, it is enormously highly regarded on the continent,
and quite rightly. The FSA is a repository of excellence, which
will be carried on into the PRA and the CPMA, because the UK is
a much more sophisticated market for financial services, where
a lot of the standards, both in consumer protection and in prudential
work, are a generation ahead of what goes on in Europe. I think
that would lead me very much to the point that we shouldn't be
too despondent. There's a real win for the UK if we take a positive,
engaged agenda to Europe, and we work constructively to make the
single market work better, and we work constructively to make
things like the solvency II regime, the new prudential rules for
insurance and the Basel 3 rules, get those in in a way that works
for the UK and works for Europe as a single market. I think if
we do that, frankly, we'll continue—and particularly the
FSA—to be held in the highest esteem on the continent.
Q257 <Mr
Umunna: What do you think we do about this mismatch
between the regulating structure at a European level and the new
structure being proposed here, because they are quite different?
I am just looking at the diagram of how each of the different
bodies feeds in. They are quite different and what can we do to
overcome that? Is there a danger that we lose focus, or priorities
are not given due attention because we have different authorities
here dealing with completely different authorities at a European
level?
Mr Vipond: Well,
it requires high skills in management and it can be done. Wherever
you draw the lines, whatever the UK have come forward with in
the White Paper we have, then even within the UK, the day after
you draw those lines, you have to work about pragmatically working
across them and getting the right people in the right room on
the right issues. That's the same issue in Europe. I do think
a lot of the European structure for solvency for the prudential
side works pretty well, because it will reflect what's going on.
The banks and the insurers, which are the major prudential regulated
firms—because unlike the fund managers, the banks and insurers
hold risks on their balance sheets, they have the sophisticated
Basel insolvency rules—that will go through to the European
Banking Authority and the European Insurance and Occupational
Pensions Authority.
I think the more interesting work for us, or the
more problematic work, is around the area that Richard has already
referred to, the European Securities and Markets Authority, because
that body has to do wholesale and retail conduct of business rules
and that will fall differently across Europe.
Q258 <Mr
Umunna: What about the Treasury, because obviously
Treasury has a role here? How do you think that the Treasury should
be engaging with the European authorities? I would also ask a
subsidiary question to that, without appearing vain for the Committee
that is. Do you think there is more of a role there for us as
a Committee in terms of the way the Treasury engages with its
European counterparts, given the volume of regulation and legislation
coming out at the moment?
Mr Saunders: I
think that is a very good and very interesting question. My observation,
as somebody who deals with regulators and legislators, is that
the great weight of stuff that comes and hits us as an industry
comes—we go and talk to people in Brussels, we talk to members
of the European Parliament but we don't come along and talk to
members of the UK Parliament about it.
Mr Umunna: About the European—
Mr Saunders: Yes.
All the significant stuff that affects us comes from Europe, yet
the UK Parliament is completely outside that process. To me, that's
very striking. Your colleagues who are in the European Parliament
are very heavily engaged in all these negotiations but it seems—
Q259 Mr Umunna: We're
slightly apart from it, yes.
Mr Saunders: Yes.
And it's quite a big constitutional conundrum I think.
Angela Leadsom: It
is.
Q260 Mr Umunna: Obviously,
there are things on which we will disagree with European legislators
and regulators and there are ongoing debates; bonuses for example,
some of the stuff that came out of Brussels last week. What fights
do you can think we can afford to lose and what debates do you
feel we can't afford to lose going forward? I suppose you could
start with the bonus one for example, because obviously there
was a difference of view between us and some of our European counterparts
on some of the proposals that were being put forward last week.
Mr Vipond: Yes.
I think, if I were answering that trying to be very analytical,
the ones we can not so much afford to lose but the ones where
we should be looking to build a majority consensus across the
single market are very much around how customers are treated,
the next generation of customer rules and follow-up rules, so
that it's possible to make the internal market work to the benefit
of consumers more and get better outcomes. There, I think, we
need to make sure that those internal market rules have legitimacy
across the EU and we get a buyin as to what the single market
should look like, because I think if we get that then some of
the other things would be easier to fight on.
On the specific question of bonuses, clearly,
there is a wish to regulate bonuses across the world at the moment.
The G20 in Korea this autumn will discuss bonuses and VAT taxes
and the rest. There is a tremendous upsurge in interest in how
you regulate remuneration in the banking industry primarily. I
do not think it's so much a problem for insurance. To do that,
I think it is still the case that the whip hand is with the national
regulator because you have fiscal issues, and on fiscal issues
the EU's authority and power base is much more restricted. So
I think if you still want to be regulating bonuses nationally,
then you are in a position to do so if that's your decision.
Mr Saunders: I think things we
cannot afford to lose are those that are essentially protectionist
in their nature. The UK is by far and away the primary financial
services centre in Europe. We have an important national interest
in it because it's an important part of our economy. The AIFM
directive, the alternative investment fund managers directive,
is in its final stages—we are getting a new draft every
day practically—but certainly versions of it we have seen
would be quite overtly protectionist in that they would deny access
to the European market for funds and products based outside Europe.
