Examination of witnesses (Questions 480
THURSDAY 15 APRIL 1999
and MR TONY
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
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
483. Is it not the case that your own appointment
required the agreement of Ministers?
(Mr Whittam Smith) Yes, it did.
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
(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
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 consumersand where one is talking about regulators it
is basically the industry who has to understand how the regulatory
system worksconsumers 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 sensibleand I do not know if my colleagues entirely
share this viewthat 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
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
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
(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.
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.