Treasury Committee
Oral evidence: Financial Conduct Authority
Tuesday 4 February 2014, HC 1058
Ordered by the House of Commons to be published on 4 February 2014.
Members present: Mr Andrew Tyrie (Chair), Mark Garnier, Stewart Hosie, Mr Andrew Love, John Mann, Mr Pat McFadden, Mr Brooks Newmark, Jesse Norman, Mr David Ruffley, John Thurso
Questions 1-173
Witness[es]: John Griffith-Jones, Chairman, Financial Conduct Authority, and Martin Wheatley, Chief Executive, Financial Conduct Authority, gave evidence.
Q1 Chair: Thank you very much for coming to give evidence this morning. Can I begin by asking you, Mr Wheatley, whether you agree with the Governor’s remark about the bonus cap?
Martin Wheatley: I think that the Bank of England have been fairly consistently—including the previous Governor and the current Governor—of the view that trying to impose a fixed percentage against a salary would have perverse consequences and I think that is what we are seeing. It removes the ability that we have always believed in quite strongly in the UK that malice and clawback are important parts of the accountability system. Insofar as they were the comments, yes, I do agree.
Q2 Chair: I just want clarification that there is not a cigarette paper between you and the PRA on that issue.
Martin Wheatley: On bonuses in general, I think we have very similar—
Chair: I am asking just about the bonus carrot. We will come on to other things in a minute.
Martin Wheatley: Right. You haven’t said specifically. As I say, in my understanding, the view that the European structure of a fixed percentage is the wrong one—I would agree with that if that was the specific question, the specific reference.
Q3 Chair: Yes. You have seen the Governor’s remarks?
Martin Wheatley: I cannot remember the specific recent remarks. I know I have seen many remarks from the bank on the bonuses.
Q4 Chair: They were very widely reported, but anyway, I think we have the general gist of the answer to that question.
I sent you a letter on behalf of the Committee with a large number of questions a few days ago and I—none of us—cannot possibly expect you to answer all of those fully in written form before this meeting, but I am sure you will get down to it in due course. In the meantime, I would like to pursue one area with you, which relates to remuneration. You fined Lloyds £28 million for mis-selling, and this was sales-based incentive schemes. Is it the FCA’s view that the Lloyds’ sales-based incentive schemes were part of the cause of the mis-selling?
Martin Wheatley: I think it is fair to say that our investigation did not specifically look at the outcomes; it looked at the design of the systems and the control over those systems. Our view was that there were very poor controls, it was a poorly-designed system, but that is not the same as saying that specific mis-sales resulted from the design of that system. There were cases that we found where there were, but we did not, in a sense, look widespread at something like PPI and say, “How far was PPI related to the sales incentives?”
Q5 Chair: You have not looked at whether the sales-based incentives caused the mis-selling?
Martin Wheatley: There were examples. What I am saying is we did not look and try to do a widespread review as to whether the sales practices at Lloyds were strongly linked to the mis-selling. I think our judgment was they probably were, but we did not feel that we needed to do that to make the case.
Q6 Chair: Okay. I will just try asking the same question in a slightly different way: have you formed a view—it is pretty much the same question I began with—about whether the sales-based incentives played an important part in triggering the mis-selling?
Martin Wheatley: I think that they did. Sorry, if that is the question, yes; I think the answer is yes.
Chair: That was the first question, yes.
Martin Wheatley: Yes.
Q7 Chair: Okay, they did. Do you think that those incentives therefore did serious harm to Lloyds’ customers?
Martin Wheatley: I think they resulted in a sales-driven culture that did do serious harm to Lloyds’ customers, yes.
Q8 Chair: So the answer to that is yes. Do you think that therefore people who are beneficiaries of such sales-based incentive schemes should be included in the certification regime?
Martin Wheatley: That is a difficult question. As you know, we will be consulting on the senior persons’ regime and the certification regime later.
Q9 Chair: We are just talking about the certification regime here. Let us put to one side completely the senior persons’ regime, although we now have to call it the senior managers’ regime, for reasons only lawyers are able to understand.
Martin Wheatley: Our understanding of the way the certification regime will work is that it will extend to people who put the reputation, I guess, of the organisation at some risk. I would honestly say we have not formed a view as to how far that should go down into the organisation. Many of the people that we looked at in the sales incentive structures were, in the broad scheme of things, relatively junior people within the organisations. They were recipients of badly-designed schemes. In many cases I think it is true to say they were not themselves trying to do something wrong, they were simply trying to run their bonuses to the scheme that had been devised for them by the bank.
Q10 Chair: The conclusion of the Banking Commission was that all those people who could do serious harm to customers, to the bank or to the market should be included in certification and only those people, not people who could not do harm. Do you agree with that conclusion of the Banking Commission?
Martin Wheatley: Yes, I do.
Q11 Chair: In that case, since you have said that these people who were incentivised by the sales-based incentive schemes did serious harm to Lloyds, I cannot understand why you are hesitating about just saying yes, that these people should be included in certification. I am doing the preliminary questions. I want to get to the substantive part in a minute. I just want to be clear at the start about the thinking of the FCA on this point in relation to the recommendations of the Commission.
Martin Wheatley: Okay. I think the thinking is that we have not, frankly, extended it to how would that be implemented in practice. As you know, our aim is that we will consult later this year, so our aim is that, by the summer, we will have published a consultation paper and we will set out in that exactly how we think that should work.
Q12 Chair: I want to come on to that in just a moment, but before I do, I want to cover this core question, and I will ask it again: do you think that all those people who can do serious harm should be included in certification and do you still think that—you said it a moment ago, so I presume you have not changed your view—these people in the sales-based incentive schemes did do serious harm, in which case they should be included?
Martin Wheatley: The difficulty I am struggling with is that clearly the system as designed and implemented as a whole did serious harm, but the people who were operating to these sales-incentive structures were very often quite junior people, frontline staff, who did not think or know that they were doing something wrong; they were simply doing what their bank asked them to do. I would not want to be drawn at this stage on should every one of those individuals be included within the certification regime until we have done further work.
Q13 Chair: But they were incentivised to sell a product in a way that did serious harm to customers.
Martin Wheatley: If you ask them, I think many would say they did not know they were doing serious harm. They were selling the product that their bank had told them to sell.
Q14 Chair: I did not ask whether they knew about it, but they were incentivised to do something that led to serious harm to customers—correct?
Martin Wheatley: It led to mis-selling to customers and therefore created consumer detriment.
Q15 Chair: Serious consumer detriment. I am trying to use the phrase that is now in law in the Banking Act. You are moving back to language that is, if I may say so, FSA speak. What I am trying to do is use the language that is now on the statute book as a result of the recommendations of two commissions and I am trying to clarify the extent to which this is now in the bloodstream of the FCA. If I may say so, the messages I am getting back across are not the ones I am hoping to hear. I have only done the preliminaries. I am just trying to clarify whether these are groups of people in whom you, as a result of this fine, will want to be intensely interested in.
Martin Wheatley: Again, if I can, to clarify, clearly in aggregate it created serious consumer detriment, and there will be people in those banks who designed those schemes that in the future we would want to have full accountability, who implemented, who monitored those schemes. I think it is hard to reach from that that every single person who was on the recipient end of that scheme should be part of the certification regime, unless—and as I say, we still have to work through this process—we decide that anybody with any selling responsibility at all should be part of that regime.
Q16 Chair: The Parliamentary Commission on Banking Standards looked specifically at the use and the scale of sales-based incentive schemes, and in some detail. We recommended that the FCA limit the use and scale of these and we set out how that should be done: certification supporting the regime that will ensure that remuneration does not mis-incentivise activity; reward should be linked to the maturity of the risk. We set that out in some detail, but your response was—you have touched on it—and I will quote it now, “We are conducting thematic work on sales-based incentive schemes, after which” not within which, but after which, “we will consider the need for high-level remuneration principles for UK staff”. To be frank, that did not give much confidence to banking commissioners that you were taking this forward, and now that you have announced a record fine for £28 million in exactly this area, the sales-based incentive scheme area, it strikes me that you might have been wanting to reconsider the urgency of this work, put it higher up your set of priorities.
Martin Wheatley: No, it is very high up our priorities. We have done a lot of work in this area. The Lloyds fine that you referred to resulted from a piece of work that we started in 2012, where we reviewed the practices of a broad sample of firms across the financial sector. We found very, very poor practice, frankly, across the whole sector. We sent some strong messages to the industry and we took forward one enforcement case, which is the one you referred to. There are two other enforcement cases with sales incentives as part of the case. We published new guidelines in January last year and we have been carrying out a thematic review over the course of last year, which we will publish shortly. What we found is that all the major firms have redesigned their systems substantially, some to take out sales-based incentives entirely, some to reduce the proportion that is based on sales. We have said that as a result of the work that we have done, we will publish our findings and then we will look at whether we need to do further work. But I would not say it is not a priority. We have put a lot of effort into this and, frankly, we have seen a lot of change in the market.
Q17 Mr Ruffley: On 20 May last year, The Guardian reports you as saying, “Anyone earning more than £420,000 a year, €500,000, any attempt to cap bonuses at 100% of salary for those people could make it difficult to punish bankers by clawing back payments when things go wrong” but that seems fairly self-evident. Could you tell us where you think the European Court of Justice case is getting in relation to that and other objections to the bankers’ bonus?
Martin Wheatley: Clearly, as in the earlier questioning, the UK has had a different position from the EU in terms of bonuses. I cannot tell you where the case is progressing to, because frankly I do not know the inner workings of the European Court of Justice.
Q18 Mr Ruffley: But if we win the case, where will the UK end up?
Martin Wheatley: Were the case to be won, we would end up with a system where the UK might adopt something very different, so its remuneration code would look very different. Frankly, we should not therefore have what is reported at the moment—the incentives of most major banks to increase their base pay to compensate people for not having a bigger bonus, which seems a very perverse outcome—and we would have a position whereby we can claw back and exercise malice, which is the position that we always wanted. That is “if”—I think it remains highly debatable whether the UK will win that case.
Q19 Mr Ruffley: In this conference in May last year, you also said, “The last time regulators attempted to restrict bonuses, pay of middle-ranking bank staff, vice presidents, had gone up by 100%”, you are quoted as saying that, “and the same thing will happen again”. Can you just remind us of that occasion?
Martin Wheatley: In 2009, when the FSB had sought to limit pay, there was an attempt to try to cap bonuses and my experience was—and it is anecdotal, rather than being very strongly evidence-based—that most banks were putting up the base salary of the vice president level in some investment banks by 100%. If you believe what is reported in the press, that is happening again. People are finding ways to pay a cash amount which moves people outside the caps that are being structured.
Q20 Mr Ruffley: Would you describe this as self-defeating, those who believe in the bonus cap that we currently have in front of us?
Martin Wheatley: I think the reaction has been self-defeating. It has put up the fixed cost within firms and, frankly, we would rather have a bit more flexibility. It has removed the regulatory ability to have a significant impact post the event and I think the UK has constantly said it is not an ideal outcome.
Q21 Mr Ruffley: On the current remuneration code, it only applies to material risk takers and those individuals who pose the greatest risk to the financial stability of an institution. The FCA says in its October response to the Parliamentary Commission on Banking Standards, “Applying the code to other individuals would go well beyond the international standards of remuneration”. If we go beyond international standards, can you describe what damage that might do to the City of London?
Martin Wheatley: If I am honest, I do not think it is damage to the City of London per se.
Q22 Mr Ruffley: But you are obviously a bit windy about going well beyond the international standards of remuneration. Can you just unpack what you mean by that?
Martin Wheatley: I think just in terms of effectiveness, and again coming back to my answers to the Chairman’s question, what we have been looking at in organisations are not just the very high-paid risk takers who run derivatives desks and the rather complex operations, we are looking at front of house sales staff of banks, insurance companies, asset managers who are operating throughout the UK, not just based in the City of London. Our question was one of proportionality: is it appropriate that the regulator should do the job of assessing what bonus somebody relatively junior in a bank should be paid, or should we set some guidelines and expect the organisations to do that for themselves? It is very much the latter that has been our approach for those people outside the risk-taking category.
Q23 Mr Ruffley: How many firms for which you are the regulator have to comply with the bonus cap, as set out in CRD IV?
Martin Wheatley: I cannot tell you the precise number.
Q24 Mr Ruffley: Can you help me, Mr John Griffith-Jones?
John Griffith-Jones: No, but it would be the banks. It must be 1,500-ish.
Q25 Mr Ruffley: I mean in percentage terms.
