To be published as HC 1574-iv




Treasury Committee

Financial Conduct Authority

Tuesday 8 November 2011

MR Mark Hoban and Emil Levendoglu

Evidence heard in Public Questions 186 - 264



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 8 November 2011

Members present:

Mr Andrew Tyrie (Chair)

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr George Mudie

Jesse Norman

Mr David Ruffley

John Thurso


Examination of Witnesses

Witnesses: Mr Mark Hoban, MP, Financial Secretary to the Treasury, and Emil Levendoglu, Deputy Director, Financial Regulation Strategy, HM Treasury, gave evidence.

Q186 Chair : Minister, thank you very much for coming to see us this morning. Can I begin by asking you whether you are deep in a trench on having the objective "protecting and enhancing confidence" as the top line for what the new bodies will do?

Mr Hoban: Chairman, as we set out in the White Paper in July, we are prepared to listen to comments about both the overall objective and the operational objectives.

Chair : So you are not in a trench on that?

Mr Hoban: No. We never seek to be in a trench.

Q187 Chair: Good. So it means that if we and others come forward with alternative suggestions-indeed, others already have-these are seriously in play?

Mr Hoban: Yes. We have been very clear throughout this process that we are listening. It has been a very collaborative process, and of course we have this Committee and the Pre-Legislative Scrutiny Committee, which Mr Ruffley sits on, and we have also had thoughts from the ICB too about the nature of the objectives of the FCA, and we will respond to those in due course. We have had all that feedback.

Chair : We will be coming back to that issue in a short while, later on this morning.

Q188 Andrea Leadsom: Minister, there is a lot of regulation coming out of Europe at a time when we are rewriting our own regulatory environment. Since the PRA and the FCA are going to deal with their European counterparts through a memorandum of understanding, could you talk us through how you see that working to ensure that we can maintain a strong relationship with those regulators?

Mr Hoban: What will happen is that the FCA will represent the UK on ESMA, and the PRA will represent the UK on the EBA and EIOPA, the banking and insurance arms, and that reflects the nature of their responsibilities, but it is not a new situation for there to be one lead voice on those bodies, with others contributing to the process. Under the previous regime when you had the various committees, you had people like the FRC, for example, working with the FSA in its dealings with CESA, the securities regulator; the pension regulator worked with the FSA on CEIOPS, the old insurance supervisor. The idea that there is one voice at the table is not new, nor is it new to say that they will work with others to ensure that consistent views are reached, that we identify areas where someone has specialist expertise, or where the expertise needs to be channelled through the FCA or the PRA.

Q189 Andrea Leadsom: But isn’t it new that the European regulators will have far more statutory powers in future to be able to require British regulators to act in accordance with EU regulation, and under QMV? Does some of the talk concern you? The potential short-term bans on short selling, for example, and some of the proposals that we could, in spite of having 60% of Europe’s financial services, only have an 8% vote on under QMV?

Mr Hoban: It does concern us, which is why we engage actively with the Commission. Of course, when it comes to the negotiation of level one insurance, like directors or regulations, it is not the FSA that is leading that process; it is the Treasury. We draw in views from the regulators and from industry in formulating our response, but we do need to robustly engage with those institutions. In the discussions around closer fiscal integration, the Prime Minister made it very clear that one of the national interests we need to safeguard is the way in which financial services are dealt with in any new institutional architecture.

Q190 Andrea Leadsom: Specifically on that point-the Prime Minister’s determination to safeguard financial services-do you anticipate that we would go to the extent of enforcing what is called, I believe, the "Luxembourg compromise", where effectively we say that, under EU law, financial services is such a strategically important industry to the UK that we can override EU legislation on that matter? Do you think that we would go to that extent?

Mr Hoban: Clearly that is one of the options available to us. We would always hope that our ability to influence and persuade other member states meant that we would not need to use that.

Q191 Andrea Leadsom: What about the location of the European regulators? Obviously the EBA is going to be in London, but ESMA is going to be based in, I believe, Paris. Since the markets bit of financial services is clearly very dominated by the City of London, do you think that the location presents unique communications problems?

Mr Hoban: Not particularly, no.

Andrea Leadsom: Right, okay. Thank you, Chairman.

Q192 Mr Love: Regarding the memorandum of understanding, we have had it put to us at this Committee that it will be at best a muddle. With a chequered history of memoranda of understanding, has any thought been given to having something of a more executive nature, say, for example, the CBI’s proposal that there should be some sort of executive co-ordinating committee? Is that something being considered?

Mr Hoban: The institutions we are referring to, who interact with ESMA and the EBA and EIOPS, are used to working together already, and the MOU just puts it on a slightly more formal basis. I do not think we need to overly formalise that process.

Q193 Mr Love: Let me ask you a second question relating to last week. We had the FSA representatives in front of us, and they reminded us that there is a strong political element to regulatory activity at a European level through the Parliament. Does that not mean there should be a stronger role for Government in this country to co-ordinate activity at European level, not just the interlink between the regulators, but also through the political processes as well?

Mr Hoban: We as Treasury engage not just with other member states and the Commission, but we also work very closely with MEPs-not just our own UK MEPs, regardless of party, but also MEPs from other member states-and I am going to Strasbourg later this month to continue that process of engagement at a political level. But you are right, Mr Love, to identify the dynamic in Europe in terms of regulation. It is very different to the dynamic we see here, where it is broadly a technical approach. In Europe, there is a political element, and that is not just for the Parliament. It is also in the Council of Ministers too, and we are alive to both the threats and opportunities that presents us with.

Q194 Chair : Can you think of any major area that the EU is engaged in at the moment on financial regulation, where you are confident that if their proposals are implemented, we will benefit?

Mr Hoban: We have seen areas where-

Chair : No, I am not talking about the future. I mean from their proposals.

Mr Hoban: Measures such as MiFID, which I think will help complete the single market across a whole range of securities and asset classes, will help London. What we are pushing for are measures that will make it easier to trade cross-border. That will break down some of the barriers, and there are good examples of where that is coming up on the horizon. I do not see this as a one-way traffic, Chairman.

