Session 2010-11
Publications on the internet

To be published as HC 857 -i




Treasury Committee

Retail Distribution Review

Wednesday 9 March 2011

Hector Sants and Sheila Nicoll

Evidence heard in Public Questions 1- 116



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Oral Evidence

Taken before the Treasury Committee

on Wednesday 9 March 2011

Members present:

Mr Andrew Tyrie (Chair)

John Cryer

Michael Fallon

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr George Mudie

Jesse Norman


Examination of Witnesses

Witnesses: Hector Sants, Chief Executive, Financial Services Authority, and Sheila Nicoll, Director, Conduct Policy, Financial Services Authority, gave evidence.

Q1 Chair: Good afternoon. Thank you very much for agreeing to give evidence to us on this sensitive subject, on which there has been a good deal of correspondence to the Committee and to you over a run of years.

Mr Sants, can I begin by asking you about the sense of priorities we can discern from your consultation paper, compared to the oral evidence you gave to us last time you saw us when this was discussed in response to a question from Mark Garnier? In your written evidence, one of the objectives of the RDR was that there should be, and I quote, "A market which allows more consumers to have their needs and wants addressed", but in your oral evidence you made no reference to consumers at all, even though you were invited to do so. Was that an oversight?

Hector Sants: I think broadly, yes, in the way you are putting it. I think the general point about consumers we feel underlies many of our initiatives so I was, for brevity, just trying to focus in on the specifics of the RDR, but I think in terms of clarity for the Committee we would say that was an oversight. Our basic objectives of the RDR have not changed, so sustainability and access remain in there. They are basic objectives that underlie, as I say, pretty much everything we do in the consumer sector, so I didn’t choose to highlight them for brevity.

Q2 Chair: In which case when you said in your oral evidence about the RDR that it had become, and I quote, "More focused and more realistic in its intent", you were not then referring to the downgrading of consumers but to something else. What was it you were referring to?

Hector Sants: Yes, correct. I had in mind the speech that the then Chairman, Callum McCarthy, had given-I think at Gleneagles, from memory; I don’t have my notes with me on that point-where he made some rather more general comments about the savings market being broken and therefore had set out what I would describe as a more ambitious agenda in respect of improving the savings market in a more holistic way. I was contrasting what I hope are focused, measurable objectives that we have for the RDR to the original speech that commenced the piece of work. My reference point was the inaugural speech that led the FSA to commence the RDR study, not earlier pieces of RDR material.

Q3 Chair: You have been working on the RDR for a long time. We have been inundated by those telling us that, with the creation of the FCA imminent, we should at least wait to give them an opportunity to form a view about this before implementing it. What is your response to that?

Hector Sants: I am not quite sure who "them" is, other than Martin Wheatley, obviously, who is due to join us in September, but-

Chair: Do you want me to read them out? I have a string of them here: the Financial Services Small Practitioner Panel, the Financial Services Practitioner Panel, Aviva. I could go on.

Hector Sants: Oh I see, you meant people making the suggestion; I thought you meant "them" in the FCA. I beg your pardon, a misunderstanding of your question. I thought you meant there were some other FCA people who we could consult with. But leaving that aside, I think from our point of view we feel that this is a thoughtfully constructed, vital reform to the market. We don’t believe there is any suggestion in the thrust of Government policy that the FSA should be stepping back from continuing to deliver needed reform and improvements to the financial market.

The FCA obviously will be a successor body to the FSA and I think it is right and proper that it will carry forward those initiatives that have been properly assessed and have been through the full kind of approval and consultation process, and the RDR is one of those. We have had some discussion with Martin Wheatley, who obviously is not yet in post, and he is very content with that approach.

Q4 Chair: How far do you think the RDR can go towards encouraging a reduction in the savings gap?

Hector Sants: May I first of all say that the issue of reducing the savings gap, encouraging savings, is a central concern, I am sure, to Government and to you here in this Committee. It is very right that you should be focusing on that because it is a key issue, I think, for the long term prosperity of the country. I don’t think that we see the RDR as specifically designed to address that issue. Obviously, we hope, in the sense that if we have a marketplace that is working better and is trusted more by consumers, that this would have an influence on that issue but we are not specifically targeting the savings gap problem as a measurable, immediate consequence of the RDR. Sheila, do you want to expand on that?

Sheila Nicoll: Yes, I think that is right. It is clear that there are a lot of consumers who don’t seek investment advice now. The figures are that 70% of consumers don’t seek such advice, and even of those who have sought the advice, 40% have said that they don’t necessarily trust it. I think a vital part of the initiative is to make sure we enhance the trust and confidence that consumers have in the market.

Q5 Chair: What about the view that savings need to be sold rather than merely bought, and that what we are going to do with RDR is reduce the number of people trying to sell it?

Sheila Nicoll: I think even if you do continue to say that it needs to be sold, it would be clearly easier to sell in the context of a consumer who feels they can trust the person who is selling it to them. I am not sure that the RDR necessarily specifically tackles an imbalance between the consumer buying or the consumer selling, but I certainly think the intention is that consumers would be more willing to participate in the market.

Q6 Chair: You are basing that view on research that the overwhelming majority or a large number of people don’t trust the people who are selling?

Sheila Nicoll: Yes, we are.

Chair: I see.

Hector Sants: I am sure you will probably come on to ask us questions about the specifics of this in a moment, but just to add on, in terms of ensuring that there are the maximum number of available channels for consumers to access savings products, we do believe that an effective simplified advice service would be a very useful component to that architecture. I am sure you will come on in a moment to ask us how we feel the industry is progressing in developing those channels. We do see there are other elements of the jigsaw that we need to solve too, to improve the overall environment for consumers in respect of savings.

Q7 Michael Fallon: There was considerable anger, Mr Sants, among IFAs in my constituency at your admission to this Committee in November that a removal of 10% to 20% capacity would be acceptable. Do you now regret that? Don’t you think that you were being a bit blasé with people’s livelihoods?

Hector Sants: I am certainly happy to say I am sorry if we have caused offence and distress. It is never our intention to cause distress in the language we use and if you would like me to apologise for that, I am more than happy so to do. I try to be a mild-mannered individual and I am certainly not trying to make any remarks for effect and to cause distress.

What I was trying to do-which I am sure you appreciate I was; I am sure the Committee members who were in the discussion recognise that-was, quite properly, in answer to the question, to lay out the assumptions that lay behind our statutory obligations, and indeed our proper obligations, to carry out cost-benefit analysis in respect of any regulatory actions we take. I was laying out the facts that lie behind the cost-benefit analysis that underlies the RDR. I was rightly being asked what those figures were, and you would have found it odd if I hadn’t been able to answer the question.

Q8 Michael Fallon: Is there a loss of IFA capacity that you would think was unacceptable?

Hector Sants: I think what we are talking about of course is judging, improving the marketplace. Clearly, there is a level of capacity that we might judge then leads to the marketplace deteriorating in terms of the benefits it brings to society and, at that level, that would have to be taken into account in the calculation-that is absolutely right.

Q9 Michael Fallon: What is that level?

Hector Sants: I think it is very difficult to judge and one of the key aspects of the way we take forward the RDR has to be constant monitoring of how the marketplace evolves. We are in the process of developing some performance metrics, which we can no doubt give you a flavour of now, but we will be publishing a more lengthy paper on that in the autumn, and we will need to look at that as it progresses.

It is an interaction, of course, between the total capacity in the market, not just that of IFAs or the selling channels; the costs that consumers are paying for access to a product and the ease with which they can access a product. In itself, I don’t think there is a single number for specifically the IFA channel. What we need is a marketplace that works in the round for consumers.

Q10 Michael Fallon: So there is not a specific impact study of the loss of 20% of IFA capacity?

Hector Sants: There is a judgment by us that the loss of capacity-I have to say that we need to differentiate, we would need to get into detail here between numbers of advisers and numbers of the firms. We are estimating that the central number of advisers is a somewhat lower number than the number of firms; 10% to 20% covers a spectrum of advisers and firms. I think the number of advisers we have are more like 10%.

Sheila Nicoll: 8% to 13%.

Hector Sants: 8% to 13%, and 10% is the mid-point in that. In making the judgment, we are saying we believe that, with the loss of 10% of the advisers, the consumer experience is not adversely affected-that is correct.

Q11 Michael Fallon: Okay. The evidence that you have presented for the effectiveness of qualifications seems to depend on an Australian study that you conducted. It was conducted on a sample of 124 different financial plans. Why was there not a significantly larger sampler done inside the United Kingdom?

Hector Sants: We should, of course, recognise that there is, I think, widespread support in the consultation process for qualification standards. I recognise that that is not the same as a specific study, but I would like to make the point that in the widespread consultation for the RDR-which, as you know, involved 2,500 or so firms being proactively contacted-there is strong support in the round, including from industry associations, for the qualification initiative. But on the detail of technical evidence, Sheila, would you like to-

Sheila Nicoll: I just wanted to say any conclusions that we reached are not based on any one piece of research. There has been extensive research, both of consumers and across the industry, in all the thinking that we have done around this and probably the most unprecedented consultation that we have ever had. We haven’t just based our conclusions on one piece of research.

Q12 Michael Fallon: If there is such widespread support for all this, why are so many people unhappy?

Hector Sants: It is not clear to me, and this includes looking at our understanding of the submissions the Committee has received, but obviously we look forward to receiving the Committee’s report and we will take into account your conclusions. But it is not clear to me that we would say that in the round that this initiative is not supported. Our sense in the round is that this initiative is supported on individual measures within the initiative. There are certainly areas where there are significant minorities of the relevant affected communities who have expressed concerns.

I am not aware of any particular initiative where you would say the majority of all respondents, both in terms of consumers and investors, as well as professional participants, are against it. If you would like to highlight any area where you think there is widespread opposition across the full spectrum of those who are affected, that would be a point we absolutely and rightly should take into very serious consideration. If this Committee reaches a view that you can identify something that passes those criteria, then we would listen very carefully to what you have to say.

Q13 Michael Fallon: I hope you would. You argue in your submissions strongly against grandfathering, but many IFAs have written to us asking how it is that one day they are fit to advise and the next day they are not.