Were we to see retaliation by the US Congress against that, then
the principal losers would be fund managers in the UK. Those are
the important battles, I think.
Q261 Chair: Don't you
think the biggest tool we can deploy to deal with bonuses is increased
competition and a reduction in protectionist environments?
Mr Saunders: Yes; I think that
is absolutely correct.
Q262 Chair: Do you agree
with that, Mr Vipond?
Mr Vipond: I do. There is no Archimedean
point to bonuses. There is no one thing you can do that will resolve
it. It's a complex issue. It has been going on a long time. The
UK has quite a good record in things like Cadbury and Greenbury
and the new stewardship code, and we haven't got there yet. It's
a journey. But if you could make a more efficient market and if
you get those macro-prudential rules right as part of that, so
you don't get those bubbles, then you don't create the opportunities
for those absurd bonuses. That is part of the picture.
Q263 Chair: Putting words
in your mouth, aren't I right in suggesting that if we are not
careful we're going to write new regulation that could generate
the conditions in which the bonus culture is sustained because
it creates the opportunity for protection?
Mr Vipond: Yes. I think that could
well be true. If you get protectionism within Europe and people
cannot get access to markets and markets do not function, that
is a way that people can earn excess economic rent.
Mr Saunders: I absolutely agree.
Most fund managers would take the view that there is insufficient
competition in investment banking. I think they would perceive
that there is a global oligopoly of investment banks.
Q264 Chair: And it has
become worse?
Mr Saunders: There has been more
consolidation through the crisis and I think just one tiny step,
which I hope is a step in the right direction, is that the IMA
Chairman, Douglas Ferrans, is currently leading a study to look
at the issues around underwriting fees charged for raising equity
capital through a rights issue that have been steadily rising
while the apparent risks associated have been falling. So that
report will hopefully appear about the end of November and, while
I wouldn't want to promise anything revolutionary from it, hopefully
it's the beginning of a step just to push back. The problems of
excess rent extraction are essentially problems about a lack of
competition.
Chair: Very helpful. David Rutley.
Q265 David Rutley: I think
everybody would agree that savings ratios aren't where they need
to be in the country and I think Money Marketing has launched
a new campaign, "Pave the Way to Save". Should the CPMA
have a statutory objective to encourage people to save?
Mr Vipond: Yes, it should and
it should also address the issue that, in this country, when your
constituents seek debt it's delivered to them. In fact, they do
not even have to seek it. It comes to them as an offer just about
every day. But if they want to save and they want to take some
responsibility for developing medium and longer-term savings,
it's often very difficult for those products to be sold to them.
It's often an enormous compliance process and it puts people off,
particularly those who are perhaps not used to doing it and are
not natural savers. So we think, as part of the CPMA's work, it
does need to have an obligation to support and to promote savings
in the context of feeding into the discussion we've already had
at this session about macro-economic stability and getting the
balance right in the UK.
Q266 David Rutley: Before
we come on to you, Mr Saunders, what do you think about Mark Hoban's
view that that's absolutely inappropriate?
Mr Vipond: Mark obviously has
a leading role in this and we respect and listen to his views
and it will be part of the continuing dialogue, but if we don't
have a situation where somehow or other the conduct of business
rules in this country are rethought and reworked, it becomes very
difficult to turn around the situation we have in this country
where people, the majority of the population, are not saving the
sorts of sums they will need for their own longterm well-being,
given the kind of political decisions we see on a daily basis
now about a state that's going to do less for more of the people.
Q267 David Rutley: Mr
Saunders?
Mr Saunders: Right; I'm in a slightly
different place from Peter on this, partly, I think, because fund
managers are not generally involved in the selling process as
intimately as life companies are. I think we're not pressing for
a savings objective. While it would be nice if the CPMA acted
in such a way as to encourage saving, I don't think it is something
that's entirely within its gift. I think a lot of the levers for
encouraging saving sit with Government. I think the biggest, single
step towards encouraging saving that has been taken in the last
several decades would be the introduction of autoenrolment
in 2012 and that will make a serious contribution to encouraging
people to save for the future. There are probably things one could
do around tax relief, although now is not the time to be looking
at new tax reliefs given the fiscal situation. I wouldn't see
the CPMA as being central in the encouragement of saving.
Q268 David Rutley: Do
you think, if the CPMA isn't the body to do it, is it the consumer
finance education body? Who is going to chivvy that along? Who's
going to push that forward?
Mr Saunders: Ultimately I think
people respond to incentives. Clearly, people having a better
grasp of the issues would help. On the whole, I think I'm a little
bit sceptical about consumer education because people receive
when they're motivated to receive. Again, I think that auto-enrolment
and NEST will have a positive impact. Once people start receiving
a statement a few years down the line saying, "You now have
£15,000, or whatever, in your savings account", that
will grab their attention in a way that any number of well-meaning
consumer leaflets won't.