Chair : I am only asking you for an example.

Mr Hoban: Yes, I think MiFID is a good example of that.

Chair : Of something that we are pushing for?

Mr Hoban: Yes, and we have been very vocal in MiFID, in making sure we get the rules right to enable London to-

Q195 Chair : I will just have one more go at the question. I am just asking for one clear market area where we are going to pick up business or do better than we would otherwise do as a consequence of a proposal on the table at the moment.

Mr Hoban: If you looked at the issue around scope in MiFID around the clearing obligation, where we want to extend the clearing obligation to exchange-rated products-currently it is restricted to OTC products-I think that will benefit London, where there is a good platform for trading derivatives.

Chair : Okay, thank you.

Q196 John Mann: I would like to clarify something as well, Minister. In what areas are we giving more powers to Brussels?

Mr Hoban: What we agreed last year as part of the supervision package is a range of areas; for example, the new ESAs we were referring to earlier-ESMA, EIOPA and EBA-that, for example, can ensure consistency between member states and the application of the rulebook. They can improve the quality of supervision across Europe. They are very important areas where the new European architecture can help. One of the concerns I hear often in London is a lack of a level playing field-that we are very good at enforcement here in London, but that those same standards are not applied elsewhere-and by giving the ESAs more powers than their predecessor bodies, it will enable that consistency of supervision, consistency of enforcement and consistency of the interpretation of the rulebook, which will become much more effective than it is now.

Q197 John Mann: The Germans and the French have their own priorities that they have been pushing, are pushing and will continue to push. Are any of their proposals already formalised, or that have been lined up, that you would regard as a good thing?

Mr Hoban: I think it is the case that all member states will champion their own interests. London is uniquely placed in this, because we have a wide range of financial service bodies.

Q198 John Mann: I am asking for your view as the Minister responsible. You have full oversight, more than we have, of some of the things that are perhaps not fully in the public domain, but obviously full oversight of things that are in the public domain. Are there any proposals from France and Germany that you think are a good thing?

Mr Hoban: I would not say it is strictly a Franco-German proposal, but I think their shift to make sure that exchange rate derivatives are cleared is a good thing. It is good for financial stability. It happens to implement a G20 commitment, and that is a positive.

John Mann: I think it would be helpful, Minister, if you would be so kind as to provide a note for the Committee on precisely which powers are being shifted to Brussels from here in these areas, so we can gain knowledge of them.

Mr Hoban: Yes, I would be very happy to do that.

Q199 John Mann: That would be helpful. How is it going to affect UK international competitiveness?

Mr Hoban: One of the challenges that we have as a Government when we negotiate these directives is, on the one hand, to take measures that strengthen financial stability and learn lessons from the crisis, and I think our constituents would want us to do that. It is also to ensure that those measures are proportionate, evidence-based and do not unduly impact upon our competitiveness.

Q200 John Mann: How will these changes to the Financial Conduct Authority impact on UK international competitiveness? There are some concerns that people have been raising about this.

Mr Hoban: A strong regulatory system is a competitive advantage, and many businesses come to London because they want to operate in strong, well-regulated markets. They want to know that the regulator is up to the job, that they have a rulebook that reflects the sophistication of markets in London, that the rulebook is implemented properly, that firms are properly supervised and that adequate capital is in place. Those things are the hallmarks of a good regulatory system and are a competitive advantage.

Q201 John Mann: Looking at the regulatory system that you want to see come in here, obviously you will know where the inherent weaknesses in British banks are and you will know better than us what the exposures are, not just to Greece, but to Italy and other potential scenarios, including in the immediate term. With this new system that you are proposing, is the British taxpayer going to have to bail out any other British banks in the foreseeable future, let us say in the next two years?

Mr Hoban: The first point I would make is that changes have happened over the course of the last two or three years that have led to banks increasing their capital. Increasing their holdings of high-quality liquid assets has, to an extent, insulated them against some of the problems we see elsewhere in the eurozone, and the EBA have said that there is no requirement for British banks to recapitalise as a consequence of the recent exercise they have been through. That is a good sign. What we are trying to achieve through our reforms of the banking system and regulation is to move away from a situation where the taxpayer has to stand behind the banks, and that is partly the thrust behind why we asked Sir John Vickers to do his work looking at the structure of banking.

Q202 John Mann: Obviously we are trying to, but in that answer you just used the phrase, "To some extent this will insulate British banks". What I am trying to ascertain is precisely to what extent this will insulate British banks and, therefore, the British taxpayer.

Mr Hoban: If we go back to the EBA exercise that was completed recently, they indicated that banks will have to increase their capital by €106 billion. In that exercise, there were two elements. One was to increase capital to 9% of core Tier 1. The other exercise was to make sure that the banking book and trading book exposure to sovereign debt were mark to market, and it was off the back of those two elements that the EBA said that no banks in the UK needed additional capital. What we have seen are high levels of capital to enable banks to absorb a write-down on a mark to market basis, but obviously the ability to which banks are able to fund themselves means they do not have to go out to markets to replace funding. It helps protect them from that crisis.

Q203 John Mann: But "helps" is a vagary. With this new regulatory regime, how much help? What is the risk to the British taxpayer? You appear to be reluctant to state that this is going to solve the problem. Will the British taxpayer be asked in the next few months to be contributing further, or is this regulatory regime sufficiently robust for you and others-the regulators-to be able to identify what the risks are and, therefore, what can be done about them?

Mr Hoban: The degree of engagement between regulators and banks is such that they can identify what the risks are, and there is a very open process of communication there, but what I would say, Mr Mann, is that there is a range of interventions we are making to improve the resilience of the financial system in the UK. High levels of capital and liquidity holdings are part of that, and improved supervision and regulation is another part, but some of the structural changes proposed by the ICB will help too. I don’t think there is a single magic bullet that will solve this problem, but we are taking a range of steps that will lead to an increase in the strength of the banking system and away from the point-

Q204 John Mann: But the question is, will they work?

Mr Hoban: We believe they will work, which is why we are pushing these reforms ahead.