Hector Sants: As you rightly point out, quite a number are concerned about grandfathering and I understand why individuals in those circumstances might take the view you have just described. It is not that we are not appreciative of why they would hold that view but it is obviously our judgment; there is an obligation on us to make judgments. Some of those judgments are difficult judgments where we have to weigh all sides of the argument.

We do have the majority of the respondents to our consultation favouring not having a grandfathering proposition, and that is the majority. We do have concerns raised by a number of participants in the market that that would then not be a level playing field and we do have the consumer bodies clearly wishing not to have grandfathering and to make sure that we move to a position where people can have absolute trust that they are dealing with advisers who are properly qualified.

I recognise that you could have some sort of tagging or kind of kite-marking system that I think we all in this Committee previously discussed. There are limitations to the degree to which consumers absorb risk information at the point of sale-a general point that you are all familiar with. Sheila, do you want to elaborate at all on that point?

Sheila Nicoll: Yes. I would also say that we have been conscious of the need to give advisers time in the build-up to gain the necessary qualifications, and they have known for some four years of the requirements to qualify to the next level up. We do feel that we have been reasonable in giving plenty of time for preparation in advance of the deadline.

Hector Sants: Again, I know you are familiar with this data because we have presented it to the Committee, of course, but on the market research we have, which was conducted back in April 2010, we had 49% or so of the advisers already qualified, 40% studying and expecting to qualify, so we effectively have, in round numbers-just for the record, round numbers-90% of the community back in April last year indicating that they expect to be qualified. We do need to put this understandable concern in the perspective of that type of information.

Q14 Chair: When you said that you were inviting us to find an issue on which there was widespread opposition, that was not necessarily the right criterion by which to assess where to look, was it, to see what might be right or wrong with these proposals. After all, many regulatory changes are likely to benefit some in the market at the expense of others, so some may be supportive of those changes. Large institutions may benefit at the expense of small IFAs, might they not?

Hector Sants: Quite so. I think I was hoping to respond in a helpful way to the particular observation that there was dissent about a particular measure and making the point that that would be a basis for us looking at the issue. It would not necessarily be the basis for us changing our position but certainly widespread concern would be an absolute legitimate reason for us taking a look at the question again, so I think I was just responding-

Q15 Chair: I hope you have been looking at these things even where the concern has been small but nonetheless strongly felt.

Hector Sants: Quite so, we have indeed. Quite so, absolutely, yes.

Q16 Andrea Leadsom: Specifically on the point of grandfathering, we did have a submission from a barrister who thought that potentially refusing to allow grandfathering might in fact be illegal. I wonder if you have taken advice on whether there might be an application for a judicial review.

Sheila Nicoll: Yes, we have taken legal advice on this. There have also been challenges in the context of human rights law and we have satisfied ourselves that the powers that we have are sufficient, that it is legal and that we are doing this within the law.

Q17 Andrea Leadsom: Moving on to work-based assessments, because you have introduced the possibility of a work-based assessment as an alternative to an exam, may I ask why is that such a late entry and why was that not something that was considered early on, because obviously that might have removed some of the specific objections? In particular, why is the take-up so low? Have those types of assessments not been well marketed? What is your assessment of that?

Hector Sants: To the general point, it was always our intention to try to find some alternative mechanisms to pure formal, exam-based assessments. Again, back to some of the earlier points, I have quite some sympathy with why people who have been in the business for some time might feel uncomfortable as individuals being in a formal examination hall, and so we do recognise that point. As you rightly pointed out, it has taken some time to bring forward proposals, longer than certainly I would have liked and there are reasons for that. Sheila, would you perhaps like to-

Sheila Nicoll: Yes. I think it is something that we responded to comments that had been made to us, so it is an example of us having listened to the concerns of IFAs in this area. Some of them have been relatively slow in developing, but I would hope and expect that, now that they are on the market, we will see increasing take-up.

Q18 Andrea Leadsom: So you are promoting the work-based assessments?

Hector Sants: Yes, but the trouble is obviously that we needed to find a credible work-based solution that was not one that was seen as entirely self-assessed within the firm itself. I know some firms have said, "Why would that not be reasonable?" but equally I have sat with consumer bodies who have made very clear that they would find that a very uncomfortable position. It has been difficult, and we are recognising that, to work out how we could develop some of these workplace non-formal assessments without turning them entirely into a self-assessment process that we felt uncomfortable with.

Sheila Nicoll: And to make sure that they were as rigorous as more traditional methods. I think the fact that they have been approved suggests that we have satisfied ourselves that they are as rigorous as traditional methods.

Hector Sants: We are looking at this 10% I referred to earlier, who appear to be not actively pursuing qualifications at the moment. If that data I referred to earlier is correct, then we would certainly encourage them to look at this type of assessment process if their reasoning for not getting themselves qualified was their concern around the exam process. We certainly think there is still time to do that.

Sheila Nicoll: Yes, definitely.

Q19 Andrea Leadsom: You will be pressing people who have not applied for the qualification to consider this alternative route, proactively or just reactively?

Sheila Nicoll: We are certainly doing a lot of road shows with IFAs and others. We have got 1,500 IFAs who have signed up to road shows that are taking place over the next few months. This is certainly something that will be part of what we are telling them about in where their options lie.

Hector Sants: We would certainly encourage IFAs to continue to sign up. I am sure there is close interest in what we are saying here, so we can perhaps use it as another opportunity to say that we really like people to come to our road shows.

Q20 Andrea Leadsom: One last question: on the level of qualifications, there is a significant minority of IFAs who have already gone to the full degree level 6 and there is a concern that obviously this is just the tip of the iceberg and within a couple of years we will be requiring a level 6 qualification. Is that your plan? Is there an intention to continually increase the level that IFAs are required to achieve?

Hector Sants: I wouldn’t take it as a formal plan. I recall a discussion in an earlier Committee here where it was questioned whether we had set the qualification at a high enough level, for those of you who might remember that conversation, and I think we responded at the time that this is something we would keep under review, but we don’t have a formal intention at this point in time.

Q21 Stewart Hosie: Mr Sants, the fundamental flaw the FSA identified was that customers believed they were getting free advice when charges for advice were being added to the cost of the product and the product provider paid the adviser a commission, and that advisers may have been biased towards products that provided them with the greatest commission. That was in your letter. You have proceeded down the RDR process. Does that not simply confirm that the FSA were unable to police the previous regime properly?

Hector Sants: Two points. First of all, I think that the previous regime was probably not amenable to the type of policing that the FSA is resourced to or set up to do, so, in that sense, you are right, but it would not be a realistic goal to have asked that type of regime to be effectively policed by us.

Secondly, I think we are saying that, in respect of the inherent payment structure that you referred to, evidence shows that it seems to set sales in a way that works against customers’ interests, and surely it is right for us then to look at every possible tool to address that. Putting in place a transparent and more easy-to-understand system works both from the point of view of making an easier-to use your terminology-police system and also hopefully leads to changed behaviour patterns that work to the benefit of the consumer.

Sheila Nicoll: I think it is fair to say that we have explored and used a range of tools, as Hector has said, and we do recognise that the RDR requires substantial change. We have never made any secret of the fact that there is substantial change, and that is simply because of the extent of detriment that we found in the market.

Q22 Stewart Hosie: The change you are suggesting is the removal of the influence of commission by banning product providers from selling commissions, with advisers agreeing a charge on the basis of a fixed charge, an hourly rate or a percentage of the amount invested. That is kind of where we are, but practitioners are telling us that that still might not be transparent or necessarily fair because consumers may still not be able to compare the cost of advice because the charging regimes will be different.

The RDR adviser charging regimes, as drafted, don’t adequately reflect the way in which advice may be given by a business whose advice on financial instruments is not wholly based on retail products and because even where there is a fixed charge an adviser may be drawn towards a product with a high rate of commission than on a low rate of commission. Practitioners are telling us that even though you have put this new charging regime in place, it may still not yet be transparent and fair. How will you police that?

Hector Sants: I think it certainly will be transparent. If you are making the point-and I apologise if I haven’t quite grasped the point, so please do come back if I haven’t-that obviously they can charge different rates for different products, therefore that might still potentially bias their advice. You might argue that, in the sense that if they sell one product with a commission over another then that bias potentially could still be there, but at the end of the day I think we would make the statement that in the round that is still a much improved system over where we were. As for the policing point, Sheila, do you want-

Sheila Nicoll: Yes. I think on the policing point we do have an extensive programme, both in the lead up to the RDR and post the RDR, of supervising firms. We will be seeking data from firms and one of the areas on which we will be seeking data will be charges for advice, so that is an area that we will intend to monitor going forwards. I think one of your questions was also around the fact that commission will continue to be paid on other retail products. Was that also one of your areas of concern?

Q23 Stewart Hosie: Yes. The question was effectively in relation to the charging requirements. They don’t adequately reflect the way in which advice may be given by a business where the advice is not wholly based on retail investment products, where there is a mix of things.

Sheila Nicoll: We are taking a targeted approach to this and for different types of retail products we are using the RDR as a benchmark and then asking ourselves the question whether we should apply the same rules to this other area-for example, general insurance-as we apply to the RDR. We are studying the detriment that exists in that particular market, so we are focusing our efforts.

For example, in the general insurance market we have concluded that the important aspect there is the nature of the cover, for example, and that is where consumers should be focusing. But we have very clearly said that if a broker is offering advice on investment products alongside insurance products, they should make very clear the commission that they are receiving, so that the total cost is visible to the consumer.

Q24 Stewart Hosie: I have just one final question. To go back to the fundamental flaw you identified, you said, "Advisers may be biased towards products that provide them with the greatest commission"; those were your words. In your answer, Mr Sants, you said that there may still be bias in the system. One of the concerns I have is that lots and lots of IFAs have contacted me and others, deeply concerned about this process. I think we all understand there are reasonable objectives behind it, but it is a little odd to be this far down the line and to have a concession that there may still be bias in the system, which is all this pain they are supposed to get rid of.

Hector Sants: I think that reflects the fact that I am afraid I am a cautious regulator and I am never one to claim we are going to have 100% success with anything. I am also conscious that we are in the world of the interaction between behaviour and economics and that that linkage is an imprecise linkage. It would be nice to say, "Of course this solves all the problems" but, to be honest, it is almost axiomatically true that we never solve all the problems with 100% probability when we are going into a change process. I am afraid it just reflects my natural caution in responding to your question.

