Examination of Witnesses (Questions 390-448)
Q390 Chair: Let's
begin again. Thank you very much for coming along. You'll have
heard some pretty robust evidence that we managed to encourage
out of our previous witnesses. The first question must be, judging
by the fact that one aspect of regulation may end up in your hands
under the current proposals, should it be in your tender hands,
Baroness Hogg?
Baroness Hogg:
We've said in our evidence to you and in our response to the Government
that we believe there are important synergies between what we
do at the FRC in terms of corporate governance, corporate reporting
and audit accounting practices— disciplinary and standard
setting—and the work of UKLA. For example, UKLA is responsible
for ensuring the accuracy of information that companies put to
the markets when they raise capital; we are responsible for overseeing
the information they give to the markets in their annual accounts.
A piece of work we did a year ago suggested, how shall I put it,
that there wasn't entirely consonance between—
Chair: Sorry, can you
speak up.
Baroness Hogg:
There wasn't entirely consonance between these sets of documents.
It was an interesting piece of work that we could let the Committee
have if they would like.
Q391 Chair: You
mean they were confused?
Baroness Hogg:
They were on occasions rather different.
Chair: We managed to decode
what was being said in the first session, we would like to start—
Baroness Hogg:
All right, we will try and be more decoded.
Chair: Yes.
Baroness Hogg:
However, I think there is probably more agreement between us and
Monsieur Rolet than perhaps he appreciates in that—
Chair: Well, put him right,
yes.
Baroness Hogg:
No, I just say I agree with him to a considerable extent that
one of the key issues here is our representation at ESMA, and
just as there are significant weaknesses in how that works at
the moment, for example—at the risk, Chairman, of depressing
you still further—I was astonished that he didn't mention
as one of the risks coming down the track the proposed Green Paper
on corporate governance which poses a very serious challenge to
our comply or explain regime with respect to the monitoring of
corporate governance. This is of enormous importance, not just
to financial services companies but to all companies listed in
the UK on all sorts of markets and threatens a rules-based procedure,
which is very different from what we follow here.
We suffer from the frustration that the ESMA seat
on issues like that or audit or a number of our other responsibilities,
is occupied by somebody not particularly apprised of the issues
in that area. So what we have said in our evidence to you and
to the Government is that while we do see some synergies in that
suggested bringing together of UKLA and the FRC we think it is
sub-optimal. We think a better proposal would be to create out
of the remains of the markets division of the FSA and the FRC
a fully rounded securities regulator, which would get rid of a
whole set of boundaries and weaknesses of representation in the
existing arrangements without creating the others about which
Monsieur Rolet is concerned.
Q392 Chair: Have
you discussed that with Mr Rolet?
Baroness Hogg:
No, we have raised it with—
Q393 Chair: Why
not?
Mr Haddrill: We
have discussed it with the stock exchange and some of his staff.
Baroness Hogg:
I've discussed with the Chairman too.
Q394 Chair: What
do they think?
Mr Haddrill: They
were quite interested in the proposition and they felt that that
wasn't an option on the table from the Government so they weren't
going to put it forward. But I think really they should speak
for themselves.
Baroness Hogg:
But you'll notice that in their evidence they suggest that the
CPMA, in order to keep a distinction between market regulation
and consumer protection, should in effect have two chief executives.
It doesn't seem to us that's a great way to start off with a new
regulatory institution.
Q395 Chair: Is
it your view that we've got to get on with this. What you're describing
sounds like a bit of a mess—we've got a lot of proposals
and no one seems happy with any of them. What you generally want
to do then is take stock, spend a bit more time thinking about
it and get it right, but everyone is telling us this has to be
done quickly, otherwise market confidence is going to get sapped,
we're going to lose business abroad. Which is it? The latter?
Baroness Hogg:
I think that is absolutely right. I think you're helping to make
it—how can I put this?—rather better thought through
but that needn't delay the process. I see no reason why at the
conclusion of your inquiry Government shouldn't be ready to get
on with things. Some things require primary legislation and some
don't, of course.
Q396 Chair: Have
you got anything else you particularly want to add, before I bring
in others, with respect to the evidence you've just heard? Either
of you?