Martin Wheatley: Oh, of the total firms that are regulated by us, it is a relatively small percentage, but our guidelines on pay cover all the firms regulated by us, so we regulate 27,000 firms as of today. Even though the CRD IV applies to a very, very small number, our guidelines apply to all those firms, so whether it is wealth managers, IFAs, insurers, asset managers or bankers.
Q26 Mr Ruffley: Yes, you have the power. According to your consultation paper, in relation to the implementation of CRD IV, you can deem it necessary to apply a bonus cap to a firm, can’t you? You have a bit of discretion there.
Martin Wheatley: Yes, there is some discretion.
Q27 Mr Ruffley: How do you exercise that? How do you decide whether a firm’s staff should be subject to a bonus cap?
Martin Wheatley: We have not as yet, so at this stage we have our guidelines that apply to all firms and we use those guidelines to effectively allow us to ensure that firms themselves operate good practices. We have not decided to extend the CRD IV definition beyond effectively the banking sector, which is—
Q28 Mr Ruffley: Okay, you have not made a decision, but can you tell us what factors you will be looking at when you decide to deem a bonus cap appropriate in relation to any business?
Martin Wheatley: I think we would have to form a view that it was significantly distortive of the activities of that firm and therefore outcomes for consumers in order to implement something like that. We would probably want to do it across a sector as a whole, rather than individual firms within a sector.
Q29 Mr Ruffley: You said “distortive”. I am trying to get a handle on what criteria you will be looking at specifically, so you have said it would be sectoral rather than individual firms, but what are the options in that respect?
Martin Wheatley: Again, it comes back to evidence, so we would need to have evidence that the existence of a cap was distorting outcomes and creating consumer detriment or the lack of account was creating consumer detriment. We would do that through our normal supervisory work or investigative work if we found that there was cause to suspect that that was the case, but we would not jump to a conclusion that said a cap was necessary to be applied across the entire financial services industry. Frankly, it sounds to me disproportionate.
Q30 Mr Ruffley: But there is a considerable amount of uncertainty resting in that answer. It seems to me that there do not seem to be any hard and fast criteria that you will use in deciding whether to apply a bonus cap. How are you going to make this transparent? I can imagine parts of the industry sort of howling when you suggest that a bonus cap is being applied to them because their practices are distortive.
Martin Wheatley: We would be very transparent, and so our approach is that when we reach findings, we always will publish a final decision that includes a lot of detail about that decision. When we carry out a themed review across a sector, we will publish specific findings as to what we have found and the conclusions.
Q31 Mr Ruffley: When do you expect your first themed review on this particular point to come out?
Martin Wheatley: I am not sure that we have a particular themed review on this point.
Q32 Mr Ruffley: It is quite a big point, isn’t it? You have very wide discretion, as you yourself have admitted, where you can deem it necessary, where there is distortive activity, and you have indicated it might be sectorally-based rather than individual firms, but when are you going to start talking about the exercise of this discretion in your themed review?
Martin Wheatley: We will be consulting on the remuneration code later on this year, so by the middle of this year.
Mr Ruffley: Later in this calendar year, yes.
Martin Wheatley: Later in this calendar year we will be doing a piece of consultation on whether and how far the remuneration code that we currently have needs to be extended.
Q33 Mr Ruffley: I just have one final question, which goes back to the Chairman’s line of questioning. The Parliamentary Commission on Banking Standards said, and I am quoting, “There should be a presumption that fines on banks should be recovered from the pool of deferred compensation as well as current year bonuses. The recovery should materially affect to different degrees individuals directly involved and those responsible for managing or supervising them, staff in the same business unit or division and staff across the organisation as a whole”. Can you point to any action you are taking to ensure that fines are not just something that the shareholders have to divvy up for, but that payment of fines does fall on the relevant perpetrators of misdeeds?
Martin Wheatley: The actions are that each year when it comes to bonus award time, we are given a schedule by each of the major institutions of the awards they intend to make to the individuals, so it is a very detailed schedule by individual, with indications of where clawback or malice is applied. In particular we have seen that over the last couple of years for LIBOR fines, for PPI, where real money has been clawed back, real malice has been withdrawn from people’s payments that they would otherwise have received.
Q34 Mr Ruffley: Is there a particular percentage in your mind? Do you say that in relation to fine X for financial institution Y? How do you apportion the amount you levy from the shareholders in relation to the amount you levy from the deferred compensation pot?
Martin Wheatley: To be honest, ultimately that is a judgment call. It is based on, frankly, to some degree, the individuals who remain with the organisation who were kind of reflected in the activities that we fine a bank for; to some degree it will be the seriousness of the activity we have found in a particular bank. That is a discussion we go through and we go through a very formal process to agree it, but ultimately it is a judgment call, that there is not a simple formula that works it out.
Mr Ruffley: Thank you.
Q35 Mark Garnier: Mr Wheatley, can I carry on with some of the questions that the Chairman was asking about certification of staff, particularly going back to the Lloyds Bank debacle and the fine the back end of last year? What struck me as particularly interesting about that Lloyds Bank infringement was that it happened several years after the financial crisis, so from 2010 to 2012 was the period when there was this problem going on. Under no circumstances could anybody be given any slack, if you like, for saying that this was anything to do with pre-crisis behaviour that had become endemic in banks. This is absolutely brand new, calculated, thought through carefully, sort of brave new world infringement, with no sign of conscience or corporate responsibility being carried over or lessons learnt from prior to the crisis. Would you agree with that?
Martin Wheatley: Yes. It was quite surprising, from our point of view, that the lessons had not been learnt.
Q36 Mark Garnier: Okay. That is very interesting. What troubled me about your answer to the Chairman, particularly about the certification, was your approach to the individual staff who were selling the products. You seemed to be giving almost a sort of post-modern Nuremberg defence that they were only responding to bonus incentives as opposed to obeying orders, but are you familiar with the three lines of defence model that banks run?
Martin Wheatley: Yes.
Q37 Mark Garnier: You would agree that the first line of defence, which is where staff deal with consumers, is absolutely about driving the good standards and that is the starting point of good standards?
Q38 Mark Garnier: That is a nod, for the record. Getting this sort of, “I was only obeying bonus incentives” argument of these people is completely the wrong answer, is it not? What you want is those people on the first line of defence—those people who should be certificated staff—turning around to their bosses and saying, “Hang on a second. This does not smell right. I do not understand why it is wrong, but it does not feel right” rather than giving them the excuse that they were only obeying incentives and therefore it was okay to do it. Don’t you agree with that?
Martin Wheatley: Obviously, in the Lloyds case, what we pointed to was the most extreme cases. In those cases, you will have seen that there were individuals who, because of the cliff-edge nature of the awards, in the last week or last day would be selling to—in one case—themselves, a colleague, a wife. That is clearly at one end of the spectrum, absolutely, but a lot of the sales practices that we have seen over a number of years were people selling products that were not obviously to them as individuals the wrong thing to be selling or bad things to be doing. They were simply trying to reach their sales target for the month and that is where I would question whether—
Q39 Mark Garnier: But my point is this: they were selling product in order to meet sales targets. Should they not have been in a position where they are compelled, if you like, through a certification process to come back to their bosses and say, “No, no, no, this incentive scheme does not work”? During the course of the Banking Commission, it was practically impossible to find any mechanism whereby those frontline junior staff could do this. We checked with the unions to see what they had said, and the unions said, “We kind of understand, we kind of get the problem, but we do not really understand the dynamics, because that is not what we do”. We could not find any mechanism whereby the regulator would be able to pick this up. Whistle-blowing was pretty scant and not very well-supported. Now we have you as the chief executive of the regulator giving us, as I say, this Nuremberg defence for those individuals. This is not going to drive better behaviour, is it?
Martin Wheatley: I hope it is not a Nuremberg defence. Genuinely there are quite diverse ranges of behaviour that happened. There is, at one end of the spectrum, behaviour that clearly should not have happened, should never have happened, certainly should not in 2012, when you would hope the lessons of the past have been learnt. In many, many cases there are people with sales-incentive structures that are not obviously poorly designed, but taken to excess lead to bad outcomes. That is where we have introduced guidelines and where we have seen all the major players revise their structures.
If I can come back to the point of certification, I think part of the concern—I cannot give you a more definitive answer—is we are still going through that process. We will consult in the summer and we have not yet been through our own board and internal governance process on how far we should apply the certification process and therefore what we will consult on.
Q40 Mark Garnier: All right. Can I turn to the Retail Distribution Review? I have just come from a breakfast with members of the industry. Seven years, £3 billion of costs estimated to the industry and therefore to the consumer. There has been a subsequent impact on innovation because everybody has been trying to be RDR compliant; there has been a cost to growth of the financial services industry. What does the consumer have for all that?
Martin Wheatley: I think the consumer has a much more transparent industry. I think the consumer is much better served by the structure. We have removed the commission bias that meant products were sold by some—not all, but by some—in the industry simply because of the commission that would be paid to the intermediary. We have a professionalised industry where everybody in the IFA space, the banking sales space, is qualified. We have more advisers today than we had a year ago, because we are seeing growth in the industry as well.
Q41 Mark Garnier: We have substantially fewer advisers than we had three years ago.
Martin Wheatley: Yes, because there was a significant drop in—
Mark Garnier: All the high street banks have pretty much pulled out of independent financial advisers.
Martin Wheatley: Yes, absolutely. So what we saw was—
Mark Garnier: So there is less available for the consumer.
Martin Wheatley: The mass market took a decision and backed away, so some of the high street banks. The IFA space has seen quite a big increase and we are seeing that growth, and contrary to the point that was made to you at breakfast, I think we are seeing a lot of innovation in the industry. We are seeing new technical models come along, which I think are far-reaching, in any event.
Q42 Mark Garnier: No, you are absolutely right. Hargreaves Lansdown is coming up with a new platform, and that is a very good thing, assuming you know what you are talking about. The problem is that there is now widely spoken about this large advice gap; you can reword it and call it a savings gap. If you are somebody with £75,000 of income a year or £100,000 of capital investment, you are unlikely to get any meaningful holistic advice from advisers.
Commission bias, just following up on that: there is a legacy of people who have been put into products before the Retail Distribution Review came along with trail commission. Now they are being left in those products, when in fact perhaps the advice would be better to move to a different product, so you have increased commission bias because you have commission lag bias, if you like, because people are sticking with their old products because it is better for an adviser to leave them there than it is to move them on.
Martin Wheatley: A couple of points, and maybe John will comment as well, because I know John has some views on this. In terms of the people who do not get advice, you have named various threshold levels. Certainly from the banks, they worked out that below a certain level, they cannot, in a cost-effective way, provide the sort of advice that—
Q43 Mark Garnier: Do you know what level that was?
Martin Wheatley: It would vary by bank, so different banks would have different numbers, but they concluded that they could not cost-effectively deliver an advisory service at those sort of threshold levels. What the banks frankly failed to do, and I think other people are doing, is try to find more cost-effective ways of delivering the sort of solution that people want.
John Griffith-Jones: I have spoken to several people and a lot of industry players have been coming to see us essentially to test out what you might call simplified advice models. What they are trying to do is get this automated so that you can go down some form of a checklist and get to an answer that may not be the perfect answer, but which is a cost-effective answer relative to the amount of money. I think talking to IFAs, the sort of cost per hour of advice is kind of £7,500 minimum, so I would not go at £75,000, based on the people I have talked to, but certainly at £25,000, when you are at £100 an hour and you need sort of three hours’ worth of advice, the front-end cost of making the investment begins to weigh heavily, whereas on a computerised machine, once you have done the set-up cost, it is essentially very little. My view is we should encourage the innovation in this area. Ultimately we will have to take the decision, “Is this good enough?” but I do not think we should let the perfect be the enemy of the good when the fundamental problem is the cost of providing advice at all. I would rather have some good automated advice that gets to reasonably simple, understandable products than to have had hidden trail commission in the past. I think it is—
Q44 Mark Garnier: The negatives that were being put forward to RDR is that it is increasingly difficult to access advice for the consumer, which we would agree; they have halved the number of banks that are participating in it and the total annual cost of ownership of a portfolio has in fact gone up to about 2% per annum, as opposed to being 1.5% per annum, because this is how the transparency of the cost had been rolled into long-term portfolios.
Martin Wheatley: I do not recognise those percentages. What we have seen is—
Q45 Mark Garnier: This is what the investment advisers were saying it is costing, so it used to cost you 1.5% of management fees to run a portfolio and now it is 2%.
