Examination of Witnesses (Questions 808-885)
Q808 Chair: Mark
Hoban, thank you very much for coming before us today. We've managed
to keep roughly to time so far; so we'll try and keep that up.
I'd like to begin by asking you about the interim
FPC. Has it met?
Mark Hoban: We're
in the process of establishing the interim FPC and hopefully that
process will be accomplished by the end of this year.
Q809 Chair: The
consultation document in July said that it would be created in
the autumn. I don't know what you feel about things but it looks
like winter out there to me.
Mark Hoban: We
are working very closely with the Bank to establish the interim
FPC, and get the right people on board, and we aim to do that
by the end of this year. It's taken slightly longer than we'd
hoped but—
Q810 Chair: Why?
Mark Hoban: Well,
because we are going through quite a radical process here, Chairman,
as part of this whole regulatory reform package and it does take
some time to put these bodies in place.
Q811 Chair: When
is it going to meet?
Mark Hoban: Once
we have established its membership, it will meet shortly thereafter.
Chair: I'll just ask the same question
again if you don't mind. When is it going to meet?
Mark Hoban: We
don't have a timetable for it to meet. Once its membership has
been established, then it will be in a position to meet and then
to undertake some of the tasks that we are keen for it to look
at, including, for example, assessing the macroprudential tools
that will be available to the full FPC.
Q812 Chair: Hasn't
this got shades of the tripartite, a body that never quite met?
Mark Hoban: I think
once it's in place the interim FPC will meet. It's important that
it does meet, and I would say that you are right to highlight
the failings of the previous tripartite arrangement, where the
principals clearly hadn't met before the financial crisis.
Q813 Chair: You
are going down the same road again. You put a consultation document
out in July saying you were going to meet in the autumn. Now you're
not even giving me a promise that it's going to meet before Christmas.
Mark Hoban: Our
aim is to complete the appointment by the end of this year, as
is sufficient to meet and undertake its work and fulfil the remit
that we want it to undertake, including, as I said, a review of
the macroprudential tools.
Q814 Chair: When
it does meet, will it publish minutes?
Mark Hoban: We
want to make sure that the new regulatory architecture is more
transparent than the previous architecture. We think it's important
that the FPC does publish minutes and that it publishes notes
of meetings, and obviously the six-monthly Financial Stability
Report is a public document already. But we're committed to
developing that further, so not only would it identify the risks
that the committee have agreed on but it will also set out some
of the responses to those risks.
Q815 Chair: Of
course we understand that some aspects will need to be confidential
on commercial regulatory grounds, perhaps, but can I take it from
your answer that minutes will be published in a timely manner
after meetings?
Mark Hoban: Yes.
I think we've said that the record of meetings—
Chair: That's "Yes"?
Mark Hoban: It
is "Yes".
Q816 Chair: Okay.
How often do you think the FPC is going to meet?
Mark Hoban: We're
committed to the FPC meeting on a regular basis. It will produce
formal reports every six months, but obviously it will meet in
between that time as it thinks is appropriate.
Chair: How often?
Mark Hoban: I can't
remember the precise details of how often it is going to meet.
Emil Levendoglu:
The assumption is that it would meet on a quarterly basis, but
with the flexibility to meet more frequently if required.
Q817 Chair: We're
making a bit of progress on that. I want to ask a second set of
questions, which concerns the control of macroprudential tools.
When the next crisis hits—and we're all agreed there will
be one, one day—who controls the tools?
Mark Hoban: We
have established the Financial Policy Committee to take responsibility
for assessing the threats to financial stability, and it will
have at its disposal a range of macroprudential tools that it
will be able to use as a response to those risks and it will be
able to instruct the PRA or, if appropriate, the CPMA to use those
tools.
Q818 Chair: Exercising
those tools, who controls the FPC?
Mark Hoban: The
FPC will be controlled in a number of ways. Obviously it will
be established with a clear objective and remit. It will be transparent.
It will be accountable to Parliament, through its reporting process,
and I'd assume, Chairman, that the Treasury Select Committee would
also seek to engage with the committee and review its regular
reports. So there is a range of means by which it is controlled.
It will be a broad-based committee. There will be six members
of the FPC who are drawn from within the Bank, the Chief Executive
of the CPMA and then four external appointees.
Q819 Chair: When
macroprudential tools are employed public money is very often
on the line. I'm asking you: who is in charge of this body that
is taking decisions that may well lead to the use of public money
in support of a macroprudential objective?
Mark Hoban: The
range of tools is to be determined but we're very clear that,
where public money is put at risk, the Chancellor is accountable
for that. But if we look at—
Chair: Sorry, that the—
Mark Hoban: When
public money is put at risk in this process the Chancellor of
the Exchequer is in control. But the macroprudential tools people
are talking about at the moment include such things as varying
levels of capital and proposals on counter-cyclical capital. That
is putting the bank money at risk, not public money at risk. A
loan-to-value ratio is another tool people talk about. There may
be liquidity measures that people use. So I'm not clear at the
moment which tools you think will require the deployment of public
money.
Q820 Chair: When
meetings take place which may put at risk public money, will they
be chaired by the Chancellor?
Mark Hoban: As
I say, I do not believe that public money will be used to implement
the tools that it is currently envisaged the FPC will deploy.
Q821 Mark Garnier:
I completely get that the CPMA and the PRA are going to, in the
broadest sense, replace the FSA, but this FPC is quite a change,
and a lot of conversations have been going on in this Committee
about the effect of the FPC on certain elements of society. One
of the things that is going to happen is that the FPC may well
be making decisions that are going to affect the economy in ways
that perhaps are not necessarily intended. I will give you an
example: if you tighten up the mortgage market in order to try
and collapse a hovel, the people it is going to affect most are,
for example, the mobile work force moving to another area or the
people who are less well-off in our society. Although the FPC
is going to be completely independent there will be political
ramifications for the Treasury. How do you see this panning out
in the future?
Mark Hoban: I think
that there are always aspects where independent decision-making
will have a political impact and we have seen that already with
the MPC. The Monetary Policy Committee has been given independence
to set interest rates to achieve an inflation target, so this
is not a new situation. I think that we need to make sure that
the remit or the objectives of the FPC are correctly framed, so
they are making the right judgments about the trade-off between,
say, financial stability and economic growth. In the same way,
if we look at the objective of the MPC, that's a very symmetrical
one. The Governor needs to write to the Chancellor if inflation
exceeds that band of 1% either side of 2%. That's there to help
get the right balance between bearing down on inflation and the
wider economic issues. So I think the FPC's objectives do need
to take into account both the maintenance of financial stability
but also the wider economic consequences.
Q822 Mark Garnier:
There was quite an interesting political element in the MPC's
remit, which, of course, is 2.5% of inflation. Originally it was
on the RPI and then it moved to the CPI. Of course one includes
and the other doesn't include household costs, and at the time,
as I remember it, when it moved from one to the other, there was
a lot of tooth-sucking and saying that the then-Chancellor was
doing it because it was getting rather uncomfortable with the
RPI and moving to a less broad measure would get around that.