Q25 Mr Love: Can I turn to classification of advice? A number of the submissions made to us have described the new categories, particularly restricted but also independent advice, as creating a muddle that confuses the consumer. The argument they have used is that it is confusing the industry, so what will happen to the poor consumer with these new categories? How do you respond to that?

Hector Sants: I think there are a couple of general points. First of all, I believe there is a strong body of support to try to differentiate between those two types of advice, two types of sales process. When it comes then to determining what was the right tag, nomenclature, to make that distinction, again I go back to my earlier comment of recognising that it is very difficult in the job to be certain of achieving perfection.

We have tried hard here to work out both what the terminology is we can use, and there were some limitations on the terminology in respect of European rules, and what works best. We have conducted some market research and so forth, which Sheila can elaborate on in a moment, to try to choose a terminology that achieves the goal that people are looking for, which is clarity around those two types of service. I recognise that in choosing terminology, I think it is in the world where we can’t get perfection, and there will always be some who feel that a different terminology might have been better. But we have done market research to try and choose the one that has the most widespread support.

Q26 Mr Love: Perhaps you could tell me about restricted, because that appears to be the most difficult area.

Sheila Nicoll: Very briefly on the consumer research point, yes, we did considerable research with consumers and the restricted independent was where we ended up as a result of that.

On restricted, again this is an area where we have listened to comments that we have had in the sense that we do recognise there will be different types of restricted advice, so we recognise that there will be some advice that will be restricted, for example, to the products of a singular provider. There might be other areas where their advice is restricted to a particular range, so the firm may not, for example, give advice on life products and only on collectives. We are not being prescriptive in terms of what is meant by restricted and we are not being prescriptive in terms of how a firm describes its services, so it will be able to say, "I am restricted but I specialise in a particular area of activity".

Q27 Mr Love: But doesn’t that put at a disadvantage someone who advises only on pensions but is otherwise independent, and others that are tied but only advise on pensions being in the same restricted category? I do accept the point Mr Sants made that you will never get a perfect solution to this, but that would confuse me. Didn’t it confuse the panel of consumers?

Sheila Nicoll: No. We tried to keep it simple. We try to keep it as simple as we possibly can and we will require firms to describe the nature of the restriction on their advice.

Q28 Mr Love: I want to come on to simplified, because you mentioned it earlier at the beginning and I think it is an important consideration. Let me just ask, and correct me if I’m wrong, but you seem to be placing a lot of emphasis on the improvement and trust that will be created by the new regime to overcome any bias that may be lost from this whole issue that the Chairman raised about selling products and the commission-inspired sales process. Are you convinced, from your research, that this new regime will lead to an increase in trust? After all, I think you mentioned earlier that 40% of those who accept advice don’t trust it, so we have got a major job to do here. Is this going to achieve it?

Sheila Nicoll: We hope so and we intend so, and we intend to monitor that fact. Once the RDR is in place, we will have a programme of continual monitoring of achieving what it is that we are seeking. One of them will be in this particular area in consumer research and the confidence and trust that they have in this market.

Hector Sants: But you are right, this is an absolute key yardstick by which the success of the RDR should be judged and we do believe that it will improve trust. It is not just that 40% figure. You have the other 70% of people not seeking investment advice at all. So we have 70% of people who don’t seek advice at all and 40% of people who do don’t trust the advice they get. That, I think we would all recognise, is a problem to be solved and this, we hope, will make a significant contribution to improving those statistics.

Q29 Mr Love: Which brings me to simplified advice, because clearly this is an area where both the industry and the regulator seem to be singing from the same song sheet. Are there difficulties? Will you be able to introduce simplified by the 2013 deadline? Presumably there are definitional issues at the heart of the difficulty in getting to a simplified regime.

Hector Sants: To the general point, the answer is yes, we hope so. We intend to make sure that certainly there aren’t any regulatory barriers to doing that. At the end of the day, it is the firms that have to offer the service, not us, so that ultimately determines whether the service is available, but we completely agree, as you have said, that this is a really important part of the overall savings architecture.

We also agree, and are working with industry at the moment on the point, that industry haven’t yet got themselves to a point of sufficient comfort in the regulatory environment to be absolutely sure they can launch services that comply with our rules. So we recognise we haven’t completed that dialogue and we have therefore accelerated our efforts in the last few months to do that. We were literally having meetings as recently as last week on the subject.

We committed recently, as you know, in response to some of the earlier concerns, which this Committee is aware of, to publishing a further paper in the summer-indeed, if we can publish it a bit earlier, we will do so-in which we would hope to give the firms, or we intend to give the firms, there the necessary certainty they need in respect of the regulatory questions to enable them to deliver the advice. Assuming we are successful in that goal, and we think we can be by the summer, then there would be enough time, we believe, for the firms to get those services in the marketplace by the deadline. So absolutely, the key priority for us at the moment.

Q30 Mr Love: Let me just ask you, Sheila. I am happy for you to answer that, but let me add a question. If there is any difficulty with the simplified regime, either in terms of constructing it or in terms of the industry getting up to speed on it, will that delay the introduction of RDR? Is it that critical?

Sheila Nicoll: No, I don’t think it is that critical.

Hector Sants: We would see that the other measures, including the RDR package, are justified by the particular issues there, address them. I think the key importance of the simplified advice service is that it is a key component of helping to address the wider savings issue that was mentioned by the Chairman in the opening remarks. Having said that, we are pretty optimistic that we will address the regulatory issues, so hopefully that question won’t occur.

Q31 Mr Love: Let me ask this, because the other side of that is if there is a two-speed, if RDR comes in and then simplified advice comes in, will that add to the confusion for the consumer?

Sheila Nicoll: I don’t think it should add to the confusion. As Hector suggested, I think we would wish to make sure that any regulatory issues were solved well in advance, so if we do it in the summer, that will be 18 months in advance, so there should be plenty of time to bring it in. If it is a matter of a few months after the RDR deadline, I don’t think that would be the end of the world.

Q32 Mr Love: A final question: we are in the process of changing regulators with all the attendant difficulties, and I know you are dealing with this on a daily basis, but do you perceive any difficulties from the smooth transition to the new regulatory structure?

Sheila Nicoll: No.

Hector Sants: There shouldn’t be because, as I mentioned before in the opening comments, the FCA is the successor organisation to the FSA and the specialist conduct staff under Sheila are clearly intending to work in that new organisation; they know that. That is a pretty seamless process. There is no movement needed, not even any physical movement needed, so they should be able to stay focused on their task, I hope.

Sheila Nicoll: We do remain very focused on our task.

Q33 Jesse Norman: Mr Sants, I wrote to Lord Turner a few weeks ago about the situation of my constituents, Alistair and Terry Hinton. They ran a successful local IFA firm that brought in compliance and other services from Berkeley Independent Advisers as an appointed representative for several years until 2004. During that period, their firm sold no products of BIAL and offered no advice relating to BIAL.

BIAL was later severely censured by the FSA. As a result, an entry was made by the FSA against the Hintons on the FSA register, which gives the quite false impression that they were directors of this firm, BIAL. As far as I am aware, there has never been any suggestion that the Hintons acted improperly and their existing clients, who are some 80 in number, have stayed with the firm notwithstanding the FSA’s decision. The entry on the register has blighted their business, which has all but ceased to attract new clients ever since, and it has cost them huge stress and financial expense.

They made a complaint to the FSA, which upheld their claim that the entry is misleading. They have been continually stonewalled by officials at the FSA who have refused to remove the entry even so, while other agencies have deferred to the FSA. The situation, therefore, is that they, as far as I can see, have been declared guilty purely by association. This has impugned their reputations and cost them hundreds of thousands of pounds in lost revenue and additional legal charges. My question is this: do you think this is appropriate behaviour by the FSA towards an IFA?

Hector Sants: I hope you don’t feel this is an unreasonable answer but I will be absolutely honest and say I am not familiar with the details of the particular case you have raised. I think for me to suggest otherwise would be misleading. I can see from the comments you have made why your constituent would feel upset. Experience tells me, of course, it is always important to evaluate all sides of the story.

If you, through the office, pass me that material immediately, or if you prefer to write to me, I undertake to respond to you immediately and, I hope, in a totally satisfactory manner, and I’m happy to share that with the rest of the Committee. I think for me to suggest otherwise at this stage would not be fair to either my staff or your constituent. I can see from the points you have raised publicly why you feel that is a reasonable question to pose to me.

Q34 Jesse Norman: I am very grateful for that; thank you. A further question is do you think it is right that the FSA should be almost immune from public accountability on these kinds of issues?

Hector Sants: I don’t think we are immune from public accountability. I am an extremely strong supporter of accountability. I hope I have always given that impression and I, on a personal basis, will always make maximum effort to make sure that any questions and challenges put to us we have answered in an open and transparent way. I demonstrated that, I believe, in the post-crisis period in a number of different ways.

We clearly are accountable to Parliament through a number of mechanisms, including this Committee, which, as you know, I take extremely seriously. I am also a strong supporter in the new legislation of ensuring we have maximum accountability. In particular, I personally have been very supportive of, and indeed I believe the Government is instrumental in making the suggestion, that in the event that we have regulatory failures, either in the FCA or in the PRA, there is some clear mechanism to avoid confusion in the future and that we account for those in a clear and transparent mechanism without constraint under our current supervisory powers, which as you know, causes some problems in terms of revealing information.

I think we are accountable. We can, of course, be judicially reviewed but, nevertheless, I do think in the new legislation that we should be looking to improve that accountability framework. I am a strong supporter of that particular suggestion, which is already in the consultation document.

Q35 Jesse Norman: The difficulty is that these complaints can reach you via the Treasury Select Committee or otherwise via a law suit, and there doesn’t seem to be anything in between. The question is whether that kind of immediate accountability-

Hector Sants: We have a complaints commissioner specifically for those. Many consumers, of course-and I’m sure you will appreciate, which is not the nature of the complaint that you have raised, may I make clear-do write to us thinking we handle individual consumer complaints in relation to firms, which of course, as you realise, is a matter for FOS, but we have our own complaints commissioner process that is available for people who feel the FSA’s process has not delivered as it should. We have a review process and we have an accountability process in Parliament.