Q205 Mr Ruffley: The strategic objective of the FCA, "Protecting and enhancing financial stability in the UK financial system", has come under quite a bit of flak. The FSA says that that definition overlaps significantly with the responsibilities of the FPC and the PRA, and we also have the potential confusion for consumers. The FCA, the OFT and the FSA say it risks confusion in the authorities themselves, in regulated firms and among the public, because the super complaints go to the OFT under your regime, I think. They do not go to the FCA. Because of the kind of criticism you are getting, are you going to review significantly the strategic objective of the FCA?

Mr Hoban: As I indicated to the Chairman earlier, we will look at it.

Q206 Mr Ruffley: In which direction is your thinking turning?

Mr Hoban: What is important is that the strategic objective, as with the operational objectives, sends out a very clear signal as to what the FCA is there to achieve, and it is a conduct regulator.

Q207 Mr Ruffley: Forgive me, Minister, but the whole point is that the FCA speaks for all of us when it says, "The formulation does not adequately capture the distinctive nature of the FCA’s responsibilities" and it is confused about competition, such as the example I gave of who gets the reference of super complaints; it is the OFT, not the FCA. What do you say to that?

Mr Hoban: There are two aspects here. One is, what is the right remit for the FCA around competition? That is a topic that this Committee has opined on. It is an issue that has been raised by the Independent Commission on Banking, and we have signalled our willingness to listen to that. Once you recast, if you choose to do so, the operational objectives of the FCA around competition, we then need to ask, "Are the powers of the FCA proportionate to those operational objectives?"

Q208 Mr Ruffley: Let us just stick with the strategic objective. The argument is that protecting and enhancing the confidence of the UK financial system certainly overlaps with the PRA.

Mr Hoban: It is how consumers feel confident about the service they get when they buy products or access services from the providers of financial services. That is why it is important you do not just see the strategic objective in isolation from the operational objectives, and it is the operational objectives that give the meat to the bones and set out what the FCA will do.

Q209 Mr Ruffley: There is also an argument that having that over-arching strategic objective-forget the operational objectives-could enhance confidence in markets that may inadvertently lead to the risk that the regulator continues to support and build confidence in a market where confidence in the market is misplaced.

Mr Hoban: I do not think you can prise apart the strategic from the operational objectives. The strategic objective is an umbrella statement about the role of the FCA. It is amplified through the operational objectives, and that, I think, gives a clear remit for the FCA.

Emil Levendoglu: Mr Ruffley, I just want to expand on what the Minister said, because the way the objectives operate is that the action taken by the regulator must be consistent with the strategic objective and at the same time advance one of the operational objectives, so it would be difficult, if not impossible, for the regulator to act in a particular way in advance of the strategic objective, which was nevertheless contrary to its consumer protection mandate, for example.

Q210 Mr Ruffley: On that point, there is another thing you have missed out, but I will mention it, which is the requirement in the discharge of general functions to do it in a way that promotes competition. That is another limb, isn’t it, after you have the three operational objectives and the over-arching strategic objective? Can you tell us about that?

Mr Hoban: Yes. That is the duty that the FCA has in trying to fulfil its strategic operational objectives. Can they be fulfilled in a way that increases competition, or can you use competition powers to deliver those operational objectives? That really is in response to the concerns that this Committee and others have raised about the role competition will play in the toolbox, as it were, of the FCA.

Q211 Mr Ruffley: On the discharge duty which you have referred to, that explicitly is to do it in a way that promotes competition.

Mr Hoban: Yes.

Q212 Mr Ruffley: When we go to the operational objective, it is a slightly different formulation. It does not use the word "competition". It says, "Efficiency in choice is the operational objective". I want to know why you do not take the advice from this Committee, and also from the FSA and others I could list, which is to have an explicit duty to promote effective competition? Why do we use woolly words like "efficiency in choice", which is three words, when one word, "competition", would be preferable?

Mr Hoban: There are two points I would make. The first is that the way in which the operational objective is articulated focuses on the outcome of competition. Competition should lead to better choice for consumers and better prices for consumers, and we are trialling this in heading up the FCA to focus on good consumer outcomes, and I think competition should lead to better choice and greater efficiency in pricing. The second thing I would say is that the duty you refer to is not just in relation to the efficiency and choice objective. That duty applies to all three operational objectives, so we do not see competition purely delivering on a single operational objective. We should see the way in which the FCA uses competition to deliver against all three of its operational objectives.

Q213 Mr Ruffley: Basically this duty to discharge its general functions in a way that promotes competition, you are arguing, covers everything-the word "competition" is there and, therefore, it all right-but I think this Committee takes the view that the word "competition" is not included in the strategic objective, nor is it included in any of the three operational objectives, and I rather wondered why.

Mr Hoban: But Mr Ruffley, I have been quite clear in my evidence this morning that we will listen to the comments that this Committee has made.

Q214 Mr Ruffley: So you will look at using the word "competition" in one of the strategic or operational objectives?

Mr Hoban: What I do not want to do, in the same way as you would not wish me to prejudge the outcome of your inquiry, is to prejudge the outcome of the PLS process or, indeed, pre-emptively respond to the ICB.

Mr Ruffley: I will make one final comment, just so that it is on the record. We have four objectives in the legislation, three of which are operational, one of which is strategic, and in not one of those objectives is the word "competition" mentioned, and I think this Committee, or certainly myself and others, would like to see it there.

Q215 Chair : We are all very grateful for the flexibility that we are hearing in the remarks that are coming back across the room.

Mr Hoban: It should be clear.

Chair : We are listening, and I expect the wider world is too.

Q216 Jesse Norman: Mr Levendoglu, you will excuse my appalling ignorance, but I have no idea who you are or why you are here. Could you just give me a little bit of background?

Mr Hoban: Emil is the official who is leading the work on financial services, but I am sorry I didn’t have a chance to introduce him at the start of the session.