There are going to be dynamics between the MPC and
the FPC, which I find slightly worrying. You can almost liken
it to the MPC having its foot on the accelerator of the economy
and the FPC having its foot on the brake. If both organisations
are applying their forces at the same time, you have some quite
conflicting dynamics. If it's going wrong, how is the Treasury
going to be able to signal the fact that it is not happy with
what is happening and then subsequently deal with the problems?
It may be that the Treasury then has to step in, in another way,
in order to sort things out.
Mark Hoban: I think
that is why it is important to make sure you have the objectives
right. We need to think very carefully about the distinction between
the MPC and the FPC, and I know this discussion has taken place
in the evidence sessions you have had to date. The role of the
MPC is to deal with inflation and it clearly has a broad impact
as a consequence. The role of the FPC will be to tackle issues
around financial stability. Now, the prevailing wisdom, prior
to the financial crisis, was that if you had stable inflation
rates you would have a stable economy. What the financial crisis
demonstrated is that stable interest rates don't necessarily lead
to a more stable economy and financial sector.
That is why I think it is important the FPC is set
up with that broader remit around financial stability, and because
they have different remits there will be different responses they
will need to make at different times. The fact that there is cross-membership
between the two committees will help resolve some of those things.
But there may well be times where, because inflation is low, the
interest rates are low but, at the same time, the FPC is concerned
about threats to financial stability and that may lead it down
a different route.
Q823 Mark Garnier:
The four external members are therefore very important to this
whole thing. What is the selection process for these four external
members and what qualities do you think the candidates should
have?
Mark Hoban: The
external members for the FPC will be appointed by the Chancellor,
obviously going through the same process he used for the appointment
of members of the MPC. But clearly you want people who understand
the financial services sector, understand its wider economic impacts
and draw upon a range of experience; in the same way as the external
members of the MPC clearly demonstrate their experience.
Q824 Mark Garnier:
That could mean that you end up with a City-based type of people.
Do you see that as an advantage or a disadvantage? In your personal
opinion, what do you think is the right profile of the candidate?
Mark Hoban: I think
you need to make sure you have people on there who are knowledgeable
and understand the area, but are in a position to challenge the
prevailing consensus and add value to the whole process. I think
you can see that in the MPC, where there is a variety of voices,
there is clearly very vigorous debate. We would want to make sure
the same qualities exist in the FPC.
Q825 Mr Mudie: I think
at the end of the debate last night we all had our first taste
of this accountability to Parliament, in terms of the regulator
doing something that caused a great number of MPs to turn up and
speak on behalf of their constituents. Now, at the end of the
day, apart from making those statements in the House, it appears
that the last word is with the regulator. Is nobody in the Treasury
or in the Government uncomfortable about what even the bankers
call "the democratic deficit"?
Mark Hoban: There
are a few points I would make in response to that. The first is
that the regulators—and I know this is the case both for
the Bank of England and the FSA—take their accountability
to Parliament particularly seriously. They are focused on the
way in which they are accountable to the Treasury Select Committee,
and that does have an impact on the way they conduct their work.
So I think they do listen very carefully to views expressed in
this Committee, and in Parliament, and are always willing to engage
with Members of Parliament on this. But I also think that Parliament
has set up regulators to be independent of Government, and there
is always a risk that their independence, credibility and authority
is undermined if it's seen that they are becoming politicised.
So I think we need to get that balance of scrutiny and accountability
right, and also recognise that we should be setting out the framework
for the regulators but leaving them to get on with their job.
Q826 Mr Mudie: A worry
I have is getting that balance right. Where is the balance? The
Governor told us last week that the Treasury should not get involved
with decisions made by the FPC. He claimed, "If the Chancellor
doesn't like it, don't set up the FPC". Now, that doesn't
seem to me a very collaborative, listening or empathetic statement.
Vast powers have been given to regulators, and to the Bank, and
the Treasury doesn't seem to have much power, apart from raising
an eyebrow, which used to be the Bank of England's job in the
past. Now, we are in that position. It seems to me a bit—a
lot—out of balance.
Mark Hoban: The
process we are going through at the moment, consulting on the
new regulatory framework, is very helpful because it gives us
an opportunity to re-assess the objectives, the methodology and
the powers of the regulators. But I would say this: I think that
we have benefited hugely from the independence of the MPC and
the fact that there has been de-politicisation of the interest
rate-setting process. I think those same consequences flow from
other independent regulators. One of the reasons why the regulatory
structure in the UK is highly regarded elsewhere is because of
its independence. One of the reasons why we want to set up the
FPC is to ensure that where there are threats to stability action
can be taken—that somebody is responsible for taking away
the punchbowl when the party gets out of hand. There is a scepticism
about the willingness or ability of governments to do that.
Q827 Mr Mudie: I understand
that, but, with Mark's description of that situation where the
punchbowl has been taken away, the Chancellor is outside that.
They can take the punchbowl away by their own power without reference
to the Chancellor. Now, that just sounds an empty phrase but,
as we mentioned last night in the debate, it is not only the RDR
that is causing great excitement. The full horror of the FSA's
reign of fear on mortgages has not really percolated and people
don't understand why mortgages are starting to be rather scarce.
It would be very difficult to get a mortgage without a very big
deposit if you were a first-time buyer and if you were self-employed,
"hard luck" seems to be the phrase. At a time when the
construction industry desperately needs the market to pick up—not
a bubble, just a normal market to return—that's the early
actions and early warnings of an independent regulator. Are you
confident about giving even bigger powers over to regulators and
the bank, without hesitating and saying, "Is this wise?"
Mark Hoban: That's
why I think, Mr Mudie, we need to make sure that we get the objectives
of the new bodies right; that is why we need to make sure we get
their powers and also the process in which they engage with industry
right as well. On the objectives, the FPC will have responsibility
for financial stability but I think it is important that that
objective is bounded by consideration about the impact on the
wider economy. I am not saying there should be tension in the
system, but a recognition that financial stability should not
be seen in isolation from the broader impact upon the economy.
Q828 Mr Mudie: The comfort
you sought to give Mark was transparency and accountability to
this Committee. But—and I say this genuinely as a member
of this Committee, because I have a lot of time for the abilities
of the members of the Committee—that doesn't fill me full
of happiness. Because they come here, they sit there for two hours
and then we don't see them for six months. What about accountability
to the Government; accountability telling us why they did something
when they've caused chaos out there and we politicians are taking
the responsibility for it? It's not acceptable. Surely we want
some involvement in the decisions. We want to strike a balance.
Mark Hoban: I think
we would be then moving away from the way in which regulation
has been developed in this country since the setting up of the
SROs. We would be back to a situation where government departments
shared some responsibility for financial regulation. I think that
would lead to some confusion as to who was in charge, and one
of the lessons from the financial crisis—going back to that
great question that was asked of Mervyn King, "Who is in
charge?" And he said, "It depends what you mean".
I think one of the great merits of this proposal
is to make sure there is much more clarity and focus about responsibility.