As I say, I am supportive of an additional layer of accountability when major regulatory failures occur. I am also supportive of the NAO being a review authority for us, as we have volunteered to. If you have other accountability mechanisms you would like to suggest, I am sure you will do so during the Bill period and we are certainly are happy to take them into account.

Q36 Jesse Norman: Thank you for that. The RDR is principally about improving the standard and the quality of retail investment advice, but it is very striking that a large portion-maybe as high as 70% or 80%, or maybe more-of a typical financial adviser’s work does not involve offering investment advice as defined by MiFID. How would you react if firms deauthorised most of their advisers?

Sheila Nicoll: I think our reaction would be that we would need to make sure they were no longer giving investment advice.

Q37 Jesse Norman: But provided that the investment advice is given by authorised advisers, you are happy, in principle, for the FSA to allow large numbers of members of its firms to be deauthorised?

Hector Sants: I think you then come back to the opening point about the point at which you make a judgment that the market is no longer working efficiently for investors. So we wouldn’t be happy if that then damages the efficiency and effectiveness of the market in servicing investors. It is true-perhaps I can state what I think is obvious but in the light of that question it might be worth doing-that the FSA and the FCA going forward, our obligation is to get an efficient, effective and fair market for society as a whole, for investors. So the judgment is: is it working for investors? We are in the consumer protection business.

Q38 Jesse Norman: But the consequence of that approach might be to lower the cost of access to financial advice that was not regulated or authorised.

Sheila Nicoll: I think we would be conscious that quite a lot of IFAs give advice that doesn’t go towards the RDR. Indeed, a lot of lower-income individuals may not need investment advice. They may need advice on protection, they may need advice on investing cash, and to the extent to which advisers are not giving investment advice but are giving that kind of advice, then we would have no problem, provided that they weren’t giving investment advice.

Q39 Chair: To go back to this accountability question for a moment, and you were asking for suggestions from us a moment ago on how accountability might be buttressed; it is correct, isn’t it, that you are immune from redress in the courts for negligence?

Hector Sants: Yes.

Q40 Chair: It is also correct, is it not, to say that you are immune in the courts for gross negligence-that is, reckless behaviour?

Hector Sants: I think that is correct.

Sheila Nicoll: I think we need to check that.

Hector Sants: I think that is correct, yes.

Q41 Chair: I’m 99.9% sure it is correct. Reckless behaviour was defined for me when I asked exactly this question when FSMA was going through Parliament. Recklessness was described as doing something really stupid knowing it’s really stupid. Do you think that you should retain immunity from redress in the courts for doing something really stupid knowing it’s really stupid?

Hector Sants: Of course, presumably the question is: who would pay? Would you then be suggesting, given our only revenue raising capacity is the firms, that in the event that you judge that the officials had breached the requirements you outline, we would then retrieve the money from the firms, or if you felt we should be paying, you probably would find you would have an issue as to who would want to work in the business?

Q42 Chair: That is not an answer to the question at all, is it? Of course, the fact that you may be subject to action in the courts will alter your behaviour. If you know that you might be held culpable for reckless behaviour-that is, doing something really stupid knowing it’s really stupid-you are going to be extremely careful not to do something really stupid knowing it’s extremely stupid.

Incidentally, an example of such recklessness was given, as I recall, in Committee, which is looking at something that you know has a very deleterious effect, has a negative bearing on the reputational risk of a firm, looking at it, knowing that it probably needs action, putting it in your pending tray and going on holiday for a fortnight. You are immune, as an organisation, from redress for action of that type, are you not?

Hector Sants: I believe so, yes.

Q43 Chair: Do you think this is something we ought to visit? You asked for a suggestion and I have now given you one.

Hector Sants: I think it is a very complicated question and I think it is an interesting question and I would be happy to pursue the conversation or write back, but even the example you give, of course, demonstrates why this is a very complicated question because the action you have described is an action that would require somebody to make a judgment as to whether that was truly reckless-that is, was that really something that couldn’t wait until point X in the future.

If you want to have more judgment-based regulation, which of course is a phrase Government policy is asking for, and less box-tick regulation, if you place the individuals who are exercising a judgment in a position of knowledge, there are, at some point in that spectrum when exercising that judgment, very, very severe consequences. You are raising a set of questions about their willingness to engage in the right sort of brave judgments that you are looking for. I think it is an interesting question and I invited a debate and you have rightly picked up on that, which I appreciate. I am happy to come back to you but I think even the example you have used shows this is not a straightforward question.

Q44 Chair: I agree with your view that it is not straightforward and I am not now trying to persuade the Committee to recommend to you that we do this. This is something that may need to be examined. I recognise, too, that you need protection from vexatious action by counterparties with extremely deep pockets, which can also be prejudicial to the good conduct of regulation. Nonetheless, the fact that you are only liable for acts of bad faith in law, which are extremely difficult to prove, may be something that needs to be looked at again in the context of this legislation. By the sounds of it, you are happy to consider it.

Hector Sants: I am certainly happy to look at it. I think it is a good question. I would maybe make one further passing observation. I think the accountability mechanisms as such, including this Committee, for when people feel that individuals have made poor judgments, we are already held to account in a way that makes us give very careful consideration to the judgments we make as individuals, but this is a slightly different point.

Q45 Jesse Norman: A followup point on this issue of accountability. I think it is fair to say that many other people in private companies operate as directors on a basis that involves the discharge of fiduciary responsibilities dealing with customers, without any concern as to whether they are being held on a gross negligence-free basis or not. They may have D&O insurance, but in many companies they won’t even have that. So it is not clear that the deterrent you describe would necessarily apply. That may just be needlessly alarmist.

Hector Sants: I take the point you are making and, as I have already indicated to the Chair, I think it is a fruitful area for discussion. I would certainly expect, when the new legislation goes through Parliament, that this whole question of accountability is one that should be properly considered. I also recognise that the climate around the accountability question has changed considerably, and indeed around the transparency question, since the original FSMA legislation and we see it as a very important point to recognise that society’s views on what is appropriate now in these sorts of spaces of transparency and accountability have changed dramatically.

Q46 Chair: It has a heavy bearing on issues where great reputational risk attaches to any action.

Hector Sants: I think it is a complicated subject and we do need to think carefully so that we do not end up with the situation in which people don’t want to be regulators-that wouldn’t really help us-but there is a very meaningful debate to be had here.

Q47 John Cryer: I just want to return briefly to the question of commissions, which Stewart Hosie raised with you. In your answer, you said-and this isn’t an exact quote, but this is more or less what you said-they can still charge different rates for different products. That worries me quite a bit because in the 1980s and 1990s we had various scandals involving the payment of commission. It was very often in industrial areas where you had widespread payments of large redundancy cheques. That made those areas a target for certain individuals who, in pursuit of commission, misled people by what they were selling them. Is the system going to be sufficiently transparent to ensure that sort of scandal doesn’t happen in the future?

Hector Sants: We hope so, plus again, back to the earlier point, we are putting in systems to monitor commissions in a way that previously the regulators were not.

Sheila Nicoll: I think the regulatory system has moved on quite a lot since then anyway, regardless of the RDR. I think the important point about different costs for different services is also about consumer choice and it is about consumers understanding how much they are paying and them being in control of how much they are paying, and that is precisely what the RDR is about.

Q48 John Cryer: But to make those choices they have to have the information at their fingertips. Is the industry going to be in a position where it has to provide the sort of information, full information, that is going to be required for consumers to make choices?

Sheila Nicoll: They will have to explain the service that they will be offering and how much they will be charging for that service. Yes, they will. I think the issue is that under the commission arrangements, the individuals just don’t know how much they are paying and they don’t know that they are paying for advice and, therefore, have no control over it. So the intention is that they have a lot more control and that, because they know how much they are paying for that advice, they also value that advice.

Q49 John Cryer: Yes, all right. Just moving on. We have had a number of submissions from private banks stating that high net worth individuals might be tempted not to use London as a base because of the RDR. Would you agree with that?

Sheila Nicoll: I would be very surprised by that because I think in many ways the RDR is going in the direction of the sort of ways that high net worth individuals expect to interact with their advisers in the sense that I think you would find that the high net worth individuals-there is more fee business, for example, and, therefore, I think it would be going with the grain of the way that high net worth individuals already operate in the market.

Q50 John Cryer: Has the FSA done any work on this particular area? Is there any research?

Sheila Nicoll: The research that we have done has covered the whole area. The consumer research that we have undertaken has been across a crosssection of types of consumer.

Hector Sants: On the point you have just made, Sheila, it is not obvious to us-and again when you come to make your report if you want to spell something out here we can take a look at it-how the high net worth model would be adversely affected by the RDR, given that is primarily often at a-well, there are various different types of models, but they don’t seem to be particularly at variance to the RDR. So no, we haven’t specifically done research in that area, being absolutely open about it. If there were grounds for so doing again, we could take a look at that.

Q51 Mr Mudie: Hector, are these proposals final?

Hector Sants: Yes, is the short answer in the sense that our rules are broadly made and we are moving towards implementation.

Q52 Mr Mudie: Hector, I am just asking: are they final?

Hector Sants: They are final, yes, except-it is reasonable for me to put an "except" on this-insofar as we are a regulator that needs to constantly monitor the market, constantly determine whether the model we have in place works and to take into account new information. Yes, they are final, but if new information came to light you would expect us to sensibly look at it.

Q53 Mr Mudie: Let’s just go to a different point if they are final. In a reply to Michael Fallon, you said, "Obviously, we’ll take into account your proceedings". How on earth do you take into account our proceedings if they are final? You have said, quite rightly, "Well, we’ll revisit them when we see how they’re working", but we are having the hearing now and we are going to produce a report. What is the point of this report if they are final?

Hector Sants: I think I just answered that in my last comment, which was if you give us new information then we should quite properly take a look again at the issue generated by any new information that you give us. We have studied carefully the information that we have seen that has been submitted to the Committee so far. I am not sure we felt there was anything that was telling us that we hadn’t already taken into account, but we are very respectful of this Committee and if you lay out to us new information that means we should take another look, we will do.

