Examination of Witnesses (Questions 660-683)
Q660 Chair:
Thank you very much for coming before us. We're hoping to finish
at 12.00pm, not because we're not interested in your evidence,
but there are other things many of us have to get on to today.
Please feel free to submit further written evidence if there are
points raised that you don't feel you've had an opportunity to
answer fully. May I begin with a question to Which? You say, "There
are serious flaws in the FSA's approach to conduct of business
regulation". Can you tell us—
Mr Vicary-Smith:
Sorry, I missed the question.
Q661 Chair:
I am just reading what you said in your evidence. I quote, "There
are serious flaws in the FSA's approach to conduct of business
regulation". What are they?
Mr Lindley: I think
it was that the FSA didn't do enough to tackle the root causes
of consumer detriment, like complex products, like remuneration
systems, which meant that someone could be paid six times as much
for selling a loan with payment protection insurance as for selling
a loan on its own, and the lack of competition in the market.
When the FSA did identify detriment it spent a lot of time looking
into it, conducting thematic work, instead of taking strong action,
and eventually when it did get through to imposing fines on companies,
those fines were such a low percentage of the amount of money
the companies had made from mis-selling those products that it's
not surprising it didn't have that kind of disciplining effect
on the market, and also it refuses to reveal information about
what it is doing.
The Committee might be aware of the freedom of information
request that we submitted to the FSA, over a number of months,
when the FSA was doing some work into the treatment of customers
and mortgage arrears and it found that five firms were not treating
customers fairly and referred those to enforcement. So we tried
to get the names of those firms out of the FSA, because we thought
that judges hearing repossession cases involving those firms should
have a right to know what the firms had been doing, but the FSA
refused our request. They said they couldn't disclose the names
of those firms, partly because of the restrictions put on them
by the Financial Services and Markets Act, but also partly because
they said if they disclosed the names of those firms it might
lead to some reputational impact on the firms; it might make consumers
more willing to complain, which could lead to unjustified complaints.
So it's a definite change of approach that needs to be accomplished
alongside the changes in structure.
Chair: That is an interesting
and full answer. You're suggesting that the investigations are
inadequate, that the fines are inadequate, that too much attention
is being paid to reputational risk, and that there isn't adequate
competition in the market?
Mr Lindley: Yes.
Chair: Have I summarised
the situation?
Mr Lindley: Yes.
Q662 Chair:
Do you know, roughly, how much consumers pay for the existing
level of regulation?
Mr Lindley: I think
the FSA's total fees were several hundred million pounds a year,
which of course are paid by consumers ultimately. I think what's
also important—
Q663 Chair:
And the cost to firms?
Mr Lindley: Yes,
and the cost to firms.
Chair: Do you know what
that is, roughly?
Mr Lindley: Not
in total. I also think it's important to distinguish between the
cost of regulation and the cost of what you would expect good
firms to do anyway. If you take mortgage regulation, then the
FSA may have rules on affordability, but a good well-run firm
would already be checking that consumers' income and expenditure
was sufficient to be able to repay that mortgage. So the actual
additional cost of regulation—
Q664 Chair:
Yes, that's a business cost to protect shareholder value. What
I'm looking at here is what the compliance burden is on that firm
generated, for example, by its own compliance department. Have
you ever tried to look at any of these issues or discuss it with
the firms, your counterparties?
Mr Lindley: We
have tried to discuss with firms what internal compliance they
do, because sometimes if the internal compliance is over-burdensome,
or inadequate, then there is something we can do about that. I
think it's important to weigh those costs against the substantial
costs we've seen to consumers, and firms themselves, when mis-selling
is allowed to continue for such a long period of time for products,
such as pensions, endowments and now payment protection insurance.
We were raising concerns about payment protection insurance back
in 2002. The FSA took responsibility for it in 2005. If the industry
had done a much better job in not selling as many products poorly,
then it wouldn't now be facing a redress bill of up to £3
billion and that doesn't even include the detriment suffered by
consumers from buying those poor products.
Q665 Chair:
That is a market failure that presumably can be assisted by more
competition. How do you think we should get that?
Mr Lindley: In
terms of more competition, we'd like the FSA to be given a specific
duty to promote competition, because one of the problems—
Chair: A specific objective?
Mr Lindley: Yes.