I think the blurring of that boundary between what is the responsibility
of Government and what is the responsibility of regulators will
lose that focus and responsibility.
Q829 Mr Mudie: That response,
after all that's gone before, rather suggests the Treasury thinking
it is right and proper to give this all away; not to blur it;
not to give the Chancellor or the politicians any say in decisions
that will directly affect their constituents. That really worries
me. Is there no doubt in the Treasury that this step should be
rethought?
Mark Hoban: We
think very carefully about accountability, and about transparency
of the new regulatory architecture. That is why we have spent
a lot of time getting this right and there is a variety of tools
we will use to ensure that we do get the system right and that
Parliament does set the right boundaries for regulators—both
in terms of the activities they regulate and their objectives.
I think that's the best way in which Parliament can influence
the work that they do.
Q830 David Ruffley: This
alphabet soup of acronyms for the new regulators with overlapping
responsibilities is troubling. You're a practical man, Financial
Secretary. Can you help the Committee by giving us a worked example,
if you will? Take the Northern Rock debacle. We all know the basic
facts of what went wrong and when it went wrong. Could you just
take us through, if that scenario were replayed, what the Financial
Policy Committee's role would be; what it would be doing during
and in the run-up to such a crisis; what the PRA would be doing;
and what the CPMA would be doing—each one in turn?
Mark Hoban: Yes,
and that is a very good way of looking at it. The FPC does have
responsibility for assessing system-wide risks to financial stability
and so—if we go back to the Northern Rock crisis—it
perhaps would recognise that there was increasing dependence in
the financial markets on wholesale funding and it would ask the
question, "What are the risks that attach to that and what
action should we take on a system-wide basis to address those
risks?" The PRA, because it is tasked at looking at the safety
and soundness of individual institutions, would, I think, look
at the business model of a bank and would express concerns about
the appropriateness of that business model. I think one of the
differences is that we would expect the PRA, where it identified
particular risks flowing from a business model, to intervene earlier
than the FSA would have done historically, to discuss with management
the consequences of the model that they are following and outline
the sort of actions they would expect that firm to take. So I
think that is a very clear difference between the FSA's approach
and the PRA's approach: the PRA would look at the business model,
challenge them and talk about the remedial action that should
be taken to mitigate the risks.
In terms of the CPMA, there is a series of issues
within a firm that will express themselves in different ways.
So obviously there is a prudential risk and that would flow from
the business model. But clearly the business model also affects
the relationship that a bank or financial institution would have
with its customers, and the CPMA would use that understanding
to look at the relationship. For example, it may decide that one
of the problems of a particular institution was that its approach
to affordability—say, for mortgages—was creating a
risk that had an impact on consumers but perhaps it would have
an impact on prudential stability as well.
So there would be a relationship back to the PRA.
It would identify some of those issues and think very carefully,
perhaps about the sales practices, whether or not the institution
was following best practice, and respond in that way. So I think
you look at what is a system-wide issue, what is the impact of
a particular business model on the stability and soundness of
a particular firm and what is its relationship with the customers.
In the new system you have a very clear focus on each of those
areas that comes from the way in which we are structuring the
regulatory architecture.
Q831 David Ruffley: That
is helpful. So, in the Northern Rock case, you have delineated
which regulator would be tackling which problem with Northern
Rock. Out of all those three bodies, who is accountable?
Mark Hoban: Perhaps
I could step back a bit on why we are delineating these responsibilities?
Clearly the FSA had a dual mandate for both prudential supervision
and also for conduct of business and I think we'd all agree, with
the benefit of hindsight, that the problem with the FSA was it
prioritised conduct of business to the detriment of prudential
stability. So I think that the structure deals with that confusion
in mandate. So, for example, if you take—
David Ruffley: Can we
just keep it practical? If the Northern Rock scenario were replayed,
which of the regulators would ultimately be accountable to this
Committee, to Parliament and to the public for the disaster?
Mark Hoban: If
the view was that the business model of Northern Rock was fundamentally
unsound and that put its financial stability at risk, it would
be the PRA that would be accountable. Of course, the PRA is also
the body that would be responsible for determining whether or
not the institution would go into the special resolution regime
for which the Bank is responsible for. But if it is a failure
of business model, a failure of prudential soundness, then it
is the PRA that is accountable when it is looking at individual
institutions.
Q832 David Ruffley: But
we have a situation where there are three failures in the Northern
Rock scenario because each of the regulators will have detected,
we hope, a problem, as you have set out. But we have three lots
of accountability there, haven't we?
Mark Hoban: No.
I think the role of the FPC is to look at system-wide risks, not
to take judgments on individual firms. So if a firm failed in
isolation then very clearly the PRA would be accountable for that.
But the FPC would be accountable for its actions, in terms of
trying to identify the risks that are there and responding to
those risks on a system-wide basis.
Q833 David Ruffley: Okay.
Can you define regulatory success?
Mark Hoban: Clearly,
it would be judged by the extent to which the regulators deliver
on their outcomes and their objectives. That is what they will
be measured against and clearly the regulators will need to think
very carefully about how they report against those objectives.
Q834 Chair: Just to go
back to this Northern Rock example, public money was put at risk.
Who is in charge of running the bail-out?
Mark Hoban: The
Bank of England is responsible for the special resolution regime
and the tools that were put in place in the Banking Act 2009,
but, as is clear from our consultation document, where public
money is put at risk, or is likely to be used, then the Chancellor
has to make the final decision because he is accountable to Parliament
for the use of taxpayers' money.
Q835 Chair: The question
is: who is in charge? Who brings together the people around the
table to take the strategic decisions to solve this in a timely
manner? Saying he has overall responsibility for the cash doesn't
take us anywhere. What we need to know is: who is running this
crisis? We have moved out of peacetime. We are in wartime. If
I may say so, I have experienced one of these events myself in
the Treasury and I have seen exactly this take place. What I want
is reassurance that these new arrangements have in place someone
in charge in wartime, and I'm not getting that reassurance from
you today, Minister.
Mark Hoban: I think
we have moved from a situation where there's lack of clarity about
who is responsible under the previous architecture to one, I think,
where there is much greater clarity because it is the PRA that
will be responsible for prudential supervision of an institution.
It will be responsible for pulling the trigger for the special
resolution regime. The Bank of England is responsible for determining
which of those tools is appropriate—whether it is a bridge
bank, or whether there is a sale to the private sector—but
where public money is used in the resolution, ultimately the Chancellor
will have to decide whether or not to use public money to do that.
Chair: That arrangement fills me with
foreboding. I'll bring in Michael Fallon and then I'll come back
to David Ruffley.
Q836 Michael Fallon: In
your paper the Consumer Protection and Markets Authority is described
as "a strong consumer champion" and "a regulator".
How can it be both?
Mark Hoban: I think
what the CPMA will bring is a clear focus on conduct of business
issues, whether you are a customer of a high street bank or you
are trading with big international investment banks. So because
it is a pure focus on conduct of business, it will act as a champion
for consumers.
