Select Committee on Constitution Minutes of Evidence

Examination of Witness (Questions 840 - 854)



  840.  The impression you had perhaps confirmed my own impression from the small practitioners when we saw a group of them, that the regulatory burden actually was very considerable on them, even though they are not in regular contact with the FSA. In your own sector, the large sector, if that is what it is called, what sort of percentage, if you can come to a figure roughly, of a practising company's energy goes into compliance?

   (Mr Bloomer) It is almost impossible to come up with a generic figure. The recently released FSA—sponsored work by the independent consultancy firm Europe Economics had some figures that are around 1 to 2 per cent if looking at actual incremental costs, because there are some aspects of compliance that a well-run firm would do anyway regardless of the rule book: monitoring the way sales are done, security over assets, and so forth. Their estimate of the incremental costs, if you like, of FSA regulation is 1 to 2 per cent. The median number is in the report published last week[2]. For small firms, the issue can be more not so much that of cost, but if it is small and owner-managed with one, two or three people, then the people who have to deal with all the regulatory burden and compliance are the same people who are out there trying to do business, to get new business, to maintain relationships with clients and so forth. They do not necessarily have the scope of a larger firm that has its defined compliance department.

  841.  It is a one hundred per cent of the risk to their clients.

   (Mr Bloomer) Absolutely, but I would support the FSA as a non-zero failure regime. They measure the risks by the risks to their objectives. They are quite clear in classifying firms into high and low category, et cetera, which are the risks to their objectives.

  842.  How much of their policy like that do you take as given, so to speak, and how much of your view is formed as a result of being their access to practitioners? I am really asking whose side you are on, I suppose.

   (Mr Bloomer) I think most practitioners would agree that a risk-based, non zero failure regime is the right way.

  843.  There the question does not arise. As an animal, your Panel, which is appointed by, paid by and serviced by the FSA, could be seen, if you only looked at those facts, as being just part of the FSA and recruited out of the practitioners' market. I am sure your learned practitioners do not want to look at you like that. How do you actually see yourselves?

   (Mr Bloomer) The Panel would not see itself like that at all and would clearly see itself as representing the views of practitioners to the FSA. I know we do not have any doubts about which side of the divide we are on.

  844.  That goes for the practitioners' view as well?

   (Mr Bloomer) Absolutely, that is very much a practitioners' view.

  845.  Not so long ago, your chairman was asked in a room in another place whether the FSA focus should be less on regulation of banks and more on insurance. You probably recall his reply then. Would that have changed in the light of recent reports?

   (Mr Bloomer) I do not recall his reply, I am sorry. I know the view, and I agree with the view, that the insurance industry, because it came from a different regulatory background to the banking industry, has not developed as far in some areas of regulation, particularly I think in risk management. Also, its regulation was previously much more fragmented with the PIA, DTI, GAD, FIMBRA and IMRO. Typically, an insurance group had a range of five or six regulators. I think insurance has been a greater part of the FSA's agenda in the last year or two.

Lord MacGregor of Pulham Market

  846.  In your memorandum to us you pointed out that the Panel takes care to ensure it does not duplicate the work of trade associations. You make the point that they have the staff and resources, which you do not have, to promote those particular interests. Could I just explore a little bit more with you exactly what the relationship is between the Panel and the trade associations and how you decide which issues you are going to take up, which ones you leave to them and how you can possibly make use of their own resources to take forward your own work?

   (Mr Bloomer) It is something the Panel has been working on developing over the Panel's time. There are quite a lot of trade associations. The Panel is getting to know them and build links and relationships with them. We do not have a formal process where we decide who is going to deal with what. Mostly it is obvious if a particular trade association is going to be interested in and involved with a particular consultation paper from the FSA. They may well give us copies of their responses to consultation papers and talk to us about their views on particular papers, either formally in meetings or informally. I sit on the ABI board, so I tend to know naturally what the ABI is doing on other topics. That is true of many of the members of the Practitioner Panel; we have links with various trade associations, almost inevitably. It is much more informal but the trade associations have the resources and the research to do detailed papers. They will send to the FSA a very detailed response to a consultation paper. We do not do that. We will have a dialogue; we will typically have the authors of consultation papers along to talk to us about the paper, preferably at an early stage when we can be most effective I think in trying to raise issues or look at the direction of a particular topic. That is very different from the detailed analysis clause by clause of particular points in a consultation paper. Recently, for example, the FSA came to us with an early version of some work they want to do on educating the consumer, something again from the Practitioner Panel point of view that we are very supportive of, but it was very early thinking and so it was a very open conversation and dialogue between us as to some thoughts and input into the FSA's thinking, which I hope they will use as they go along and come out with their plans in that area. I think the Practitioner Panel is most effective when we can be involved like that at an early stage. It is typically later on that the trade associations get involved as well, when things are in a more detailed structure.

  847.  But presently you also take a broad brush, strategic view of issues at the other end of the process, if you like, because a lot of the points you raised at the beginning in relation to your Treasury letter are broad brush, strategic issues?

   (Mr Bloomer) Yes. Again, we are trying to stand back from the detail of any individual consultation paper and have a look at the wood rather than getting buried down amongst the trees. We try occasionally to get down amongst the trees as well, but we try and stand back and look at broader themes and broader issues as well, much more broad than, say, a trade association typically would.