Baroness Hogg:
Perhaps I might just add that an important emphasis, of which
we didn't hear quite so much in the previous session, is on the
interests of investors and long-term investors, which is a very
important focus of the FRC. If you look at what we've done recently
in the revision of the corporate governance code and the introduction
of the stewardship code, that is all about trying to make engagement
between long-term investors and companies work better. Because
it was, after all, those long-term investors who lost a lot of
money in the financial crisis, and who did require and deserve
a better process of engagement with the companies in which they
invest, and we have taken on the role of facilitating that.
Chair: Corporate governance
is also something we will be taking a look at.
Q397 Mark Garnier:
I am going to stick this FRC-UKLA merger thing because it is quite
a big conflict if you like between you and the stock exchange.
The other thing it is, as well, is it seems to be slightly confusing
as to which department wants to run it. If we look at the document,
A new approach to financial regulation, and I quote directly
from it, "The Government is therefore considering whether
UKLA should be merged with the FRC under the Department for Business
Innovation Skills or whether it should remain within the CPMA
markets division." Do you see this as a possibility for a
bit of a dust up going on between government departments trying
to take control of listing arrangements?
Baroness Hogg:
May I start with the first half of your question because, as I
say, there may not be that much disagreement between us and the
stock exchange on the need to ensure that we have a very strong
voice, ESMA. It is just the range of responsibilities across which
that voice is exercised. I wonder—and I promise I will come
to the second half on departments—if I might ask Stephen
to say a bit more about that.
Mr Haddrill: Is
that okay?
Mark Garnier: Yes, go.
Mr Haddrill: Well,
at the moment, or up until very recently, where we have had the
CSR Committee, the FSA has represented the UK on that committee
but there is quite a long list of issues, including some that
are pretty important to investors. Sarah has already mentioned
governance, there is also the question of the accounting rules
that affect the whole of the market, there is a question of audit
rules, and more recently the question of investor stewardship.
Now, all of those are being discussed in Europe somewhere but
particularly in these regulatory committees. The FRC, except on
the rarest occasions, is not allowed to take part in those discussions.
That is not the fault of the FSA. The FSA has been very strong
in trying to get us into the door. The reason is that many other
European regulatory authorities that have securities responsibilities,
the French in particular, won't allow their audit regulator or
their accounting regulator into the room because they don't want
to dilute their influence in the committee.
So we have a situation at the moment where there
are big responsibilities where the UK has to be represented by
the regulatory authority that is not responsible. It doesn't matter
really where UKLA ends up, that will continue. If it ends up in
the CPMA, we will still have that problem in relation to those
matters relating to investors. If it ends up with us then the
split that Mr Rolet is worried about arises. That is why we think
we really must make sure that everything to do with securities
is brought together, both the trading side, which is what Mr Rolet
is focused on and, from our perspective, the interest of investors
in governance, audit and accounting.
Q398 Mark Garnier:
There is a wider point with the governance, though, isn't there?
One of the points that Mr Rolet made was that you've got only
about 6% of quoted vehicles, if you like, that are equities, which
is kind of where you are concentrated. You've then obviously got
bonds and derivatives and all the rest of it which make up the
rest of it. I got the impression that his point was that your
remit doesn't really extend that much into those sort of sub-classes,
if you like, of investment opportunity. Can you comment on that?
Mr Haddrill: We
take as much interest in the good governance of companies almost
wherever they are but we certainly focus, yes, on the main listed
market. I would agree with that, because that's where the listing
rules apply at the moment. One of the synergies, and I think one
of the things we would want to focus on if UKLA was joined with
the FRC, is this question of governance, because at the moment
the FRC sets the governance rules, if you like, the code—not
the rules, I should say the principles—and UKLA, in effect,
creates the listing rules that enforce that, and requires companies
to follow that subject to the comply or explain principle. So
it would be an opportunity really for the FRC and UKLA together
to look closely at listing propositions to see whether the governance
of the company that is being put forward for listing is sound
and solid and meets UK expectations, particularly perhaps for
a listing coming from overseas.
Q399 Mark Garnier:
I am going to go back to the second part of the question; I am
not going to let you off the hook on that one. It is an important
point, though, isn't it? If we do move forward to this merged
organisation, should it be under CPMA or should it be directly
regulated by or looked after BIS?