Q837 Michael Fallon: But
a regulator ensures that people comply with rules. A consumer
champion lobbies for consumers.
Mark Hoban: No,
it's not a consumer advocate. It will expect to—
Michael Fallon: It says "strong
consumer champion" here.
Mark Hoban: Yes.
But I think it's by virtue of the fact it is entirely focused
on conduct that it will become a champion for consumers.
Q838 Michael Fallon: But
if it is a strong consumer champion it is not likely to advocate
caveat emptor, is it?
Mark Hoban: The
CPMA will need to look at how it delivers its outcomes. I think
that it's right that it is independent and impartial, and that
it acts in the best interests of the financial services sector
in general. But I think its focus on consumer issues does mean
it would be a consumer champion. I do not think that is the same,
though, as being a consumer advocate. There are plenty of other
bodies out there—like Which?, the CAB and Consumer Focus—who
act in that role.
Q839 Michael Fallon: What
kind of duty will it have to promote competition?
Mark Hoban: That's
a very good issue and we would all recognise that competition
plays a significant role in delivering better outcomes for consumers.
I do not believe that regulation is enough to deliver those outcomes
and, in framing the objectives of the CPMA, we think very carefully
about how competition is reflected in those; and also what we
mean by competition. We can have situations where there are relatively
few providers in the market but it is very competitive because
of, say, the ease of switching between those providers; for example,
in the supermarket sector there is a lot of competition but relatively
few providers. Equally, we could have a sector where there are
lots of competitors but, because of the high cost of switching,
people are locked into those providers.
So we need to think very carefully about what we
mean by competition and how that works best in this sector. Clearly,
we need to make sure that the market is competitive and that means
looking at a whole range of issues around transparency, the cost
of switching, and about the number of players in the market.
Q840 Michael Fallon: I
understand all that, and you said you would think carefully about
it, but what I want to know is: will competition, in fact, be
a primary objective of the Authority?
Mark Hoban: Well,
we want to make sure it's reflected in its objectives and we need
to think very carefully about how we—
Michael Fallon: Yes, but will it be a
primary objective? What does "reflected" mean? Will
it be a primary objective or not?
Mark Hoban: I think
there are issues about the boundaries between the FSA and the
Competition Authority; so there are some sector regulators that
have competition as an objective and take over the powers of the
OFT. But I'm clear that we need to make sure we have a competitive
financial sector.
Michael Fallon: Sure, but will it be
a primary objective of the Authority?
Mark Hoban: Its
primary objective is around ensuring confidence in markets and
the integrity of markets, and I think that competition flows from
integrity in markets.
Q841 Michael Fallon: So
in fact it won't be a primary objective?
Mark Hoban: Well,
the primary objective—
Michael Fallon: To secure and promote
competition will not be a primary objective. You're seeing it
as some kind of beneficial side-effect of its other duties?
Mark Hoban: I think
we need to make sure these institutions have very clear focuses
and one of the problems of the previous regime was a lack of clear
focus. That is why we want to make sure that each of the three
bodies does have a clear objective that it can be judged against.
But I do believe that if we are talking about the integrity of
markets that does imply there has to be competition in those markets.
Q842 Michael Fallon: Yes,
but that is an implication. What would be wrong with just putting
in, as one of its primary objectives, a duty to promote and secure
competition at all times? What would be wrong with doing that?
Mark Hoban: I believe
it will be reflected in its objectives, but I think we need to
be very careful that we don't end up having a series of objectives
that means that the regulator loses focus on its primary responsibility.
What we have said when it comes to the CPMA is that it must ensure
there is confidence in markets and integrity in those markets.
Q843 Michael Fallon: So
competition would be a secondary objective?
Mark Hoban: I think
it flows from those objectives.
Michael Fallon: Thank you.
Chair: David Ruffley has a very quick
rejoinder and we would be grateful for a quick reply.
Q844 David Ruffley: Just
to sum up this question about accountability. Would you accept
that, in the Northern Rock case, it was totally unacceptable that
the public and commentators were wandering around and they didn't
know who to blame: was it the Treasury; was it the FSA; was it
the Bank? Do you accept that was unacceptable?
Mark Hoban: Yes,
and that's why it is very clear—
Q845 David Ruffley: Okay.
On that basis, if Northern Rock was played out again, what I'm
seeing and hearing is that we would have three people to blame:
we'd have the head of the FPC; we'd have the head of the PRA,
and probably the CPMA as well. Who will we blame out of all those
three? Who will be the one person accountable if a Northern Rock
situation is played out again?
Mark Hoban: If
it's about the stability and soundness of Northern Rock itself,
it would be the responsibility of the PRA.
Q846 Mr Umunna: May I
pick up on David's line of questioning, because I'm still not
sure we have a clear answer to it. To repeat the question: who
would be the one person, in the scenario that has been given,
who would be accountable?
Mark Hoban: I'll
repeat my answer. If it is about the stability and soundness of
Northern Rock, it is the PRA.
Q847 Mr Umunna: As David
has just said, there could be three different parts to it where
there has been a falling down and there have been problems in
each of the three areas. Which one person is responsible? If the
answer to the question is, "There isn't one person who is
responsible", perhaps you could just confirm that.
Mark Hoban: No,
I think that we are moving towards a regulatory structure where
there are, unlike the previous structure, clear responsibilities
for the regulators.
Mr Umunna: But it doesn't
seem that there is clear accountability and I think that is the
point that David was making.
Mark Hoban: If
you look at the remit of the three bodies, it is very clear what
they are accountable for. If the FPC failed to identify a system-wide
risk, then it is the FPC that would be accountable for that failure
and would be held to account through the transparency operation—in
fact it is accountable to the TSC—and it would be very clear
that they failed to identify a threat to our financial stability.
Q848 Mr Umunna: So in
that Northern Rock situation, who would we be looking to fire?
Mark Hoban: If
it's about the stability and soundness of Northern Rock itself,
it would be the responsibility of the PRA.
Q849 Mr Umunna: Isn't
the real answer to the question, to the extent that we would be
looking for one individual, that in some sense the one individual
who sits atop the entire system is the Governor of the Bank of
England? Has not this system, in reality, put a huge amount of
responsibility and power in the hands of one unelected individual?
Mark Hoban: I think
you need to look at the bodies that are engaged in this. With
regard to the FPC, the Governor is one of 11 members. If you look
at the PRA, it is the chief executive who will be responsible
for running the PRA and the Governor is the chairman. The CPMA
is outside of the structure completely. So I don't see power as
being concentrated in one person as you suggest.
Q850 Mr Umunna: In some
senses he is the one person with the most hands in lots of different
pies. So if you were looking for one person to hold responsible
you would probably look to the Governor of the Bank of England,
would you not?
Mark Hoban: I think
it's an issue about the institutions and how they would make decisions,
and I think that the PRA would make a whole series of decisions
on prudential regulation. Not all of them will be taken by the
Governor.
Q851 Mr Umunna: How much
will the transition to the new system cost?
Mark Hoban: The
estimate put forward by the Bank and the FSA is for about £50
million.