Martin Wheatley: Again, my intelligence is that the funds are increasingly creating clean funds and super-clean funds that do not have bundled within them rebate charges that go back to the platform and then back to the individual. You get a very transparent charge of what you are paying to the fund manager. You get a transparent charge as to what you are paying for the adviser. You have seen in the last couple of weeks announcements from some of the big platforms, some of the funds, of pricing structures that they are introducing, which is bringing down the total cost of ownership, so the trend I think we are seeing is that those costs are coming down, but I accept entirely the point about the banks, the mass market withdrawal and what then happens to fill the advice need in that space. That is where, as John says, we are starting to see innovative models emerging in the market.
Q46 Mark Garnier: Are you undertaking a review into RDR?
Martin Wheatley: Yes.
Q47 Mark Garnier: Is that into the implementation and how that has gone or are you doing it into whether it has been a good thing or a bad thing?
Martin Wheatley: We will do a post-implementation review, so in advance of the—
Q48 Mark Garnier: So, has it been implemented properly?
Martin Wheatley: And is it a success against our original criteria, so have we seen professionalism, have we seen the removal of commission bias? It will touch on—I think it has to touch on—this question of whether people are getting advice or not.
Q49 Mark Garnier: There is a lot of criticism, as you know, about the Retail Distribution Review coming in. There is absolutely an advice gap or a savings gap, whichever you like to call it. Do you think that this is the beginning of a long-term problem that has not been resolved by RDR or do you think we are bumping along a stony patch in the road as the implementation is introduced, so that once we are over a year or two, we will work through this?
Martin Wheatley: Two things I would say. I think we are in the middle of a long-term problem, that people are saving less. I do not think that is about RDR. If you look at adviser numbers in the US and the UK, if you look at the total number on propensity to save, it has been falling, so I think that is a long-term trend. Our expectation and hope is that the greater transparency that RDR brings and the innovation that will come around it will see some reversal of that trend, but frankly, I cannot claim that RDR will solve all problems. I do not accept the contention that RDR has not been a success. I think in a number of areas it has been; in a number of areas, it is still work in progress and we will continue to see the industry evolve. The one thing I would say is that, certainly when I first joined the FSA, there was a lot of criticism of RDR. Mostly what I hear now are finer points about what RDR has delivered than not, but not the wholesale condemnation of the whole package of measures.
Q50 Mark Garnier: Is it the same people who were condemning it who have now left the industry, for example, the banks?
Martin Wheatley: No. I think the most vociferous people commenting were the IFA community, who by and large have just got on with it and made a good business from it.
Chair: Those that are left.
Mark Garnier: Those that are left, absolutely.
Martin Wheatley: As I said, the number of advisers in the IFA space has increased.
Q51 Mark Garnier: It has increased over the last year, but if you go back to—
Chair: It is down on pre-RDR levels.
Mark Garnier: Absolutely. In 2012 there was 35,073; there is now 32,690.
Martin Wheatley: That is right. What we saw was a reasonably significant drop at the start, mainly from the mass market players. In the last year, we have seen the numbers start to tick up again.
Q52 Chair: It must be to the good to get rid of the trail and to increase transparency. The question is what damage we have done in the process and whether it is going to repair itself. You talked about innovative models, and in particular e-models, for product and this relates also to banking, indeed selling vanilla products like bank accounts or basic savings accounts. Do you have a policy for deciding whether a product sold on the web by a bank or by one of these institutions can constitute an advice sale?
Martin Wheatley: In the general overall scheme of things, we do not preapprove products, so apart from a relatively narrow range of products, we do not preapprove. There are some products that we have taken the view that they should not be sold on anything other than an advised basis or some products that should not be marketed to retail. They are interventions that we have made.
Q53 Chair: Are these vanilla products things that should only be sold on the basis of advice? For example, when a bank on the web offers a bank account or a straightforward savings account, should that account be offered on the web only after there has been human intervention, only after there has been advice?
Martin Wheatley: Again, because of the way the Know Your Client rules work, there would have to be a degree of intervention if it is a new customer to a bank; if it is an existing customer, typically not. People would be able to take additional products from a bank without the need for much additional advice or intervention.
Q54 Chair: No, it is not the “much”, it is “any”. I am asking you whether this constitutes advice. It is a switch: it is either advice or it is not advice. Are these products advice products or not?
Martin Wheatley: Again, I do not think I can give a blanket answer that covers all, but in some cases there will be products sold through the web-based interface that are not advised products and there will be some that are.
Chair: There are some that are.
Martin Wheatley: Yes.
Q55 Chair: Do you require banks and other institutions to say which are which on the web?
Martin Wheatley: The ones that can only be sold on advice, we clearly require that is made apparent, that there is a not self-execution option on those, but not on others. They can be sold on either route.
Q56 Chair: So there can be no misunderstanding between the customer and the firm in the cases where advice is not offered?
Martin Wheatley: No. I think that is one of the problems. I think there is misunderstanding.
Q57 Chair: Right. I am asking you to think of ways of clearing that up and I have just made a suggestion, which is that the website should always say whether this is an advice-based product or not, and if it is not, then caveat emptor applies.
Martin Wheatley: Yes. The answer is it should be clear. I think a lot of people would feel that once they had been taken a couple of steps through some sort of guided process, they feel they have been advised, and it needs to be clear when advice is given and when it is not given.
Q58 Chair: So you think it is possible for a firm to offer advice on the web without any human intervention?
Martin Wheatley: I am not sure that we have seen that model yet.
Chair: You have just said that. That is what you just said.
Martin Wheatley: No, I thought I was saying the opposite. I was saying that, many times, with a service that is a non-advised service, a customer would still go away thinking that they have received advice.
Chair: That is my point.
Martin Wheatley: Yes.
Chair: That is what we are trying to clear up. I am only saying it for the sake of argument, but you are agreeing with me that that does not constitute advice?
Martin Wheatley: I think I am agreeing with you. There are processes, which is a non-advised process in our terminology—
Chair: This is such hard work. Let us just go to square one again. Do you think it is possible to offer advice to sell an advice-based product virtually without any other intervention?
Martin Wheatley: Yes.
Chair: Right. You do not think human intervention is required in order to—
Martin Wheatley: That is a different question.
Chair: It is exactly the same question. By saying that, you have agreed that it is possible to sell a product and offer advice without human intervention.
Martin Wheatley: Yes.
Q59 Chair: How do you think a distinction should be drawn and what thought have you given to how to draw the distinction between those that are web-based advice products and those that are not?
Martin Wheatley: I am sorry it has taken a while to get to the heart of the question, but for me it is something we spent a lot of time worrying about. It is a real concern because the distinction between a product which is advised on the web and execution-only on the web is not a distinction that people naturally and easily can determine. We are spending quite a lot of time talking to the industry about whether we need to revise our guidance to make products fall very clearly into one class or the other.
Q60 Chair: We are agreed that it is a concern. I am asking you for evidence that you are bringing some clarity to the piece. If we do not bring some clarity, given the mood in the market, don’t you think banks and other firms may withdraw from the market?
Martin Wheatley: The evidence I will give you is—
Chair: After all, why do they want to sell something that they do not think constitutes advice only to find subsequently you decide that it did constitute advice?
Martin Wheatley: There is quite a narrow dividing line between those two and what we are trying to do is work with the industry to work out how we can make that dividing line much clearer to both the consumer and to the adviser. What we are doing in this space is we have spent a lot of time over the six months talking to firms about this issue; talking to them about where it may need to have further guidance from us and structuring a paper that will come out within the next quarter that focuses on that.
Q61 Chair: Within three months we are going to have clear guidance on this issue in the market?
Martin Wheatley: To say we will have clear guidance—we will have raised the issue and we will be seeking input on it. Guidance will follow.
Q62 Chair: You are going to initiate consultation?
Martin Wheatley: Yes, formal consultation.
Q63 Chair: Okay. We are making some progress. Now, when are you going to publish this RDR review?
Martin Wheatley: Towards the back end of 2014. It is a review that we have always committed that we would do this year. It will be nearer the end of 2014.
Q64 Jesse Norman: Just a series of quick follow-up questions on points that have been raised already. Mr Wheatley, when you do your RDR review can I request that you include a cost benefit analysis of the RDR itself, however rough that may be, and also a specific analysis of how it has affected specific parts of the market differentially?
Martin Wheatley: Yes.
Q65 Jesse Norman: Secondly, will you join me in noting the irony in banks talking about products being cost effective when their own costs are so high and driven by bonuses?
Martin Wheatley: I am very happy to join you in the irony of that, yes.
Q66 Jesse Norman: Thank you. When you talk about the Lloyds’ fines that have been levied, what percentage of those were drawn from the bonus pool and what percentage were attributed to shareholders?
Martin Wheatley: The fine was in this financial year and we are in the process of reviewing bonuses at the moment, so I can’t tell you because we have not completed that process.
Jesse Norman: Do you have an expectation as to where it will lie?
Martin Wheatley: Again, I can’t give you any figures on that. It is something that we are going through at the moment.
Q67 Jesse Norman: Right, but I take it you share the widely-held view that, first, there should be a meaningful deduction from the bonus pool and, secondly, that deduction should not merely be focused on those who were involved but on the senior managers who might have set the sales incentives and also on others who, although not part of it, nevertheless can feel some of the pain of the misbehaviour of their colleagues?
Martin Wheatley: Yes. The whole concept of clawback and malice is that those people who were involved in the decision-making should suffer the consequences of our subsequent enforcement action.
Q68 Jesse Norman: Good, thank you. When you said you looked at the Lloyds situation, you said you had not gone into detail on the relationship between incentives and bad practices. Can I just say I think that is a real shame and I wish the FCA would make a detailed study of the relationship between incentives and bad practices in bonuses because there is lots of evidence across an enormous swathe of products? It is an area in which the FCA, in my judgment, has very considerable experience.
Martin Wheatley: Okay. I should clarify. We did to a degree, but what we didn’t do was a complete drains-up of the entire sales of products and whether that was entirely driven by poor practices. We found examples where we could link.
Q69 Jesse Norman: I would go further. I think, not only should you have a detailed understanding; you should have behavioural economists crawling over the different incentive schemes in order to work out how these have been handled and why they have contributed to mis-selling or to customer detriment.
Another very quick question. It has been suggested there should be a cut-off date on PPI claims. Do you agree with that?
Martin Wheatley: It is a very complex one because individuals have rights and their rights would be curtailed by any cut-off and, in order to curtail an individual’s rights, there needs to be a strong case as to why we would do that. We would have to make a business case and we would have to go through full consultation about it. It is a complex case that does not lend itself to a simple answer.
Jesse Norman: Only with proper consultation?
Martin Wheatley: Only with proper consultation would that happen.
Q70 Jesse Norman: I have had three minutes so far. I am very grateful for your quick answers. We have talked a little bit about conduct. Have you made a detailed study yourself, and also Mr Griffith-Jones, of the circumstances under which the Reverend Flowers was appointed to be chairman of the bank, the FSA’s role at the time, and have you managed to satisfy yourself that such a thing would never happen again?
Martin Wheatley: I think this Committee has already taken some evidence on this. There are two levels of investigation that are underway that we are looking at currently. One is our own internal investigation, and the Treasury have asked for a review. Those processes are ongoing. I can say with some confidence that the processes that allowed it to happen in the past have now been changed and, therefore, would not allow that to happen again. In particular, the ability of somebody with a demonstrable lack of banking experience to end up in such a crucial role within a bank—
Jesse Norman: That process will not shy from referring to the ineptness of the previous procedure to the extent that it finds it to be so?
Martin Wheatley: No, it won’t shy from that.
Q71 Jesse Norman: Okay, thanks. I have a couple of specific topics I want to ask questions on. One is the money advice service. You will be aware that has been a topic of great interest to this Committee. When you looked at the money advice service in June 2012 the arrangements were considered to be inadequate by the FSA, but they became inadequate, it appears, with no change other than the appointment of a subcommittee to the FSA board. Is it plausible, Mr Griffith-Jones, that the subcommittee is going to be an adequate way of exercising proper oversight over the money advice service?
John Griffith-Jones: I certainly hope so. We have had, dare I say, quite a significant impact in the 12 months that the committee has been—
Jesse Norman: What is the evidence of that?
John Griffith-Jones: We have a new chairman. We have a new chief executive. We have a new way of doing the handing out of the debt advisory money to people like Citizens Advice. Previously this was done on an annual basis, which meant that the people working for the citizens advice bureaux did not know whether they were going to get the money next year and they were permanently under threat of dismissal. We have moved to three—when I say “we”, MAS have moved to a three-year arrangement, which I think has been very well received.