Baroness Hogg:
Perhaps I might answer in a personal capacity. As the FRC at the
moment is responsible to BIS it would be better if I answer personally.
Is that all right, Chairman?
Chair: Yes.
Baroness Hogg:
I could see a good argument, to be frank, for making the consumer
protection part responsible to BIS, because the difficult interfaces
with the consumer protection regulator in financial services are
with the OFT and the Competition Commission, which, as you know
both, or maybe just one going forward, are responsible to BIS,
then having a market regulator, a securities regulator, responsible
to the Treasury. With all these things I think it is important
that both departments are engaged, because I think BIS has a real
and powerful interest in some of the issues you were discussing
earlier about the chain of capital-raising potential for companies
from very small through to FTSE 100 and the gaps in that chain.
But then, of course, so does the Treasury, which has an interest
in private equity, and in growth capital, which is a very important
part of the piece that doesn't follow the description you were
given of requiring the company to be sold. It's an investment
in a company which is then grown with the original founders still
holding the majority of shares and listing on markets in that
way. But consumer protection I can see being primarily responsible
to BIS and markets to Treasury. But I am giving that to you as
a personal view.
Q400 Mark Garnier:
But does it not strike you that we start off with this twin peaks
model, and then you have one part of the twin peaks model as being
having a twin peak kind of reporting line, if you like. We are
getting back to some sort of horrible place that we were before
with the FSA, where nobody really kind of knew who it was reporting
to and it just became too complicated. We've got an opportunity
here to have a very simple, very straightforward and a very understandable
framework that we can do, and all of these sorts of hypothetical
arguments end up with us going in completely the wrong direction.
What I want to hear from you really is how you are going to contribute
to this argument to make it simple and understandable and not
likely to have the same problems we had a couple of years ago?
Baroness Hogg:
I absolutely agree with that, and I do not think the CPMA is a
simple model. It would suffer from exactly what we saw—and
again I must say I'm speaking personally—with the FSA before
the crisis, which is that it did not know whether it should be
focusing on consumer protection, consumer detriment, information
asymmetries and the delivery of product, or whether it should
be focusing on market regulation and prudential requirements.
It was always swinging between the two, so there is a need to
separate consumer protection. Consumer protection in financial
services is all about the conduct of business and the character
of products in financial services which are complex products for
the consumer to understand and should be put with consumer education
in a self-standing body.
Q401 Mark Garnier:
But the CPMA is about consumer protection.
Baroness Hogg:
Then the markets piece, if I may, will be second string and will
not have the strength that Monsieur Rolet has described it as
requiring.
Q402 Mark Garnier:
Sure, but the central counterpart is clearing houses and settlement
systems and markets, which are going to be reportable directly
to the Bank of England. Is that maybe the answer?
Baroness Hogg:
Exactly, but then the markets—the remains of the markets
piece—if you put that with UKLA and the FRC and create a
securities regulator you would have greater clarity. I should
say in this that we're turkeys voting for Christmas because the
FRC is a small organisation; we would be put into a bigger organisation.
So there's no FRC interest here.
Q403 Mark Garnier:
Yes, sure. It is incredibly important to resolve this. How are
you proposing to work to get to a conclusion to this and to get
to a simple end and a simple outcome?
Baroness Hogg:
All we can do is put our views to you.
Q404 David Rutley: Can
I just ask a supplementary question? So you are putting forward
the view effectively for a new tripartite role, I guess. Is there
any enthusiasm from other stakeholders, other key organisations,
for your model?
Baroness Hogg:
I think they haven't seen it as on the table. I would say that
there are three pieces at the moment. There is the FRC, and its
role is growing: it has been given new responsibilities over the
last couple of years. For example, with the stewardship code and
the relationship with the investor community, which is a new and
very important piece of the activity. So there are three. It's
about restructuring them so that they work best at this point
going forward. There's quite a lot of concern, I think, out there
about putting together consumer protection in the remains of the
markets authority. There are always difficult boundaries wherever
you cut this one but there is quite a lot of concern about that,
as with the proposal that they need to have two separate chief
executives—that sounds odd to us.