One of the problems that we've found is the FSA always viewed
its competition objective as not putting in place extra barriers
rather than seeking to proactively remove any barriers, which
might exist already. Now that's weak for consumers because then,
to get things fixed, the Office of Fair Trading has to conduct
a very long and intense investigation, and that takes time. If
you take something like the transferring of individual savings
accounts, of ISAs, there was a complaint made and now improvements
have been accomplished, but it would have been much better if
the FSA—a year and a half ago, when it was introducing rules—had
said to firms, "Look, you need to make sure that people can
transfer ISAs within 10 days. Instead, the FSA made a rule saying
people should have a prompt and efficient service, and then when
asked, "What does that mean?" just codified existing
industry guidance, which allowed them to take up to a month.
Q666 Chair:
I understand. On reputational risk, just to be clear, I don't
think there are any takers here for shielding firms who have behaved
badly from public scrutiny, but have you given any thought to
the concerns that are expressed, by the industry to the FSA, about
the risk of misplaced allegations, which lead to reputational
risk and therefore damage to the firms, and do you have a specific
proposal for shifting the balance in that area that you think
the FSA might be prepared to agree to?
Mr Vicary-Smith:
I think, in a sense, we need to separate two elements of the information
they receive. At the moment the FSA effectively says, "Anything
we get in the conduct of our investigations is privileged information
and, therefore, we're prevented from disclosing". Our view
is: keep that between the FSA and the firms up to the point of
enforcement, but once somebody has been placed into enforcement
we then believe that the consumers have the right to know what
problems exist. The issue at the moment is the FSA takes that
issue right the way through to the point of a fine being levied,
and that is the only point Which? has made. So it's the enforcement
point.
Chair: You want the information
out in the public domain at the point of enforcement rather than
at the point of the fine?
Mr Vicary-Smith:
Indeed.
Q667 Stewart Hosie:
May I ask, when we get the restructuring of financial regulation,
which will come, it's clear that the financial problems will rise,
in particular the compliance cost. How do you think they'll pass
those costs on to the consumer? Will it be higher premiums or
will it be higher costs involved? Will it be one-off fees? Will
they take some of those costs themselves or do you think everything
will be passed straight on to the consumers?
Mr Vicary-Smith:
I would suspect—given the evidence—it will pass on
absolutely as much as it possibly can, to the consumer. It will
not do that in a clear and allocated way. It will do that by a
bit here and a bit there, by widening margins where it can. But
we're clear that in all industries, not just in financial services,
the costs of regulation are always borne by the consumer. In this
industry we would agree that the regulation failed in the crisis
and therefore needs to be handled differently going forward. That
is inevitably going to mean extra cost, and therefore the likelihood
is that costs will be passed on to consumers. But there are also
other reforms in the industry, notably enhancement of competition
that, if it was effective, would result in the cost of products
going down. So it isn't automatic that consumers need to be paying
more for financial services in the future, than they have in the
past.
Mr Cullum: Can
I just jump in on that? I think there is plenty of experience
in other sectors of firms and sectors effectively earning autonomy,
or earning less regulation, by demonstrably behaving in a more
responsible way and having simpler, more straightforward products.
One of the issues in this sector is what appears to be a deliberate
attempt by the financial services companies to make products difficult
for consumers to understand and the selling process hard, so that
consumers are misled. The more that is removed the less regulation
will be required, because it will be much more straightforward
and at a more basic level. But that does require quite a substantial
culture change on the part of the industry. I absolutely agree
with Peter. Ideally, the industry should be paying the costs of
its own past and current irresponsibility, but we recognise that
what will happen is they will try and sneak it on to consumers
in various ways until there is effective competition.
Q668 Stewart Hosie:
The competition point is interesting, but I'll park that just
now. But in terms of regulation let's turn that question around.
Do you think there is a possibility or potential that we could
actually use regulation to reduce the cost to consumers, or would
that place such an additional cost burden on the businesses that
a number of them would go bust?
Mr Cullum: From
a consumer perspective there are really two bases for regulation:
one is about consumer protection, stopping bad people doing bad
things; and the second one is about making markets work. Regulation
that makes markets work should, in the end, lead to less regulation.
I think one of the issues in this sector is, fundamentally, how
does regulation achieve culture change? Because the last thing
we want to do is, forever and a day, to be in a position where
every aspect of what the industry does needs to be regulated in
a command and control way. What we need is for companies to internalise
the point of regulation, so that they start making the right decisions
and see it as part and parcel of what they do to behave responsibly.