Q72 Jesse Norman: How often does your committee meet?
John Griffith-Jones: We meet formally three times a year and I either nip round and see or talk to MAS pretty regularly in between. There was some correspondence between Lord Turner and the then Treasury secretary about who was in charge of what. There is a board of MAS. It is a properly constituted board. I think there are 12 people on it, six of them non-executives or something like that. I think they should have the responsibility for running MAS well and we should have the oversight of them. I am more confident than perhaps in the report that you put out at the back end of last year that they are now on the right track. You probably saw that—
Jesse Norman: You have had an earlier report, though, which says that the service is not providing value for money.
John Griffith-Jones: No, I think it said that the—
Jesse Norman: Generic money advice, not providing value for money.
John Griffith-Jones: I think it said it was not sure whether it was, rather than it wasn’t, and they put out some statistics yesterday.
Jesse Norman: “Its provision of generic money advice is not yet achieving value for money.” The question is, what consideration have you given that and what specific steps have you taken to address it?
John Griffith-Jones: Quite a lot. I think they have an incredibly important job to do. They obviously had a strategy, which was to build, as you know, this automated computerised advice service. That links, quite interestingly, to what we have just been talking about. I don’t think it is perfect but they have had, as you probably saw in the press this morning, 10 million hits in the year—their year runs March to March. They were heading for 12 to 13 million hits. I can’t tell yet and nor can they, rather frustratingly, whether someone coming off the website gets what they want or changes their behaviour as a result of it, but I have to believe, from a cost benefit basis, that a computerised system that is widely accessible and that has a good reputation is a major step forward. Some people disagree with that.
Q73 Jesse Norman: I find those numbers hopelessly opaque. I have no idea what they mean. Can I ask you a question about competition? It is obviously an FCA requirement now to promote competition as one of its objectives. You have told us that you will make a specific commitment to act as the champion within the FCA of competition. You are part time. You are a non-executive, Mr Griffith-Jones. How can you do that and what steps have been taken to promote competition?
John Griffith-Jones: That was the commitment. I think I volunteered it and, if I didn’t, you wrote it in that I was volunteered and very happy to accept the responsibility. That was 15 months ago now. Things have moved a lot. I am no longer the only champion. I think we have generally a strong record of achievement.
Q74 Jesse Norman: What are the examples of that? Just give us some examples.
John Griffith-Jones: Okay. We have recruited two very strong people as joint head of our competition department. We have 25 people working for them, towards a target of 45. We have launched three market studies: one on GI add-ons, one on teaser rate bank accounts and one jointly with the OFT on SME banking. Those are all due to report in the first half of this year, March I think. I don’t know whether they will all come out in March. Most importantly, our board has Amelia Fletcher on it, who is a professor of competition from East Anglia University, and I would like to think that we are well on the way to injecting competition into everything we do, which is possibly the most important cultural change that we need. That is nine months. I don’t think that is too bad. Maybe it is base camp rather than summit, but it feels like we are heading in the right direction.
Martin Wheatley: Can I just add to that? We are also appointing David Saunders, who is the CEO of the Competition Commission, who will join us as a senior adviser. That is another very important, senior hire for us.
Q75 Chair: How many days a week will he be working with you?
Martin Wheatley: Typically, senior advisers, three days a week but it can be more, depending on the issues.
Chair: So you have the lion’s share of this man’s time?
Martin Wheatley: Yes.
Chair: Okay. That is very interesting and helpful. Thank you.
Q76 John Mann: Mr Wheatley, in the whole new system of financial services, oversight and regulation, the whole paraphernalia that is there, where is the consumer champion within it? Which organisation should I be looking for to find the champion of the consumer?
Martin Wheatley: I think you should look to the FCA. We have been set up as a consumer champion.
Q77 John Mann: Good. Have we or have we not just had the biggest series of quantifiable wrongdoing in the history of our financial services industry?
Martin Wheatley: Yes, we have.
John Mann: Is there any other industry in recorded history in this country that has had a comparable level of quantifiable wrongdoing, to your knowledge?
Martin Wheatley: Not to my knowledge. I don’t know what other industries have suffered, but certainly not to my knowledge.
Q78 John Mann: We have had a bit of a problem there. You are the consumer champion, but I have not heard you say anything yet about consumers. It has all been a bit dry.
Martin Wheatley: I am sorry. A lot of our work is necessarily technical and when we are in front of the Committee we get drawn into technical areas. The RDR is all about consumers. The work on remuneration structures in banks is all about consumers. It is all about getting a better deal for consumers.
Q79 John Mann: Good, because 10 minutes ago, of the 15 people who are the general public here, seven were texting and one was asleep. That is natural. I thought it was getting a little bit dry and I just wanted to make sure I was at the right meeting. So you are the consumer champion. Now, David Lawton stated in November that the Financial Services Act 2012 did not give the impetus for a radical change to the way we approach market supervision. Why is that, Mr Wheatley? You have been there all along?
Martin Wheatley: I think it was drawing a distinction within our organisation as to which bits were more affected and which less. Market supervision is effectively the oversight of, in our terms, formal markets—equity markets, debt markets, credit markets—and which are the areas that have been less affected. I do not think he was using “markets” in its much broader sense of markets for mobile phone insurance or markets for low-value home insurance. All of those markets have been massively affected. I think that was a context that was just—
John Mann: But my question is, why is your organisation saying that the Act in 2012 was not good enough when you were there advising on these matters all the way through?
Martin Wheatley: As I say, because we are a technical organisation we tend to lapse into technical language and I think you will find that David was talking about formal regulated markets like the stock exchange or the debt market. Our view is that the Act does give us significant new powers and significant new powers to benefit consumers. If you use “markets” in its much broader sense of what people buy, things like mobile phone insurance or assets insurance, those markets are radically affected by the new powers.
Q80 John Mann: He did go on to then outline the consumer protection objective. Dr Carney in Davos emphasised that one of his big challenges is legacy issues of past mistakes. Has he indicated to you, in your role on the FPC, what precisely these mistakes are in relation to your work?
Martin Wheatley: To be honest, he very much looks to us to inform him as to what those mistakes are. In terms of my role on the FPC, a large part of that is trying to make the FPC aware and, therefore, the banks aware how much of a problem that legacy is likely to create and whether that is a source of systemic risk, which is primarily what the FPC is concerned about.
Q81 John Mann: You would say to us, would you, that the consumer should feel far more confident than they could have felt in previous years about the ability of your organisation to protect their interests?
Martin Wheatley: If you are asking me, “Do they feel more confident?”, frankly, I think all the bad news about the industry does not engender confidence. It does not build confidence.
John Mann: Should they feel more confident?
Martin Wheatley: In practice, yes. The answer is yes and we have made interventions in the banking system where we have required that the banks give power to consumers to cancel their continuous payment authorities; one of the problems that payday loans were creating for individuals. We have asked the banks to not immediately put a debit on to an account if a payment does not go through because a salary cheque has not gone in. That saved the consumer £200 million. We have made the mobile insurance industry deliver real benefits and real clarity about what the products are that they offer and that is, again, hundreds of millions. Consumers have benefited hugely and that is not to count the £16 billion and counting that the consumers are getting back from the work on redress that we have done on PPI.
Q82 John Mann: It is just that in the first hour we did not hear the word “consumers” mentioned once.
Mr Griffith-Jones, with your new role, is there a consumer detriment due to the incestuous nature of the relationship between financial institutions and the top accountancy companies?
John Griffith-Jones: I don’t believe so.
John Mann: When Mr Tomlinson, for example, suggests that this is a major problem, he is wrong then?
John Griffith-Jones: As you know, we are looking into the Tomlinson allegations and the Large report and we will wait to see what they say. I am not sure I would use the word “incestuous” myself, but I will wait to see the evidence that they come up with in those cases.
John Mann: Obviously you have no remit for the Tomlinson report but you have chosen to look into it?
John Griffith-Jones: Yes.
Q83 John Mann: The relationship between the top accountancy companies and the financial institutions and particularly the big banks, what are the fault lines there? What is the weakness in the system?
John Griffith-Jones: I think a lot has been done. Obviously there was an exposed weakness as a result of the crash or at least the accounting profession did not see it coming, along with everybody else. A lot of work has been done, as I am sure you are aware, by the FRC and the EU around rotation and on audit services. I do not think it would be appropriate for me to give a precise comment on either where that should or will end up.
John Mann: Of course it is. You are the consumer champion. Mr Wheatley has just told us you are the consumer champion. It is consumers who are losing out. That is what Mr Tomlinson’s report is all about.
John Griffith-Jones: I do understand that. As consumer champions, I think we have a far more direct way of protecting consumers than going via the relationship between the auditor and the banks.
Q84 John Mann: There may be other ways but what precisely are you going to do about the relationship between the top accountancy companies and the banks that Mr Tomlinson and others have highlighted as a fundamental weakness that causes a consumer detriment?
John Griffith-Jones: What I suggest we should do is analyse the evidence in the first instance and then take whatever action is appropriate once we have a firm handle on whether the allegations are substantiated and the extent of the damage.
Q85 John Mann: We have had six years since the financial crisis. The evidence is there. I am not asking you to analyse the evidence. I am asking what you, as the consumer champion organisation, are going to do about it.
John Griffith-Jones: I have to go back to where I started. As the consumer champion—and, please, I certainly take that seriously as the main job—when we are looking at detriment across the whole panoply of things we are asked to look at, I would not go to the relationship between the banks and the accountants as the most important way of making sure that customers get a good deal from the banks.
John Mann: You are ducking the question, with respect. No one is asking you to define that as the most important. I am not asking what the hierarchy is.
John Griffith-Jones: Right, okay.
John Mann: I am asking, on that issue, what your organisation, the consumer champion, is going to do about it. You obviously regard it as important because you are looking into Tomlinson, even though you don’t have to. What precisely are you going to do about it?
John Griffith-Jones: As I say, I think we have to get the evidence from Tomlinson substantiated by our own investigation and then, to the extent there is either inappropriate behaviour or inappropriate linkage between the banks and the accounting firms, which of course is detriment to the consumers, we will act on it.
John Mann: Can we expect a report from you on what you are going to do on the consumer detriment of the relationship between the top accountancy companies and the big banks?
John Griffith-Jones: You can certainly expect a report from us around Tomlinson in general and I agree it should cover this part of the market as well.
Q86 Mr Love: I want to come on to consumer credit, but I would like to start with a question going back to sales incentive schemes in branches. Mr Wheatley, you said earlier that you had asked the banks to revise their structure of remuneration. I am being told that, while on form structures have changed, the ethos and the atmosphere in branches has changed little. The way that that has been characterised is that meetings attended by bank staff are now being used as a crude proxy for products sold. Are you aware of these concerns and are you speaking to the banks about it?
Martin Wheatley: In terms of the first part of your question, yes, the banks have responded by taking away a large part of the sales component; sometimes 100% and sometimes 50% of the incentive structure. That part has been achieved. The point you make about, “Well, has it really changed?” Yes, I am aware of that. We have had whistle-blowers. We have had reports to us of that. Where that is reported to us, we go in and directly look at those firms and look at those branches or regions where we see that to be the case. If we find that frankly it has not changed except in name, we will take strong action with banks.
Mr Love: Is that happening? Can you give us an example of a bank where you have taken robust action to deal with the failure to respond to your revision of the remuneration structures?
Martin Wheatley: I can’t give you public examples of that because obviously our new guidance came in in the early part of last year and so any cases would still be working their way through our system, but I can assure you that it is something we are very focused on and we are spending time looking at.
Q87 Mr Love: Can I come then to consumer credit, particularly high-cost credit? In October last year you published a document on your assumption of responsibility for consumer credit. At that time, Europe Economics estimated that between 25% and 30% of high-cost short-term lenders would leave the market. You are now being asked to introduce a price cap in tandem with those recommendations and, indeed, you may be strengthening those recommendations as a result of the consultation. What estimate do you make of the number of firms that are likely to leave the market as a result of the overall approach that you are now taking?
Martin Wheatley: To deal with the first part first, we took our consultation out to the market. We have completed that process. Later this month we will publish our conclusions and, therefore, initial rules. Under that initial impact, we estimated that between 18% and 30% of available consumer credit may withdraw from the market. That was the initial calculation based on the changes to rollovers, changed continuous payment authorities and the new affordability rules.