Q217 Jesse Norman: I am enormously grateful. Thank you very much. This is really a question for the Minister. It is about this idea of confidence in financial services and markets, because it is obviously part of the core purpose of the FCA to protect and enhance market confidence. Could you tell us a bit more about what that means to you, and the way in which the FCA would be protecting and enhancing market confidence?

Mr Hoban: You want to be in a position-I think this is right for both the consumer and for the industry as a whole-where people have the confidence to buy products, and that they know, if they go and seek advice, they will get good advice, and also that market participants, whether they are retail consumers or trading in derivatives at Canary Wharf, have confidence in their counterparts as well. It is trying to ensure that whether you are a retail customer or a wholesale customer, you have confidence in the people you are dealing with, and that is a different issue from the choice and efficiency objective, or indeed the market integrity objective.

Q218 Jesse Norman: I understand that. The kind of confidence you have in mind is, as it were, justified confidence. They should feel confident because they are buying good quality products from reputable counterparties. One could have irrational confidence; we could be pumping, as it were, laughing gas into the system as a way of achieving confidence.

Mr Hoban: That confidence comes from having a good regulatory system, but of course it does not absolve either senior management or consumers from their responsibility in this process.

Q219 Jesse Norman: No. I am just thinking about cases where the FCA uncovers behaviour which, if revealed, might unnerve the markets, as you often find with cases like Barlow Clowes or misbehaving firms, where lots of retail investors have money held. If you had a market confidence issue there, would it feel, as it were, a requirement to diminish confidence in the short term by going after these characters, or to maintain confidence in the short term while privately pursuing its own regulatory and supervisory responsibilities? How does that work in those cases?

Mr Hoban: You need consumers to be confident, and trying to hide from them and sweep them away under the carpet does not promote confidence in the longer term.

Jesse Norman: Emil, did you want to add something?

Emil Levendoglu: It would be very difficult for the FCA to take action that it thought was enhancing false confidence of the sort you described and that it knew was having a detrimental impact on consumers, because that would be contrary to its objective to protect consumers and potentially to promote market integrity as well. It would not be able to act in a way that was consistent with its strategic objective but was inconsistent with its operational objective.

Q220 Jesse Norman: That is very helpful. There is conflict then, potentially, between the desire to maintain confidence and the desire to preserve the integrity of the markets and, as it were, to prosecute wrongdoing. You are saying it would go on the integrity and prosecuting wrongdoing side, or going after wrongdoers side, rather than the confidence side.

Emil Levendoglu: It is debatable if there is an actual conflict, because confidence has to be justified, as you say, but the operational objectives would trump in those circumstances.

Q221 Jesse Norman: But you might get a run on the markets in some situations, if you were balled with a sufficiently large retail organisation.

Mr Hoban: I need to think about this quite carefully. I do not think the market is well served by hiding or sweeping away these things. One of the principles that will drive the FCA is transparency and openness about some of the regulatory actions it has taken. For example, we are going to give the FCA the power to publish details of misleading adverts or adverts the Financial Commission has required firms to withdraw, and we have given them the power to publish warning notices. The thrust of the FCA is to use transparency as a very powerful tool to improve people’s confidence in the market and their understanding of how these markets function.

Q222 Jesse Norman: That is very helpful, thank you. One of the reasons why we have had all these problems recently has in part been because of excessive and foolish risk-taking, as well as ignorance about different kinds of financial products, and it has also been part of a certain kind of clubby-ness at the top of many of these institutions, where there has been insufficient challenge or threat to some of the dominant figures. Do you think promoting more women to senior positions in the financial sector would help that, and is that something you think is important within the regulatory system?

Mr Hoban: I don’t think it is the role of-

Jesse Norman: There is clear evidence that it does challenge both of those issues.

Mr Hoban: I do not think it is the role of the FCA or the PRA to do that. It is important that we have more diversity on boards and that we have good people there who are prepared to challenge the perceived wisdom. One of the outcomes of the financial crisis is the need to have more challenging voices in the board room, not fewer.

Q223 Jesse Norman: No kidding. I agree. But you think that it would be valuable to have it in the supervisors for the same reason-to avoid clubby-ness and to improve challenge?

Mr Hoban: Yes. Supervisors need to be robust, and that is why we have been very clear about the remit of the PRA and the FCA; we want to move towards a much more judgement-based approach with much more discretion, earlier intervention, and that requires greater challenge to the firms that they regulate.

Q224 Jesse Norman: More female judgement might be quite a good thing as well?

Mr Hoban: I think more judgement generally is a good thing, Mr Norman.

Jesse Norman: Thank you very much.

Chair: When we talk informally with quite a number of the people who have thought deeply about this, very few of them have much confidence in the confidence objective, and I am very grateful-we are all pleased-that it sounds as if you are giving some thought to whether we should stick with it or amend it in some way.

Q225 John Thurso: I want to talk about consumer protection, but before I do that, can I ask you about the overall cost of regulation and what analysis has been made of the costs and benefits of the proposals for the FCA and the PRA?

Mr Hoban: There is an impact assessment published in the White Paper.

Q226 John Thurso: What is the broad cost? We have had a variety of different answers, and it is interesting for us to know. Nobody seems to really know where the costs are going to land.

Mr Hoban: Right. We published an impact assessment that set out some of the transitional costs for the FCA and the PRA and also some of the costs to business, and it is set out in the back of the White Paper.

John Thurso: I will read it later.

Mr Hoban: For example, the best estimate of the total cost on a net present value basis is £770 million, with an average annual cost of £75 million, and a transitional cost-again, my best estimate-of £275 million over two years.

Q227 John Thurso: I have one last question on that bit. One of the points that was put to us is that, on the benefit side, if you have something like the mis-selling of PPI and you look at the cost of that, the benefit of preventing that is very high. Has that been taken into account in what you have looked at?

Emil Levendoglu: Most of the benefits that have been calculated have been in terms of the financial stability improvements, using some of the research that the Bank of International Settlements has carried out to understand the impact of financial crises. On that basis, in the impact assessment, the reforms clearly come out with a net benefit, but you are right to identify the avoidance of those sorts of mass detriment issues as an additional benefit on top. We will be working through and quantifying those benefits in addition.