There is no other sector—and we work across lots of different
sectors on regulation—there is no other sector where you
can conceive that the regulator would have a programme called
"Treating Customers Fairly". That would be seen as self-evident
in every other sector, and yet somehow it seems to be rather groundbreaking
and novel in this sector.
Q669 Stewart Hosie:
Just to push this use of regulation a little further. Would you
suggest regulation might be used to cap an interest charge on
a credit card, or to cap a commission fee on a pension fund, for
example? Have you ever seen regulation used that way to protect
the consumers?
Mr Cullum: It is
certainly right that the regulator should be looking at the margins
at the moment, which you touched on in the previous session. I
think the jury is out in terms of caps on interest rates, and
there is quite a lot of evidence to suggest that it may drive
some consumers into the hands of the illegal or less good sector.
We've done quite a lot of work recently on payday
lending, where a lot of people have called for this sector to
be banned. What our research showed was that the consumers who
use it really like it. It's the way that they use it that's damaging.
So what we tried to do was to make a series of proposals that
would retain the industry—because if it doesn't exist our
fear is: not that they'll all start going to banks but they'll
start going to the rather dodgier end of the market—to try
and make that market work properly. So we would be concerned about
some of the unintended consequences of caps.
Mr Vicary-Smith:
I also think some forms of product regulation effectively needn't
be as intrusive as some people see. We've talked with this Committee
and with Ministers many times, for example, about the method for
calculating interest on credit cards, and the fact that an APR
isn't an APR, and why can't there be one way of calculating interest
so that people can genuinely compare their credit cards? That
doesn't seem to us to be a mind-numbingly intrusive element of
regulation but the argument the industry always raises is, "But
it's anti-competitive". I cease to see a consumer who thinks
that there should be competition on how interest rates are calculated,
and that's an example.
Q670 Stewart Hosie:
That sort of approach, which simply delivers transparency, you
do not expect to add any additional cost burden to commercial
funds at all?
Mr Vicary-Smith:
No, exactly.
Q671 Mr Mudie:
The FSA was never seen to be comfortable with consumer protection.
They were always behind the curve. The impression given by the
new structure is that they've sorted everything out and discovered
that they have consumer protection left over, so where the hell
do we put it? So they have thrown it in with markets. Do you think
it's injurious to the interests of consumers to be in that division
where the synergies between the two seem slightly out of kilter?
Mr Vicary-Smith:
I think if it's to be an effective combination then we need to
change the primary objective of the CPMA that's in there. So we've
argued in our submission, for example, that maintaining confidence
in financial markets should not be an objective—it's caused
so much trouble being in the FSA's objectives—but fair,
transparent and competitive markets should be an objective of
the CPMA. If you put that in there, then you turn the CPMA into
something that is genuinely trying to bolster competition in the
sector that we always say has far more rivalry than real competition,
and then it can work effectively with that.
Q672 Mr Mudie:
But does that not limit consumer protection to market activity
whereas, along with financial services, there is a range—banking,
for example—where we are interested in what you're going
to say in the next session, about insurance, and so on. The fact
it's in there, does that not circumscribe its activities?
Mr Vicary-Smith:
In a sense for me, it only circumscribes it if the regulator chooses
to interpret that brief in a very narrow way.
Q673 Mr Mudie:
Could you not avoid that by making it independent?
Mr Vicary-Smith:
I think the issue for me then is: how do you get the competition
dimension working effectively in the markets area. So I think
one of the biggest problems—
Mr Mudie: But the markets
are arguing they don't want that competition, apart from the consumer
protection, that pressure.
Mr Vicary-Smith:
I'm sure the markets don't want competition. But in order for
the markets to be working effectively we have to dramatically
increase the level of competition. Real competition exists within
this sector. That isn't the panacea but it is a huge step that
needs to be conducted, and we're pleased the Vickers inquiry has
been widened to incorporate that.
Chair: Then tell us how
to do it because that's exactly what we want to report on.
Mr Vicary-Smith:
Okay.
