Treasury Committee
Oral evidence: Work of the Financial Conduct Authority, HC 142
Monday 7 November 2022
Ordered by the House of Commons to be published on 7 November 2022.
Members present: Rushanara Ali (Chair); Harriett Baldwin; Anthony Browne; Dame Angela Eagle; Siobhain McDonagh; Alison Thewliss.
Questions 309-414
Witnesses
I: Nikhil Rathi, Chief Executive, Financial Conduct Authority; Richard Lloyd OBE, Interim Chair, Financial Conduct Authority.
Witnesses: Nikhil Rathi and Richard Lloyd.
Q309 Chair: Welcome to the Treasury Committee evidence session on the work of the Financial Conduct Authority. Can I invite our witnesses to introduce themselves?
Richard Lloyd: Good afternoon. I am Richard Lloyd. I am the interim chair of the Financial Conduct Authority.
Nikhil Rathi: Good afternoon. I am Nikhil Rathi, chief executive of the Financial Conduct Authority.
Q310 Chair: Thank you very much. As you know, we have had a reshuffle, and we have a new Prime Minister. We are awaiting the election of our new Chair, and in the meantime you have me as your interim Chair.
The Government have said that they intend to amend the Financial Services and Markets Bill to give the Treasury the power to direct regulators to make and remove rules where there is significant public interest. What does each of you think of that?
Richard Lloyd: The first thing to say is that we have supported many of the proposals from the future regulatory framework that are in the Bill. Obviously, a lot of extra powers are coming our way, with retained EU law coming on to our rulebook. The proposals that the Treasury consulted on—for more scrutiny, more consultation and more accountability—seem to us to be right. If we are to be given extra responsibilities, our accountability needs to be clear.
What the Treasury did not consult on, and was in fact ruled out when it consulted, was a power to direct the regulators. I would simply say that our international reputation, and indeed our international competitiveness in financial services, is in part built very clearly on the perception and the reality of the independence of regulators. It is built on our very clear objectives, which are set by Parliament, and on our practice of consulting, engaging and making measured rules based on the evidence. We have not seen the amendment that the Minister spoke of in Committee—
Q311 Chair: You haven’t seen it.
Richard Lloyd: We haven’t seen it.
Q312 Chair: Have you had any discussions with the Government about it?
Richard Lloyd: We have had very many discussions about both the perception and the reality of that sort of measure being introduced.
Q313 Chair: It sounds like they didn’t pay much attention to what you had to say.
Richard Lloyd: Even if it is used very sparingly—it depends on how it is bounded, what the safeguards are and what commitments there are to Parliament about how infrequently it might be used—the perception that comes with the ability of Ministers to direct independent regulators will go to undermining our independence. We are very clear, and have been very clear with Ministers, that that is of great concern to us.
Nikhil Rathi: As Richard said, we supported the Bill as introduced and we have been working intensively to make sure we are responsive to the accountability requirements that are set out there. We very much welcome this Committee’s decision to establish a Sub-Committee on financial regulation, supported by expert advisers. We very much want to engage with that Committee and support you in your scrutiny.
Richard emphasised the point about operational independence, and I would say that doesn’t mean we operate in a vacuum. I think we have demonstrated, particularly over the last couple of years, that we really understand the public policy environment that we are operating in. During the pandemic, we were responding as rapidly and decisively as was needed to support consumers and businesses through. In the Russia-Ukraine situation, we have been working very hard with the Government and with partners to implement the sanctions regime.
It is worth noting that the FCA, for many years now, has been making rules—consumer protection rules, listing rules and so on. That has operated without such a power in place, and I am not aware of any example of where there has been an issue with how the rules have been made—no example has been provided to me.
I think that, should such a power come in, the role of Parliament would be incredibly important. What is the parliamentary oversight of this? Is it a power that simply calls in the rule but doesn’t require Parliament to vote on the actual text of what is going to be substituted? Is there going to be an impact assessment? How do we express our view to Parliament about what the proposed new regulation may entail, in terms of the risks? How do we articulate what the operational issues for us may be if a particular rule comes into force and how it might interconnect with other bits of our rulebook?
Then there are some areas that really go to the fabric of our institutional framework in the United Kingdom. For example, in the area of enforcement, it really would be a very big departure from any established practice for there to be political rule making in relation to enforcement. There are very good reasons why enforcement has been kept very separate once the overall framework has been set by Parliament. Likewise, on listing rules, I am not aware of any other major developed jurisdiction that would have a power such as this.