Q852 Mr Umunna: Right.
What comfort can you give us that those costs are not going to
be automatically passed on to the consumers?
Mark Hoban: The
costs will be borne by the levy pay in the first instance. So
it's the financial services businesses that currently fund the
regulatory arrangements that will pick up those costs.
Mr Umunna: How can you
be sure that they won't pass it on to the consumer?
Mark Hoban: Inevitably,
the costs of regulation are borne either by the consumer or by
the shareholders of these organisations. I'm not sure whether
you are suggesting that the taxpayer should pick up these costs.
Mr Umunna: No, what I'm
asking you is what comfort can you give that the industry won't
pass on the costs? That is what I was getting to.
Mark Hoban: I think
if we have competitive markets, where there is pressure on price,
the industry won't be able to pass on those costs to consumers.
Q853 Mr Umunna: Have you
carried out a cost benefit analysis of the costs of putting in
place the reforms and the actual difference they will make? Maybe
I could just put my question in context. We took evidence from
Lord Turner last week—you may have read some of it—and
it was put to him that we could produce the outcome that you're
seeking to achieve with the new regulatory structure by tweaking
the existing system, as opposed to doing the wholesale reform
that the Government is embarked upon at the moment. Do you think
it is worth this £50 million?
Mark Hoban: Yes,
I do and I think that simply tweaking won't answer the fundamental
problem about the clarity of responsibilities and accountability.
The problem we have with the FSA is one of design. It has two
mandates: one is around prudential supervision and one is around
conduct of business. I think as long as you have that tension
in there, I don't think it's going to deliver the regulatory outcome
that we need. There is no macroprudential regulator in place at
the moment. It is clear from the crisis that we need one. So I
think we do need these reforms to bring clarity to the system.
Q854 Mr Umunna: I have
to say, Minister, in some ways I was quite sympathetic to the
new system, but the answers that you have given today—and
the questions that were posed by Mr Ruffley have highlighted that
there is still not a great deal of clarity, in terms of who will
be accountable—demonstrate that some of the same problems
that we had with the old system may be present with the new system
that you are seeking to put in place.
Mark Hoban: No,
I don't agree. I think that there is much greater clarity of responsibility
now than there was in the previous regime, where I think there
was lack of clarity and responsibility when it was dealing with
the problems at Northern Rock. Now it is very clear about exercises
the special resolution regime. It is very clear who puts a business
into the special resolution regime. It is very clear what the
responsibilities of the regulators are. I think it is a much clearer
system than we had before.
By the way, I don't think that next time there is
a crisis Mr Fallon can ask the same question about who is in charge
and not get a clear answer.
Q855 Mr Umunna: Okay.
May I just ask one final question—and I ask this since you
are the Minister responsible—in relation to the bank levy.
There has been some speculation, and I believe your officials
have been in contact with the media, about the rate at which the
levy is going to be imposed, and some concern has been expressed
in the Treasury about the sum that the levy is likely to raise.
We are aware that the aim was to raise £2.5 billion a year
with it, and there is a concern that it is going to raise more.
Could you confirm to us—on the record now—whether
you will moving to reduce the rate that was consulted on, and
when can we expect to know at what rate the levy will be imposed?
Mark Hoban: The
question was raised last night at the tail end of the debate.
Mr Umunna: I know.
Mark Hoban: We're
very clear that in a full year the levy will raise about £2.5
billion.
Mr Umunna: So you will
go for a rate that will get you that amount.
Q856 Andrea Leadsom: I'd
like to come back to the question of the CPMA, Financial Secretary.
The first question is a very simple one: should it be called the
MCPA? There is an issue around the public understanding of what
its role is. You said it is not going to be a consumer champion;
it is there for consumer protection, which is more of a regulatory
focus, and predominantly the key job—the thing that it spends
most of its time on, I would imagine—is market supervision.
Is it right to be calling it the CPMA?
Mark Hoban: I think
this is the body that will have the greatest relevance to the
vast majority of people in this country who buy financial services
products. Many people will see it as being primarily a consumer
body rather than a markets body, but it will fulfil both roles.
Q857 Andrea Leadsom: But,
for example, in its activities in the European sphere, calling
something a Consumer Protection and Markets Authority is slightly
misleading, isn't it? Do you not think there is an issue with
the understanding of its brand, its purpose?
Mark Hoban: I am
always happy to listen to suggestions about how it might be better
named, and people have expressed views about its name. I think
it is going to cover both consumers and markets and, of course,
increasingly we see in the European debate much more emphasis
on consumer issues as well as market issues.
Q858 Andrea Leadsom: Thank
you. I'd like to address one very specific point. We've just had
a very interesting session with Sir Donald Cruickshank. One of
the key issues he was proposing was that the CPMA ought to have
the responsibility for licensing money transmission systems. In
other words, so that if you, as an owner of a retail bank account,
wished to switch between banks, you would take your account number
with you. You would change the sort code and the CPMA would license
banks to provide money transmission services. For example, now
you can transfer your phone number and in the future you could
transfer your bank account. That, at a stroke, would remove the
inertia and the disincentive to switch bank accounts and would
create much healthier competition, also enabling new entrants
to come in without that massive hurdle of building their brand
and their customer base. Can you comment on that?
Mark Hoban: It
is an interesting idea. One of the things that concerns me is
the difficulty that consumers have in switching personal current
accounts. If you look at retail financial services, the level
of competition varies from product to product, and clearly in
those areas where the cost of switching is lower you see greater
competition. I am keen to explore ways in which we can encourage—
Q859 Andrea Leadsom: But
it's not just the cost, is it, it's the complication of moving
your standing orders and your direct debits and forgetting to
pay your mortgage and that sort of thing?
Mark Hoban: Yes.
It is really about the difficulty of doing so and it is not necessarily
just the financial cost. It's the emotional cost and the concern
that a standing order might be bounced if the transfer hasn't
gone across. We need to look very carefully at how we can reduce
the barriers to switching. It's an interesting idea that Sir Donald
Cruickshank has put forward and we will look at that. But there
are international standards around bank account numbering, for
example, that might act as a brake on doing that and, of course,
you have to make sure that the other bank hasn't already issued
the account number that you have.
Q860 Andrea Leadsom: Yes,
absolutely. Can I press you once more on the competition objective
of the CPMA? We have heard a lot of evidence on the need for greater
competition and it's still not clear who is going to be incentivised,
among these three new bodies, to ensure that at least regulation
doesn't trump competition as it has done for the last 15 or 20
years.
Mark Hoban: It's
an interesting question you raise because there are areas where
regulation helps competition. One of the things that illustrates
some of the challenges about delivering competition is that it
was the responsibility of the OFT to look at some of the practices
in the ISA market. It was the OFT that recommended that ISA providers
should put the interest rates on statements. I think that is the
right thing to do. It surprised me it took it so long to get to
that point. This division of responsibilities between the OFT
and the regulators needs to be looked at. But I do think we need
to make sure that competition is the centrepiece of how we improve
outcomes for consumers alongside increased consumer responsibility
and education, but also better and more effective regulation.