Q54 Mr Mudie: Why, Hector, should you dictate the terms under which we ask you to look at something afresh? We are talking about accountability and we have agreed, as a Committee, to look at the bank and the new arrangements because we are concerned about the accountability of you and the bank to Parliament and this is a key forum. You tell us here the criteria will be that we produce more information for you. What if we say to you, "We don’t think you’re right and we’re representing the people. We’ve been elected and you’re going to harm, by these acts, a lot of innocent people"? Would that meet your criteria? It doesn’t seem to.

Hector Sants: If the evidence you presented to us led to-

Mr Mudie: You are interviewing us now.

Hector Sants: But, if I may, I think the way we work is we are accountable to the framework that Parliament places us in. We are currently operating to our FSMA framework and I’m not aware that the FSMA framework, which Parliament set up, vested powers in this Committee of direction over the FSA as an independent regulator; I believe Parliament was setting up an independent regulator.

We are completely accountable to Parliament. If you, as the parliamentary process, want to change our accountability mechanisms and the way in which we take direction from Parliament, then I will completely respect that, but I look to the Chair. If I am told by Parliament that direction from this Committee is one that we are meant to take then of course I will take it. I am sure you understand the point. I am not trying in any way to be difficult. I am trying to take forward the initiative in the way that I understand the framework to be that you have given us.

Q55 Mr Mudie: No, I think you are making a very valid point, and it is good that you say that bluntly to the Committee because we are concerned about your accountability. You are saying, "Unless you change the law, I’m not accountable to you. I might listen to you and if you put a strong enough case on I might consider it, but I’m the final word". I just find that a very strange position in a democracy when the elected member will say to an official, "We think you should have another look at that. I want evidence, Mr Mudie or Mr Tyrie. I want evidence and I might consider it". Let me just move on.

Hector Sants: Can I just make one point for the record? I would appreciate it, which I am sure was not your intention, that given the importance of this issue to a large number of individuals, it is not a personalised point. I am sure you recognise I am trying to represent the FSA in a professional way, so it is not me saying that.

Q56 Mr Mudie: It is very much a personalised point. Let’s move on. You describe yourself as a cautious regulator and I find you a cautious regulator when it comes to the banks, but not individuals. Do you have in the FSA an age profile of IFAs?

Hector Sants: I think we have. I’m not sure if I have it immediately to hand, but I believe we have, yes.

Q57 Mr Mudie: How many are over 60?

Sheila Nicoll: We don’t have that information immediately here but I think we can provide it to you.

Q58 Mr Mudie: But you should have had it and it should be in the back of your minds because you have taken an action that affects over-60s.

Sheila Nicoll: We do know that there are quite a considerable number of IFAs in the older-

Q59 Mr Mudie: How many are over 60? You could be forcing five or 50 or 500 over-60s to spend very valuable money on something that will take effect in two years-well, maybe one year, but two years-and they will retire within three.

Hector Sants: We do have the statistics-I am afraid I don’t have them at hand-of those within five years of retirement age, don’t we? We do have that statistic.

Q60 Mr Mudie: How many, Hector?

Hector Sants: I am trying to look through my brief here. If you accept it as a provisional figure, I thought it was something like 10%. We have about 8% of advisers leave the industry a year. I would have to clarify that.

Q61 Mr Mudie: Do you have a length-of-service profile that matches the 60year-olds?

Hector Sants: A length of service of how many-

Q62 Mr Mudie: I could be 30 years in the trade. I could be reaching retirement age and you are saying you won’t give me grandfather rights. Why would that be so bad under those stated circumstances?

Hector Sants: I come back to my earlier answer to the question. I think these grandfather rights basically-

Mr Mudie: No, I heard your earlier answer.

Hector Sants: It is a finely balanced argument, but the question is in the round which way do we-

Q63 Mr Mudie: Hector, with the greatest deal of respect, you did not address an individual point about a man or a woman over 60-55 onwards, even. It would be for you to put some proposals on the table to say, "This is where I think it is reasonable or unreasonable". You didn’t consider age and you didn’t consider length of service. You can’t tell me how many over-60s have been in over 20 years, and then I would say even then how many with a trouble-free record? You can’t tell us.

So you took a decision, a blanket decision. Don’t you think that was unfair and don’t you think that is a reason for revisiting grandfather rights? Not opening the floodgates. Grandfather rights are like that; they’re not dispensed freely but they’re dispensed with a view of the harm that you are doing somebody who has given a given industry years of good service and approaching retirement. You don’t think that is something you should look at?

Hector Sants: I certainly think that it is absolutely good justification for us to write you a carefully constructed letter with those statistics in and do what exactly you have asked us to do, which is give consideration to that point. I am happy to do that because you have made a number of reasonable points. I, however, still continue to make the general point that we are primarily focused on a level playing field and the majority of our respondents wanted a level playing field, including-

Q64 Mr Mudie: Hector, none of the pieces of evidence said that at the aim for perfection you knock out the good. At the aim for getting a perfect situation, you are prepared to destroy an individual. I don’t think that is acceptable and I don’t think anybody reasonable would think it was acceptable. Besides, I put another point to you. Have you considered-

Hector Sants: They can take the qualification if they want to. We’re not-

Mr Mudie: No. Have you considered, at the same time to be fair to the FSA, saying, "Look, under those circumstances, we might have to regulate you a bit more closely, so we might have to charge you a bit more money"? You could build up a package that is fair to the FSA and fair to a certain group of people.

Can I just raise the question of Europe? Is it not true that passporting will allow someone to come in here from Europe, or someone from here to go to Europe-maybe hired or affiliated to a firm over there-and come back and carry out the job without the RDR regulations?

Hector Sants: In respect of some of the RDR regulations on passporting, yes.

Q65 Mr Mudie: I have noticed that in your press releases you don’t indicate which ones work, but clearly you are going to spell them out.

Sheila Nicoll: If somebody is operating from a branch here in the UK, they will be subject to the RDR requirements. If they are providing services on a cross-border basis without a place of business here in the UK, they won’t be subject to the RDR. But they would need to be authorised in their home Member State, and some of the authorisation requirements are more stringent in other Member States than they are here. Also, if it was clear that they were doing it specifically to avoid the RDR, we would be able to apply the RDR to them.

Q66 Mr Mudie: Yes, but you would have to prove they were doing it and that is as bad as proving Hector is doing something deliberately to harm someone; it is very difficult. Passporting will knock some holes in the RDR facade that it affects everyone. It doesn’t. If you come from Europe, you will be able to do the job in here and not be covered by a fair bit of the RDR. You will give us details of which bits don’t affect that. But the more important thing is-and I know Mr Garnier is going to go into this, but just for the sake of my last point-what is the cost to the industry, as we sit, of the RDR proposals?

Hector Sants: The cost to the industry? The estimates are the same estimates as we gave you the last time, which is including the oneoff implementation cost, the £1.4 billion to the £1.7 billion, which was the figure we discussed, over five years. The statistics are the ones you are familiar with.

Q67 Mr Mudie: You have written evidence and we have written evidence from one firm that says, "Why on earth are you putting us through this when Europe is in the process of dealing with the same regulations and their regulations will overcome our regulations?" So, Hector, why are you putting firms through the costs of £1.7 billion when, within a couple of years, they can be overtaken by Europe? The firm will never forgive me for not mentioning their name, but I cannot find it on this. I’ll get it before the end if you challenge it. They are a big firm and they say they put the additional cost at €500 million for PRIPS. Why are we in such a rush? Do you find that amusing, Mrs Nicoll? The industry doesn’t.

Hector Sants: I very much doubt they would be in a position to accurately price out PRIPS at the moment. We are very conscious-

Q68 Mr Mudie: Is that the point, Hector?

Hector Sants: No. I was going to answer the point. We are very conscious of the general point that is being made, which is a very important general point. Undoubtedly, we don’t disagree-I have said this, again, many times to this Committee-that rule-making authority is broadly gradually moving to the European architecture, as you know, and also that consumer issues are rising to the fore of that European agenda over the coming years. Both are statements of truth. We have given a lot of thought, therefore, to try to ensure alignment between the RDR and what we believe will come out of Europe. Also I think the timeline is somewhat longer than you have alluded to. I don’t think we expect it to occur on that sort of timeframe. Again, Sheila can give you the detail.

Q69 Mr Mudie: Hector, I don’t think you can say that you are quite sure about it or sure about it because they are still out for consultation, and who are you to anticipate what will arise out of consultation? It would be bad if you’re speaking to the Commission and you are telling this Committee that the Commission have told you what they are going to do while they are still out consulting Member States.

Hector Sants: No, I am not saying that. I am saying that we are, as you would expect, in dialogue with the Commission, which I believe is our role to try to influence the European agenda, and I know it is very important to you that we do seek to influence the European agenda. We are comfortable with the model we are introducing here in the UK and we are proposing that as a way forward in Europe, and that is what you would expect us to do. I am certainly not saying that I know what the Commission is going to do.

Q70 Mr Mudie: Yes, but the European one will be the one that wins, so if it is not as you suggest that they are agreeing with you-and you can’t say that because it is still out to consultation-it means that you are charging the industry to spend £1.7 billion chasing ahead and Europe are doing the same job, instead of saying, "I think we’d better wait for Europe before you start doing those computer programmes and spending this and spending that" and even going out to the industry-

Hector Sants: The question then must be how many years do you want to wait against the potential detriment, and we have also laid out the statistics here before of the potential detriment, which includes some very big misselling events, which total up to some £50 billion. We have PPI as well currently ongoing as a major event. The question is what is the trade-off, and that is a judgment that we have to make.

We also note, in addition to the actual pounds million detriment numbers that we have laid out to the Committee before, we have in recent times done thematic visits and file sampling exercises. That sort of data strongly supports the type of detriment statistics of £0.4 to £0.6 billion per annum that we have previously reported to this Committee in the sense that the file processes-that is not the same as saying mis-selling has occurred, just for the record-in many of the samples is somewhere between 16% and 46%.

There is evidence-in our judgment, very good evidence-of significant current consumer detriment. So, yes, we have to make a judgment between seeking to address that problem now and the possibility-I take your point that we are not responsible for the final determination that Europe makes, that is absolutely correct-that at some point in the future, a number of years hence, the European regime might come out with an outcome that is somewhat different to our proposal. That is possible. The question is what if we make the judgment in the round, and we judge on the basis of the data we have, that that is a reasonable judgment to make?