Chair: Do you want to
add something, Mark?
Q405 Mark Garnier:
I was going to talk about where the potential conflicts are going
to come from your model. The more I think about it the more I
just can't see any other reason apart from there would be lots
of conflict. Can you talk about the conflicts and talk about how
they are going to be resolved?
Baroness Hogg:
The ESMA piece is resolved by having a securities regulator, which
brings me to—
Mark Garnier: I am thinking
more with the structure of the management, reporting back to BIS,
reporting back to the CPMA, the way it works in terms of the regulation
within the UK.
Baroness Hogg:
I would see the securities regulator reporting to the Treasury,
consumer protection reporting to BIS, a lot of interest in that
area.
Q406 Mark Garnier:
Which gets back to my original point about the power base, if
you like, because you've got a conflict of interest there between
one department and another, trying to effectively take control
of what amounts to the backbone of the financial services industry
in the UK.
Baroness Hogg:
You have it at the moment of course, because some of the consumer
protection piece is with BIS and it's proposed to move it to the
Treasury. So you have that going on in this process. So with the
proposal put forward by the Government you would have UKLA and
FRC reporting to BIS and the markets division and consumer protection
reporting to the Treasury.
Q407 Mark Garnier:
Yes, but talk about the conflict. Talk about where the problems
are with this.
Baroness Hogg:
The problems with that lie in the squeezing together of the markets
division and consumer protection: with one part of market regulation,
that is to say ours or ours plus UKLA, with BIS and the rest of
the market division with the Treasury.
Q408 Mark Garnier:
So do you think that we're sticking with the problems we had with
the FSA?
Baroness Hogg:
I'm so sorry, I didn't hear that at all.
Mark Garnier: Sorry, do
you think we're staying with the structural problems we had with
the FSA or do you think we're moving away from that? It just feels
like we're staying with the structural problems.
Baroness Hogg:
With the CPMA, we're staying with the structural problems, or
one of them. Obviously the prudential piece has been resolved
by moving that to the bank but with the CPMA as one piece there's
that same looking both ways within the one institution.
Q409 Mark Garnier:
So ultimately we're no better off. We're going to all this trouble
and we're possibly not addressing the fundamental point.
Baroness Hogg:
There is another fundamental point, I think, which is the macro-prudential
issue. So putting that aside.
Q410 Mark Garnier: Sure.
Yes, yes. But let's look at the nuts and bolts on the regulation.
Baroness Hogg:
Yes, on that piece, we haven't solved that problem and have created
a new one.
Mark Garnier: Thank you.
Q411 Chair: Not
a very strong endorsement of the Government's proposals?
Baroness Hogg:
We've said we think that we can make their proposal work and that
there are important synergies. But we think there is a better
option.
Q412 Chair: That
is the polite bit, isn't it?
Baroness Hogg:
I've been extremely open, Chairman, I'm allowed occasionally to
be polite.
Chair: You wanted to add
something?
Mr Haddrill: Just
that the model we're talking about matches up to Europe in another
respect as well. We mustn't forget that—we've been talking
a lot this morning about the regulatory level, the ESMA level,
but above that is the political level, the council and the commission.
Of course the basic decisions about the framework of a regulation
are taken by the council with the commission, with the European
Parliament. ESMA is then asked to implement those in detail. It
gets its funding from the commission. It is quite responsible
to the commission. And at that higher level you do have a separation
in Brussels between the internal market team and Commissioner
Barnier looking largely at financial services, and consumer protection,
including its impact on financial services, handled separately
by a separate part of the commission, and often in separate council
discussions. So they have, in a sense, recognised the split that
we're proposing here.
Q413 Jesse Norman:
Baroness Hogg, you have said that you think that the relationship
between the FRC and UKLA could be made to work, and the Chairman
has noticed it's hardly a ringing endorsement. Could I make a
mischievous suggestion, which is that part of this is driven by
financial considerations and that the desire is, in part, the
UK Listing Authority's revenue stream be used to sustain the FRC.
Is that something the Government, you think, might have in the
back of its mind? Because it's hard to see many other points of
interesting overlap between these two organisations.