Q861 Jesse Norman: Minister,
can I briefly return to the issue of a Northern Rock going under.
From the way you've described it, I take it that the FPC is not
going to be involved at the point where Northern Rock is going
under. Its job is to make sure that the system is appropriately
stable before that. Therefore, it is the PRA and the CPMA that
would be engaged. Now, what is actually going to happen? As you
know, sometimes you have 24 hours or very short periods of time
to make a decision on these things. Will the chairman of the PRA
be pulling together an ad hoc team from his own organisation and
from CPMA? What will be the process by which meetings are had
with the institution concerned to try to resolve some of these
issues?
The reason I focus on it is that many of these institutions
are massively complicated and, therefore, there will be huge numbers
of different businesses that fall under each of those regulatory
structures. Is there a protocol as to how that happens?
Mark Hoban: There
is a whole range of responses I could give to that question but
let me say, first of all, that where an institution is regulated
by both the PRA and the CPMA. there will be protocols about their
engagement. We would expect there to be a college of supervisors
for that body. But clearly the responsibility for the safety and
soundness of a body rests with the PRA, who we would expect to
work very closely in the event of a crisis to identify what the
issues are. But it would be responsible for pulling the trigger
and putting the institution in a special resolution regime, and
the special resolution regime is the responsibility of the Bank
of England.
The other thing I would just say is—and this
is based on my experience over the last six months as a Minister
looking at these areas—that there shouldn't be a surprise
to the regulators, or indeed to the Treasury. There is continuing
engagement around contingency planning and I think that helps
ensure that the Treasury is well sighted on these issues. That
will mean that when the decision comes as to whether or not you
should commit public money, it is not something we should be asked
to answer in an instant. There will be a lead-in to that point
that we would be aware of.
Q862 Jesse Norman: I wish
I shared your confidence. It is always the contingency you're
not planning for that is the one that comes and gets you. Anyone
could see that the Northern Rock balance sheet was expanding massively
in the money markets over a period of time—that was why
it was able to ramp up its market share so quickly—and yet
it did still seem to come as a tremendous shock to the authorities
involved. But what you said is very helpful, in terms of clarifying
matters. There is a college of supervisors; and the PRA is pulling
the trigger, convening these people together. I take it the thinking
is that you'd like it to be done quickly and effectively?
Mark Hoban: Yes,
and I think you are also right to say that people should have
identified the problems with Northern Rock sooner. I think the
much more intrusive approach that the regulators will adopt will
help us identify those problems at an earlier stage, and that
will aid the ease of resolution.
Q863 Jesse Norman: Thank
you. Is it a concern for you, as it was for me, that the corporate
governance systems in the banks should have been so ineffective
in the run-up to the crash? What I mean to say by that is that
these were institutions that seemed to have tremendous non-executive
directors, supposedly doing their job, very high-profile figures
in position, and they were all caught completely napping. They
looked utterly foolish. They weren't in touch with the organisations.
They were at least, as it were, involved in their own positions
as they were in managing the institutions for which they normally
had responsibility. How do we strengthen the issue of corporate
governance in those financial institutions? I think that is foundational
to the issue of regulation.
Mark Hoban: It
is. I think it's a very good point and it is an issue that we
need to think about quite carefully, because it's not only the
directors but also the shareholders of institutions. One of my
predecessors, Lord Myners, spent a great deal of time thinking
about both of these issues after the financial crisis. But your
question points to the fact that there is a range of responsibilities
for this and we do need to make sure that directors and shareholders
exercise their responsibilities properly. We have seen some major
reforms. The FRC has done some excellent work on stewardship,
which I think will help underpin the responsibilities of institutional
shareholders, and we have seen work done in the aftermath of the
financial crisis around corporate governance led by Sir David
Walker.
I know that Michel Barnier, the European Commissioner,
is particularly interested in corporate governance and has published
a green paper on that. I have to say, looking at the green paper,
that we have made quite a lot of progress in improving corporate
governance and we do have comparatively high standards of corporate
governance, and I want to see those standards applied elsewhere,
too.
Q864 Jesse Norman: Especially
in the financial sector. A very quick final question, and that
goes to your gentleness in dealing with George Mudie on the issue
of political interference. It seems to me, when you look at Bill
Clinton and the expansion of mortgages in America in the 1990s,
or the political interference we have had to deal with in the
last few years, a degree of insulation is rather important in
the management of our financial affairs. It seems to me this regulatory
system tries to build that in.
Mark Hoban: Yes.
Regulatory systems and structures that are seen to be independent
have much more credibility in the eyes of the market and in the
eyes of consumers than those that are seen to be politicised.
So we need to think very carefully about that balance and about
how Parliament puts boundaries around the activity of regulators,
but I do think that independent systems do have that credibility.
Q865 Stewart Hosie: Minister,
in relation to managing a systemic risk, the general picture is
now we'll have tougher macroprudential regulation, higher capital
ratios, and we have the new architect. But at the back end, should
a bank fail, there will be a resolution mechanism where it would
be allowed to fail. Is that the broad shape of where we are with
the new regime?
Mark Hoban: One
of the comments I took from last night's debate on regulation
was that there needs to be a range of interventions to tackle
some of these issues. I think you're absolutely right, Mr Hosie,
to identify that there is a macroprudential piece to this. You
need effective supervision. You need to make sure there are standards
in place around capital and liquidity, but you also need a resolution
regime that, in the event of a failure, minimises the impact on
consumers and, indeed, taxpayers.
Q866 Stewart Hosie: That's
fine. You talk about this range of interventions and you have
spoken earlier about the PRA and what they could do with individual
institutions. You said they would be concerned with their stability
and soundness; they would challenge management; and they would
mitigate risks. That sounds like a fairly active supervisory role
and I presume that is what you would like to see the PRA do, in
particular?
Mark Hoban: Absolutely,
and I am very clear—it is one of the guiding factors behind
the regulatory reforms we are introducing—that we want both
the PRA and the CPMA to engage much earlier in the process, to
identify risks at an earlier stage and to be proactive in trying
to tackle those risks. We go back to the point that Mr Ruffley
raised: that people should have been aware of the problems at
Northern Rock. It is being aware and then doing something about
it that's important.
Q867 Stewart Hosie:
In terms of early intervention and identifying risks, I'm much
more confident with those answers than what we heard from Hector
Sants. He gave the impression he would be much more reluctant
to have active supervision. He said if you're going to have a
failure where the cost only falls on those who provided the capital,
there is no adverse impact on the rest of the system for systemic
purposes, and so on, then the bank would be allowed to fail and
enter the resolution regime. He confirmed that he would not have
put £37 billion into Bradford & Bingley and confirmed,
likewise, that Northern Rock and Dunfermline would simply have
been allowed to fail. There seems to be a chasm between the active
supervision to mitigate against risk in advance which we are hearing
from you today and the impression we got from the soon-to-be-head
of the PRA only a week or so ago. Are you concerned about that?
Mark Hoban: No.
