Examination of Witnesses (Questions 855
- 859)
WEDNESDAY 9 JULY 2003
SIR HOWARD
DAVIES AND
MR ANDREW
WHITTAKER, FINANCIAL
SERVICES AUTHORITY
Chairman
855. Sir Howard, good afternoon. We are
very grateful to you for being with us and also for the paper
you have kindly put in. Before we get under way could I invite
you for the record to introduce yourself and your colleague?
(Sir Howard Davies) Yes. I am Chairman
of the Financial Services Authority, pro tem, and since I never
travel anywhere without my lawyer these days I have with me Andrew
Whittaker, who is the general counsel to the authority.
856. I should mention that one or two members
of the Committee because of particular interests may not put questions
during the session; others may declare their interests where appropriate.
Before we put questions to you, is there anything you would like
to say?
(Sir Howard Davies) Very briefly if I may, since I
know the Committee will want to use most of its time for questioning,
the accountability structure we have at the Financial Services
Authority is quite elaborate, you might say, following extensive
consideration of the appropriateness of the structure that pertained
to the previous regulators during the passage of the Financial
Services and Markets Act and the question of our accountability
was discussed at some length particularly by the joint committee,
chaired by Lord Burns, of both Houses which gave our legislation
pre legislative scrutiny. Indeed I think the Committee is aware
of the extensive nature of the arrangements because of the number
of people you have had to have in front of you to explain them.
If I might just make one point, a point of international comparison
which is perhaps less visible to the Committee but something of
which I am very conscious since I do a lot of our international
work, our structure is relatively unusual internationally. It
is fair to say that the Financial Services Authority does have
by comparison with other regulators quite extensive rule-making
powers. In some other countries some of what we do would, in fact,
be done in legislation but we can do that in secondary legislation
and that is something on the whole that is welcomed by the financial
community as meaning that we can keep our regulation up to date.
The other side of the coin is that as a result we have a board
which includes serving practitioners which is highly unusual—indeed,
I think unknown—internationally. There are some regulators
who have advisory boards but none with serving practitioners on
the board responsible for making rules. We have a practitioner
panel and a consumer panel and I am not aware of any other regulators
who have those, though in Europe at the European level they are
now copying that approach and the Lamfalussy Report on European
legislation borrowed from our accountability structure and suggested
the same thing for European committees and regulators, and that
has now been set up for the Committee of European Securities Regulators.
The Complaints Commissioner I think also is a novelty—that
is the other side of the coin of our statutory immunity and was
explicitly agreed as such by the Burns Committee. By international
standards, therefore, we are surrounded by these various mechanisms
but I nonetheless think that the structure is entirely workable
and although our experience of it is so far quite short, only
18 months, I would say that we as the Authority are happy that
it is working in the way it was intended.
857. That is very helpful. We appreciate
the fact that you have been in place less than two years so the
system is just getting up and running. Now, we are focusing on
accountability and you cover that in your paper, I also note in
your letter you say, "We also recognise and welcome the accountability
which justifies its independence", so clearly there is the
need for you, given your very particular role, to have that degree
of independence, to be detached, but the corollary as you identify
is some measure of accountability and, as you say, the process
itself is quite complex. Could I summarise it. I was reading through
your paper and also looking at the Act itself. Part 1 provides
the accountability structure and, as I understand it, when you
are dealing with individual cases, if there is a challenge that
could go to complaint, depending on what the nature of the complaint
is, it could go to the Complaints Commissioner, the Financial
Services and Markets Tribunal, and there is always Judicial Review.
On the other side in terms of the general fulfilment of your functions
it seems that the accountability is in a sense through consultation
and scrutiny, so you have on the input side as you mentioned the
practitioner and the consumer panels making representations and
having the statutory basis for doing it, and on the output side
reporting particularly through your annual report to be scrutinised
by both Parliament and ministers. So one can see there a clear
process provided for by statute in terms of that input and output,
in terms of consultation and scrutiny, and I can see why those
would be necessary conditions for accountability. The question
is are they sufficient? Could I tease out whether there are any
teeth in the process if, and I know the Chancellor could instigate
a review under the provision of the Act, you were found wanting?