Mr Cullum: I think
the key issue is that a lot of people from the industry side,
and people that you've seen, interpret the consumer interest in
quite a narrow way. So they see it very much about stopping companies
doing bad things to consumers. Our interest—both Consumer
Focus and Which?—is a much broader and more forward looking
one, I think, which is about that in part, but is also about creating
markets, which work properly, which meet the needs of all consumers,
which are seen to be fair, and so on. I absolutely agree in terms
of the statutory duties. I'm less convinced about having competition
as a primary duty, just because my experience in other markets
with regulators is they can obsess about competition for its own
sake, and the point in this market is everything should be driven
through the consumer prism in the end. Of course often that is
about competition but competition isn't an end in itself, it's
the consumer perspective.
But there are three worrying words in the Government's
proposals: "champion", which we might come on to; "stability",
which we might come on to, and "confidence", and Peter
is right to pick out confidence. We could end up in the completely
absurd position with a regulator agonising about whether they
should act against a part of the sector or a product, because
telling people how bad it is might reduce confidence. Well, that
would be a crazy position to be in.
Q674 Mr Love:
It was put to us—last week I think it was—by the Finance
and Leasing Association, that APRs weren't particularly good at
reflecting the cost to consumers of payday lending or home credit.
How do you respond to that?
Mr Vicary-Smith:
There is never a perfect measure when consumers are trying to
compare things, saying that the APR was meant to be a good way
that consumers compare the cost of a credit card; at the moment,
it's not a very good way because of the way the interest rate
is calculated. So I think, while there are undoubtedly other mechanisms
that are useful, and consumers shouldn't just take one measure
of anything, having APRs that could genuinely be compared would
be a huge advance to enable people to work out which credit card
is good value and which credit card is bad value.
Q675 Mr Love:
Aren't you making an assumption that consumers will naturally
look across the market where many of the people who will be interested
in payday loans, or home credit, will either feel that it's inappropriate
for them or have already been excluded from being able to take
up a credit card as an alternative, and therefore you have to
focus on what's available and appropriate for them in their circumstances,
and in those circumstances APRs don't provide a helpful hand.
Mr Cullum: Can
I just jump in for a second? Our predecessor body did the super-complaint,
which reached the Competition Commission, on home credit. You're
right that APRs are misleading on it. However, I don't think we
should rule out the idea of competition, even in markets like
home credit, for example by trying to get a fair way of comparison
or allowing home credit customers to build a portable credit history
for customers. It's quite important. We shouldn't assume that
just because consumers are at the lower end of the spectrum that
competition is impossible in some of those sectors. But you're
absolutely right that it's easy to produce astronomical APR figures
for some of those things, which clearly wouldn't mean anything
to people. I'm not sure if it's still the case, but if you ever
went to visit the FSA, and you came out of the tube at Canary
Wharf, there used to be a figure of what percentage of people
didn't understand percentages, and clearly there are issues about
the information.
Q676 Mr Love:
Let me take that a little further. From memory—and correct
me if I'm wrong—the OFT did an inquiry into home credit
and that came out saying that one of the solutions was greater
competition, and they made some recommendations about not flooding
the market, with one company controlling the whole of a city,
or whatever. How effective have the recommendations they've made
been in increasing competition? I get the impression it hasn't
done very much but you tell me how you feel about it.
Mr Cullum: As far
as I know, and I haven't seen the most recent figures, I'm not
sure it's changed concentration. From memory, there were about
500 providers, but about four companies hugely dominating the
market; so, in some respects, not unlike retail banking more generally.
I don't think that's changed. I don't know, is the answer.
I guess one of the issues for the new single competition
and markets authority could be when they revisit areas that they've
investigated, because it wasn't just the OFT that looked at it,
these were Competition Commission recommendations as well. Regulators
are quite quick to try and assess other people's effectiveness—the
regulated companies—but they're not so good at accounting
for their own effectiveness.
Ms Brooks: Going
back to the issue of payday loans and short-term loans, obviously
APR doesn't make much sense if you're borrowing for 15 days or
30 days. It's helpful for people to understand exactly what they're
going to pay back, and one of the things that our research into
payday loans showed is that that was welcome. I know if I borrow
£100 I'll pay back £130. That could be an APR of 1,000%
or 2,000%. However, if they didn't borrow that money and went
over their overdraft limit, they might be equally hit by £60
from the banks. So it's not always the case that these high interest
rates are worse than some of the alternatives.
Q677 John Mann:
I'll just ask my three questions together to allow the two organisations
to give one answer each. You have communities across this country
that are about to be brought to their knees because of the excesses
of bankers and the risk-taking, and we still have no transparency.