Sheila, you might like to expand a bit on the timeline, which seems pretty important to us, of the European debate. If it was happening tomorrow, then your point, I think, is much more powerful.

Sheila Nicoll: I think, as you say, they are in consultation at the moment. We don’t yet have legislation in the context of PRIPS and we are not expecting that until the end of this year. Most European legislation-

Mr Mudie: This doesn’t come in until 2013, so you have plenty of time.

Sheila Nicoll: Yes, but most European legislation then has a leadin period and a transitional period. We think that would take us well beyond the RDR deadline date.

Q71 Mr Mudie: That is okay, but you are asking an industry to spend £1.7 billion and you don’t know that it is not going to be made redundant by the European legislation.

Hector Sants: Of course we are not asking them to spend £1.7 billion in one year. It is over five years and therefore in the event that, which we wouldn’t expect, somehow or other the European legislation came in in a shorter timeframe they would not, of course, spend the money that would be due in any of the following years. I don’t think it is quite the same as saying it is a oneoff cost of £1.7 billion. I think that is slightly misleading.

Q72 Mark Garnier: Following up on that point, that £1.7 billion is going to be frontloaded, isn’t it? It is going to be immediate cost, so a significant proportion will be in the first couple of years, so you do have some coming in.

Can I quickly turn to commissions, and in particular trail commissions? One of the submissions that we have had suggests that firms are moving to place business pre-transition to secure as much income as possible through trail commissions while the facility is still available. Have you done any work to monitor this or to try and assess whether that is right?

Sheila Nicoll: It is one of the risks that we have very specifically identified in the lead-up to the RDR and is one of the areas that we are very specifically looking to in our supervisory activity, yes.

Q73 Mark Garnier: What are you doing about it?

Sheila Nicoll: We will stop firms carrying on-if we do find that they are flouting the rules by taking trail commission inappropriately, we will take action against them.

Q74 Mark Garnier: How do you decide what is inappropriate? They could be genuinely selling a product that is absolutely right for the consumer but then you may turn around and say, "Well, we think you are doing the wrong thing". How does this work? You are not the financial adviser, are you? You are not the ones that can determine what is best for the consumer.

Sheila Nicoll: No, but we can consider whether advice, for example, is suitable. As Hector has already indicated, we do that now on the basis of file reviews and so on, whether advice is suitable and, for example, we can look at trends among particular advisers, compare particular advisers against other advisers. Particularly the way that we supervise smaller firms is by looking at trends and looking at returns data and we will continue to do that in the lead-up to the RDR.

Q75 Mark Garnier: Another suggestion is that if you do have a significant amount of selling of a product with trail commissions running up to it then it will prohibit or it will deter on-selling afterwards. So, you might get a lack of good advice afterwards because people want to leave their clients with the pre-sold package with the trail commission. So, therefore, you might get a reduction in advice afterwards.

Sheila Nicoll: Well, there may be an immediate effect, but I think if individuals are being given suitable advice then our approach would be exactly the same post-RDR as it is pre-RDR, in that we would take judgments about the suitability of advice. There are suggestions at the moment that there is too much churn in the market because of initial commission and so therefore a certain amount of less activity may be appropriate, depending on the circumstance of the particular individual.

Q76 Mark Garnier: One of the problems with this whole business of trail is that of course it gives a value to a firm, it gives ongoing recurrent earnings to a firm, and therefore the value will change. Clearly there is going to be an interest by firms in order to try and get some sort of replacement to a trail commission. I understand anecdotally that people are now looking at alternative ways of getting a trail commission, which can be a notional advisory fee given by a product provider. What are you doing to look into that?

Sheila Nicoll: Well, we are certainly saying, and our rules very clearly say, that if post the RDR, a firm is taking trail commission, then individuals will still be able to pay for the product through the product, but if trail commission is going to be paid going forward that has to be clearly against the provision of a continuing service and that the individual should be able to say, "I don’t want that service any longer and therefore I want you to stop receiving trail commission".

Hector Sants: I think the general point that comes from a number of the questions raised, which we would completely agree with, is that strong policing is also required alongside effective rules. There is no question about that and we are much more active, as you know, in the last couple of years since we have changed elements of our supervisory strategy in respect of being willing to firmly intervene with firms to stop them doing things. That is not something historically that the FSA was particularly inclined to do, as you know. We have had that debate, but we do need to have a firm supervisory policy to sit alongside this rule framework; there is no question about that.

Q77 Mark Garnier: I am going to come to that in a minute. Can I just quickly look at commissions versus fees? What evidence do you have that the smaller investors-and I am particularly thinking of the bottom two deciles, the bottom 20% or so of investors-particularly want to go and pay a fee as opposed to commission? Anyone can answer it.

Hector Sants: I think we have the research, but generally speaking I think your point is well taken. There is reasonably good evidence of the willingness of potential investors to pay fees, but that does correlate to somebody with the available amount of money for the investment and clearly at the lower end-

Mark Garnier: What is "reasonably"?

Hector Sants: -there is a risk that they would not want to pay, which is why we are encouraging the development of the other advice channels and it takes us back to our simplified advice point earlier. So, we do absolutely acknowledge that moving to more of a fee-based environment in terms of the overall marketplace working requires simplified and other services to also be available.

Sheila Nicoll: That is also why we have said that the investor doesn’t necessarily have to pay an upfront fee, and it was particularly thinking of that end of the market. If they don’t wish to pay an upfront fee, they can continue to pay through the product but the difference between now and post RDR will be that that level will be agreed with the consumer and by the consumer rather than being decided by the product provider. So, the product provider can continue to facilitate the payment for the advice so there is not necessarily a need for the investor to pay an upfront fee.

Q78 Mark Garnier: So, it is essentially factoring?

Sheila Nicoll: No, it’s not factoring. It is facilitation through the product so it is-

Q79 Mark Garnier: It just seems a very complicated system to go through. You talk about transparency, but the fact of the matter is that transparency is about disclosure. Surely it would just be a lot simpler and a lot cheaper to have a disclosure rule that says you have to show what the fees are, rather than going through this incredibly expensive and convoluted process?

Sheila Nicoll: We have a disclosure rule now and-

Q80 Mark Garnier: So why isn’t it working?

Sheila Nicoll: The evidence from our consumer research is that consumers don’t listen to that disclosure; they don’t understand the effect.

Q81 Mark Garnier: What are you doing to educate the consumer?

Sheila Nicoll: Well, we have done quite a lot in terms of educating the consumers- Mark Garnier: But not enough.

Sheila Nicoll: -over many years, but it has become fairly clear across the board, not just in this area, that disclosure is necessary but not sufficient, particularly when dealing with consumers.

Hector Sants: But the point you are making is an important one, which is the general proposed shift in the consumer protection strategy of the FSA, which we would envisage being carried over into the FCA, as myself, Lord Turner and others have articulated here, does recognise a view that point-of-sale disclosure alone is not a sufficient mitigant for avoiding significant consumer detriment.

That was the model the FSA was working on primarily, that the principal issue was not policing, it was point-of-sale disclosure, and that was the prevailing philosophy historically. The evidence is suggesting that overall, given what has happened with endowment mortgages, what has happened in PPI and a number of other areas, that society finds that level of consumer detriment unacceptable. Therefore, we are moving to a different model. So, that is correct and the educational remit, of course, of the FSA in any case now sits with CFEB, but that is a separate point.

Q82 Mark Garnier: You have referred on a number of occasions to your consumer research and there is one in particular that came up that 70% of people don’t seek advice and of those people who do, 40% are unhappy with their advisers. What is the profile of those 40% who are unhappy with their advisers and in particular what is the profile of their advisers?

Hector Sants: Do you have the detail of that to hand?

Sheila Nicoll: I don’t think I have the detail of that to hand.

Mark Garnier: If you don’t have it with you if you can-

Sheila Nicoll: Certainly, yes.

Hector Sants: It is an important one, this, because-

Q83 Mark Garnier: If you could just give us a general view. You must know who they are.

Sheila Nicoll: I think any research that we have done, as I have indicated before, has been very deliberately across a cross-section. I can’t tell you at this stage whether there was a particular profile, but certainly whenever we have done consumer research we have made sure it is across a cross-section of types of consumers.

Hector Sants: Our presumption is that we properly sample the marketplace as a whole. I am very reluctant to assert things with absolute certainty if I don’t have the piece of text in front of me and we would rather confirm that, but I think that is our assumption.

Q84 Mark Garnier: What I worry about is that if you look at a Which survey done in 2007, that found that when they did it blind-sort of secret consumers-they found that 84% of bank advisers failed to pass all the benchmarks for good advice compared with just 66% for independent financial advisers. Unless you can be absolutely clear on who is creating that worry among that 40% then are you possibly not doing the right thing in terms of RDR?

Hector Sants: I think there is a presumption there that the RDR is targeted solely at the IFAs. It is a general reform of the savings environment. The debate does at times suggest this is an IFA-focused agenda. That is, of course, not the case.

Q85 Mark Garnier: But the reason why this has re-emerged and why we are getting a lot of submissions from people is that it is this type of independent financial adviser that George is talking about-the person that has been working for many, many years who has a trusted relationship with their consumer. The type of person like my constituent Mike Jacob who has a shop in Stourport High Street and he networks at the Stourport Working Men’s Club. He is not treading the pavements around the family offices in Mayfair. This is somebody who is looking at the bottom end of the market and this is a key point. We have a savings gap and we have to address that and this RDR, from the huge amount of complaints we have had from people, is affecting exactly those people in the market who are going out trying to address this savings gap.

Hector Sants: First of all, I am perfectly conscious that we need to be very sensitive to and recognise the impact on individuals. To be fair, I don’t think you are suggesting we are not as individuals sensitive to that point, and I perfectly understand why individuals may feel from their perspective this is an unreasonable initiative. I can see there will be individual circumstances when people might think that.