(Sir Howard Davies) It depends on how we were found
wanting. The key thing for us in the legislation which we are
not just content with but I think that my general counsel and
I are enthusiasts for, insofar as a lawyer can or should be enthusiastic
about anything, is that we find the architecture of statutory
objectives and principles of regulation to be an extremely useful
and practical discipline on the way in which the regulator operates,
and even the architects of the legislation might be surprised
at the extent to which we have built them into the management
of the authority. Every paper that goes to the board has to explain
why this is related to the statutory objectives in the legislation,
and also any proposal for a regulation or a rule change has to
have attached to it a checklist which explains how each of the
principles of good regulation have been met in this area, and
that includes the impact on competition, on innovation, on proportionality,
the effect on the competitiveness of the United Kingdom's markets
internationally and the cost benefits, etc. In relation to each
of those principles I guess the teeth are slightly different.
In relation to the competition principle the teeth are quite sharp
because there is a power for the OFT to review our rules for their
impact on competition and to refer them to the Competition Commission
which can, in fact, overrule us or can strike them down, so in
that case we have to be very careful and think very hard about
whether any adverse impact on competition is justified, and almost
anything you do in regulation has some kind of impact on competition
so you always have to think about that. In the others the disciplines
are more our board and the panels. The panels, particularly the
Practitioner Panel, have been quite sharp where they believe that
our cost benefit analysis has not been adequate. Indeed, the Consumer
Panel on one or two occasions has said that the Practitioner Panel
tends to comment on the "c" and the Consumer Panel tends
to comment on the "b" but that is what you expect and
that is quite sensible as a process. So the teeth attached to
those are, as I say, primarily the board and the two panels with
the Chancellor behind.
858. As you know we have had the panels
before us and I think the view they expressed was that the process
was working. As I understand it, there has been no use of section
12 or disagreement where you had to provide a written response
or anything of that nature, so I discern from what you are saying
that the exchanges have worked in the way they were intended to,
but just on the point about the output and relationships with
ministers obviously there is going to be some dialogue, that is
quite natural, but in terms of the extent to which you are constrained
or there is a power reserved to ministers, could you explain that?
(Sir Howard Davies) Well, ministers considered whether
they wanted a power to give a direction to the Financial Services
Authority and they decided they did not want such a power. What
ministers do have is the ability to order a review of the economy,
efficiency and effectiveness of our activities, but that is fairly
broadly defined so it could cover almost anything plus it could
be done by almost anybody. There is also, however, an exchange
of letters between me and the Chancellor of the Exchequer which
took place right at the moment in which we went live in December
which describes the circumstances which the Treasury wants to
hear about, cases with which we are dealing, which may have some
public interest dimension, may affect our international obligations
or a variety of other criteria, so we would regard that as a trigger
or reference to Treasury ministers, but it would be fair to say
that ministers have not attempted in any way to interfere with
the rule-making power within the Act. They have explained the
Treasury role for legislation and our role for regulation and
practically that has worked quite neatly with the Treasury working
the scope of our activities, so if they throw a ball to us then
it is for us to determine how we hit it, and that division of
responsibilities I think works really quite well.
(Mr Whittaker) Could I note that there are three very
limited powers of direction in the legislation; the first applies
where there has been a competition issue, there has been a reference
to the Competition Commission and the Commission has made a report;
the second one applies where there is an issue about compliance
with international obligations and our rules need to be directed
in a way to ensure they comply with international obligations;
and the third one is that the Treasury can direct us as to what
to include in our annual report. They have not yet sought to do
so.
859. Yes. For me where the trail ran cold
was that in circumstances where one could say that a review was
initiated, what then, because under the Act they can schedule
a review, but I could not work out what were the consequences,
were a review to be initiated.
(Mr Whittaker) I guess it would depend on what the
conclusions were. If they were that our scope had been improperly
defined then the Treasury can adjust that through secondary legislation.
If the conclusion was that there was a competition issue then
they could refer that to the OFT. If the conclusion was that we
had been simply too costly or inefficient, that would have to
go back to our board for correction.
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