Mr Hoban: As Emil said, there is a financial benefit, but there is a benefit to confidence in the market as well.

Q228 John Thurso: Coming on to the objective to protect the consumer, what protection do you expect the FCA to provide?

Mr Hoban: The FCA is given under this Bill a range of new powers to enable it to better protect consumers; one of the powers it has is the product-banning power, which is a new power. I referred earlier to the power to publish warning notices and the power to publish details of promotions that they have required firms to withdraw. What we are trying to do is beef up the powers of the FSA so it is in a position to give better protection to consumers, but of course this is not a zero failure regime. It is a regime where both consumers and management need to take some responsibility for their actions.

Q229 John Thurso: Consumer Focus said, "The Draft Bill does not strike the right balance between the responsibility of firms and consumers, and is too geared to an unrealistic concept of consumer responsibility". How do you respond to that?

Mr Hoban: The Bill sets out a series of factors that need to be taken into account in thinking about consumer responsibility. It is very difficult to quantify precisely the amount of responsibility a consumer should take, because it depends on the context and perhaps the product. A retail consumer going into their high street insurance broker and buying a motor insurance policy is in a different position from a retail consumer going into a bank and buying a pension, because asymmetry information is greater. There is a different level of responsibility, perhaps, in wholesale markets, where you are dealing with sophisticated investors on both sides of the transaction. You need to look at this in the context of individual decisions, rather than saying there is a simple principle you can apply across all transactions.

Q230 John Thurso: What I am trying to get at is, first of all, the definition of "consumers". Leaving aside the informed wholesale consumer, we are talking about the retail consumer who walks into a shop, is offered a product and is told, "It will do X", and on the basis of having been told it will do X, buys it, then discovers it doesn’t do X, whatever X may be, which is exactly what happened with PPI. They were told that it would protect, and it doesn’t. We had some interesting evidence from a range of City firms that suggested there should be a number of plain vanilla products, where what is written on the tin is exactly what they get, the sort of thing that people buy without going to get advice. Therefore, the suggestion is that what the product is meant to do should be wholly regulated, almost pre-approved, but the consumer’s choice as to which one of them does it best should be a matter for the consumer. Is that a definition you would concur with?

Mr Hoban: I go with you part of the way on that journey. I certainly think there should be a range of products where it very clearly does what it says on the tin, and that is why last month we launched a working party chaired by Carol Sergeant to look at simple and simplified products, so people do know what it is they are buying. A very good example of where the market works well in this respect is motor insurance. We know what we are buying when we buy motor insurance, and you can have-

Q231 John Thurso: That is because the law tells them they have to provide it.

Mr Hoban: Absolutely, but it also means it is easy for the consumer to know what they are buying, and that is where I see simple and simplified products going; consumers will know exactly what a simple protection product does for them. In recognising the range of consumer needs, I do not think that simple products would be right for everybody. You will want some product innovation going beyond those. There is a view-certainly among the industry; I suspect it may be shared by consumer groups-that simple products are very good in their own right, but moving to a product approval process for all products would stifle innovation, adaptation and competition in retail financial services.

Q232 John Thurso: But, for example, again in evidence to us, "Consumer documentation from a major high street bank for a personal loan requires degree-level education to understand. A standard text describing a PPI product requires PhD-level education to comprehend. It takes 55 minutes to read a standard consumer credit agreement before you can start to try to understand it".

Mr Hoban: Absolutely right, and I think there is a challenge here about how we make sure we equip consumers to buy products and services, and that is why I am a very big supporter of the Money Advice Service, which helps there. I also think we need to make sure we give consumers the information they need to enable them to buy the right product, and sometimes we have gone for-it is a personal bugbear of mine-lots of information rather than the right information.

Q233 John Thurso: Would you concur with those who say, "A simple statement on half a page of A4 that guarantees what the products does is worth a million times more than 30 pages of dense text that leaves you confused"?

Mr Hoban: I think it is the right approach for relatively straightforward products, absolutely.

John Thurso: Thank you.

Q234 Andrea Leadsom: I wanted to come back, Minister, on this issue of women at the top of financial services, because it does seem to me that it is more than just an issue of getting better people with better judgement. There is a very real issue. Fifty per cent-in fact, more than 50%-of the population of this country are women, and it is not just that there aren’t women at the top of the Bank of England, the FSA, the future PRA, the FPC or the FCA. I could go on. There just aren’t any women, but it is not just that. It is also the same men who saw us through the financial crisis and arguably presided over the biggest crisis since the 1920s, and I would like to press you a bit further. Do you really think that it is simply a matter of getting people with more judgement? I certainly don’t. I realise I am a woman and, therefore, I may have a biased view, but I certainly think personally that the different approach of women would bring something very valuable to the senior levels that we desperately need to get right, and at the moment, even on our own Draft Financial Services Bill Committee, there isn’t a single woman, so there is no female perspective anywhere in this.

Mr Hoban: I think Baroness Wheatcroft would suggest she was a woman.

Andrea Leadsom: Oh, okay. I am sorry. I did not realise there was a lady peer. I beg her pardon.

Q235 Mr Mudie: Minister, I am sad to see that you are less sympathetic about the case of consumers in relation to how the Bill affects them. It is down to the challenges to equip consumers through the FCA, who promised to do a lot more for the consumers than the FSA. That hardly cheers us up, because the FSA were a bit deficient in the area.

If I can come to two things, when the consumer groups came before us, they were united in their concern about the definition of "consumers". They were united about their opposition to the principle that consumers should bear responsibility, as it is framed. It is interesting that providers and sellers were absolutely for this and welcomed it. You will have done your homework and you will have read the evidence from the consumers group. Do you not have any sympathy for the argument that the definition of "consumers", covering hedge funds to grannies, if you like, is a bit too all-embracing?

Mr Hoban: This is a conduct authority and the consumers of financial services are many and varied, and it has a remit across all aspects of financial services conduct, so inevitably "consumer" will be a broad term.