The problem is how do we evaluate that in the round in terms of improving the overall savings market here. I come back to the point that I think we do agree that you need a complementary set of services, which include simplified advice targeting those who may want to have a more simple-potentially so, a slightly different point-charging structure. I recognise the point. We have tried to make it in the round and your constituent, they can get qualified, go ahead and provide the service, and there is plenty of evidence of IFAs currently operating to the model of charging that we are talking about that operate successfully and profitably. It is not that we are proposing a model that cannot operate effectively in the IFA environment. There are plenty of IFAs who already operate to that model successfully.

So I think it is not that we have not thought about the business model. We believe that an entrepreneurial, motivated IFA can adapt, thrive and prosper and that their clients can benefit from that in the new world. I am sympathetic to a point made earlier about individuals who at a certain point in their careers and so forth as individuals might feel it is an unreasonable burden; I understand that point. But I think we know that this is a workable model. We have people out there who work this model already.

Q86 Mark Garnier: But by your own admission up to 20% of IFAs could drop out of this marketplace.

Hector Sants: "Could", first of all, and that will probably be for other reasons, such as the personal lifestyle reasons that have just been articulated.

Q87 Mark Garnier: As I say, not only have we had 700 pages of formal written evidence but collectively among us we have had huge amounts of informal, background material that has also been submitted, which I think totals another 1,000 or so pages of this stuff. There is a huge, huge weight of feeling out there.

Hector Sants: From the IFAs or from others?

Q88 Mark Garnier: From the IFAs, absolutely. I would completely agree that there are some people who think that RDR is a very good thing and that overall, I think, the profession does agree that a raise of this standard is not a bad thing-but not at the cost of 20% of IFAs, potentially, and importantly, up to 2 million to 3 million investors who have a trusted independent financial adviser who may, as a result of RDR, not have a financial adviser afterwards and then be having to go off and look for other advice. How is that a good thing? How is that meeting your stated objective of a market that allows more consumers to have their needs and wants addressed?

Hector Sants: First of all, as we have reflected on, I think, the 20% figure is the number of firms, not the number of advisers, and I recognise these are two slightly different points.

Mark Garnier: We are talking about thousands of individuals.

Hector Sants: Secondly, as I say, I don’t wish to minimise the impact on some individuals who feel for personal lifestyle reasons that they do not want to embrace these changes. I do understand that, but we are making the point that it is a perfectly viable model that we are proposing they move to, which has been adopted by a number of fellow practitioners successfully and profitably. We are not in any way inhibiting them from moving to that new model and we have good evidence certainly, if you take that training evidence with 90% of the people saying they expect to get qualified.

We have a position where as of April last year it would appear that 90% of the community are expecting to get qualified, or 89% to be absolutely precise. It would not be unreasonable, I assume, to presume that the people who are going to become qualified expect to continue to practise. We would presumably assume there will be a few more over and above that 89% figure, so at the end of the day our estimate on which we did our CBA-and, back to the earlier point, I recognise that we are obliged to do CBAs, you expect us to do CBAs-that figure, if anything, will not be as bad as that, if I can put it that way, in a positive way, if you look at it against the training number.

Then you come back to the basic substance of do we think it is going to significantly improve the trust in the industry and reduce the elements of mis-selling-nobody is disagreeing that there is good evidence for those mis-selling statistics? It is our job as a regulator to make that judgment in the round. I realise how uncomfortable it is for some individuals. I do understand that point.

Q89 Mark Garnier: Mis-selling: I will come on to that particular point. Of mis-selling, how much mis-selling is done as a result of ignorance and how much is done as a result of deliberate misleading?

Hector Sants: I think you know that is a very difficult question for us to answer.

Q90 Mark Garnier: It is a very important question, because just raising the level arbitrarily-and I agree that in the round it is not a bad thing to have better qualified people, but that doesn’t get rid of malicious intent. If somebody wants to mis-sell and churn and this kind of stuff it doesn’t matter how qualified they are, they will still do it. Your job is to police this, your job is to supervise this and to weed that out. I don’t understand how a higher level of qualification will address that point. All you will have is better qualified crooks, if there are crooks there.

Hector Sants: I agree with that. I don’t think it does address that point. I am not disagreeing that it would be wholly wrong for us to suggest that we are going to eliminate all mis-selling, and I don’t think we suggest that. It would also be, it is absolutely right, again I agree with you entirely, that the regulator both needs to be an effective policeman and an effective rule-setter. It is also true, by the way, which I am sure you also agree with, that the reality of the cost of regulation is such that even if we were the most efficient policeman, for the sort of money and resources we have we will still have mis-selling on top of that. There are certain types of wilful deception that, however good your regulatory police process is, the cost to detect would not be acceptable. We are never going to completely solve this problem absolutely, and that was my earlier point. I am sure we all recognise that.

The question is, is this a significant improvement in the round on where we were? We believe it to be. We believe we have good, solid evidence to that effect and that is why we believe we should go forward. A number of very useful, sensible points have been made, which I would like to consider on the margin, but on the central thrust of the argument, it still seems to me that the logic is compelling.

Q91 Mark Garnier: You challenged Mr Mudie to come up with new evidence, but surely the interpretation of the evidence you have is the important point, not necessarily finding new evidence to prove that you have done something wrong. The interpretation of the evidence, as I see it, is different from the conclusion that you are coming to.

Sheila Nicoll: I think it is worth saying that in our supervisory activity we are looking at and, as Hector mentioned, we are finding there is a lot of mis-selling. But what we are also finding is there is clear evidence that there is less mis-selling at the point where the adviser is more highly qualified, and that is being borne out in the work that we are doing in monitoring firms’ activities.

Q92 Mark Garnier: This is ongoing monitoring?

Sheila Nicoll: Yes.

Q93 Mark Garnier: Let me ask a more general question. In terms of regulatory supervision, who are, of your members, the most hard-to-reach group in terms of policing?

Sheila Nicoll: Hard to reach? We have 16,000 small firms who we supervise and we take a risk-based approach to that supervision, so we are more intensive with those firms that we consider to be more risky.

Q94 Mark Garnier: 16,000, so there are quite a lot that you may never ever talk to.

Hector Sants: Yes. In the current model, broadly speaking, we changed the small firm advisory strategy in late 2007 where we moved from a model where there was little or no supervisory contact with the majority of the small firms to at least bringing in a model where roughly on a four-year cycle there is some form of direct contact with a firm on a thematic basis. But we do not work an inspection-based model where we go every year to every firm to look at the files and so forth, which is why, as we observed earlier, even with the more intensive policing model we introduced in late 2007 it would be wholly wrong for us to represent ourselves as being able to ensure that no mis-selling occurs.

Q95 Mark Garnier: But at the end of the day, it would be a lot easier if you didn’t have all these small firms.

Hector Sants: I don’t think that would be the case. We manage it in a very cost-efficient and effective way and we recognise the value of diversity in the marketplace and the value that they bring to potential investors and current investors. I think you are trying to encourage me to make some comment that would suggest that we have an anti-small firms agenda. That is absolutely not the case.

Q96 Mark Garnier: I am not asking you to do that. This is what has been put forward by some people to me-that you do have an anti-small firms agenda and it would be a lot easier for you to regulate the banks than it is to regulate 16,000 small firms.

Hector Sants: Well, of course, I think you would probably agree with me that is not the case.

Q97 Mark Garnier: I would like you to give a very good reason why that is not the case, because a lot of people are watching this and they want to know why it is that you are putting so much pressure on them that quite a lot of people will go out of business. There is a huge strength of feeling out there about this.

Hector Sants: Absolutely, and I can assure you that when I took over as Chief Executive, one of my key objectives was to try to lay to rest this view, which I do recognise people have, that somehow or other there was an anti-small firms objective. Within the constraints of the considerable time pressures placed upon me within the last few years, I went out and spent some time with some individual firms; not as many as I would like, by the way. I have gone out of the way to encourage within the FSA an awareness of the small firms agenda. I absolutely see the value in the diversity in the marketplace.

We changed our small firms supervisory strategy under my leadership, which included not just the change in the visit programme, the supervisory programme, but also a dramatic increase in the outreach work. We talked earlier about our workshops and our regular visits around the country and we expanded our Edinburgh office. We have made a huge effort, I think, to reach out to the smaller firms and make them feel that they have good access to us so that working together we can improve the offering they make to their investors.

I absolutely reject the idea that we in some way or other have a hidden agenda here and I think all the efforts we have made over the last few years are testament to that point. I understand why some of the individuals feel uncomfortable but it is really not the case that we are trying to in any way damage the small firm sector. What we want is a better and more trusted small firm sector. If we come back to our opening comments, we do not have trust with small firms. The statistics can tell us also that we don’t have trust with banks either. Clearly consumers don’t trust banks either. The complaints data for the banks absolutely demonstrates that. We have a lack of trust in the whole financial system.

Q98 Chair: But you have evidence to suggest that small firms are more distrusted than big firms, do you?

Hector Sants: We do not have direct evidence that would enable us to say that and I would not expect that to be the case.

Q99 Chair: In which case, if you are trying to build trust, it doesn’t strike me as-

Hector Sants: We have no evidence that would enable us to assert that small firms are less trusted than big firms, nor are we building the RDR case on that statement.

Q100 Mark Garnier: Of the people that are going out, including yourselves, to go and engage with smaller firms, how many of them have worked in firms with fewer than 10 members of staff?

Hector Sants: Certainly a number. As you know, our policy is to have a mix of people from industry as well as career regulators. That mix, I think, is a good approach. I know we have recruited a number into our small firms division. Our small firms division is 250-odd people. I couldn’t tell you what percentage of that; I should imagine it’s tens.

Sheila Nicoll: Also in my division I do have people who have worked in smaller firms.

Q101 Mark Garnier: So, you do have people who have hands-on experience?

Hector Sants: Absolutely.

Q102 Chair: Perhaps you would give us the number?

Hector Sants: Of course.

Q103 Chair: I would like to ask you about another issue, which is this longstop on complaints. We have received a lot of submissions that the absence of a longstop or time limit on complaints is a problem. Would you be prepared to look at that again?

Hector Sants: Yes, I think this is an interesting area. It is not specifically the RDR but the reality is that what we are looking at, I think you are rightly taking input on, is a whole series of issues that small firms feel concerned about-aggrieved about, in some cases.