The cap we have not assessed yet. We are in the process of trying to work out what that cap would look like and what its impact would be. Undoubtedly, if the cap is going to have any success, it would reduce the availability of credit to the market and we will have to balance the additional protection we can give to the consumers against the loss of a service that, for many people, is a valued service, and that is a very difficult equation. We have been given that challenge to introduce that by 1 January 2015—so next year—and that is a tough ask for us and I can’t yet tell you what our assessment of impact will be.
Q88 Mr Love: Is there a level of market excess above which you would be concerned that there would be consumer detriment from that?
Martin Wheatley: It is a tough call. I think our latest figures show there are around 2 million people in the UK who use short-term high-cost credit. I am told from MAS figures that 1.2 million took out payday loans over the Christmas period. That sounds like very high numbers and, clearly, for us to have an impact, a number of those people would not have access to the service, but we do not yet have a figure as to what level of impact we would find acceptable.
Q89 Mr Love: The Government has asked you to introduce this cap. Indeed, I think the initial indications you gave were that you were not convinced that a cap was necessary. Are you now convinced that the cap is necessary or—“forced” is probably the wrong word—are you being persuaded that a cap will improve the situation for the consumer?
Martin Wheatley: To go back to the first point, we were unconvinced because we simply did not have the data. Until we start regulating the industry and getting under the bonnet of how these operations work, where the profitability is or what causes the real detriment, then we would find it hard to reach a strongly interventionist policy. That interventionist policy has now been mandated to us. It is not a question of whether we agree with it or are being forced. That is now the law and we have to implement that as best we can.
Q90 Mr Love: Let me come on to the fee structure. Statistics show that the number of people seeking debt advice has increased sevenfold over the last five years, so there clearly is a need for debt advice. Are you sure that the proposed fee structure is proportionate to that need?
Martin Wheatley: I think so. We have tried quite carefully to make sure that the fees are proportionate. We have tended to align our fees to the highest risk end of the market. We see the high risk end of the market being debt collection and payday loans and that is where the fees will be paid. There has been a significant growth in demand for debt advice and I think that will grow even more, not least because, as part of our proposal, we will make it a requirement that access to debt advice is much more clearly signalled.
Q91 Mr Love: The overall pot of debt advice money, you are suggesting, should be kept the same, even when consumer credit comes over. Is the vast increase in the need for debt advice taken into account as a result of the transfer of consumer credit to your organisation? Is it appropriate that you should keep that pot steady, reducing the amount of money that has been raised from the industry to provide that advice?
John Griffith-Jones: This is the MAS £35 million, from memory. It is a genuinely interesting question. MAS obviously put their budget together. We review it, but they put it together with a steady state number for the year starting based on their work around this three-year deal, as opposed to the one-year deal. I am minded to ask them during the course of this year to look at that again to say, “Is that enough or not?” but I do not want to pre-empt the facts that they have by just sitting here saying, “More is necessarily better”, as opposed to, “More may be necessary”. I am not being evasive. I think it is an open question.
Q92 Mr Love: There has been a sevenfold increase in the number of people accessing debt advice. If you hold steady state on the amount of money that is provided by debt advice, they have been asked to do a great deal more with the same amount of money. Surely that is perverse?
John Griffith-Jones: They are on the frontline of this and they have looked into the efficiency with which the advice is provided. My understanding, I think confirmed by the NAO, is that we are in a value-for-money position, but there is always a policy option to increase the amount allocated to them.
Mr Love: Can you reassure the Committee that this is something that you will look at?
John Griffith-Jones: Absolutely. I think we should be looking at this. I would like to see exactly what our proposals are on the payday lending and the cap and some more work on the likely outcome from that and then, if we believe that genuinely there will be more hardship or more need for face-to-face debt advice, the logical response is to give MAS more money to allocate, but I don’t want to commit to that without hearing the MAS view and seeing the figures.
Q93 Mr Love: Let me ask one final question, which relates to the criteria under which the levy is sought. They are suggesting that it will be a combination of total lending and write off levels. Now, we know that payday lenders don’t write off. One of the reasons why there is considerable consumer detriment is they will chase people. You are giving a whole sector a perverse incentive to chase people rather than write it off. Is that not a concern relating to the experience of consumers, particularly in relation to the high-cost sector?
Martin Wheatley: What we are trying to do is not incentivise people to create more consumer detriment through the debt recovery methods that they pursue. We will be supervising the debt management and the debt recovery part of the industry and if we find that our rules or tariffs are creating a change to that then clearly we will have to reflect that and change that again. I mentioned earlier that we regulate 27,000 firms today. One of the challenges for us frankly is we will have around 50,000 firms becoming subject to our regulation as part of this new structure, but then those 50,000 firms will also be subject to recovery of tariffs, which includes recovery of debt advice charges as well. So there is a bigger pool to contribute to debt advice in the future.
Q94 Mr McFadden: PPI is at one end of the conduct scandals that have occurred in recent years. Benchmark price fixing is at another end. We have seen the inquiries into LIBOR rates. I want to ask you about foreign exchange. Mr Wheatley, do you think that the way that foreign exchange rates are fixed can be trusted?
Martin Wheatley: It is quite interesting because the methodology of foreign exchange rates would, to most people, seem a much safer methodology than LIBOR because it is trades that are real trades, not somebody’s view of the price at which things could happen, in a very liquid market. I think the surprise for all of us as regulators is that the allegations have become so strong about fixing of those trades, collusion between traders in that market. The elements that are different from LIBOR are that it is a much deeper and much more liquid market based on real trades. The elements that are similar to LIBOR—and this is purely on what is reported—are the suggestions of collusion between individuals at a number of firms and the use of chat rooms and phones to collude to influence prices, but we are still in the investigation phase. I can’t comment too much on any findings other than to say the allegations are every bit as bad as they have been with LIBOR.
Mr McFadden: I am going to try again. Do you think that people can trust the way that rates are fixed?
Martin Wheatley: Again, given what has come out, no. People will not trust the way that rates are fixed. I am chairing a group at the FSB level and also at IOSCO, which are the global bodies that look at this, to introduce a new standard that all rates operate to. We are trying to change the method, but in truth, no, people will not trust it because of what they have seen and the stories that they have seen come out.
Q95 Mr McFadden: You said in October, and I am quoting from the FCA press release, “We are conducting investigations alongside several other agencies into a number of firms relating to trading on the foreign exchange market.”
Martin Wheatley: Yes.
Mr McFadden: Can you tell us which banks you are investigating?
Martin Wheatley: I think around 10 banks have themselves volunteered information that said they have been asked for information. I can’t remember the 10 banks. I am sure we can write to you and confirm that afterwards.
Mr McFadden: Can you name any of them here today?
Martin Wheatley: I would rather not because I don’t want to inadvertently name a bank that hasn’t itself. We have not named banks. That is not something we would do as part of an investigation until we reach a final stage. I would not inadvertently want to name a bank that has not itself confirmed talks.
Q96 Mr McFadden: Who is leading this investigation? Under the LIBOR investigation, it appeared that the American authorities were leading and that we were in some ways following. Who is in the lead? Who is in the driving seat?
Martin Wheatley: Again, under the LIBOR investigation, it was a combination of us with the CFTC and then, more latterly, the Department of Justice in the US. In this case it is those again, but also FINMAR, the Swiss regulator. It is a number of national regulators. When you say, “Who is leading?”, the activities happened here in London. So we have the lead position in terms of access to information and access to traders, but the firms themselves will be UK firms, Swiss firms and American firms.
Q97 Mr McFadden: But we are such a large foreign exchange market, presumably you accept that the UK regulator should be leading this and should be the consumers’ champion. I am not talking about holiday money for the beach, but this is very important for businesses in this country that import or export and need honest foreign exchange rates, or indeed pension funds which may make investments in a number of countries and they need to know these rates are honest. What I want to know on their behalf is, is the UK regulator at the forefront of trying to ensure honesty in the way that these rates are fixed?
Martin Wheatley: Yes.
Q98 Mr McFadden: Can you tell us anything about the timescale of this investigation? When should we expect a report?
Martin Wheatley: If I am honest, these investigations are very complex because they cover a number of jurisdictions and a number of traders. I would be surprised if we got to conclusions within this year. I do not think we will get to final conclusions within 2014. I hope that we will next year, but again the nature of these sorts of investigations is that it is very hard to predict.
Q99 Mr McFadden: We have had LIBOR. We now have question marks over the foreign exchange markets. Are there any other benchmarks like this, which are fixed here in London, that you have concerns about or are investigating?
Martin Wheatley: Yes, there are. Those investigations are not public. I can’t tell you what the investigations are, but there are a number of other benchmarks. London being the centre it is, there are a number of benchmarks that operate in London that we are investigating because of concerns that have been raised with us.
Q100 Mr McFadden: Why is it a secret that you are investigating other benchmarks? Why can’t you tell us which ones you are investigating? You put a press release out in October saying that you were investigating the foreign exchange markets.
Martin Wheatley: Yes.
Mr McFadden: Why can’t you tell us which other benchmarks you are concerned with?
Martin Wheatley: The difficulty always is that, with any announcement, people and the press will typically jump to a conclusion that says, “Well, there is clearly a problem”. We like to get our facts and clarity as to whether the allegations are substantiated.
Mr McFadden: I appreciate that and nobody is asking you to prejudge an investigation, but you have not reached the end with foreign exchange and yet you have announced you are doing it.
Martin Wheatley: Yes.
Mr McFadden: Why is it a different process for other benchmarks that you are concerned about?
Martin Wheatley: Because foreign exchange was so widespread and there had already been public comment. There had been substantial public comment about concerns in that market. We felt it would boost public confidence if we could make a strong statement that we were investigating that market. In the other cases there has not been.
Q101 Mr McFadden: When do you think you will be in a position to tell us which other benchmarks you are investigating?
Martin Wheatley: As and when we reach a conclusion and I can’t give you—
Mr McFadden: With other benchmarks that you are investigating, you will not tell us that an investigation is even underway until it has reached its conclusion?
Martin Wheatley: Until we think there is a case to answer, no. That is our approach and I think that is the correct approach. Otherwise, essentially it is guilty until proven innocent because as soon as we make an announcement there is an assumption that there is a problem and whoever is involved is guilty.
Mr McFadden: There is an assumption that there is cause for concern, but there is not an assumption that anyone has been proven guilty.
Martin Wheatley: I beg to differ. I think very often that is the response whenever we publish any investigation that we have underway.
Mr McFadden: But you would not be investigating these benchmarks unless you had a cause for concern.
Martin Wheatley: Yes, that is right, but we have to be evidence-based in substantiating whether that concern is mere tittle-tattle or whether there are genuine problems.
Q102 Chair: Can I go back to one of the earlier questions that Pat McFadden asked there? Are you leading these investigations?
Martin Wheatley: The term “lead”—there is no formal definition as to who is leading. We are putting in significant resources. We are calling meetings to get other regulators together. We are in the lead in terms of conducting interviews and seeking information, but there is no formal structure as such where one regulator seeks sovereignty over another. That structure does not exist.
Chair: In that case, an institution might find itself with a procession of the regulators, one by one, coming through asking the same questions. Is that correct?
Martin Wheatley: It is a possibility and one of the things we are trying very hard to do is to make sure, with other regulators, that we use our resources as regulators efficiently.
Chair: This is exactly the point that I am trying to get to. Have you agreed an arrangement whereby one of you is in the lead for collecting this information?
Martin Wheatley: No. It would typically operate on an institution-by-institution basis where we would try to agree that a certain institution would be something that the UK would take a lead on and another institution may be one of the other regulators.
Chair: Right. You do informally identify people who take a lead on information gathering?
Martin Wheatley: We try to as far as we can, subject to legal constraints.
Q103 Chair: So back to the question. Who has informally been given the lead role for investigating these forex allegations?
Martin Wheatley: I suspect we have put more resources on and we have put more requests for information in. I don’t think there is an informal arrangement that says, “Okay, you are the lead”.
Chair: You told me a moment ago that informal arrangements are generally made in order to try and make the best use of resources.
Martin Wheatley: We try to do that on information gathering.
Chair: In this massive new investigation that is currently taking place, given it is an extremely important market for the UK and globally, I am trying to establish whether such an informal arrangement has been put in place. I think you have just told me, no, it has not. At the moment it is a free-for-all and at the moment these people may be coming one by one to collect exactly the same information.
Martin Wheatley: I do not think it would be true to say it is a free-for-all, but also I would be wary of saying we have reached anything as formal as an agreement between the different regulators in respect of these powers.