  848.  Could I tease out something you touched upon and with which we are very concerned, which is obviously the relationship between the independence and accountability on the part of the regulator, in this case the FSA? You were saying, in response to Lord Holme, that you recognise the FSA has to have a degree of independence, has to have an arm's length relationship, but then there is the aspect of being accountable to different constituencies. In terms of practice so far, a point Mr Brydon made, especially when appearing before the Treasury Committee, there have not been any major problems in the relationship. There has been dialogue, which has been listened to. So far, what you have in place has worked, which I think on the one hand is the membership of your panel, in other words it is the expertise. You are listened to because of the knowledge that you have on the subject. There is also the leverage to some extent, as you were touching on in terms of Section 11 representations. If you make a representation and there is disagreement: you get a written response. If the FSA rejects that, and you mention that has not been necessary, but in the event of a conflict, do you think that what is in place is sufficient? Should there be more? If you take a Section 11 representation, there is statutory power to make a representation and you get a written response, but the written response could be, I presume, anything along the lines of: "Well, we disagree. You are talking rubbish. Leave it at that"! In that hypothetical situation, do you think one should be anticipating that eventuality and, if so, do you think that what is in place is adequate?

   (Mr Bloomer) I think it is. I think we would have to some degree failed if we get to Section 11 because by definition the topics that we go backwards and forwards on are complex and are capable of many different interpretations. We are trying to seek common ground, something that on the Practitioner Panel we think is worth doing. It is not a "nice to do" but a "must do" or "worth doing": is it practical and workable and actually is it of benefit? Can we work to something with us trying to understand the FSA objectives and what their goals and purposes are and can we find something that makes sense? So far we have been able to do that. I think if we get to Section 11, probably on both sides we will have rather failed in having a constructive dialogue on this. By its nature, Section 11 is public. It then raises the debate into the public forum, if you like, which would inevitably allow others to become involved in the debate. My hope would be that we can generally resolve things without having to resort to that. I think the mechanism is in place. We do feel we have an open and constructive dialogue with the FSA and we see at the Practitioner Panel representatives at all levels through the FSA, including its chairman.

  849.  From your point of view, that balance between independence and accountability is perhaps probably about right?

   (Mr Bloomer) Yes, it is about right in respect of the Practitioner Panel.

  850.  As a final point, and in part it follows on Lord Elton's point and what was put by the Treasury Committee to Mr Brydon, in effect, as to the perception of the way in which you are appointed, Mr Brydon's point was: yes, we recognise we are appointed by these processes but it works. I think you made the same point earlier in terms of the membership of the Panel; you are drawn clearly from very senior positions, and so you are able to argue your case. From the outside, could one do something to address the perception that the relationship may be a little too cosy, even though it might be a mistaken perception? Can you see where people might be coming from in doing it in that way? Is there anything one can do, if you like, to make clear the extent to which you are independent, that in fact it does work in the best interests of your members?

   (Mr Bloomer) I think there are two things that we do already that ought to address that. One is that the Practitioner Panel does its own annual report and raises its own list of topics which have given us cause for concern during the year and where we want to take up matters with the FSA. I have pointed out matters in our report, and I made the point at the beginning of this meeting. There are some substantive points there. I do not think we look as though we are a creature of the FSA. The second point is the survey, which is independent, completely independent, and again we publish the results of that. I think in a practical sense to me those demonstrate the Practitioner Panel's independence rather more than changing the way we appoint members.

  851.  Finally, on the survey itself, which led from members' questions, that is very interesting from our point of view. I see the value of it, particularly since you are putting the same questions over time. Is there anything additional from the survey, given the purpose of this Committee's own inquiry, that the survey has turned up that you think might be pertinent from our point of view?

   (Mr Bloomer) I have mentioned a couple already: the burden and cost of regulation. The other point I made at the beginning is the complexity or length of complexity and sheer number of and amount of time available to review all the consultation papers currently being issued. The FSA would say about quarter of their output last year was driven by EU Directives, which would be a growing burden and something that we as a panel, as part of our own rationale for research, would want to spend more time on. About a quarter is driven by the UK Government's agenda and about half of the FSA's output are things the FSA themselves think need dealing with. The FSA play it back in their report but we have pushed hard about the "nice to do" versus "must do" points. We appreciate the EU Directive points; we appreciate the Government points. Half of what has come out in the last year was generated by the FSA itself. That is a real burden when it comes to innovation and competitiveness, particularly international competitiveness, of firms in the UK. It is a real burden.

  852.  That comes across very clearly then from the survey itself. I presume that is consistent across the survey. Is it actually becoming a bigger problem?

   (Mr Bloomer) It is one of those areas which is becoming a bigger problem. That does not surprise me because the first review was before the FSA got going, but it is an increasing burden.

Lord Elton

  853.  May I come back to almost my first question, which I am reminded of by your telling us that a quarter now of all the regulation is Europe-driven? Remembering your figures for the size of your sector, do you really think one researcher is sufficient for your business? What would be the response of the FSA if you said you wanted to double or quadruple that effort?

   (Mr Bloomer) I am not sure what the FSA's response would be. We would probably have a chat about costs. In practice,in my own company and those of most of the members of the Panel, we also have access to our own support and research.

  854.  You know the answers without getting somebody else to find them again?

   (Mr Bloomer) We already have alternative sources of input and research. I suspect the collective research effort available to the Panel is actually quite significant. We do have a direct, dedicated researcher, though.

  Chairman: It sound a bit like a House of Lords Committee! Mr Bloomer, that has been extremely valuable for our purposes. We are very grateful to you, especially given the arrangement of the timing for our session. Thank you very much indeed for being with us.

2   Note by the witness: All but two of the 42 firms indicated some increased cost arising from FSA regulation. Half estimated that incremental compliance costs added between 0 and 2 per cent to operating costs, with 14 reporting values between 2 and 10 per cent and 5 indicating values between 10 and 20 per cent. The sample median of incremental compliance costs was of 1.6 per cent of non-regulatory operating costs. Back

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