Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 480 - 495)



Mr Sheerman

  480.  Could I take you back very quickly to one item. Would you prefer to be accountable to this place through a Minister or to your FSA friends?
  (Mr Whittam Smith)  Certainly the FSA are my friends. Accountability is extremely important to me. It is important in a number of ways. It is important, first of all, because of course we have a lot of power and there have to be checks and balances. Secondly, because in forming the ethos of this new organisation it is very important that everybody should understand where accountability lies. How I see accountability, and it would be up to others to judge whether the Act needs to reflect this, is that we are first of all accountable to consumers, we are secondly accountable through Ministers to Parliament, but thirdly we are accountable to the industry. I do not think any regulator or body such as ours can do its business properly without having an eye to the health of the industry. Fourthly, of course, we are accountable to the FSA. We are very accountable to the FSA because they both have to approve our budget and make every appointment to the board.

Lord Fraser of Carmyllie

  481.  Do you approve of that appointment by the FSA?
  (Mr Whittam Smith)  So far I am very pleased with it!

Lord Haskel

  482.  Who do you think should appoint you? Do you think the FSA should appoint you?
  (Mr Whittam Smith)  All I can say is that I think one has to be guided by how matters have turned out so far. I will not say anything about myself but I will say that the board which has been chosen by the FSA is an extremely good one and represents a wide range of interests and, moreover, as I have discovered from the first two board meetings we have held, they are very independent and pugnacious people so we have an exceptionally good board.


  483.  Is it not the case that your own appointment required the agreement of Ministers?
  (Mr Whittam Smith)  Yes, it did.

Mr Beard

  484.  Several people in consultation made the point that has been made that the provisions look possibly more legalistic and inflexible under the new arrangement than the rather open and flexible arrangements of the voluntary scheme to its detriment. Is Article 6 the only source of this inflexibility and legalism?
  (Mr Dean)  It is the principal outstanding source. We were earlier concerned about appeal on a point of law and issues of costs. Article 6 remains the single most important aspect of it.


  485.  Could I ask a slightly naive question on this issue of scope? You are suggesting the scope of your activities should be different from that of the FSA and that you would like to be involved in areas where people are not going to be involved with the FSA. Would this not be a source over the longer term for a good deal of confusion? You are dealing with complaints to do with things where you are seen in some instances as being an FSA Ombudsman and yet you would be responsible for some areas which the FSA is not actually regulating.
  (Mr Dean)  A number of issues there, Chairman. We do not see ourselves as an FSA Ombudsman. There is a huge distinction in the minds even of those of us who are associated in some way already with the regulator between the process of regulation and the process of an Ombudsman. We are an independent process from that. Secondly, the main source of our concern was simply this, if you take the five of us as we are at the moment we are dealing with disputes not all of which are covered by the regulatory system, therefore unless you are going to have a multiplicity of Ombudsmen or gaps the jurisdiction does need to be extended beyond the proposed scope of the regulation, otherwise you forfeit one of the objectives which is to have a single comprehensive scheme.

  486.  You will appreciate that we have covered this in other discussions where people have argued we will need a single comprehensive financial regulator, which I suppose is where these two issues come together.
  (Mr Dean)  Yes.
  (Mr Merricks)  Perhaps I could add, Chairman, that because this is going to be a scheme which has to be explained to consumers—and where one is talking about regulators it is basically the industry who has to understand how the regulatory system works—consumers who complain have to know whether this really is a one stop scheme or not. I, as the Insurance Ombudsman, deal with quite a large number of complaints which arise from payment protection insurance, that is insurance against accidents and redundancy if you are taking out a loan. Nearly all those loans are provided by consumer credit providers. I can say that I can deal with the insurance aspect of that at the moment. If I was part of a one stop Financial Services Ombudsman scheme, it would be very odd indeed to say to a consumer, "We can deal with a complaint you have about the insurance that you took up which backs this loan but not about the loan." I would not wish to be the Ombudsman who had to explain to somebody why we could do one but not the other.