Chair: It is such hard work to try and get clarity. We are all agreed that a formal agreement might find itself the wrong side of various legal constraints on the players concerned. I have not been raising that issue at all. We have all been talking here about informal arrangements to put one body in the lead in order to make the best use of resources and you said earlier that that is exactly what does go on.
Martin Wheatley: Yes.
Chair: Now I have asked you, “Has such an informal arrangement been put in place for this crucial investigation”, and the answer is—
Martin Wheatley: The answer is, to a degree. It can’t be complete because some of the authorities have criminal powers that they are pursuing and some have civil powers that they are pursuing. If it is criminal—
Chair: In respect of the civil powers, has agreement been reached?
Martin Wheatley: I think broadly an agreement has been reached. It is not written down as such. There is no signed agreement that says—
Chair: Nothing in writing whatsoever?
Martin Wheatley: No, not on this.
Chair: Nothing in writing whatsoever?
Martin Wheatley: It is co-operation.
Chair: This is an informal agreement to co-operate?
Martin Wheatley: Yes. It is co-operation between regulators, which is something we do under the IOSCO memorandum.
Chair: Okay. On the legal side, nothing whatever?
Martin Wheatley: It is much harder on the legal side because of the legal burden of proof that goes with criminal cases.
Q104 John Thurso: You will be surprised to learn that I am returning to my favourite subject of tailored business loans, for which I am sure you are very prepared. Thank you for sending the correspondence and thank you also for the follow-up meetings. I was very grateful for your assistance on that. There are two areas to this. There is what has happened in the past, but there is also what may or may not happen in the future. On this occasion, can I turn firstly to what may or may not happen in the future? In the correspondence you let us have, particularly the letter to the Financial Secretary of 9 May, you state that the size of this issue is potentially significant. In one of the two letters you go on to talk about the fact that you were seeing evidence of firms moving towards embedded loans to take advantage of the perception that they were not regulated. Can you update us on whether you have had meetings with Ministers or officials as to what might need to be done for the future to ensure that does not happen?
Martin Wheatley: There are couple of points I would make. Firstly on the evidence, our concern was expressed as “a concern that businesses may”. We have not collected a significant body of evidence. We know that some banks operate to that model, but there is not a body of evidence to suggest—
John Thurso: So when you wrote, “We have seen evidence that this has already occurred”, it is not a lot of evidence?
Martin Wheatley: It is with one or two banks in particular, but it was not a trend that was changing dimension and moving pace. In terms of our current work, there are three very germane pieces relevant to this. One is the redress exercise that you know is going on. One is the Tomlinson follow-up that we referred to earlier where—
John Thurso: I will come on to those in a moment. It is specifically around the TBLs that I was asking.
Martin Wheatley: Inevitably our other work will take us into looking at what forms of loans are provided. The final point I was going to make is that we are doing a competition study with the OFT to look at SME lending. There are a number of pieces of work that we are doing. In terms of follow-up with Ministers, there has been no follow-up. We have not had further discussions about whether new law needs to be created or amended.
Q105 John Thurso: To put it in shorthand, you have identified that, where the swap is embedded, you are not the regulator because it is essentially a credit product and you do not regulate credit. Therefore, it is essentially, potentially, unregulated. Your fear you expressed to Ministers was that credit providers may therefore take advantage of this and not offer plain vanilla swaps but instead offer embedded swaps to potentially avoid that regulation. Having raised the issue with Ministers, quite properly, we have not made any progress as to who might in fact be the regulator going forward. Is that correct?
Martin Wheatley: I think that it is fair to say, and I think Ministers would probably say, that there is not an additional body of evidence that has come forward to show that the concern that we originally raised has been substantiated. That is why I say that these other pieces of work that we have underway will be—
John Thurso: Your answer to that is, having said there was some evidence, with the benefit of the passage of time, that evidence has not materialised into a major shift?
Martin Wheatley: Yes, I think that is what I am saying. At this stage there does not appear to be a significant trend.
Q106 John Thurso: Just one question on the historic side. On your last occasion here, you and I discussed a particular example that I put forward, which appears to have been one of mis-selling. There are two potentials here. One is where the product was not mis-sold and it has proved to be a bad product but caveat emptor. The other is where the product was mis-sold because the person buying it did not understand what was in the product and the reasons for buying and the sale of the product did not match. In that mis-selling side, which is not your responsibility to regulate as I understand it, is there anybody who regulates that mis-selling?
Martin Wheatley: I think we talked in hypothetical terms previously, but for relatively small amounts, the FOS could be an adjudicator. There is the route of going to the FOS. Obviously for large amounts there are the courts, but recognising the courts are very expensive. For people who are caught between those two camps, no, there is not. Can I just complete one final point?
John Thurso: Yes.
Martin Wheatley: While our rules do not affect the product per se, we do have rules on complaint-handling for banks and if complaints are not adequately handled, banks still have to be subject to our rules and we may need to look at it from that angle.
Q107 John Thurso: If somebody has made what may or may not be well-founded but a well-constructed complaint and it is badly dealt with by the bank, then you would have an in on that regard?
Martin Wheatley: We would have a locus on that, yes.
Q108 John Thurso: A final question on this. PPI all came about because of a super-complaint that was eventually made. The 2012 amendment allows Citizens Advice, Consumers Association, General Consumer Council and the National Federation of Self Employed and Small Businesses to each have the possibility of making a super-complaint. If one of those—and the Federation of Small Businesses is the one that leaps to mind—were to make a super-complaint on TBLs, would that be admissible and how would it be dealt with?
Martin Wheatley: That is a good question. It would certainly be admissible in the sense that they could make a complaint, but we might conclude that it is not something we have to spend much time on because we do not have powers in that space.
Q109 John Thurso: Okay, thank you for that. Can I now turn to the Tomlinson report in particular? Firstly, very quickly, in the statement that was made on 29 November one of the points was, “Separately, the FCA is writing to all other relevant banks seeking confirmation they are satisfied they do not engage in any of the poor practices alleged in the reports.” Can you confirm yet what responses you have had?
Martin Wheatley: We are still in discussion with those banks. I think all of them would say that they do not have something that operates in quite the same way as the restructuring group does within RBS but, nonetheless, everyone had different ways of pursuing bad debts or failing debts. It is something that we are still in discussion with the banks on, but the allegations in the report are obviously quite serious and I think all other banks have said, “We don’t have a structure exactly like that”, but our work is to go a bit further than that.
Q110 John Thurso: I think the key word in your answer is “exactly”, because I think all of us would have case work that indicated there might be something very similar. Of course, there is the great danger of them saying, “No, we don’t”, and they would say that, wouldn’t they?
Martin Wheatley: Yes, and that is why I was quite careful in my answer to say we would not necessarily accept at face value.
Q111 John Thurso: Yes, I was picking that up for those who might not have listened to how carefully you were answering. Can I turn to the section 166 review that is being undertaken? Could you quickly take me through why you opted for that and what you hope to get out of it?
Martin Wheatley: It is a strategy we use very often where we will have a professional go in, at the firm’s expense but to our terms of reference, to look at specific elements of it. We opted for that because we didn’t want a review that simply looked at systems and controls and whether there were systems and controls, but went through beyond that to do some file testing to work out whether the outcomes against those files were adequate or not. I think we will have that review in the course of the next few months. I can’t give you a precise date for it. We will then form a conclusion as to whether that needs to be referred forward as an investigation for us.
Q112 John Thurso: Again, given this is credit, is there a danger that you could come to the view that this is not something you need to regulate or you that you do not have the powers to prosecute?
Martin Wheatley: That is a risk, yes. There is a risk that we might reach that conclusion.
Q113 John Thurso: There seems to be a lacuna in the legislation that may be intentional or unintentional, which is that there are areas where you say the legislation does not cover what I think most people would expect to be behaviour that was covered by a regulator. Is that a fair—
Martin Wheatley: When you say “a lacuna”, I think there is a mismatch between what people would expect we would cover and what the law allows us to cover. There are a number of areas where our legal ability to enforce our rules—to go in, to investigate, to seek powers, to seek papers—are constrained by the fact that it is not defined as a regulated activity. Even once we have consumer credit, business loans above £25,000 are in that category. They are not subject to our oversight as a product and, therefore, our principles do not bite on that product.
Q114 John Thurso: We will be doing a very short inquiry into some of these matters coming up in the not-to-distant future. It seems to me that a key aspect of this will be an expectation on behalf of the less sophisticated, small business consumer that the people they are dealing with are regulated and the fact that, by the way we have passed regulation, they may not be regulated. I suspect that the Clerk will be writing to you in due course to ask you to put your views on paper. I will just leave it at that for the moment.
I just want to ask one last question. Was the publication of Tomlinson the first time the FCA became aware of the allegations of mistreatment by SMEs in their global restructuring group?
Martin Wheatley: No. We had had some information prior to that that we had been responding to and gathering information on.
John Thurso: How long ago were you informed about that?
Martin Wheatley: Honestly, I can’t remember precisely. We mentioned whistle-blowers earlier and I think there was a comment that said that we do not have a very effective whistle-blowing regime. We do. We have a very effective whistle-blowing regime. We get a lot of whistle-blowers, but a lot of that data and information comes in in incomplete form or a form that is quite difficult for us to work out what the next step is. Some of the information would have come in through whistle-blowers where we would have been trying to establish the facts and establish more information on it.
Q115 Chair: Just to be clear, whistle-blowers in RBS had already told the regulator that GRG was a problem?
Martin Wheatley: Again, if you can allow me to check the facts. We had had some indication that there were problems. We had had some complaints previously.
Chair: Perhaps you could write to us and set out, in as much detail as you reasonably can, what it is you already knew and how you came to know it. I say “as much as you reasonably can” and, of course, there may be routes that you have obtained to get this information that you do not want to disclose and I quite understand that.
Martin Wheatley: Yes.
Q116 Chair: Have you discussed this issue with the board of RBS personally?
Martin Wheatley: Not personally, no.
Q117 Chair: Do you attend the annual feedback meetings for regulators with the major banks?
Martin Wheatley: Typically not. The Head of Supervision would typically attend those.
Chair: Why don’t you go to those?
Martin Wheatley: I think a question of time and priorities. There are a large number of things that we are involved in doing. The team that is directly involved with the banks are the supervision team.
Q118 Chair: Given the scale of the problems that the major banks have been presenting us with over the last five years, both on the conduct side and on the prudential and market side—two of those three very much your concern—you don’t think it would be a good idea to have that interaction with them directly as the chief executive?
Martin Wheatley: I have the interaction directly with the chief executives. I talk to the chief executives regularly. I know John does with the chairs of various banks.
Chair: But you do not go to the board and you do not go to that feedback. I think I am right in saying, but correct me if I am wrong, that your opposite number at the PRA does go.
Martin Wheatley: I think that is right, yes.
Chair: Have you considered going?
Martin Wheatley: As I say, I think the appropriate level is the Head of Supervision.
Chair: So you have considered it and rejected it?
Martin Wheatley: Yes.
Q119 Stewart Hosie: Finally on that issue of whistle-blowers inside GRG within RBS, the Chairman has asked you to provide what you can in terms of how you received information and who provided it. Can I ask a slightly different question? When those allegations were put to you, I presume you sent teams of supervisors into RBS to crawl over these allegations and find out if they were true or not, did you?
Martin Wheatley: Can I just be precise. You have said “whistle-blowers from within GRG within RBS”.
Stewart Hosie: That is what you said.
Martin Wheatley: No, it was not what I said. I said we had sources of complaint that had raised issues about GRG. They would not necessarily have come from within GRG and, as you know, the law about protection of whistle-blowers is we have to be very careful. Please do not infer from what I have said that I was telling you a source of where any information had come from.
Coming to the follow-up question, we would send our resources in where we thought there was significant enough risk of detriment and, typically, we would do that when we had information that suggested there were problems. We would do that either through sending in a 166-type piece of work, which is what we have now done with GRG, or by directing our own annual inspections to a particular bank. I can’t comment specifically on GRG prior to the receipt of the Tomlinson report.
Q120 Stewart Hosie: Fine, but I think we might come back to this later in terms of the review on SMEs. On the issues John Thurso was raising about the business loans, products with embedded swaps, and the FCA’s inability to regulate those, you said at the hearing in September that you had effectively said to the Treasury, “There is a gap here and you might want to think about whether you want to close it”. In terms of policy options, what policy could be put in place to close that gap to allow these products to be properly regulated?