Q236 Mr Mudie: You say that, but need it be? You have the power to be a bit more sensitive and to break that broad definition of consumers in a way that protects the rights that consumers already have under common law and are in danger of losing, in their view, by this lumping together of consumers as anyone who purchases a-

Mr Hoban: I think that the FCA will take a much more nuanced view than that would imply. They are not going to assume that consumers of fairly straightforward retail financial products are as sophisticated as the people who trade in Canary Wharf, and I think there is a distinction. They talk in the objective about "appropriate protection", recognising that some consumers are different to others. It is emphasised in section 1C (2) as well, so I think that differentiation is there.

It is important that consumers do take some responsibility, in the same way as it is right that senior management should take responsibility for compliance with the rules. I suspect if you asked senior management privately, they would rather not have that responsibility imposed upon them in the Bill, but I do think it is right for both consumers and management to take their share of responsibility. This is not a zero failure regime, and the FCA cannot take on its shoulders the responsibility for every player in the market. What is important is to make sure the right protections are in place. The product intervention powers are very strong consumer protection, and are powers, frankly, the FSA should have had. I think that is a big step forward for consumers.

Q237 Mr Mudie: I feel the definition is too wide, but then it drops down to the matter you have raised, which is the question of consumers taking responsibility for their actions. Because of the wideness of the definition, that applies to all consumers, and you have just heard John Thurso. Do you think that Consumer Focus was exaggerating when they said you needed a degree to understand a major high street bank application form for a personal loan? It is fine to say, "Well, we treat all consumers the same", but you are now saying, when we drop down to it, "They have responsibility for their own actions".

Mr Hoban: No, Mr Mudie, I am not saying we treat all consumers the same. I am saying we must differentiate different types of consumers.

Q238 Mr Mudie: But how do you, under that? You are passing a law.

Mr Hoban: When you then look at the next sections of the Bill, in subsection 1C (2), it differentiates there. This is broadly the same sort of definition of consumer that was in FSMA, so I do not think there is anything particularly new. The only amplification is the way the markets side of FCA is dealt with. It is very clear that consumers have different levels of protection, given their degree of sophistication, and it is right to do so.

Q239 Mr Mudie: How? An ordinary lad with no university education goes into a bank-it says here you need a university education for a major bank giving you a loan, and you have to understand its terms-and this major bank requires a university education for you to understand that. The lad goes in, signs up for the personal loan, lands in trouble, goes before the courts, and the court looks at the law and says, "Well, you are responsible for signing up for this loan. You must take responsibility, and therefore I find against you". That is the detailed fact that the consumer organisations are raising with this Draft Bill. It cuts across present protections and weakens the position of consumers.

Mr Hoban: I made the point to Mr Thurso around information on supplying those products that I think we should go for greater transparency and less disclosure. I recognise the concerns that are raised by people like Consumer Focus about the complexities of some of these documents, and that is why things like simple products are quite helpful, because people will know what they are meant to do and know what their responsibilities are. I am equally as uncomfortable with the status quo as you are on this, Mr Mudie, but I do think we need to recognise that both management and consumers have responsibility.

Emil Levendoglu: Could I just add one point, Mr Mudie?

Q240 Mr Mudie: Just before you do, Emil, if you are uncomfortable, Minister, is there any chance you will give it further thought in view of the strength of feeling among the consumer groups?

Mr Hoban: Consumer groups need to be clear about what degree of responsibility they think consumers have. If we move to a situation where consumers take no responsibility, I think that will lead to a situation where you see-

Mr Mudie: No, they don’t do that.

Mr Hoban: But this is where I think this is-

Q241 Mr Mudie: At the meeting, as you have read Minister, we asked them to provide us with a changed definition in the Bill, and if that is available and comes forward as they promised, will you undertake to have a good-

Mr Hoban: Mr Mudie, we have conducted a very open process on this, and if the consumer groups come forward with a measure that is workable and sensible and will not damage the integrity of Bill and how the systems function, clearly we will look at it. One of the things I would say is that throughout this process, which kicked off in July last year, we have been open, we have been collaborative and we have listened, and I think it is one of the reasons why we have had quite a lot of support from industry and consumer groups about the process. We have not closed down options prematurely or unnecessarily, and we continue to reflect on the representations made.

Emil Levendoglu: The consumer responsibility principle is a principle that the regulator has to have regard to, but that does not mean in any way that it is a principle that cuts across the statutory or common law rights that consumers would expect to enjoy in terms of their dealings with people in the financial services market, so it does not abridge their rights in any way.

Q242 Mr Mudie: I hear what you say, but in the view of the consumer organisations, it weakens their existing rights, cuts across them and weakens them in court, and that is something the Minister is agreeing he will give thought to, depending on the evidence presented, and that is acceptable.

Mr Hoban: But at the moment, we do not believe it does cut across those rights.

Q243 Mr Love: Can I move us on to the regulation of consumer credit? You carried out a consultation earlier this year about moving it from the Office of Fair Trading to the FCA. Have you concluded your view on whether that should now take place?

Mr Hoban: No, not yet.

Q244 Mr Love: You have had seven months to think about this. Can you give us some indication of your thinking in relation to the issue?

Mr Hoban: This is a complex area. It does involve 100,000 registered people who have consumer credit licences. It is a different regulatory regime to the one that the FCA will operate, so it is a complex issue that we are thinking about very carefully, both with the existing regulators, with ministerial colleagues in BIS and consumer credit organisations.

Q245 Mr Love: I take your point about the complexity of the issue. Could I sum up what you have said by saying that, in principle, you are minded to move in this direction, but you want to sort out the technicalities?

Mr Hoban: There are some big practical issues here, one of which is the cost, and one of the things that we are keen to do is keep the costs of regulation low. We do not want to impose unnecessary costs on business or indeed on consumers, who ultimately bear many of those costs, so we need to work this through properly.

Q246 Mr Love: The Draft Financial Services Bill is working its way through Parliament, as we have been hearing this morning. That would be the ideal place to append any changes that you want to introduce, but if there is further delay in the system-one understands why there is a delay-you might miss the boat. Are you giving consideration to that, and is there likely to be a decision in the fairly near future?