Consumer Focus is about to be abolished and—reading your
submission—meekly walking towards the guillotine. We have
the OFT merging with the Competition Commission. We have the industry,
not least the BBA, opposing the concept of having consumer champion
alongside regulator. So my first question is: in all of this,
who is going to speak up for the consumer?
My second question is about the Financial Ombudsman
Service, to see whether you'd agree with me that there is no weaker
Ombudsman in existence in this country at the current time, and
that, therefore, worsens the consumer situation. Thirdly, specifically
to Which?, the consumers association, in all your submissions
you seem to have skirted over the issue of investment banking
and the lack of competition in investment banking, and we shouldn't
forget that it was investment banking, not retail banking, that
was at the heart of the excessive risk-taking and the start of
the collapse that we're all suffering from now. So I wonder what
is the perspective of each of the organisations on my three questions.
Chair: As you see, that
was a brisk question and what we'd like is an even brisker reply.
Mr Cullum: Yes.
Shall I answer the first one? I don't think we are meekly walking
towards the guillotine. We're conscious that the Public Bodies
Bill first needs to be passed, that there's a consultation next
year and that an affirmative resolution comes after that. So if
we're walking towards it, it's quite a long slow walk.
I think we're clear that it's wrong for public
bodies to devote public money to fighting for their own preservation,
and our interest at heart is: what will be the functions of any
new arrangements going forward? Of course Consumer Focus has a
special place in our hearts. We think we've done a good job and
we can point demonstrably to our success, not least of all our
super-complaint on cash ISAs in this sector.
But, as I say, we shouldn't be arguing for our
own self-interest. Our concern for this sector is the extent to
which Government just doesn't seem to be interested in having
any strong consumer advocacy. It is right that the panel exists,
and both we and Which? think that panels are important in regulation
but they perform a very different role from a consumer advocate.
I used to work at Which?. Which? do a great job on aspects of
financial services, Citizens Advice do some good work on financial
inclusion, but I don't see anybody doing the kind of work that
we've done on payday loans, the kind of work that we did on our
cash ISAs super-complaints, and what we're doing at the moment
on trail commission on pensions.
Angela Knight said in her evidence to you there
needs to be a consumer champion. All she said was it shouldn't
be in the regulator, which I would agree with. Where is it going
to come from? Talking to BIS officials, I think essentially they
would say that it's a matter for the Treasury, and the Treasury
have made it very clear to them that their, supposedly, cross-economy
take on consumer advocacy shouldn't tread on the Treasury's patch
and the Treasury doesn't seem to be interested in it. So who is
going to deliver Angela Knight's consumer champion? You could
be a useful advocate on this issue, I think.
Chair: Yes, well that
wasn't an even brisker answer, but it was very interesting. Maybe
Peter Vicary-Smith can advocate.
Mr Vicary-Smith:
On the same question, on question one, if you like, I think there
are a number of functions being transferred to other bodies. I
think you're right: the worrying dimension is particularly what
is going to fall down the cracks and whether other bodies are
aware of what is coming their way and they're going to be resourced
appropriately. To my mind it is important that the various panels
continue to exist. I know there has been some talk about: do we
need panels or can they just transfer into some of these other
bodies? No, the panels are very useful. They perform a very important
regulator-facing function that is very hard for an external organisation
to do, be it financial services or the communications panel, whatever
it may be.
Of course, I would argue that Which? performs a large
role and a large dimension of advocacy in a range of areas. I
think it also behoves us in this changing landscape to look at
what more we can do. Now, we have the good fortune not to be funded
by Government, and we have already been, over the last few years,
dramatically increasing our investment in this area, and we're
now spending our time working out whether we can be investing
more to cover some of these gaps, so that in the changing landscape
consumers aren't left high and dry.
The other dimension, of course—which is the
often forgotten bit of consumer protection, generally—is
the role of Trading Standards. For many consumers it is Trading
Standards where the rubber hits the road and where the first interface
is. We welcome the reinforcement of Trading Standards' roles.
We want to make sure that the funding that enables them to do
their jobs properly doesn't disappear in the cuts going on in
local authorities.
There are a number of concerns we all have,
but I think there are still organisations that are able to advocate
on behalf of consumers and fight for consumers. We need to make
sure that, where functions are transferred, resources are also
transferred to help people do the job they're being asked to do.