Baroness Hogg:
No, absolutely not. I wrote to the Secretary of State on his appointment
saying that our funding from Government—and this was before
any of these proposals—was now down to 5% of our revenue
and we were happy to see it go to zero. It is going down to 2.5%
next year and will go to zero thereafter.
Q414 Jesse Norman:
So you're satisfied that there's no, as it were, bureaucratic
reshuffling here.
Baroness Hogg:
No, no, our activities are self-sustaining on our revenues.
Q415 Jesse Norman:
Good. Thank you very much. In relation to corporate governance,
an area in which I have some personal experience, how would you
describe the current set up that we have? Because to the untutored
eye it might look like a kind of spaghetti junction of overlapping
codes going back to Adrian Cadbury, Richard Greenbury, Hicks,
various minors—there were various other bits and bobs. And
yet our corporate governance system signally failed to inject
the kind of accountability that would have prevented the banking
system from going bust. I see, with some pleasure, that you've
pushed the idea of annual re-election of directors. Can't we go
a lot further than this in empowering shareholders? Let me give
you an example: in some parts of the US, they have cumulative
voting where shareholders can, as it were, in putting votes for
ten directors, put ten votes for one director and thus ensure
that there's an independent voice on what may be otherwise an
extremely intramural arrangement?
Baroness Hogg:
Thank you for your support for annual election. We thought it
very important to listen to investors on this issue in this consultation
on the corporate governance code. As I'm sure you know, UK corporate
governance has internationally a good reputation. You don't have
to take my word for it—I was impressed last week, for example,
to listen to the specialist of the Norwegian Sovereign Wealth
Fund, which you know has about 2% on average now of every listed
company in Europe, saying that we were—well, I won't say
what she said about France—significantly ahead would be
the word, if I'm allowed.
Chair: Why not?
Baroness Hogg:
You keep trying to get me to be rude. But I don't think any of
us can feel that things couldn't have been better and that's why
we reviewed the code and listened to the views of investors. We
were steering a course between looking at the code and seeing
where changes should be made, such as annual election, and ensuring
that we didn't impose on non-financial companies burdens of structure
that were appropriate only to systemic financial companies. Therefore
on the changes proposed by Sir David Walker, we embedded in the
code those we thought to be appropriate to all companies, and
the FSA took on the task of regulating specifically financial
services companies where they thought they were additional requirements;
for example, formal risk committees on every board.
So far as your suggestion on elections, our
instinct is to try and keep the model simple. Annual election,
as you know but not everybody seems to, is not just one vote for
the whole board, but one for each director. We thought that was
a simple model that moved things a long way forward. Everything
we do is done on a comply or explain basis because we are, if
you like, the facilitators of accountability to shareholders,
which lies at the heart of our model, and is under threat—this
is where I'll worry the Chairman again—from Europe, which
doesn't believe that at the end of the day shareholder rights
are properly exercised in many countries. Many countries believe
that those are rights that should therefore be taken away and
embedded in legislative prohibitions and requirements.
Q416 Jesse Norman:
Yes, of course that's true. It is also true that it's a very easy
way of regarding the whole of capitalism as a model that is essentially
broken because of the events of the last two years. It does seem
to me, though, however that you could go a lot further in introducing
genuine accountability and shareholder strength. We have talked
about cumulative voting. You could, for example, sue investors
who failed to exercise prudential ownership. You could open up
the question of self-reinforcing pay arrangements which we've
seen—executive compensation—go through the roof. What
about those kinds of things? Those are the areas that I think
really demand attention.
Baroness Hogg:
Shall we start with investors? I know Stephen is bursting to come
in, having spent time at the ABI. You do the investor bit.
Mr Haddrill: I
just think that the picture that we heard from the London Stock
Exchange about the very powerful capital raising that's gone on
and sort of refloated British business post-crisis, or during
the crisis as well, is that we have to be very careful about it
imposing responsibilities and costs on investors when they have
got the choice about how they deliver their money into the market.
We think the equity market model is a very powerful and good one
for the British economy, but people don't have to put their capital
up in that direction. They can lend it and so on, which we think
clearly has some advantages in some circumstances, but we would
certainly be losing something if we deterred people from being
equity holders. That's why what we have done is introduced the
stewardship code which is receiving an enormous amount of endorsement.