Mr Hoban: It is something that is under very active consideration and ongoing debate between ourselves, BIS and the regulators. I recognise that the Financial Services Bill is an opportunity to legislate for that, and we will need to think about that quite carefully.

Q247 Chair : Minister, the twin peaks system envisages that the PRA should be able to veto the FCA’s product-banning power. How is that going to work?

Mr Hoban: What the veto is aimed at is trying to avoid the disorderly failure of a business that would damage consumer confidence and would damage the market. I think it is a very narrow power that we have given the PRA in this area, and clearly it is not one that either the PRA or the FCA would enter into lightly.

Q248 Chair : There is a big difference between banning something targeted at a business and a market. Can you give us any examples of a product that would be so bad that it ought to be banned, but so important it cannot be banned?

Mr Hoban: We need to have this power as a precaution. There are products that can be quite toxic if a firm depends wholly upon them for their revenue or for a large part of their revenue, and banning would cause a problem, but what I want to be made clear is that we would want the PRA and the FCA to work out how to implement that ban, while taking steps to manage financial stability. Of course, there is transparency over the use of that power of direction as well, which adds an extra safeguard.

Chair : I do not want to linger on this, but bearing in mind we have just been through a huge financial crisis, in which there must be plenty of examples around, or at least one to justify this, perhaps it would be helpful if you could write to us and give us an example.

Q249 Mark Garnier: Clause 46 of the Draft Bill provides for triggers in relation to the FCA mounting an internal investigation, but it also talks about when the Treasury can intervene as well, and order an internal investigation. In practical terms, when do you think that will happen?

Mr Hoban: One of the things that excites me about the current regime is that-I think a number of colleagues will be aware of this-there is a power in FSMA, section 14, where the Treasury can call for the regulator to launch an investigation in particular circumstances. That power has never been used.

Q250 Mark Garnier: This is a sort of nuclear option, isn’t it?

Mr Hoban: It is, and that is probably one of the reasons why it has not been used. I am clear that as we adopt a much more transparent regime in terms of the relationship between the regulator and the firm, and pushing firms to do more by way of transparency-publishing warning notices and publishing details of financial promotions that have been withdrawn-the regulator needs to be more transparent in the way it exercises its functions. The existing section 14 power is a nuclear option. What I am seeking to do through section 46 is set in place some objective triggers so people will know as a matter of course that there will be an inquiry in a particular set of circumstances, so rather than the Treasury having to exercise discretion, people know that if there is a particular failure, "Yes, this will lead to an inquiry".

Q251 Mark Garnier: But in the case of clause 46, everybody knows where those triggers are going to be, because they are going to define them, but in reality, all of these things are never that clear. Do you see then that if the Chancellor were to intervene under clause 46 and say, "You need to have an internal inquiry", that will be a nuclear option as well?

Mr Hoban: No, I don’t think it should be; we need to work on the objective triggers quite carefully and get them right. I want it to be as automatic as possible. If there was a situation where there were five inquiries in a year and the Chancellor asked for an additional inquiry, that would be less nuclear than one inquiry being launched in a 14-year period. My objective is to make these a matter not of routine, when there are so many that they lose their importance, but sufficiently often that one does not cause a huge stir.

Q252 Mark Garnier: It is quite a challenge for you to set those triggers at the right level so that you are not just having endless internal investigations, but also that it is high enough that it justifies having an internal investigation without devaluing the currency, if you like, but not too high that you have the Chancellor intervening.

Mr Hoban: Yes. That summarises the position fantastically.

Q253 Mark Garnier: Fantastic. Turning more to the accountability of the FCA to the Treasury Select Committee, you will be well aware of the absolute wails of complaint, particularly from the IFA community, when the FSA were almost indecently hasty in their response to our RDR report. A lot of people within the IFA community saw that as utter contempt by the FSA for the work of this Committee, and indeed Parliament as a whole. How would you respond to that?

Mr Hoban: You raised this with Hector. I think he has responded, and I am not answerable for the way that he and the FSA respond to these things.

Q254 Mark Garnier: He was very apologetic and made an unqualified apology, which I was very grateful for, but it does raise a very important point. The FSA is now seen to be completely-by a large amount of people-unaccountable to Parliament and unaccountable to the Treasury Select Committee. There is a challenge now with the new FCA in terms of trying to remedy the damage that has been done by the action the FSA took. What I am really seeking from you are your feelings on that, and what does the FCA have to do, and indeed, the FSA, to remedy the damage it has done?

Mr Hoban: My sense is that the FSA takes its accountability to Parliament and to this Committee very seriously. Certainly, from conversations I have had with both Hector Sants and his predecessor, John Tiner, and also with Callum McCarthy and so on, so it is not a question-

Q255 Chair: It is not that way over RDR, though.

Mr Hoban: No, but I think generally, Chairman, that they are very aware of their accountability and they take the accountability and the challenge from the TSC very seriously. That is absolutely right. I would counsel against arguing from the particular to the general, because I think there is a particular set of circumstances around RDR that makes it difficult to draw a general conclusion, but I have been struck in my dealings with them how important or how seriously they take this Committee, and I think that is absolutely right.

Q256 Mark Garnier: It is quite interesting, from the point of view of those of us who are new to this Committee and new to Parliament, certainly as I see it, that they are not as accountable as I assumed they would be before I got elected, which is a very interesting dynamic. One thing that Adair Turner said was that the FCA board should approach its relationship with Parliament and the Treasury Select Committee more in the way that the MPC does in terms of much more transparent minutes, more accountability of the minutes, and getting external members of the FCA board to come along and present to this Committee, in addition to just the usual culprits. Again, do you think that is a step in the right direction?

Mr Hoban: It is a very helpful suggestion. There are two things I would say about accountability of the FCA. We have introduced in the Bill the power for the NAO to audit the FCA, which is a good means of accountability and good value for money and so on, and will help to reassure people on the cost.

