Parliamentary Commission on Banking StandardsWritten evidence submitted by Angela Knight CBE

Following my appearance on Wednesday 9 January 2013 before the Parliamentary Committee on Banking Standards Inquiry into PPI, I am writing as requested to set out briefly some additional points. These are as follows:

1. PPI

As the Committee will appreciate, I was being examined in respect of a written submission from the BBA with which I was neither involved nor was aware had taken place until I had received a request from the Clerk of your Committee. I am, however, sure that had the BBA believed that I would be called for such an examination, they would have discussed their submission with myself before sending it. As this is not the case, there are a few points which I would like to take this opportunity to clarify.

(a) Membership of the BBA

There were a number of occasions during the questioning when the questioner appeared to conflate the BBA with its members. As such I thought the committee would find it helpful if I provided a brief explanation to help clarify.

The BBA has a wide range of banks as members both in respect of the services that they undertake and also their nationalities. The result of this is that at any one time it is likely that only a part of the membership has a particular interest in a regulatory, market, consumer or other issue. PPI is a case in point, as although the banks who sold PPI are major banks, they represented only a small number of the BBA membership. Because of this diversity—one which is common to all sector based associations—the BBA at all times endeavoured to ensure that it represented the broad based membership and not just the few; that the Board of the BBA was constructed to represent the diversity of the constituency; and that there was a clear separation between the trade association—the BBA—and individual members who could and would represent themselves in whatever way they chose.

Further, many trade associations, of which the BBA is one, seek not just to present their members’ views but to discuss issues with the membership in a manner that seeks to move them forward, particularly on difficult questions. One example can be regulatory changes where the trade association recognises the proposed changes will be taking place whilst some members can still be resisting that change.

When asked questions at your committee which related to what the BBA thought about PPI matters; I answered for the organisation during the period that I was CEO and not for the Board or the members.

(b) PPI mis-selling

In reading the evidence that I gave in response to the examination, I believe that there is a clarification that I can make which might be helpful to the Committee. As the Committee are aware I stated that I would not have reflected the position of the BBA (see above) as being one of believing that there was not widespread mis-selling. I endeavoured to explain in response to questioning that at the time the BBA was well aware of the large number of complaints and as such this was a matter of fact and needed to be addressed.

The BBA was aware that the complaints fell into two broad groups. The first group was those complaints where a bank or banks had sold PPI to an individual for whom it was, for example, manifestly inappropriate, where it could not be claimed, or where banks had not followed the requirements set out in the rules. The BBA never condoned this mis-selling.

The second group of complaints was where the bank or banks had difficulty in evidencing that they had followed all the regulatory requirements. For example, the requirement of what should be disclosed in writing and what should be disclosed orally was reviewed and changed by the FSA from that which had been set out in ICOB to a new set of requirements in ICOBS.

The issue that subsequently arose, however, was that the changed requirements of ICBOS were being taken by the authorities as reflecting standards that should have also been put in place in 2005 when ICOB was introduced. However as the rules in both ICOB and ICOBS were extensive and detailed as they related to PPI (and as remarked by the Committee), the banks had assumed that each of these Conduct of Business Sourcebooks set out the rules that were required to be followed and evidenced. The industry therefore considered that the FSA was acting retrospectively. It was the clarification of this regulatory position with which the BBA was involved. The BBA was not aware of how many of the complaints fell into each group, nor should its involvement in the regulatory question be in any way seen as the organisation condoning mis-selling. Indeed the overwhelming majority of the time of the BBA’s involvement in PPI—6 years in all—was spent in seeking to effect the implementation of changing requirements, redress mechanisms and solutions to problems.

It remains a matter of conjecture and concern that with the same or similar data, the FSA concluded that the cost of recompense for mis-selling was orders of magnitude less than the BBA. At that time, the reason why the BBA believed this was the case, as reinforced by meeting with the FSA, was that the FSA considered their rule changes clarified the responsibilities of the PPI seller in a way that would result in effective and quick compensation for mis-selling, briefly summarised as the first group, but would have little if any impact on the second group. The BBA estimates meanwhile assumed that the FSA position would read across all PPI sales as has subsequently appeared to be the case.

The BBA was always committed to trying to resolve the PPI issues and its efforts were targeted in that direction. The establishment of an all-stakeholder roundtable to affect a Statement of Principles for dealing with complaints and redress is one example and the desire to see the FSA to uses its power under Section 404 of FSMA and then again when they were modified is a second example. A third was the proposal for engaging an independent QC to act as an arbitrator to determine a way forward. The BBA urged that a conclusion be reached without a judicial review.

2. LIBOR Regulation

I had been told that the Committee wanted to ask me questions regarding PPI. However Mr Pat McFadden MP raised the question of the BBA’s role in LIBOR. In responding I set out briefly the role of the BBA and of the FSA. In recognition of his response regarding whether there was a dispute between the BBA and FSA on regulatory responsibilities, I thought that it might be helpful if I provided further clarification in this letter.

The BBA has long held the trademark for LIBOR and convened an independent cross industry committee that develops the definition. However all contributions are made to Reuters who undertake the calculation of LIBOR which is in several currencies and many tenors. It is only at the point at which it has confirmed that calculation and makes them public that the BBA became aware of what were the LIBOR rates.

LIBOR is a rate and as such in the UK and most other countries a rate itself does not come within the regulatory framework. However in order to calculate the rate a wide range of contributions are required and in the UK those contributions are made from a regulated firm—in the instance of LIBOR a bank—then the processes and procedures that the bank has to put in place for the purpose of making its contributions, are within the ambit of the regulator and covered by the FSA Principles. This means that the calculation of the rate may be outside the regulatory environment but the actions that bank undertakes to contribute is within the FSA’s remit. It is also worth noting that in the statement that the authorities made in respect of Barclays and LIBOR, they set out that one of the fines was because that bank did not have the necessary processes and procedures in place for its LIBOR contribution to be in accordance with the LIBOR definition.

As a consequence of the first review which the BBA put in place in 2008 for the purposes of revising the governance of LIBOR, one of the requests of the authorities was that we rebuilt the website and enhanced explanations. This was undertaken and these roles and responsibilities were included.

The BBA responded to a request from the Treasury Select Committee’s inquiry in July of 2012. I am attaching a copy of that response which the Treasury Select Committee published as it may provide some useful further information. The BBA written submission is to be found at page 69–127 of the attachment and I would specifically like to direct the Commission’s attention to this evidence as providing a response to questions they may have. The section on responsibilities in Annex A of that submission again sets out the responsibilities of the regulator and those of the BBA.

3. Confidentiality Issues

I remarked to the Committee that I was not able to discuss LIBOR unless it related to matters which were already in the public domain.

The BBA operates a standard company policy in respect of the confidentiality required of all employees and this continues to apply upon departure. The agreement covers statements by former employees, intellectual property rights and documents. In addition, given the many investigations being undertaken by authorities of LIBOR contributing banks, the BBA ensured that the staff with access to information on LIBOR were aware of their legal obligations. This included matters such as an undertaking not to destroy, erase or transfer relevant information and the need to avoid any public statement that may prove prejudicial to existing or future criminal and regulatory investigations and prosecutions in both the UK and overseas. All enquiries regarding LIBOR are required therefore to be referred to the LIBOR lawyers. This was the procedure followed when the BBA provided the written response to the questions from the Treasury Select Committee.

25 January 2013