We've now had over 50 major fund managers sign up to it and we
will be monitoring very closely what they do, whether they abide
by its requirements on engagement with the companies and so on.
And we feel that strong nudge to voluntarism is the right way
forward at the moment.
Q417 Jesse Norman:
It's a very strange argument, though, isn't it, because you've
just been telling us how the benchmark of the European investors,
the Norwegian fund, has invested in every major company in Europe?
The largest investors have no choice but to remain equity investors.
Certainly they are not going to start lending into those companies
in a way that gets them out of the equity market so it does seem
to me the basis absolutely exists from a shareholder standpoint
to start to insist on what is, after all, a theme that this Government
is making a big issue of elsewhere, which is that ownership carries
with it responsibility?
Mr Haddrill: I
think I would question your first point. I think they do have
a choice and we've seen—perhaps for regulatory reasons more
than anything else I accept—the major long-term holders
of capital in the UK, particularly the insurance companies, heavily
reduce their shareholdings and move into bonds, which means that
we have a much larger—I don't object to this, it is a strength
in a sense—foreign holding in the London market than we
did say 10 or 20 years ago.
Baroness Hogg:
May I just add that in relation to that I think you're entirely
right. Again, I must say I'm speaking personally, because it's
not within our area of responsibility at the moment to press on
underwriting fees. I think that has not been a good story recently.
Q418 Jesse Norman:
But you would support the view I was hinting at in my earlier
line of questioning?
Baroness Hogg:
That they were high.
Jesse Norman: Far too
high. Thank you.
Q419 Stewart Hosie:
Can I just take you back to David and Mark's questions. In a previous
answer, you commented on the difficulties of the tripartite in
the run up to the banking crisis. But in separating out the markets
conduct regulator from the CPMA, are we not recreating, or would
you not recreate, the very underlaps, the cracks between the three
pillars, that allowed things to fall in the first place, as witnessed
by the failure to have an early takeover of Northern Rock, for
example, in the first weekend. Would we not go back to gaps within
the system if you had your way with that structure?
Baroness Hogg:
I don't believe that. Under the Government's present proposal,
there is a separation between the PRA and the CPMA. That addresses
one gap, between the Bank of England and the FSA, but of course
it opens up a new gap between the PRA and the CPMA. What I'm suggesting
is that the gap between the FRC and the markets division is closed,
and that consumer protection is a separate institution combined
with consumer education, because I believe this is enormously
important. If it is in a combined institution, which is half about
wholesale market regulation, the kind of thing you've been talking
about all this morning, either consumer protection will get lost,
or it will be a constant diversion of view between the two at
the top of the organisation, as we saw with the FSA. It could
never work out from one day to another whether it should be most
focused on consumer protection or market regulation. I do believe
a strong consumer protection body for financial services is enormously
important.
Q420 Stewart Hosie:
No, I wouldn't dispute that. Is there not a danger though that
this takes us away from the twin peaks model, which appeared to
be worked towards, with that separation.
Baroness Hogg:
I don't want to get hung up on twin peaks. I think there are three
activities: macro-prudential; market regulation; consumer protection.
I think clarity of focus amongst the institutions is the best
way of avoiding underlap—and indeed overlap, which will
also be a danger.
Q421 John Mann:
I'm trying to work out what's going on here. We've got an active
politician linked to the current Government and we've got a former
senior civil servant from the DTI. We've got a dog's breakfast
of a proposal according to everybody else. In fact I can't find
anybody else at all who thinks that this proposal has got any
merit in it, and they're queuing up to say it hasn't. The stock
exchange says that this will help sow the seeds of the next crisis.
I'd like to start by asking where did this proposal originate?
When were you first involved in discussing this proposal with
Government?
Mr Haddrill: Once
it had published its consultation document.
Q422 John Mann:
So you've had no involvement whatsoever in advance?
Mr Haddrill: No,
not with the Government.
Baroness Hogg:
No, we read what the Government put out before—
Q423 John Mann:
So somebody within Government has dreamt this up, obviously not
consulting anybody else at all, not even yourselves?
Baroness Hogg:
I'm sure it consulted, but it didn't consult us.