This was looked at in 2007 and at that time there was not compelling evidence to change the situation-that is, to bring in a longstop. But I have to say that I have some sympathy with the argument that says if people are still concerned, 2007 now is a number of years away, and possibly if this Committee was to recommend to us that we should take another look at it, I think that is something we might usefully do.

It is a little bit of a question of what is the framework that you use to reach the determination, to be fair, in the sense that the way that it was looked at in 2007 was: what is the consumer benefit that would be brought by bringing in a longstop? There was no particularly compelling evidence presented; that was the backdrop. But you could be asking the question the other way round, which is there are other industries that do have a longstop, so why wouldn’t this one have one? So, it depends on the framework, and I must admit when I looked at the question I thought there is an argument that says perhaps we should look at it again, so if you asked us to we-

Chair: On that anyway we seem to have something of an open door.

Q104 Jesse Norman: Very quickly, just to pick up the point you made earlier, Mr Sants. In your remark that the result of this might be to lose 10% or 20% of capacity, you have clarified that you did not mean individuals, you meant firms. You separately said that in terms of small firms alone there are 16,000 or so regulated by the FSA. Does that mean that you, at least at that time, were contemplating the possible exit of between 1,600 and 3,200 firms from the market?

Sheila Nicoll: No, I think it is worth clarifying that the 16,000 firms, not all of those are doing investment business, so they would be mortgage brokers-

Q105 Jesse Norman: What would be the number?

Hector Sants: That is our small firms division. We have the number here.

Q106 Chair: How many firms are going to go?

Hector Sants: We have that number here. Make sure we get the right number.

Sheila Nicoll: If 8% were to go, the adviser numbers would fall by 3,802.

Hector Sants: Out of 48,000?

Sheila Nicoll: Out of 48,000.

Hector Sants: The 8% to 13%, which is the 10%, is the number of advisers. The adviser population is currently 48,000?

Sheila Nicoll: 48,000.

Hector Sants: So, the bottom of our 8% to 13% range is that figure of 3,800.

Sheila Nicoll: 3,800.

Q107 Jesse Norman: So, if it was double that, it was 16%-that is, in the middle of your range-it would be of the order of 7,500?

Hector Sants: Now we are in apples and pears, so our estimate of the number of advisers is 8% to 13%, which is 10%. The range of the 10% to 20% was a conflation of firms and advisers as a general point in the earlier submission, but now we are giving you the very precise-

Q108 Jesse Norman: I am sorry, I am completely confused. How many people are you expecting, or firms, to leave the market if it is at 10% or 20% loss?

Hector Sants: 10% is 4,800 people out of 48,000.

Q109 Jesse Norman: 20% would be 9,600 people if the worst effect that you contemplate happened?

Hector Sants: We were not forecasting that number of people leaving. The 20% was firms, 10% is mid-point of advisers. So the worst case number in our forecast number of people is 13%, so that is going to be-

Sheila Nicoll: 6,178.

Jesse Norman: Plus presumably support staff, because those would be registered people you are talking about, or authorised people?

Sheila Nicoll: That would be authorised people.

Hector Sants: That would be authorised people.

Chair: These are people’s careers we are talking about here.

Q110 Jesse Norman: 6,100-plus support staff, so it is going to be of the order of 10,000, because they will have people supporting them.

Hector Sants: It could be. It is very important in transparency that those figures are laid out for you.

Chair: Quite a lot of people’s careers we are talking about here.

Hector Sants: But we are talking about structural change in a marketplace.

Q111 Mr Love: I want to pick up on a comment you made earlier on when you referred to the balance between judgment and, if I can call it that, tick box. This is an issue of quite a lot of interest to the Committee. We had the Governor of the Bank of England. I wondered if I could get your view, if I can call it that, as a seasoned regulator as to what the proper balance should be between judgment and regulation and whether you think we may be taking on risks if we depend too much on judgment.

Hector Sants: I think this is a question we should want to return to and I encourage at some point in the future the Committee to maybe have a wider debate on the overall supervisory approach to be taken by the two new authorities.

Mr Love: That may be something we will take on board.

Hector Sants: I digress briefly, but we are planning to publish some public material on the bank plus the FSA on the PRA and then the FSA on the FCA in the summer and that will be an opportunity to have such a debate with that material in front of you.

I think the balance between judgment, which is essentially saying a forward-looking concept to the regulator saying what might go wrong in the future and then intervening before it goes wrong, as opposed to having some rule-based system-that is possibly a better word than the rather emotive "tick-box" system-where you rely on the firms to comply with the rules and in the event they don’t, you then take redress.

I think the balance between those two approaches should differ somewhat between a prudential authority and a consumer authority. Talking to the consumer agenda in the light of the topic we are talking about today, I think that it would be proper to have a slight shift, if anything, towards clear rules because I think individuals operating in the consumer environment like to have clear, understandable rules that they comply with, and I think that would be helpful. Also clear, understandable rules make it easier to achieve redress when mis-selling has occurred. I think the balance for the consumer is a bit more towards the rules-based approach.

I think the difficult area, which is where a very interesting debate could be had, is if you have moved away, as we are suggesting we might or we should, from solely point-of-sale risk disclosure to some form of product intervention, then that is more judgmental because that is the regulator saying, "We think in the future that product could cause an unacceptable level of harm-that is, it is likely to get mis-sold".

We have to assume that firms are not deliberately creating products that create harm; the question is is the possibility of mis-selling going to outweigh the obvious benefit that that product can bring to a smaller group of customers. That is a judgment and I think that is a tricky judgment to be made and should only be made in a very prescribed way, otherwise there is a severe risk that the pendulum has gone too far and that innovation, competition, choice is being reduced.

There is a very tricky debate here, which is in my view something that Parliament should opine on, which is if you are uncomfortable with the degree of consumer detriment that occurred in the previous regime around point of sale, how much risk do you want to run of reducing choice in exchange for possibly reducing that detriment? I think that is a very valid debate that the regulator shouldn’t be having on their own. I think this is a debate we should be having together.

Q112 Mr Love: We have been somewhat surprised, certainly I have been somewhat surprised-I had better not speak on behalf of the Committee-that the Bank of England appears to take a view that decisions will be based more on judgment than perhaps we would have expected. Would I be right in saying that, and what do you think the risks are if we do depend significantly more on judgment than perhaps we have in the past?

Chair: A crisp answer will be appreciated.

Hector Sants: I think the Governor was trying to principally contrast the judgment component with a belief that there had been too much attention paid by supervisors to the minutiae that did not actually affect the safety and the soundness of the bank, which is what the prudential regulator needs to focus on. In the pre-2007 period of the FSA, I completely agree with that analysis.

There should be a switch from supervisory time and attention into the minutiae to the substance of judgment space, which is a judgment about what would happen in the future. But you must still have in the prudential regime a very effective set of capital and liquidity rules because at the end of the day, analysis of the events that have passed show us that the first and foremost problem in the regulatory sense, as opposed to any management issues and so forth, was the wrong rules and we need to fix the rules. So we need the right rules and we need judgment; we don’t need attention on the detail, and I think that was his message.

Q113 Chair: A few more very quick questions that relate to your responsibilities more broadly. First of all, and this has been touched on very briefly in comments today, we are re-regulating, we are rewriting FSMA to some degree-breaking it apart, creating two separate institutions. You saw Mervyn King’s evidence to us. Do you agree with him that it would have been better had we had a new Act rather than trying to proceed by amendment of FSMA?

Hector Sants: Yes.

C hair: Why?

Hector Sants: I think I would make exactly the same points as I understand he made, which is we undoubtedly need to make sure that to get the best possible model going forward we design it on first principles, which is encouraging some of the discussion we were just alluding to a moment ago. So if we are going to look at first principles it would seem that then it would be right to have legislation drawn up from first principles, but I should perhaps say, as I believe the Governor did as well, that drawing up legislation, of course, is a matter for Parliament, it is not a matter for us. I have been asked the question, I have answered it, but I absolutely think it is for Parliament to decide how they frame their own legislation.

Q114 Chair: On another issue, I wrote to you about bonuses of the major banks at the end of January, asking for further information about remuneration levels. You wrote back an encouraging response quite quickly, which I was very grateful for, saying that you were going to go to the banks for this information. But we are now in mid-March. What have we had back?

Hector Sants: We, the FSA, are trying to be as helpful as possible on this point and we are in the process of collating the information we received in from the banks, because we had set them a deadline.

Q115 Chair: Are they being helpful?

Hector Sants: Unfortunately, no, is the short answer. I obviously have to be mindful of individual confidentialities, but I think I can say that four of the larger banks-in my definition, we have five large banks-have declined to give essentially the information. I am trying to be as helpful as possible. We do have some regulatory information that we have already that, as long as we give it to you in aggregated form, we can so do. I am in the process of writing to you to say what we can give you and then we will no doubt look to your response to that. But in terms of collecting the additional information that we don’t hold, they have declined so to do.

Q116 Chair: I have been writing quite a bit to you recently. In mid-December, I wrote to you about RBS-or rather I wrote, strictly speaking, to Lord Turner, asking for a more detailed summary of the FSA’s investigation into the failure of RBS. I did eventually get a reply, mid-February, suggesting a publication date for that work of mid-April. Are you going to meet that deadline?

Hector Sants: As you rightly point out, this report is being prepared by the Chairman and the board, not by the executive. As you would expect, that is right and proper since elements of the report are reviewing the supervisory activity of the FSA over the periods prior to the failure of RBS. It is properly for the Chairman to answer rather than myself.

I also just observe, however, that of course ultimately that timeline is not entirely within our control-I think you do understand that-in the sense that we need permission from various people from whom we have collected the data to release that data, since we collected it under our supervisory powers.

So we are not entirely in control of the timeline, but broadly speaking, as I understand it, we are broadly on track to meet that sort of timeline roughly within a few weeks. But the issue is just we are not entirely in control of the timeline because we are dependent on some of the responses from the firms.

Chair: Thank you for coming to give evidence before us this afternoon. This is a subject of considerable controversy and concern to a large number of people whose livelihoods are at stake and we have only managed today to express a relatively small proportion of the concerns that have been put to us in the large amount of evidence that we have received. We will now consider how to take this forward. Thank you very much for the evidence.