  487.  But would you like to be the regulator who also had to explain it?
  (Mr Merricks)  It is possible, and I think it may be sensible—and I do not know if my colleagues entirely share this view—that the remit of the FSA and the remit of the Financial Services Ombudsman scheme do not have to be exactly the same, and indeed because there is going to be a voluntary jurisdiction of the Ombudsman scheme they will not be exactly the same.

Lord Haskel

  488.  In your paper you question whether your effectiveness should be judged by a cost benefit analysis. If we do not have a cost benefit analysis how would you judge the effectiveness of your work? How would people know they are getting some sort of value for money, quality of service, et cetera?
  (Mr Dean)  I will have a go at that. Our concern was about the adequacy of a cost benefit analysis as being the criterion for deciding whether or not this or that area should be subject to compulsory jurisdiction. I do not know that you can judge the value of an Ombudsman purely by adding up the costs and benefits, that was the real point.

  489.  Do you have an alternative suggestion?
  (Mr Dean)  Ultimately it is a matter for either Ministers or indeed the decision-makers rather than just an adding up of costs and benefits.
  (Mr Merricks)  The reason this problem now arises is because of the amendment the Government perhaps sensibly propose to make. As the Bill stands at the moment it provides that all regulated activities carried out by authorised persons would be subject to compulsory jurisdiction. The Treasury, wishing to provide a more flexible arrangement, decided to give the FSA a discretion as to whether anything or how much should fall within the compulsory jurisdiction as opposed to a principle set out in a Bill, an Act, endorsed by Parliament that everything was a regulated activity. The next sub-section would say that effectively fringe matters could be taken in by a compulsory jurisdiction direction subject to a cost benefit analysis. If it was only the fringe matters which were going to be added in and one could say a cost benefit analysis would be sensible to see whether we add in a few more things, then one can see that is not a serious objection. If it is actually the whole core of the compulsory jurisdiction which has to be subjected to a cost benefit analysis, I think there is a greater objection to that, indeed I have reason to believe the FSA themselves may feel a little uncomfortable about approaching that task.

  490.  I can see an awful lot of argument over the basis of a cost benefit analysis and it would be helpful if there was some sort of alternative suggestion.
  (Mr Dean)  The alternative is that it is decided in the Bill itself by Parliament.

Lord Montague of Oxford

  491.  I just wonder whether as your schemes operate at the moment you are completely satisfied with the co-operation you get from all the firms and the people with whom you have to deal. The Bill, of course, is silent on whether people should be required to co-operate with you. Do you regard that as a deficiency?
  (Mr Dean)  I will start answering insofar as I do run a scheme which deals with complaints against firms regulated by IMRO. I can say that we do not have a problem of non co-operation, there is no problem whatever. That is because the IMRO rules require co-operation and firms would be extraordinarily foolish to ignore that requirement and they do not do so in practice, so there is no problem with non co-operation. I venture to suppose that there would be little problem of non co-operation from any firm that was regulated for the same reason. I do not know whether any of my colleagues would want to add anything.
  (Mr Holland)  The only problem I have is not in relation to the big providers or even providers of any product, it is in relation to independent financial advisers who obviously carry professional indemnity insurance. Certainly sometimes, particularly with the smaller ones, there can be some difficulty both at the initial stage and indeed in the tenacity with which the case is then subsequently fought by their lawyers, particularly if there is a large amount at stake. Occasionally, it has not happened more than about half a dozen times, there is then the issue of enforcement and there is, at the present moment, a lacuna in the legislation about enforcement where somebody decides to resign from the PIA, but I think that is taken care of in the Bill.


