Joint Committee on Financial Services Minutes of Evidence

Examination of witnesses (Questions 137 - 139)




  137.  Good afternoon and welcome to this the first of these sessions following the evidence that we have had from Howard Davies and from the Economic Secretary to the Treasury. As you know, we set out a number of topics in our press release that we were hoping to cover. As far as possible we would like to arrange the sessions so that we are majoring on a particular topic in each one. Today we want to major on the issue of statutory objectives, although in the full understanding that if later in the proceedings there are one or two points that people wish to make about any of the wider issues, we would be happy to do that. But if we are going to have any order in this process and are going to be able to hear as many people as possible, we have to try to stick broadly with the major topic we want to deal with today. I would like to ask you each to introduce yourselves and to tell the Committee what your main views and concerns are about the Bill. So this is an opportunity to make your general remarks. In particular I would like to hear from you to what extent the Treasury's Progress Report and the responses we have had from the Treasury over the period since the Bill was first published, have met your concerns and what are the main issues that remain outstanding. What we are trying to do in this process is to go through a further iteration. We have had the Treasury's Bill, we have had public consultation, we have now had the Treasury's response to the public consultation. What we are trying to do is to see what is the next round and to have your response as to how far the Treasury has gone. Shall we begin with Jill?
  (Ms Johnstone)  I will go first and then hand over to Harriet. My name is Jill Johnstone, I am Head of Policy at the National Consumer Council. The National Consumer Council has a remit to represent all consumers of all goods and services, whether they are publicly or privately provided, and we have a particular remit for disadvantaged consumers and we have a long-standing interest in financial services. Indeed, we worked on the last Bill and I was the policy officer who did that work.
  (Ms Hall)  I am Harriet Hall and I am the Legal Officer of the National Consumer Council but I also do a lot of policy work in financial services that is not strictly legal work. I think our major concern that we would like to address today is the question of appropriate consumer protection. The Bill says,"the FSA shall have an objective of consumer protection" as if somehow we all know what consumer protection is, but there are different ways of defining it, and I do not think there is a generally understood body of understanding on this, and if there is not some further assistance given in the Act, then one lays oneself open in five years, ten years, 15 years, when outside flavours change, to people saying either it should be much more or it should be much less than what people imagine is appropriate. So we feel that there should be some assistance in defining consumer protection. At the moment the only thing that helps in defining it is the caveat emptor, about which we have serious concerns. This point is in our response to the Treasury, that in ordinary goods and services you have a very basic element of consumer protection, which is that goods shall be satisfactory for the purpose and fit for the purpose for which you want it, but you have huge advantages with buying things like kettles because you buy them, you take them home and you know if they are going to work on the whole, and even if you decided not to pursue your remedies on the kettle that was faulty, you would know not to buy that kind of kettle next time. That is the fundamental difference with financial services. You do not have any of these benefits and yet somehow we do not give this fundamental assurance that people are buying things of a satisfactory quality. There are other things that may arise in questions but that is the main thing we would say.

  138.  Some of the worries in your evidence have been addressed by the Progress Report?
  (Ms Hall)  A lot of the other worries we have had, indeed, about the Consumer Panel, about the ombudsman, and we understand the Government's position on scope, those are being addressed but this is an area really that has not, I think, been explored. It is left, in a sense, to the FSA and the principles for businesses. They are producing the principles and we think there should be something on the face of the Bill.
  (Mr Hutton)  Mr Chairman, I would not like to intervene on this particular issue because, first of all, I have no experience of dealing with the retail public, and perhaps I could come back later.