Q424 John Mann:
No, it can't have consulted others because they're all against
it— ABI, CBI, IOD and a string of other acronyms that are
less memorable, all against it. So you're saying that you weren't
consulted, but this totally and absolutely transforms your organisation.
You said yourself, Baroness Hogg, you're a small little organisation
and you'll become a much larger one. So no one bothered to consult
you about this major transformation in your organisation?
Mr Haddrill: There
was a proposal in the work that Lord Sassoon did before the election
for the Conservative Party, where he raised the possibility of
effectively creating a markets organisation of the kind that we're
suggesting, rather than the kind that the Government are suggesting.
He suggested bringing us together with the markets division of
the FSA and the takeover panel in a—really what we're now
much closer to talking about is our proposition as opposed to
the Government's. We discussed that with him before the election.
It then seemed to disappear. The whole thing disappeared for a
while after the election, and the first we saw or discussed of
the proposals was when the consultation document came out, because
it came out differently from Lord Sassoon's original proposal.
Baroness Hogg:
We should be clear that you mean this proposal that I've been
describing of a full securities regulator or UKLA and the FRC?
Q425 John Mann:
This principle that's there.
Baroness Hogg:
Do you mean just the FRC and UKLA or the wider—
John Mann: Yes, I do.
Yes.
Baroness Hogg:
Oh, okay. Well, we had some conversations with BIS before the
paper was published.
Q426 John Mann:
You did?
Baroness Hogg:
Yes, discussions with BIS.
Q427 John Mann:
Well, how long before?
Baroness Hogg:
They were talking to us—what, how long before?
Mr Haddrill: Well,
almost immediately before, I think.
Q428 John Mann:
Just immediately before?
Mr Haddrill: I'm
trying to remember.
Q429 Chair: Can
you define "immediately before"?
Baroness Hogg:
I'm sorry, I thought you meant the securities regulator idea,
which, no, that—
Q430 Chair: I am
astonished by the answers you've given to John. Are you really
saying that you were not in the loop at all?
Baroness Hogg:
No, on UKLA and the FRC, BIS consulted us beforehand, absolutely.
I misunderstood you, my apologies. I thought you meant—
Q431 John Mann:
Well, the securities regulator, you've just thrown that into the
equation as part of your backtracking, haven't you?
Baroness Hogg:
No, I thought you meant the securities regulator. You said "this,
which we have been talking about".
Q432 Chair: Can
you just clarify, what did they consult on and what didn't they
consult on?
Baroness Hogg:
They consulted on the UKLA-FRC combination with us.
Q433 Chair: And
what didn't they consult on?
Baroness Hogg:
The idea of a wider securities regulator.
Chair: Sorry, John, to
interrupt.
Baroness Hogg:
Is that clear, John?
Q434 John Mann:
It is but I'm still interested to see when they consulted you.
Baroness Hogg:
Before the Green Paper.
Q435 John Mann:
Do you remember how much before?
Mr Haddrill: In
the one or two weeks before. If you recall, immediately after
the election, it seemed that the proposal to take a radical view
of splitting up the FSA was being dropped and then it reappeared.
It was only after it reappeared, which was quite close to the
point where the consultation document came out, that we had some
discussion with them.
Baroness Hogg:
Is that clear?
Q436 John Mann:
So it's not coming from you all at all, and it hasn't done before,
even in pre-election discussions?
Baroness Hogg:
No.
Mr Haddrill: No.
Q437 John Mann:
In any way?
Baroness Hogg:
No.
Q438 John Mann:
What's the motive for you then? It totally transforms, changes
your organisation, what is the motive? There's always a motive
in people's actions.
Baroness Hogg:
To improve the quality of regulation. I said it's not particularly—
Q439 John Mann:
What's the motive for you as an organisation? Is the motive as
previously in some way a profit or financial motive or is it a
motive of trying to water down scrutiny of your own sector?
Baroness Hogg:
To improve the quality of regulation.
Q440 John Mann:
That is a very esoteric aim.
Baroness Hogg:
I think it's a very important aim.
Q441 John Mann:
But that's not a motive for your organisation.