Q678 Mark Garnier:
Can I turn to the work of the FPC. One recurrent theme that seems
to be coming up from your written evidence, and also from the
evidence of Martin Lewis recently, was that if the FPC were going
to act in trying to deal with bubbles, then it is going to have
an effect on consumers' welfare. Surely the whole point about
the FPC is that if you are going to try and take the heat out
of a residential property bubble by controlling mortgages and
loan-to-value ratios, and this kind of stuff, the whole point
is it is going to affect the consumer. How do you square that
circle?
Mr Lindley: From
our point of view, it probably would have been good if there had
been some restrictions on loan-to-values on mortgages in the boom
years of 2004 to 2007, because then we wouldn't have seen as much
growth in house prices and probably not have seen as much fall.
As you say, I think the problem of leaving it to the industry
is that while house prices were going strongly the industry was
lending at very high loan-to-values, then as soon as they peaked
it withdrew all those products. That's the opposite way in which
a rational banker should be operating.
What we were saying is that when there is a
change in the maximum loan to value that is going to have an impact
on consumers, if you're halfway through buying a house and you've
had the mortgage agreed but you haven't drawn down on it yet.
So what we were trying to say to the Treasury is that in their
consultation on these macro-prudential tools, they do need to
look at the impact on consumers.
The other one is about variable capital requirements.
Now, buried deep within your terms and conditions on your mortgage
is probably an allowance allowing the mortgage company to vary
the interest rate, depending on decisions made by regulators.
So if the FPC introduces variable capital requirements and increases
them, then could you see your interest rate go up? How that kind
of term might be operated will be extremely opaque to consumers,
whereas if you're on a tracker mortgage at the moment it's very
clear to you that if the Bank of England interest rate goes up,
then your interest rates goes up, and if it goes down, then it
goes down
Q679 Mark Garnier:
One of the interesting points, going back to this asset bubble
that we've had, is that the MPC was originally charged with looking
at inflation as measured by the RPI, and then when the RPI became
a little bit too overheated it was decided to move it to the CPI,
which of course doesn't include the cost of houses and mortgages.
Surely, to take the heat out of the bubble, it would have been
a lot simpler to have carried on using the RPI, which, I believe,
does take into account mortgages and therefore interest rates
would have gone up anyway.
Mr Lindley: It
does take into account one measure of house prices. It's not a
perfect measure. The other thing is that even if interest rates
had gone up, the amount that it would have had to have gone up
to have taken the heat out of the housing bubble might have been
so much that it would have had a very detrimental impact on other
sectors of the economy. That's where some of these other macro-prudential
tools come into their own because you can target sectors of the
economy that you do feel are getting out of control; commercial
property was probably another one and residential property, certainly.
The fact that we have gone from a feast to a
famine in the availability of mortgages damages consumers. It
also damages house builders and other people trying to plan for
the future. They would much rather there was consistent availability
rather than that we went from feast to famine.
Mark Garnier: A lot of
people argue that we're still in a housing bubble. We can see
favours in dropping house prices to get it back to a long-term
measure of normalcy.
Mr Lindley: Then,
I think, we need to concentrate on those consumers who might be
stuck with their existing mortgage provider. If you understand
the variable rate, then for most consumers you have very little
contractual protection. There is nothing to stop Northern Rock
at the moment, or some of the other banks, increasing their standard
variable rate. There are only a few consumers with banks like
Lloyds TSB and Nationwide where you have that contractual protection.
So we have to make sure banks can't take advantage of these captive
customers by increasing their margins because they have nowhere
else to go and they can't switch products.
Q680 Mark Garnier:
Do you see there is likely to be a conflict of interest between
the FPC and the MPC and the CPMA, and also the Consumer Financial
Education Body? Do you think that's going to be a problem?
Mr Lindley: There
might well be a conflict of interest if the FPC is imposing extra
capital requirements on consumer lending at the same time the
MPC is decreasing interest rates, and how you explain that. What
we have said about the relationship between the PRA and the CPMA
is that we don't believe the PRA should be allowed to overrule
the CPMA. So say the CPMA finds a bank that has been mistreating
customers so badly that if it was forced to pay proper compensation
it might collapse, then the PRA shouldn't be allowed to overrule
the CPMA. Because we've had "too big to fail", we don't
want to get into a situation where banks, which are too big, don't
have to treat their customers fairly because they know the full
impact of them doing so will never be imposed on them.