Martin Wheatley: We have consumer credit coming to us as a responsibility from 1 April. Under the policy option we will be responsible for business loans up to £25,000. That limit could be changed and you would have to have a debate about what an appropriate level is. The jurisdiction of the FOS could be expanded so that it did not simply look at micro-businesses but, again, there would be a cost to deal with that and you would have to weight that against the question of caveat emptor, which is: at what size should a business be able to rely on its own judgment or advice? At what size should a business have recourse through the courts rather than protection from a regulator?
Q121 Stewart Hosie: I do appreciate that. You would not be asking then, for example, to have the power of regulation of a commercial lending generally. You would still want some kind of cut-off point?
Martin Wheatley: I think commercial lending generally takes us into a space, frankly, where major corporates are dealing with banks. I would be surprised if it was proportionate that we would use our resources in that space.
Q122 Stewart Hosie: In terms of a threshold then, what do you think a more appropriate threshold would be: £25,000, £250,000, £2.5 million? There has to be a cut-off somewhere and presumably you have considered this because this is not a new issue. Where is the threshold?
Martin Wheatley: With the work that we did on interest rate swaps, we did establish thresholds, which was the Companies Act test of a small business, which looked at the number of employees and size of balance sheet and then we added to that the size of swap that any particular company would have. We established our proxy threshold in that space and we were not trying to set precedent across the board, but you would imagine thresholds being defined by either the small business definitions that exist elsewhere or by tests of turnover or number of employees.
Stewart Hosie: But moving away from the very subjective, sophisticated business-type test?
Martin Wheatley: It is difficult because inevitably by creating a threshold, as we found with our own work, by definition you will have created a set of people who were sophisticated that get caught under your threshold and, equally, were unsophisticated but sit beyond it. From our view, it always needs to be a combination of judgment and some objective tests.
Q123 Stewart Hosie: Now, you did say earlier—and I hope I have picked this up correctly—that, having raised this initially, there had been no follow-up with Ministers since then.
Martin Wheatley: No formal follow-up. It has been raised in discussion, but there has been no formal follow-up and I don’t think there is a policy desire to extend the concept of protection to smaller businesses.
Q124 Stewart Hosie: You do know every MP on this Committee and probably every MP in the House of Commons has these sorts of complaints, whether they are about tailored business loans specifically or comparable products. I am surprised that Ministers have not come to you and said, “What are you doing?” and more surprised that you have not gone to Ministers and said, “Listen, give us a steer. We need to op something”. I am quite surprised about that.
Martin Wheatley: In truth, we have done something. This is the point. The work we have done on interest rate swaps is us being operative in a space that was not obviously something that we would previously have been involved in. We are doing the work with the OFT on SME lending where, again, we are looking at this segment. In truth, we are doing quite a lot of work to look at this and we do have agreement with two of the banks who offer tailored business loans that they would voluntarily implement the structure that we have set up for the regulated sector. Even for a set of products that were unregulated, we came to an agreement with them that they would implement the same sort of standards that we were implementing for regulated products.
Q125 Stewart Hosie: That is quite helpful. Is that a recognition then that SME lending is more akin to individual lending as opposed to very large corporate lending?
Martin Wheatley: I think it was a recognition from those banks that the products they had were very similar to the ones that we had included within our interest rate hedging product regime.
Q126 Stewart Hosie: Just one final question, because this all comes back to this terrible grey area that has been alluded to. We have a product that is either mis-designed or mis-sold. The public and the business community do not understand how the conduct of the business regulator does not have this within its scope, but the question is around there. Do you have the means to highlight gaps within your powers and request extensions to them where it is self-evident, certainly to the public, that that is what should happen?
Martin Wheatley: I think we do have the means either from a discussion here with this Committee or with Ministers and, as we have spoken to you before and we shared the correspondence, we have raised this as an issue before. What we do not have ultimately is the policy-making power to implement that. That is a question for legislation and it is a question for Parliament.
Q127 Stewart Hosie: Mr Griffith-Jones, just finally, I know that you have not said much in this section. Is there anything that you want to add on this series of issues?
John Griffith-Jones: No, only a rather general comment that on arrival I was taken by the complexity of the regulatory perimeter of which this is a classic case but, if you will remember, the LIBOR traders were not within the regulator perimeter. If you say, “Well, okay, do a project to even the perimeter out”, I feel we could be doing that for some while. There is a real tension between, “Do we respond on a case-by-case basis”, and the obvious way of responding, as Martin as indicated, which is just move the limits up on this specific issue. Be very careful what you wish for because there are plenty of places where, with hindsight, it would have been a great thing if the border had been in a slightly different place and banks know no capacity not to find the perimeter and potentially move that.
Chair: This is why the Banking Commission created the serious harm test and why it feels it needs rolling out through certification and why it should be an extremely relevant structure for the treatment of remuneration.
John Griffith-Jones: I could not agree more.
Chair: That is what we began the hearing with and we are only in the early stages of getting the reassurance we need that it is being handled.
Q128 Mr Newmark: On the subject of stretching the perimeter, I want to follow on some points that both John Thurso and Steward Hosie have made. There are two areas I want to look at a little bit more, which may not have necessarily come into your remit but which I think you should be thinking about. One is to do with asset-based lenders, so factoring and invoice discounting, and the abuse that seems to have been going on in that particular area. We are here in Parliament on this Committee to try and protect the vulnerable. We heard Andy Love talk about payday lending, which is to do with individuals, but SMEs have been particularly vulnerable in areas that are not regulated at the moment and one area in particular has been factoring.
I have now had several meetings with a campaign group for the reform of the asset finance industry and, notwithstanding the questions I am going to ask you, I would ask you to spend a little bit of time looking at this whole sector because there seems to have been a lot of abuse going on there and I am going to touch on two or three points if I can. One has to do with the way the terms seem to be structured. There seems to be, on the one hand, an unhealthy relationship, as I would view it, between insolvency practitioners and the banks themselves when they do a workout. That seems to be a problem.
There seem to be huge disincentives just to simply take a commission. A lot of times when someone does a deal and gets a commission instead of getting the £40,000, if they pull the rug from underneath a business through the workout process, they make £400,000. This is causing huge stress on a number of small businesses. I am just wondering, in your time and place, is this something that has come across your radar screen much, particularly when it comes to any work you have done with GRG and some of the problems that they have created for small business. That was a very long introduction, I am sorry.
Martin Wheatley: Again, it is very similar in a sense to tailored business loans, although this is one step removed again. The short answer is no, that is not something that has come cross our radar screen. The GRG allegations clearly will take us into that space and once we get the 166 report we will look at what further we could do but, again, I think it will be another example of a difficult space for us. Even if we find something that falls short of standards we would expect, it would be a difficult space for us to act because it is not within our jurisdiction.
Mr Newmark: I appreciate that. I want to get on to swaps in a second, but I ask if you could spend a little bit of time on that and I would draw your attention to the names of two people to save you time. One is to talk to a guy called Stephen Hunt, who is an insolvency practitioner who has done a lot of work on this and he produced a report in October 2013. Another one is an RBS campaigner who has done a lot of work into the abuses of GRG when it comes to asset-based lending and his name is Neil Mitchell. Those are two names I would draw to your attention.
Martin Wheatley: Thank you.
Q129 Mr Newmark: Now if I can get on to swaps. How has the industry review of swaps mis-selling progressed so far and is the process more than halfway through?
Martin Wheatley: It is more than halfway through in terms of time. In terms of elapsed time, we have asked the industry to commit to us that they would complete by May of this year. Our expectation is that we will be very close to that, if not complete. In terms of how far through, the number of eligible customers is judged at just under 19,000. The banks are somewhat beyond a third of the way through that in terms of determinations and we published some data this morning that show that, so far, £300 million of redress has been paid out and that the rate of non-compliant sales is now running at 96%.
Q130 Mr Newmark: In this work, have any new problems arisen from this particular review or not?
Martin Wheatley: Not so much new problems. I think the one that is a remaining problem and quite a difficult one is the question of consequential loss. What we are finding is that the small businesses very much wanted to get a first-stage pay-out because many of them were suffering and the banks had responded to that. I think there are still some difficult questions about whether there are genuine consequential loss claims that can be made.
Mr Newmark: But a big issue for a lot of businesses obviously is money.
Martin Wheatley: Yes.
Q131 Mr Newmark: What have you guys been doing to put pressure on the banks to speed up the process?
Martin Wheatley: There are two things we have been doing, one of which is putting pressure on them. Frankly, we publish our data monthly. This morning we published the latest data. That publishes data on a bank-by-bank basis and there is nothing like transparency and personal pressure to get the banks to respond, so they have done that. They have also responded to our requests to show some forbearance to firms that were in distress. Of their total population, there is about 5% that they have shown that forbearance to and are not taking additional payments from. I know the process was slow to start and we were frustrated by it initially. I think we are now making good progress and we are getting well through this process. It is working well now.
Q132 Mr Newmark: RBS recently announced an additional provision for swaps mis-selling, bringing their total provision to £1.25 billion. However, according to you guys, RBS has more than double the number of cases compared to Barclays, yet Barclays has already provisioned £1.5 billion for redress. How do you explain this and do you think the banks have provisioned sufficiently for swaps mis-selling?
Martin Wheatley: In terms of mis-selling it, it is not for me to comment. The sizes of the contracts may be different between the different banks. In terms of the total number, one bank may have more but they may be a different average size. It is for the banks to work out what their provisions are and the fact is that they have consistently, both on PPI and interest rate swaps, increased their provisions each time they have looked at their numbers. It may not be the last word we have from the banks on provisions.
Q133 Mr Newmark: It would seem the magnitude of one versus the other is out of kilter. One seems to have taken a more aggressive approach in recognising it has a problem, whereas RBS does not.
Martin Wheatley: If we separate the provision side apart, we are comfortable that we are working very closely with the banks and they are taking this seriously and delivering results. Their accounting provisions will be more of a question for the PRA as to whether they are adequately recognising their liabilities.
Q134 Mr Newmark: On the issues of redress and so on, what proportion of redress provisions made by banks so far represents consequential loss claims?
Martin Wheatley: I don’t know the number. My suspicion is it is a very low figure because they have separated out the two equations.
Q135 Mr Newmark: Does that mean the final bill could be considerably larger?
Martin Wheatley: It could be but, in truth, because of the 8% interest we have built in, which is meant to cover most of consequential loss, there is a reasonably high standard to pass before a firm can bring a credible case for consequential losses over and above the 8%. The answer is it may be, but I don’t think we can quite capture those in our figures.
Q136 Mr Newmark: Are you looking into that? Is that something that is part of your work or are you waiting? Are you being more responsive than proactive when it comes to this?
Martin Wheatley: No, this entire process is something where we designed the process and held the banks to that process. They are working through it. We are comfortable that they are working through it well now after a slow start.
Q137 Mr Newmark: There are reports that some small businesses could miss out on compensation payments for consequential loss, due to time limits on taking legal action. Is this something that you are concerned about?
Martin Wheatley: Yes, and we have spoken to the banks about it. The fact is that they have already taken back these cases well beyond the statute of limitations that would affect them.
Q138 Mr Newmark: So you do not get a sense that banks are dragging their heels, and if they are they will come back and—
Martin Wheatley: Yes, I do not get a sense they are dragging their heels.
Mr Newmark: —deal with the issue?
Martin Wheatley: Yes.
Mr Newmark: Can I ask another question or not, Chairman, it is up to you on timing?
Chair: Only if you really want to ask a question because otherwise I have another questioner who wants to chip in.
Mr Newmark: Okay. I will leave it at that then, Chairman.
Q139 Mark Garnier: Just a quick couple of questions, if I may. The first was the regulation of estate agents. I gather they are regulated with regard to their selling of financial products, but do you have any thoughts about regulating estate agents with activities in terms of advising consumers on one of the most significant investments they will ever make in their life?
Martin Wheatley: I do not think we regulate estate agents as such. We regulate mortgage brokers, so anybody who operates as an adviser as such.
Q140 Mark Garnier: So if an estate agent has a mortgage broker they will be regulated?
Martin Wheatley: Yes, so if they have a mortgage broker, clearly they are regulated by us and will be affected by our mortgage market review, which will place a—
Q141 Mark Garnier: With regard to their principal activity, which is of transacting houses?
Martin Wheatley: That is not part of our remit.
Q142 Mark Garnier: No, I realise that, but do you think it should be or should not be, given the significance of the investment for a private individual?
Martin Wheatley: No, I do not think it should be.
Q143 Mark Garnier: Why not?