The other thing is that there is a difference between the MPC and the FCA. The FCA and the FSA do go through a quite thorough consultation process in the development of their ideas and policy, and I have seen this for myself with the Mortgage Market Review, which has gone through a series of stages in a very public way, where questions have been raised in Parliament, and where industry and consumer groups have had an input. There is a lot of transparency around its policy-making process, and they are making a series of policy decisions, but I think it is slightly different from the MPC, where it is one decision per month with transparency around the minutes and the speeches. I think we do need to make sure that the decision-making process for the FCA is transparent and that politicians are exposed to the public domain. They are, in the consultation process they go through, but I do not see that as a reason not to proceed down the route that Lord Turner suggested, where the non-executive directors could appear. But of course, don’t forget that the non-executive directors of the FSA and the FCA will also be the people who make decisions on adopting policy. It is a slightly different relationship, I would suggest, than between the court and the MPC and the court and the FPC.

Mark Garnier: Yes, absolutely. Indeed. Thank you.

Q257 Stewart Hosie: Minister, I have a couple of questions on the regulatory architecture, but before I do that, can I pick up on the answer you gave John Thurso? You seemed to suggest that pre-approval of products might stifle innovation or competition. Why would that be the case?

Mr Hoban: Because you would end up in a situation where you have some huge organisation based in the FCA that would have to vet every single product that came on to the market. In the heyday of mortgage markets, I think there were something like 6,000 different products. Each one of those would have to be approved, and there would be a process of approving them, so that would potentially act to the detriment of consumers who want to shop around for a good fixed-rate mortgage or a tracker mortgage. I think the bureaucracy that would impose would be quite significant and there would be some consumer detriment to that.

Q258 Stewart Hosie: Presumably, if the right people had been involved, they would have picked up some of the more exotic collateralised instruments that helped crash the financial system. That is an example.

Mr Hoban: Yes, but that is why we need to be clear where the product-banning powers will be used, and it is predominantly focused on getting the right retail outcomes. The reason why we have given the FCA product-banning powers is to give it the power, when they identify a product that will lead to consumer detriment, to tackle it early, rather than simply waiting until it gets to the point of sale or distribution, which is their current approach. Product banning is an important way of delivering better outcomes for retail consumers.

Q259 Stewart Hosie: That is helpful. In terms of the structure, some of the people we have had before us have said that the FCA should be responsible to the Bank of England directly, some have suggested it should be responsible to the FPC, as the PRA is, and others have told us it should be a subsidiary of the PRA. Did you consider placing conduct regulation in the bank when you formed the proposals?

Mr Hoban: Yes, we did. It was an option. That would move the bank into very new territory, making it a conduct regulator. While there is synergy between the FPC and the PRA-because they are both looking at threats to financial stability, one at a macro level and one at a micro level, and there are good arguments there-making the bank responsible for conduct regulation of everything from an IFA through to trading activities at Morgan Stanley would stretch that synergy beyond belief.

Q260 Stewart Hosie: I agree. I think that would just be a step too far. However, co-ordination is required between the FPC and the PRA, between the FCA and the other institutions, but only the chief executive of the FCA will sit on the FPC. Given the requirement to have this co-ordination, is there not a good argument to say there should be more structural linkage between the different bodies, even if it is only to avoid the underlap we saw in the last crisis between the tripartite?

Mr Hoban: You raise an interesting point. We need to think carefully about the relationship between the FPC and other bodies. We should not think of the PRA reporting to the FPC, as they have very different responsibilities, although there is a shared interest. In the same way, there may well be conduct issues that give rise to a greater systemic risk to the stability of financial services, so that is why it is important that you have the chief executive of the FCA on the FPC, to make sure that link is there. We are setting in place a more formal process to recognise how different bodies will operate with each other, so there will be a MOU between the FCA and the PRA, for example. For things at the moment where there is either no agreement in place or some of those tensions are internalised, the change in the structure brings those tensions out, and there needs to be a way of formalising that co-ordination.

Q261 Stewart Hosie: What is the time scale for the MOUs? When do you envisage them coming out?

Mr Hoban: Emil will be able to give a more definitive answer, but as we take the Bill through Parliament, it is important that the MOUs are exposed so that there is debate and discussion about them, in the same way as one would wish to ensure that most statutory instruments are published in draft during that process as well.

Q262 Stewart Hosie: I know I am taking advantage of the Committee and I probably shouldn’t, but I think it would be really helpful to have those as quickly as we could, and in addition, a very clear understanding of how Government sees all these bits of the UK twin peaks architecture relating to and working with the bits of European and international architecture, which is not in one place. It is not quite clear yet, and certainly some of the practitioners are not quite sure where all of this is going to lie.

Mr Hoban: The mapping of the FCA and the PRA on to the European bodies is clear. The mapping of the FCA on to IOSCO, for example, is clear, but I will take those points on board.

Chair: I am sure you understand that certainly, speaking personally, I take a somewhat jaundiced view of MOUs, having had the experience of trying to get some debate on the tripartite when it came before Committee Room 10 late at night at a time when nobody thought it was worth discussing or showed the least interest in it. If we are going to use MOUs again, we need to give them a full and early airing, and I strongly agree with what Stewart said; it would be helpful to have them out sooner rather than later so they can begin full scrutiny.

Q263 John Thurso: I have a quick question, Minister, that is not on the subject at hand. In June, the Office of Fair Trading upheld a super complaint on card surcharges. When is the Government going to respond?

Mr Hoban: Shortly.

Q264 Chair: Can you do any better than that, Minister?

Mr Hoban: I thought it was an accurate answer. I take this issue very seriously. We are looking at the range of remedies proposed by the OFT and we will see what action can be taken, but one of the things I am very keen to ensure is that there is much more transparency around pricing. That is an important consumer protection. Transparency gives people confidence about how markets operate, and I take this very seriously.

Chair: Thank you very much for coming before us this morning. We have picked up quite a lot. I hope you have a sense of where we are coming from on some of these issues as well. We welcome the flexibility we have heard and we also welcome the support, among other things, that we have had on trying to do something about cheques and the reform of the Payments Council. We are very grateful for that.

Mr Hoban: Thanks.

Prepared 11th November 2011