Mr Cullum: I mentioned
three words that worried us: "champion", "stability",
and "confidence". On stability, of course, we all want
a fundamentally stable system here, and the last thing we want
to do is to have real systemic problems. However, competitive
markets always have a bit of instability. If you look at who were
the big companies 50 years ago, versus who are the big companies
now, a lot of it is a very different list. So the economy changes.
The market should change. As colleagues from Which? say, we shouldn't
be in a position where there are not just barriers to entry but
there are barriers to exit as well.
Q681 Mark Garnier:
There are two things that worry me about the FPC. The first is
a socioeconomic impact, and I would be very interested to hear
if anybody has done any work on how many people are likely to
be affected. I know that is probably an impossible question to
answer, because nobody quite knows what the FPC is going to be
doing and how it's going to be doing it just at the moment. The
first question is whether somebody could do some work on that
just to give an idea of what the potential problems might be from
it, from what you have already discussed. The other question,
which is a much more fundamental question, is: do you think this
is the right way of trying to deal with this issue? Is the FPC,
in concept, a good idea or a bad idea, or is it just going to
be able to do too much? In answering that it would be useful if
you could talk about transparency as well.
Chair: Again an excellent
very brief question, and even briefer answers please.
Mr Cullum: The
categories are the right categories, in terms of macro-prudential
and inter-prudential, issues on individual institutions, and then
the consumer issues. Has it been divided up perfectly? I'm sure
there are different ways of doing it and there are definitely
some issues, in terms of how different bodies work together. Everything
we see in other sectors shows that where there is more than one
regulator the costs go up and it's more complicated because they
spend a lot of time talking to each other. The one plus is the
point that Adam Phillips made, which is that at least it's an
open conversation rather than one that's behind closed doors.
I think the big issue about the FPC—and I think it's right
that somebody has to be in charge, and it shouldn't be the PRA
or the CPMA; it's fine to have them as the strategic body—is:
what is their accountability? I think saying that they're a sub-committee
of the Court of the Bank of England and that the chair will have
a couple of meetings a year with the Chancellor. This doesn't
come up to scratch. What the FPC should be doing is setting out
in advance what their strategy is going to be, engage people on
that, including consumer organisations, and once they've made
decisions explain what was the basis for the decisions, so that
there is some accountability and some engagement on what they're
actually doing.
Mr Lindley: I think
the FPC in theory is a good idea. We just want to make sure that
the impacts on consumers from it are properly addressed, and that
there is not just a kind of technical, economic discussion about
how this affects economic growth, but that real consideration
is given to how it affects consumers.
Mr Vicary-Smith:
I would also say, while we're on accountability, I am much more
worried, if you like, about the accountability of UKFI than some
of the new bodies. I think that is a problem that we have at the
moment—a body with enormous power, which almost operates
in the shadows, that never will come to meetings with anybody,
except those who have the power to compel it, and whose decisions
are clouded in mystery. I think it is, frankly, outrageous that
such an important public body is held to such little account.
Q682 Chair: Sarah
Brooks, you didn't have a chance to chip in. Do you have anything
you want to add on the basis of what you've heard, briefly, or
would you like to come back to us in writing?
Ms Brooks: I have
nothing to add to what Philip said on that point, thank you.
Q683 Chair: I would
like Mr Lindley to come back in writing on one point. You argued
vigorously for tight led value rules, which amounts to rationing
in the mortgage market, and the two key issues—it may be
a good idea, it may not, it is back to the 1970s, in a sense—are
why regulators might have superior knowledge about the cycle,
and what response you would have to those who are denied access
to the mortgage market, because of the introduction of the rationing.
I recognise that I'm asking questions without giving you an opportunity
to reply.
Mr Lindley: I would
rather the market worked to discipline companies with risky business
models like Northern Rock, but I think the lesson that the wholesale
funders of Northern Rock have learnt is that they didn't discipline
the risky business model of Northern Rock and they were bailed
out as well. I think someone who is independent, like the FPC,
could have some impact. Of course maybe it's better for consumers
if house prices don't rise as quickly. I think one of myths the
industry has been trying to propagate is that its massive increase
in lending, from 1997 to 2007, led to a massive increase in home
ownership. It didn't, and the number of households with a mortgage
between 1997 and 2007 actually fell, the absolute number.
Chair: You're raising
a number of very interesting issues, which I'm not going to engage
in now. Thank you all very much for coming to give evidence today.
We've learnt a great deal.
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