I think that there are a range of points in a supervisory process
where you require intervention. I do believe that early intervention
is important but I also recognise that this is not a zero failure
regime. Regulators aren't going to get it right all the time and
clearly they didn't get it right with respect to Northern Rock
or Bradford & Bingley. But when those failures came there
was a significant cost to the taxpayer, so I do think we need
to make sure, when there is a failure, that mechanisms are in
place to resolve that failure as cheaply and as effectively as
possible with the least possible impact on the taxpayer.
I have to say that the previous government introduced
a special resolution regime that we supported. I felt it was a
very good way of trying to reduce the cost of failure and to make
sure there was an auditing process in place. More work is being
done at the moment. As Mr Norman pointed out, some of these institutions
are quite complex and that is why there is work going on at the
moment—both in the UK, which the FSA is leading, but also
internationally—on resolution and recovery plans looking
at what you need to do in the event of a crisis to resolve these
problems without recourse to the taxpayer.
Q868 Stewart Hosie: I
couldn't agree more. This isn't a zero fail game. That is a very
good way to put it. Of course, we need a resolution regime in
place, and we now have one and that is also very helpful. But
the broad focus of my questioning is this, and Mervyn King, the
Governor of the Bank, said something broadly similar. He said,
in terms of the FPC, the focus would be on big risks and not trying
to chase round each and every individual institution to make sure
that everything they do is sensible. Of course, no one would expect
that. But, nonetheless, there does appear to be uncertainty in
the balance between pre-emptive supervision to stop the overtly
risky things happening. Let us remember, even conduct risk can
morph into systemic risk. There seems to be a chasm or a difference
between that pre-emptive work and of relying simply on the macroprudential,
the capital ratios, and ending up with a resolution regime. I'm
just wondering how we might get a little more clarity in terms
of the specific rules the FPC and the PRA will have, in terms
of pre-emptive, active supervision to stop the risks occurring,
as best they can, in the first place.
Mark Hoban: I think
if I just focus for a moment on the FPC, Mervyn is absolutely
right. It is not meant to chase around problems in individual
firms. It is system-wide and, of course, it is meant to identify
risks emerging to the stability of the financial system and to
indicate what the response should be to those risks. So that is
pre-emptive. It is also the case, in the conversations we have
had with the Bank and the FSA in moving this model on, that the
PRA is looking to have the judgment and discretion available to
it to enable it to intervene early. I think the point that Mr
Sants was making is that it is important, given there isn't a
zero failure regime, that the tools are in place to ensure an
orderly wind-down. I think that if those tools had been in place
at an earlier stage we might have had a slightly different crisis
from the one that we had.
Q869 Mr Love: Minister,
earlier this month you made a very public U-turn by allowing the
FSA to retain its powers of criminal prosecution. Why?
Mark Hoban: We
had been thinking about this quite carefully for some time, and
we believe that there needs to be increased focus on the prosecution
of white collar crime. There are a number of different bodies
that are engaged in that at the moment and we thought it was best
to draw those together in a single agency, the Economic Crime
Agency.
The particular challenge that we were faced with
in relation to the FSA was twofold: the first is around the nature
of the FSA's powers when it comes to tackling market abuse. It
has both civil and criminal powers and what we were proposing
was to tease apart those criminal powers from the civil powers.
I think that is quite a complex exercise to do, and for example
there were concerns about the duplication of investigatory staff
and the detection of market abuse, and a sense that we needed
to spend a bit more time to look at this. The other aspect is
that—in the context of where the FSA is at, at the moment—it
would be best to delay that decision until the new regulatory
structure has been bedded down.
Q870 Mr Love: That answer
leads me on to the second question. You have just repeated what
a Treasury spokesman said: "After much consideration, we
have decided that, for the moment—" You have hesitated
as well. Could we see a further U-turn taking it back into the
Economic Crime Agency?
Mark Hoban: What
we have said is we believe there should be a single focus on tackling
white collar crime. There are issues around how you disentangle
the FSA's criminal and civil powers. It is right to give that
consideration and we have decided to put that decision on hold
for the time being.
Q871 Mr Love: If I may
say so, there's a tremendous lack of clarity which, of course,
means uncertainty for the markets. FSA officials haven't been
anything less than absolutely clear about this. They say that,
to achieve the primary objective of confidence in financial services
and markets, they must maintain—and I quote—"a
strong and effective enforcement function with a full range of
powers". Aren't you convinced by that argument?
Mark Hoban: I think
the FSA would look at it from its own perspective. We look at
it from a slightly broader view, about the range of bodies currently
engaged in tackling white collar crime, and we believe there is
some benefit to come by focusing those skills and expertise in
one place.
Q872 Mr Love: Let me see
if I can gain some clarity for the Committee. By 2012, when all
of this is supposed to be up and running, where will criminal
prosecutions lie?
Mark Hoban: It
will still rest within the FSA, or rather the CPMA at that point.
Q873 Mr Love: And when
the Economic Crime Agency is fully up and functioning, will it
then take over those powers? I'm not at all clear about where
you're at.
Mark Hoban: We
haven't set a timetable for this, and clearly what we need to
look at very carefully is how you would disengage those criminal
and civil powers and whether moving those criminal powers to the
ECA would make it a more effective body or not.
Q874 Mr Love: But from
that it seems clear that, while the senior officials at the FSA
responsible for these matters say it is critical for the future
of the CPMA that criminal prosecutions are retained within that
new structure, you seem to be both hesitant but also suggesting
that, in principle, you would prefer to move them to the ECA.
Mark Hoban: I think
that we need to look at this quite carefully. It's quite a complex
area and I think you would be equally critical of us if we had
rushed into this too quickly.
Q875 Mr Love: Well, you
did rush into it before the election, and subsequent to the election,
because you were clear that the Economic Crime Agency was going
to take over all these powers.
Mark Hoban: We
said it was a matter to be discussed and I think that we need
to get this right. We want to see effective enforcement when it
comes to the CPMA's responsibilities for conduct. We also want
to see effective prosecution of white collar crime. But I think
we need to find a structure that tries to deliver both of those
objectives.
Q876 Mr Love: Although
the FSA has had some modest success in prosecutions for insider
trading, I think there are a lot of people who would suggest that
they have to do better. Are they going to do better with this
uncertainty hanging over them into the future?
Mark Hoban: I don't
believe this should distract them from doing that job but, of
course, it is that concern about the effectiveness of their criminal
prosecutions. I think it is potentially a historic issue that
led to careful consideration of whether or not we should bring
these powers into one body, the ECA.
Q877 John Thurso: Can
I return to the question of corporate governance. Our predecessor
committee in the last Parliament, in looking at Northern Rock,
Bradford & Bingley and various others, were very clear that,
while the crisis became the failure of regulation, it was first
and foremost a failure of management and, above all, a failure
of boards adequately to control their management. Who in the regulatory
system is going to be looking at the way in which boards of banks
operate and whether they are adequately controlling their executives?