  139.  Could you respond to my general question about what are your views and concerns about the Bill, not necessarily on the narrow question but with a wider statement? I would like to get each person's views on the table before we go through and take them item by item.
  (Mr Hutton)  My name is Robin Hutton, I am a non-executive director of Singer & Friedlander, which is a relatively small merchant banking group but it deals only peripherally with the retail public. Most of its business is of a wholesale nature. We find the Progress Report encouraging in many respects. However, we have about four main concerns about the regulatory system as it is developing, which I would like to develop a little bit later on. One of those concerns is that we think it is very difficult and, indeed, the Bill does not really answer this point, to cover the whole range of financial services in a single regulatory system. We therefore very much prefer the idea of banks being regulated separately from securities businesses and we believe that many of the criteria and other tests which are applied to the regulation of banks are not appropriate for other kinds of financial services industries. We think that the process of building a regulatory system which is unitary is actually going to produce an enormous bureaucracy in the course of time because people will keep inventing new products, new services, new ways of approaching financial problems and every time they do so there will have to be a new division or a new group of people in the regulatory body which will have to study that and look at it. The second point I wanted to raise with you, my Lord Chairman, is that we think it is going to be very difficult to maintain cost-effectiveness if that happens and at the moment we find the cost of the system really very seriously damaging to us and we are not an untypical firm. We know that Howard Davies has said that he thinks that London is a relatively low-cost location from which to operate in financial services but that is not our experience. There are only about 10 per cent. of the working days of the year when we do not have a visitor from one of the regulatory bodies or even several visitors or some other provocation from the regulators interfering in our business. We welcome a relationship with the regulators, we are not against regulators as such, but this costs us something like £2 million a year in just running a system to cope with all these visits and requests and so on and our profits are £25 million in the United Kingdom. So it is a very heavy cost burden which is only going to go up if the supervisory serpent goes on growing. We therefore think that it would be perhaps advantageous if the legislation were to be more specific and there were to be less discretion left to the regulatory body than is actually proposed. The third point that I wanted to refer to is the question of the technique of regulation. Regulation at the moment takes place by trying to prevent anything going wrong. The result is that everybody, whether they are good, bad or indifferent, gets the same volume of interference from the regulator and has to pay a very high amount of the costs of the regulator, just in case something is going wrong or to make sure that it is not going wrong. That is a very expensive way of going about it. We therefore think that it would be a much better idea if we could have a more intimate relationship with regulators which is not provided for in the Bill. Indeed, I do not quite see how you could provide for that in the Bill, but it certainly could be provided for in practice. Finally, the last point, which is a rather serious one, my Lord Chairman, is that we are worried about the personal liability of executives, which is not treated specifically in the Bill but which is rather left to the discretion of the regulatory bodies, and we have had some experience of this in the City in the recent past. We feel that it is quite wrong that executives should be separately liable for disciplinary action from their firm. If the firm has made a mistake, then the firm must stand ready to take the rap, and that to go on and attack individuals with a process which can be very damaging to them financially and in their own lives is something which should be provided for specifically in the legislation and the offences should be spelt out in the legislation and it should not be a discretionary matter for the regulators. That briefly, my Lord Chairman, is all I would like to put on to the table for the present as points that concern us.
  (Mr Jones)  I am Bernard Jones, I am Chairman of the IFA Association. We as an Association represent 2,600 registered firms, directly regulated firms, and that comprises some 7,000 individual IFAs in the community. Personally, I have been in the financial services industry 35 years, over 30 of those as a practitioner, and for the last three years I have been Chairman of the Association, so I have had a long connection with financial services. Broadly speaking, the IFA Association welcomes the new Bill and the creation of the FSA. We feel that, as far as professional independent advisers are concerned, they will have nothing to fear from it. Our main concern is the lack of clarity in many of the provisions and it was the lack of clarity which caused an awful lot of problems with the last regulatory regime. We are looking for clarity of definition in all aspects of the Bill because we think that the operators, the IFAs out there, cannot operate successfully unless they are clear on what is expected of them. Beyond that, I would like to take up one or two of Mr Hutton's points because they also concern us, and that is the way in which the provisions are implemented by the monitoring teams. We feel very strongly that an approach of prevention being better than cure is the approach here and we would like to see the development of a partnership between the regulators and the regulated. We would like open dialogue and, hopefully, agreement eventually between the parties concerned and we prefer to see discipline as a last resort rather than a first resort, certainly where the breaches discovered are of a minor nature and are just rule breaches. There is a lot to be said for private reprimand and putting things in order rather than going out for public announcements in the first place. Obviously where the misdemeanours are wilful they have to be treated in a different manner. We also have a strong desire to see the return of common law principles to this regulation because that was almost totally absent from what we have been facing with the previous regulators. We would also like to see some form of prescribed fining basis rather than the basis at the moment, which is, how much can the individual organisation afford and what was the last highest amount that we fined anybody. There has been an element of headline-chasing in the fining policies of the previous regulators which I think bears no relationship whatsoever to natural justice. On the costs side of things, again we do need a cost-benefit analysis and I was pleased to see that that was addressed in the Progress Report, because the regulator owes a duty of care to the consumer just as much as the provider or the intermediary does because the costs of regulation ultimately affect the returns on the costs of the financial products that the consumer is buying, so there is a duty of care there from all sides. Finally, I would like to see some acknowledgement and encouragement of proper professional qualifications. I would like to see some element of moderation in the level of regulation for people who can demonstrate that they are properly professionally qualified, and the very fact that that group of people were getting a lighter regulation would surely encourage others through to obtaining qualifications, which ultimately would move the financial services on to a proper professional plane.

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