Examination of Witness (Questions 840
WEDNESDAY 2 JULY 2003
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 FSAsponsored
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.
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
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
(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
(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
(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
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
(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
(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
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
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.
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