Mr Haddrill: When
our board discussed the proposal shortly before the consultation
document came out, the board took the view that the best answer
for the UK was the creation of a markets authority—a securities
regulator. And it recognised when it took that view that it was
effectively saying goodbye to the FRC, and we would be supporting
the concept of the Government creating a completely new body.
So we did put completely on one side any organisational interest
in the proposition.
Q442 John Mann:
That is very good of you. I'm mystified. This is how organisations
in my experience overreact. Your organisation is going to be totally
and absolutely transformed—every one else thinks this is
a bad idea who has chosen to comment publicly. You've had a week
or two of consultation in advance, you've then thrown in a separate
proposal of a securities regulator, and my question is what is
going on? Because this doesn't all stack up. Where's your vested
interest in this?
Baroness Hogg:
To improve the quality of regulation.
John Mann: We're all in
favour of that, that's not a vested interest
Baroness Hogg:
Good.
Mr Haddrill: Well,
we don't have a vested interest beyond the job that we've been
given. Our job is to be the UK's independent regulator in a large
part of the investment interest and that's what we seek to do.
If the Government wants to change the framework we have to give
our view on how best that can be done.
Q443 John Mann:
Because of your knowledge of politicians and civil servants, you're
both together uniquely placed. Do you think this proposal has
originated from politicians or from civil servants within BIS?
Mr Haddrill: I
don't think I feel able to judge that, except to say that the
proposal to split up the FSA clearly came from politicians before
the election and therefore presumably the leadership was initially
a political leadership.
Q444 John Mann:
That's one issue, but the question, which is a contentious one
of course, is how it's done.
Baroness Hogg:
Indeed.
John Mann: That's the
critical issue here. That's why you're in front of the Committee.
Mr Haddrill: When
we went into the department the officials weren't saying to us,
"Well this idea has come out of Ministers but we don't agree
with it", and the Ministers weren't saying to us, "This
idea has just been cooked up by officials and we don't agree with
it". I mean they tended to say the same thing, so I assume
that they developed it together. Maybe I'm being naive but that's
what I assume.
Q445 John Mann:
We're not electing a Pope here. This is my final question. I'm
quite astounded I have to say, because everyone else who has bothered
to comment is against this. Quite a lot have bothered to comment.
Baroness Hogg:
Can I be clear what "this" is?
John Mann: This is the
initial proposal of UKLA merging in with yourselves.
Baroness Hogg:
Okay, yes.
John Mann: You've thrown
in a second proposal as part of your wriggling to get out of the
opposition to others, it seems to me. Why is everybody else so
wrong and you and a Government Minister so right in terms of—or
is it the Government Minister on his own who is responsible for
this? Are you distancing yourself—
Baroness Hogg:
We haven't said they are wrong, have we? I'm sorry, you—
John Mann: No, you haven't.
So in fact now we've just got a Government Minister on his own—I
think, Chairman, we need to get this Government Minister in to
find out what's been going on.
Chair: All in good time.
Baroness Hogg:
But I think to be fair, I think if you read the Green Paper you
will see that the Minister himself raises the questions.
Q446 Chair: Well,
we've had a good background in this subject this morning and ended
on a somewhat lively note. I'm very glad we were able to clear
up what looked like quite a misunderstanding about whether you'd
been consulted at all, and it seems things are a little less bizarre
than I initially thought.
Baroness Hogg:
Yes, I'd assumed that as we'd been talking about the securities
regulator that's what Mr Mann meant.
Q447 Chair: No,
I understand. This area of regulation is now in flux and we'd
better get it straightened out sooner rather than later, judging
by your initial remarks about the damage that this could do to
UK competitiveness. Is there anything else that either of you
want to add now? Otherwise, if there isn't, if you do have supplementary
thoughts we'd be very grateful to receive them in writing. Thank
you very much for giving evidence this morning.
Baroness Hogg:
Thank you, Chairman. Is there anything you want to add, Stephen?
Mr Haddrill: Perhaps
just on your last point about sorting it out quickly. The concern
for us is also that the staff of UKLA find out pretty soon where
they stand because I think the role they have is so important.
If they are to continue to do it and do it effectively, that has
got to be taken into account.
Q448 Chair: That
point has also been made to us. Thank you very much indeed.
Baroness Hogg:
Thank you.
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