Martin Wheatley: Partly because our resources are very, very stretched taking on the things that we are doing.
Q144 Mark Garnier: But you are the consumer champion, aren’t you?
Martin Wheatley: We are. We are the consumer champion regulating financial conduct. The purchase of a house is quite separate from the taking out of a mortgage, albeit the two clearly are related. The part that is the mortgage we do regulate. We do not get involved in the house, the valuation of the house, whether that is good value or not. I think that would be a—
Q145 Mark Garnier: No, I do not think anybody is suggesting you take on the role of being a chartered surveyor. I think, given the fact that this is a colossally important thing for every individual who ever bought a house; it is the most significant investment they will ever make.
Martin Wheatley: Yes, as you say, the mortgage part of that would be subject to us but the house part of it, no, I do not see that as part of our remit.
Q146 Mark Garnier: Yes. One last question, breaking news on Sky News is that banks are in secret talks to revive the PPI deadline. Apparently they are having quiet conversations with you guys, which you want to keep under wraps. Can you confirm or deny that?
Martin Wheatley: We talk to banks all the time and clearly—
Mark Garnier: So you can confirm you are having talks with the banks about trying to put a deadline on PPI terms?
Martin Wheatley: I can confirm, yes, we are having a discussion with those banks. We have had that discussion many times over the last three years.
Q147 Mark Garnier: Do you have any idea when you are going to set a deadline?
Martin Wheatley: That implies that we would set a deadline, as I think—
Mark Garnier: Well, you are having talks about it.
Martin Wheatley: Yes and those talks may or may not—as I mentioned at the start, one of the difficulties about a deadline is you take away consumer rights, and one of our questions—
Mark Garnier: Yes, and that is why it is news.
Martin Wheatley: Yes. So one of our questions is would there be sufficient consumer benefit to justify taking away a set of consumer rights? That is an equation. It is only if we felt that we could get to an equation that we would say, “Okay, here is something that we are prepared to talk about now”. But if we were—
Q148 Mark Garnier: Can you give an example of when it would be in the consumers’ interests to take away their rights by imposing a deadline?
Martin Wheatley: If it came along with a guarantee that every consumer who had bought PPI got a specific and tailored response to them, which said, “You have bought PPI” and a specific address where they could go to register their complaint.
Q149 Mark Garnier: And the quid pro quo, haven’t they got that already?
Martin Wheatley: Well, it is the specificity of it. One of the problems about PPI was that many people who bought it did not know that they bought it because it was simply added to a car loan or a personal loan.
Q150 Mark Garnier: That is a very good reason why you shouldn’t put a deadline on the claims.
Martin Wheatley: As you say, unless you could reasonably be very sure that every single individual was getting specific information, then putting a deadline does not add anything to the current level of visibility that exists in the market because everybody has heard of PPI. It is not that it is a secret. It is just not everybody who had it knows that they have it.
Q151 Mark Garnier: Yes, that is right. So I am really confused by what you are saying. Are you saying it is a good thing or a bad thing, or are you saying you are having talks with them but you are coming to a conclusion that it is a bad idea to put a deadline?
Martin Wheatley: I am saying that any conclusion to put a deadline on would have to have significant benefits attached to that. I am not aware yet that those benefits have been articulated to us.
Q152 Mark Garnier: You do appreciate that consumers—just to get back to the simplicity of how the general public looks at this—would find it extraordinarily surprising if you were to put a deadline on this, don’t you?
Martin Wheatley: I stress again, were we to do that we could not do that unilaterally. We would have to consult. We would have to make rules to do that. As part of those rules we would have to justify, with a cost benefit analysis and consultation, why we thought it was a good idea. It is not something that we unilaterally could do. We would have to be convinced ourselves that it was a good idea and then go out to the market and consult on whether it was a good idea.
Q153 Mark Garnier: Who would you consult?
Martin Wheatley: Well, very widely; we would consult consumer groups. We would consult the banks, of courses, consumer groups, consumers themselves.
John Griffith-Jones: Just to remind you that exactly the same story broke almost exactly a year ago. There must be something about February that causes the story to come up.
Mark Garnier: Spring is in the air.
John Griffith-Jones: We had a discussion at the tail end of the FSA board, from memory, rather than the beginning. The board got very clearly to the position that you are trying to put in our mouths that, “Look, if the banks can come up with a specific scheme everyone would get their money and the benefit would be that if it went faster that would be something to listen to”.
Mark Garnier: Okay, that is very much clearer where—
John Griffith-Jones: They can repeatedly come and talk to Martin as often as they like, and they no doubt will, and the standard—I think it never got to the formal step—would be, “Look, if you can persuade us that everyone will get their money and they will get it quicker and that will bring the thing to a timely end” I think it would be churlish of us to say no, but that is quite a high hurdle.
Q154 Mark Garnier: But if you discover, by putting a deadline on it, that people who subsequently discover that they had been mis-sold, and then chopped out—
John Griffith-Jones: Yes.
Mark Garnier: All right. Thank you.
Q155 Chair: You said that you get information from whistle-blowers all the time. As you know, this is another area that the Banking Commission was very concerned about and came forward with a number of specific recommendations. Have those been implemented?
Martin Wheatley: We have put much more resource behind our whistle-blowing. So we have seen an increase in the number of contacts that we have had. We have more cases that result from those, so we are seeing more use made of information. What we have not implemented—because we did not agree with it at the time—is that we would introduce a pay for, a reward system, as happens in the US, but we—
Q156 Chair: We did not recommend that.
Martin Wheatley: No, the recommendation was to review it and to look at the US system. So we will review it and we will look at the US system.
Q157 Chair: All right. So I do not know why you have raised it. That was not one of our recommendations. But you have not touched on two other recommendations we made—two major recommendations. One was that it should be your responsibility to ensure that every major financial institution has somebody on point, on the board.
Martin Wheatley: Yes.
Chair: Have you done that?
Martin Wheatley: No, because we would see that as being part of our senior person’s regime, where we would have that accountability attached to a senior person in the bank or a senior manager.
Q158 Chair: So you do not know whether, for example, any major bank has somebody on point directly and personally responsible for whistle-blowing?
Martin Wheatley: No, I do not think we do know that.
Q159 Chair: When will you know?
Martin Wheatley: We would have to attach it. So again, as part of our consultation, we would talk about specific responsibilities being attached to senior persons. There are a number of responsibilities, some of which were touched on today. So, incentives, remuneration, whistle-blowing, which are all in our terms things that should attach to an individual at a senior level in the bank. But to require that as a rule would require us to go through the formal consultation and rule making process.
Q160 Chair: Another recommendation we made was that you should ensure that you have the power to require firms to pay compensation, where whistle-blowers can show loss as a consequence of the whistle-blowing. Have you done anything about that?
Martin Wheatley: No, I do not believe we have. If I am honest, I will have to come back to you and check specifically where that would be.
Q161 Chair: I have to tell you that the members of the Banking Commission are very concerned about the lack of urgency in the implementation of a number of our proposals by regulators, and particularly by the FCA. This has been going on for some time. I am just picking these up more or less at random. In fact, it is a colleague from the Commission who has just asked me to ask questions on this. Maybe it would be helpful, although it would take some time to produce—I know that you do have a pretty comprehensive list of our recommendations—if you could ask one of your senior staff to go through that list and identify those things that you feel you have implemented and those that you are going to give us an update on over the next few weeks, rather than prolong a discussion now. Would you be happy to do that?
Martin Wheatley: We can certainly do that. But I would say that the bulk, insofar as they relate to us, passed into law just before Christmas. In terms of time taken, the senior person regime—which in my view is the most significant—will take some time for us to consult properly on it.
Q162 Chair: We think it is significant but by no means necessarily the most significant. We have had that discussion several times about the lack of emphasis being given to areas that are at least equally important, one of which we have discussed today, which was certification.
Can I turn to this anomaly that was detected in the fee structure, which has led a number of firms to be overcharged and fees? Perhaps I should address these questions to you, Mr Griffith-Jones. You know about this, do you?
John Griffith-Jones: I am afraid I don’t.
Q163 Chair: Do you know about this?
Martin Wheatley: Yes, there was a fee-block where—
Chair: I am very concerned that the Chairman is not aware. Perhaps you could just—for the benefit of the Committee and also for your Chairman—say how much this was.
Martin Wheatley: That information I do not have.
Q164 Chair: Okay. I have it in front of me. We are talking about £118 million here. This is a lot of money that has been overcharged from firms.
Martin Wheatley: I think the term “overcharge”, to be quite clear, we have not said that it is money that has been overcharged. We make decisions each year as to what we will charge to each fee-block. We adjust those each year according to where our efforts and where our resources are used.
Q165 Chair: This is the difference between fee-block A12 and A13. Fee-block A12 has a higher level of supervision but lower fees than fee-block A13, and if the people in A13 were acting logically they would respond to your curious fee-block structure, even though they are not requiring those high levels of supervision, because they are not doing as much, opting to go into the cheaper A12 block. Isn’t that correct and isn’t that exactly what you have said in what you published in October? “Some firms in fee-block A13 have pointed out that they could lower their fees by taking on the additional permission of holding client money and safe custody assets, even though they do not want it. There is no evidence that any have actually done so, but our fees are not intended to influence firms’ behaviour.” This is overcharging fees, isn’t it? You do not like the term but it is.
Martin Wheatley: We consult on our fees each year, so we will come out with our fee-block consultation again towards the end of March. We ask the industry for its views on our fees, and the industry provides us views on whether the fees are appropriate or not given the business that they operate. It is not just about supervision. A lot of our cost is about—
Q166 Chair: Do you think you have taken too much off this group?
Martin Wheatley: No, I do not.
Q167 Chair: They have been correctly charged?
Martin Wheatley: They were charged according to the fees that we set out in our consultation, which reflects a broad range of activity not just supervision activity.
Q168 Chair: I think it would helpful if you wrote to us explaining how it is you have come to the view. In fact I think it is the sort of thing that the Chairman should be fully aware of. Would you be prepared to review this and reconsider what appears to be a decision by your Chief Executive? On the basis of the evidence I have seen put to me, there is a strong case for compensation, for returning this money; a strong case. This money clearly should not have been charged, once you look into the detail of it and these firms have been put at a disadvantage. Effectively, their customers have been charged more than they should and their shareholders too have suffered. I am surprised that you are so firm that this is not overcharging. But let us leave it there and the Chairman can write to me.
Martin Wheatley: Yes.
Q169 Chair: We have mentioned section 166 reports, and of course as a committee we have been using indirectly the 166 process to complete the investigations into HBOS and RBS, as you know. Do you know how much is spent annually on 166 reports?
Martin Wheatley: I do not have the figures at my fingertips.
Q170 Chair: I think it is reasonable that you might not know. I think it would be helpful if this Committee could have that figure and could see the figure for past years, as many as you have. I think it is a series that we ought to keep now, bearing in mind that there is a risk of moral hazard here. After all this is something where, at a firm’s expense, the FCA commission an inquiry effectively. It is free to you, in the sense that it is not coming out of your fees, but it is certainly not free to the firm, their shareholders or their customers. I think it is something that someone has to keep an eye on and it had better be us. So would you undertake to do that for us?
Martin Wheatley: I suspect it will be a significant information request of firms, but we will certainly look at what information we can get from them. Whether they have kept records over the years is something I do not necessarily know.
Q171 Chair: You must know what you have commissioned as 166 reports.
Martin Wheatley: But I do not know if we have full records of the payments because sometimes the firms will be paying the rate through us, depending on how it is commissioned. But we will certainly try to get the information that we can.
Q172 Chair: I think we would like all the information that is available. The FCA also does internal audit reports. Do those come directly to you Mr Griffiths-Jones?
John Griffith-Jones: They do, or at least the executive summary comes to me and the full report goes to the audit committee that meets four times a year, on which I sit but I do not chair.
Q173 Chair: The Committee would be very grateful if we could see those henceforth.
John Griffith-Jones: Can I take a rain check on that one?
Chair: I think you can take a rain check on a discussion with me about whether any redactions may be necessary. But if you are telling me you want a rain check on whether they can be supplied to the Committee, I think there will be a major problem.
Thank you very much for coming to give evidence to us today. We have covered a wide range and we realise that we have asked for all sorts of information that you cannot say you possibly have entirely at your fingertips, but—as the Banking Commission made clear and as this Committee made clear—we do mean it when we say that there needs to be a high level of scrutiny of our regulators as well as our banks. Thank you very much indeed.
Oral evidence: Financial Conduct Authority, HC 1058 2