Q269 David Rutley: You
were shaking your head pretty vigorously on that, Mr Vipond.
Mr Vipond: I was sharing perhaps
some of Richard's scepticism about consumer education. I think
it's entirely laudable, worth while and important but the idea
there are going to be shortterm and immediate benefits from
it in terms of a savings culture, I think we have no evidence
to support that. That is why I think the CPMA needs to take saving
very seriously and indeed it will inherit the RDR and the RDR
is part of the way in which you make it easier for people to get
simple advice, get them into basic savings products and get them
started and that should be part of the new agenda.
Q270 David Rutley: Thanks.
I just wanted to move on to consumers. You also have quite strong
views, it would seem, on what the CPMA should do or not do for
consumers, saying it's entirely inappropriate for the CPMA to
be a consumer champion. Surely the whole point about the CPMA
is to provide some sort of protection for customers. So could
you explain your comments on that?
Mr Vipond: I think it's the word
"champion". As you saw in the previous session, there
is this issue of to what degree the CPMA is to be some sort of
retrospective advocate in all cases for particular decisions.
The CPMA will be judged ultimately by the degree to which: it
delivers good outcomes for consumers; they can buy the protection,
the general insurance, the life savings, the products they need,
the bank accounts that they need; those products are delivered;
there is a competitive market on a reasonable basis for consumers;
consumers win out on this; and the CPMA comes down heavily on
bad practice in the financial services sector, where that is to
consumer detriment. We support all of that, but we think it should
be done on a principle basis, on a basis where it uses evidence
to make decisions and really helps consumers most by making financial
services markets work as best they possibly can.
Q271 David Rutley: But
not retrospectively a champion?
Mr Vipond: I don't think it is
right and I think it would be very seriously damaging to some
of our firms; particularly in insurance we've seen it. When the
FSA tries to rewrite the rules after the event, it can do a great
deal of capital and prudential damage to insurance companies and
it can very quickly take out whole areas of product. For example,
in the first part of this century, with-profit savings were a
great savings product for this country and were used by many consumers.
Some of them had problems; some of them were far from perfect.
But FSA regulation has meant that we now sell a tiny part of those
products. Similarly with PPI in 2009, I don't know if you have
seen the figures but payment protection insurance collapsed in
2009. We now sell less than half of what was sold at the beginning
of the year. Now, there were some bad practices in the selling
of those products by banks and those had to be addressed but,
at the end of the day, consumers benefit most by modern, efficient
markets and financial services.
Q272 Mr Rutley: Any thoughts
on that?
Mr Saunders: I agree on the consumer
champion point but I think, in a sense, there is a slightly false
argument because when you look at the proposed statutory objective
that is in the Treasury paper, which is an objective of "ensuring
confidence in financial services in markets with particular focus
on protecting consumers and ensuring market integrity", I
think that captures extremely well what the role of the regulator
should be. I think that the use of the word "champion"
has created a bit of a false debate. I think the statutory objective
is what matters.
Q273 David Rutley: Moving
on to competition, it's not exactly clear as we look at the new
structures as to who's going to be responsible for monitoring
or encouraging competition—should it be the PRA, should
it be the CPMA—and especially with the news today that the
Competition Commission will consult with the OFT about the merger
of their functions. Any thoughts on that, because obviously that's
going to be quite important particularly perhaps in banking, so
in your sector?
Mr Vipond: I think
it is very important and I think we would want to see both the
PRA and the CPMA having a remit to look at competition and the
competitiveness of the sector. I think that's part of the competition
debate. It's to make sure that markets work but that the UK financial
services industry is competitive in global terms; something in
the past, frankly, the regulators have not done, have not addressed.
I think that's important because if they're competitive within
the UK as a sector and globally, then that again is going to be
a real win for consumers and indeed for shareholders.
Mr Saunders: The CPMA and the
PRA are not competition regulators, that is a function that remains
with the successor to the Competition Commission, but they need
to have regard to competition because of its importance as we've
already discussed.
Chair: I just note in
passing that Equitable Life wasn't the best advertisement for
with-profit schemes and I will leave it at that. You did say one
other very interesting thing, among a number of interesting things.
You said that there was a huge compliance cost to the sale of
savings. We're very interested, in the Committee, in trying to
establish what the real compliance cost is of regulation. That
is the full cost, not just the cost of running the bodies that
do the regulating, or just the cost of running the compliance
departments within firms, but the cost of the work generated by
those compliance cost departments within those firms as well;
all the phone calls and the activities that take place. Much of
this, perhaps all of it, is justified. It would be hugely helpful
if, on behalf of your respective industries, you could examine
in detail what you think the full compliance cost is of existing
regulation at this time of turbulence in the regulatory structure,
which would help inform us about what structure is most suitable
in the years ahead.
Thank you very much for coming to see us today.
If you have further thoughts, please come back to us.
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