  492.  Is there anything that you would like to say, David?
  (Mr Roe)  Thank you, Chairman. I just want to say a couple of things about scope. The first point is that we do recognise that there is a concern that the scope ought not to be unnecessarily narrower than the sum of the current schemes, although in saying that it is worth bearing in mind that a lot of the current coverage is voluntary. The way that we have approached this is to have two jurisdictions which run alongside each other. The first is the compulsory jurisdiction and what this does is allow the FSA to compel the coverage of all the financial services activities of regulated firms, in other words it is not limited just to regulated activities within the terms of the Bill, if you are an authorised person then your other financial services activities can be covered. Initially the draft Bill took as a starting point regulated activities and allowed that to be added to. The reason that we changed that to make it more flexible was that there were some examples which were brought to our attention of activities where in practice there were unlikely to be a useful role for the Ombudsman. One example might be an activity where it is inconceivable that there would be any retail customers for that activity. So it seemed not terribly useful in legislative terms to bring that automatically within it. The solution that we adopted, therefore, was to give the FSA greater discretion. One of the things that they will need to take into account is cost benefit assessment which we think is a principle which applies in all kinds of areas to do with regulation and complaints handling and it seems to us to be a reasonable one. Andrew may have something to say about the approach that has actually been taken towards making that assessment. The other point I want to mention for completeness is the voluntary scheme which, as I say, will run alongside the compulsory scheme. That means that where there are people who are not regulated under the Bill, and we heard mentioned people in the consumer credit area, there will be the opportunity for their activities to be covered by the Ombudsman scheme if they people agree.
  (Mr Whittaker)  There are just two points that I would like to add to David's comments, both in relation to scope. The first one relates to the idea that, as I understand it, it might be proposed that the scope of the Ombudsman scheme should be extended to some firms which are not authorised under the Financial Services and Markets Bill and that would be done on a compulsory basis rather than merely on the voluntary basis that David has just described and might be done in particular in relation to mortgage providers who are not authorised and in relation to Consumer Credit Act licensees who are not authorised under our legislation. We have some hesitation about this both for the reason you mentioned, Chairman, in relation to the confusion of responsibilities with the Office of Fair Trading who do regulate Consumer Credit Act licence holders but also because of the way in which this might work in practice. Taking Consumer Credit Act licence holders, we believe there are some 400,000 Consumer Credit Act licence holders. We would not want those additional firms and individuals to require authorisation in order to be brought within the Ombudsman scheme but it would be very difficult as we read it to try and bring them within the scheme on a compulsory basis without requiring authorisation because what is currently required as part of the way in which the Ombudsman schemes work at the moment is that there is a prior process, just as with the MP filter for the Parliamentary Commissioner, where the firm itself is required to deal with complaints and required to do so by the rules put in place by the regulator. We would have no jurisdiction to put in place such rules and to monitor and enforce those rules, or indeed rules requiring co-operation with the Ombudsman, if the firms were not authorised. We think the right approach is to go through the voluntary jurisdiction where there can be a contractual arrangement in order to deal with those firms who are not within the authorisation net. Secondly, in relation to our approach on cost benefit analysis, yes it would certainly be the case that it would be much easier if the Ombudsman scheme's jurisdiction were conclusively set by the legislation and we had no work at all to do in determining what that jurisdiction should be, but we do not take a narrow view on the application of the cost benefit test. It has been suggested, for example, that simply because the amount of determining a particular claim may be more than the amount claimed one would be compelled to take the view that was not cost beneficial. For example, if a claim were only for £100 and you knew that it always cost £200 to determine it. We do not take the view that the cost benefit test means that such claims could not be brought within the scheme. We think that it is possible not to look at each transaction but to look at the overall benefits of bringing a particular sector of business within the scheme as against the overall costs of doing so. So we think the position may not be as bad as some have feared in relation to the application of a cost benefit test.

Lord Montague of Oxford

  493.  We have not mentioned consumer panels. Do you anticipate co-operation in relationships with the consumer panels?
  (Mr Whittam Smith)  In principle, yes, I certainly do. I would always wish to consider any particular matter against the notion that we are very independent. It is very important. I think it is a very sensitive area and you have to judge it case by case. Of course, one wants to be as co-operative as possible.

  494.  I am thinking of general information about what you are learning.
  (Mr Whittam Smith)  Exactly, I understand that. It would not be to our advantage to be thought to be completely in breach of the FSA and its satraps.

Mr Sheerman

  495.  Where is your new building?
  (Mr Whittam Smith)  I do not know yet but I hope it will not be in Canary Wharf.

Chairman:  On that note, thank you very much for coming this afternoon, it has been very interesting. You have given us some very useful material.

previous page contents

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 4 May 1999