Mark Hoban: Broad
responsibility for corporate governance rests with BIS and, obviously,
within that, it's the FRC that leads most of the work on corporate
governance. You had Baroness Hogg and Stephen Haddrill before
the Committee. Clearly, in the light of the crisis, the FSA has
taken a more proactive role in this area and, for example, does
interview senior appointments—at board level as well as
more junior levels—and so they are much more engaged in
that.
Q878 John Thurso: There
were two particular areas that we looked at: one was the area
of the operation of the risk committee and—particularly,
with regard to Northern Rock—that appeared to us to have
been pretty inadequate. Do you foresee, in the regulatory framework,
any of the regulators looking particularly at how the risk committees
are working? Obviously the aggregate of poor management in risk
committees would be one for financial stability.
Mark Hoban: I think
that is a very good point, and one of the things that has struck
me recently is the variability in the approach to risk by financial
institutions. I think it is important that regulators understand
the sort of processes that are in place to manage risk, and control
risk, as a way of delivering financial stability. It's not just
about numbers and ratios. It's about culture and processes within
firms as well. I think that is a very important point for them
to follow through.
Q879 John Thurso: The
Bank has very recently said to me that if you looked at RBS and
the way it was run, they were making mistakes, as they described
it, straight out of Banking 101—in other words, the course
on banking that they do in America—and saying that those
mistakes should not have been made. So if we have a serious problem
in this crisis that came through the failure at that level that
is clearly something that needs to be taken into account.
Mark Hoban: I think
that's right, and I think about my own experience, prior to coming
to this place, as an auditor. Clearly the controls that are in
place in businesses to manage risk are important. I think that
the regulator needs to look at those processes and controls very
carefully, and ensure there is a strong culture in firms enabling
them to deliver accurate assessments of risk.
Q880 John Thurso: The
second area we looked at was the remuneration committees and the
question of remuneration, and that is something I think the Government
is looking at. Who should set the rules for compulsory disclosure
of salaries and bonuses?
Mark Hoban: You
have a range of points of intervention there because clearly company
law dictates a certain level of disclosure for listed companies.
But you also have increasing international debate about the disclosure
of salaries. So we're in the process of implementing CRD3, for
example, in the UK, which includes quite a lot of disclosure on
remuneration; not just salaries but severance pay, sign-on fees,
and so on. There's a G20 debate to be had, too, on disclosure
around remuneration. So there are various points, in the debate,
where discussions can be had about disclosure standards and their
implementation.
Q881 John Thurso: When
he came before us, Lord Myners suggested that what we ought to
be focusing on was not so much the level of the bonus but the
method of payment and that equity was wrong, and we should be
making bankers get subordinated debt in order to tie them into
the future of their institution. Do you think that idea has any
merit?
Mark Hoban: It's
an idea that a number of people have come up with. I think the
important thing is to ensure that there is a strong correlation
between risk and reward and there is a claw-back for bonuses where
performance has not been as good as it was alleged to be in the
first place. I think the Swiss came out with this concept of malice
as being the reverse of bonus and I think those sort of measures
are important. We are moving to a system where, more and more,
a higher proportion of bonuses will be paid out in shares. But
in terms of whether we should be replacing shares with subordinated
debt is a broader issue.
Q882 Mr Umunna: I have
a question in relation to remuneration disclosure. Sir David Walker
has obviously changed his position, in the sense that he said
that he doesn't think we should do this unilaterally, having said
so in his report in terms of implementing his recommendation.
It seems slightly inconsistent to push ahead with the bank levy
unilaterally—which I think is a good thing, by the way—but
not to do so with remuneration disclosure. Why?
Mark Hoban: I think
Sir David Walker made the point in his article—and he's
responsible for his words, I'm not—that he assumed that
the international debate on disclosure had moved further than
he thought at the time he wrote his report. Very clearly, there
is a range of views internationally on disclosure but we are seeing,
in CRD3, some significant progress on levels of disclosure in
the European Union, where the European debate is going further
than the debate on a global basis. I think that is a good thing.
Mr Umunna: I'm not sure
that is an answer to my question. What I was saying is: why unilaterally
on a bank levy but not on remuneration disclosure? Are you saying
that the debate has not moved on around a bank levy and it has
on remuneration disclosure, or vice versa? I'm confused about
the lack of consistency.
Mark Hoban: I'm
just reflecting back Sir David Walker's remarks in the article
last week.
Mr Umunna: But I'm asking what you as
a Government—
Mark Hoban: Yes.
I thought it was absolutely the right thing to introduce a bank
levy on a unilateral basis. Banks do pose a risk to the economic
stability of this country. It's right that they should make a
contribution towards—
Mr Umunna: But you don't think that remuneration
practices—
Mark Hoban: No.
I think it was right to make them contribute but I think it was
also right to set the levy at a level that didn't impact upon
our competitiveness.
Q883 Michael Fallon: While
you've been sorting out the regulatory mess here that you inherited,
you have also been negotiating on our behalf with the European
proposals. What are the arguments you have won since May and which
arguments have you lost?
Mark Hoban: I think
one of the big examples of our success in Europe has been the
debate on AIFMD—the Alternative Investment Fund Management
Directive—where in May we were given a bit of a hospital
pass by our predecessors and were left with a directive that would
have had significant consequences on the investor community here
in the UK. When we came into office the passport for non-EU funds
was not on the table. We were outnumbered 25 to 2. When we reached
a final conclusion on the directive in October we had turned the
debate around: passports were there and we had the support of
25 other member states in that. So I think that's a good example
of how our effective engagement in the debate in Europe, working
in parallel with the industry, delivered some significant benefits.
Michael Fallon: And which
have you lost?
Mark Hoban: I think
we have made progress on all fronts. For example, I think we had
a better outcome on the supervisory arrangements than we expected
back in May. I think we have managed to constrain the roles of
the supervisory authorities, while we have ensured that the new
European Banking Authority would be based here in London. There
was a move by the Parliament to base all the authorities in Frankfurt.
We defeated that. So I think we made some good progress.
Q884 Mr Love: Why is it
right that we have to publish the rather modest salaries in the
public sector, the BBC and all sorts of public institutions, but
we suddenly don't have to publish them for the banking industry,
when public interest in these matters is clearly focused on the
banking sector?
Mark Hoban: We
are committed to improving the disclosure regime for all salaries
in the banking sector. There are already moves afoot in CRD3.
We'll make further announcements about other matters on disclosure.
Of course, the salaries of directors in public companies are already
disclosed. There is quite extensive disclosure in company accounts
about their salary packages, their bonuses, their pensions, and
so on.
Q885 Mr Love: So why is
there such equivocation over the matter? Why don't you just publish
them? That is what you said you would do.
Mark Hoban: We
said that we would implement the findings of Sir David Walker's
report and we will make announcements in due course.
Chair: Minister, thank
you very much for coming before us today, and for giving us such
crisp clear answers, even if you haven't satisfied us on all points.
I thank you particularly bearing in mind you have had a very busy
24 hours. Of course, you have had a very busy few months but it
has been a particularly busy 24 hours. So thank you for coming
before us.
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