Q314 Chair: Just on that term, “political rule making”, we had Minister Griffith here, and he could not explain or define what public interest actually meant. That does not inspire confidence. And loaded in the words “political rule making” there is certainly interference with the regulatory independence of the FCA. Isn’t that the case?
Richard Lloyd: Obviously, we continually discuss with Ministers, and we have a remit letter that sets out the Government’s view, what it is trying to achieve with economic policy and how the FCA can help support that. So it is not unusual, as Nikhil says, for us to—
Q315 Chair: No, but my question was about the term “political rule making”.
Richard Lloyd: Well, I think, outside Parliament—
Chair: It is interference, isn’t it?
Richard Lloyd: Parliament makes the legislative framework that we operate within.
Q316 Chair: Essentially, the upshot of what you are saying is that this new call-in power is going to affect your independence. It is going to compromise the independence of the regulator, right? That is what you have said, and I am asking—
Richard Lloyd: Again, it remains to be seen what exactly it looks like and how it might be bounded, but that will be—
Chair: That will be the implication—
Richard Lloyd: The impression in the marketplace. That is already what we are hearing from our statutory panels, from players in the market and from consumer groups, and that is how it will be seen internationally as well.
Q317 Chair: Absolutely. This is to both of you. Sir Jon Cunliffe said: “I understand the point about the public interest test. I would only observe that, of course, we exist in the public interest. Everything we do in the regulatory sphere is in the public interest. We have no other reason to do it. The public interests are balanced in the legislation.” As the FCA board chair, do you feel that you are regularly acting against the public interest?
Richard Lloyd: No, I certainly hope not. Everything we do—
Q318 Chair: So why do you think there is a need for the Government to come in to introduce something on the public interest, which a Minister could not even define?
Richard Lloyd: That is a question for Ministers, but I think the purpose of having an independent regulator with a board, chaired by an independent person with no political affiliation, who ensures that the decisions that we make—it is reserved to the FCA board to make rules and to approve our guidance, as well as to oversee our operational effectiveness. That’s our purpose; our purpose is there, and we are all appointed to act in the public interest.
Q319 Chair: Nikhil Rathi, is there a reason why the Government think they need this call-in power to ensure that the public interest is protected? Are you acting against the public interest as the chief executive of the FCA? Should we be worried? Why do you think this is happening?
Nikhil Rathi: I believe that everything we do at the FCA is in furtherment of our objectives in the public interest. Those objectives are set out in the legislation in relation to consumer protection, market integrity, competition and the interests of consumers. The argument I have heard in relation to this power is the need to bolster democratic accountability. Obviously, this Committee and Parliament will be the judges of what is appropriate and needed for democratic accountability. We will certainly play our full part, as I said earlier, in ensuring that this Committee and the Committees in the other place are able to undertake scrutiny of our work. We recognise the need for us to show more of our working to improve transparency and explain what we are doing as further powers come our way. We also recognise that, at any point, the Government and Parliament of the day can introduce legislation to make changes to specific rules, should they wish to do so. That has happened in the past, for example, with respect to ringfencing, where Parliament took a very close interest in that. But that is done through a legislative process where everybody can articulate their views and Parliament can make a decision on the rules.
Q320 Chair: You pointed to the role of this Committee, which has strongly supported the FCA’s operational independence. Is that lost, in your view, the moment this power is used for the first time?
Richard Lloyd: The perception of the erosion of our independence will happen very rapidly. The concern we have already heard from the markets, other stakeholders and internationally, such as from the IMF, is that that will be the case once this measure—if it gets passed by Parliament—becomes law.
Q321 Chair: What we have seen during the mini-Budget fiasco is a Government acting in a way that did not respect the independence of institutions like the OBR. They did not take into account the part those institutions could play, and we saw what happened. You are telling us that a number of institutions, including your own, are raising alarm bells. What do you think the knock-on effects or damage will be to financial services and wider society if this power is applied in the way that the Government plan to apply it? What are the real impacts? You mentioned confidence and the concerns of the international community—the IMF and others. What will it mean in real terms for our citizens?
Richard Lloyd: First of all, our reputation as, in my view, the best country in the world in which to do financial services business is clearly something we want to protect. If part of that reputation is built on the independence and effectiveness of our regulators—and, in my view, it is—there is clearly a risk for the competitiveness of our market internationally.
Q322 Chair: Could you imagine a situation where there could be a risk to financial stability, as we saw with the Budget and how that was announced, with the OBR left out of the equation?
Richard Lloyd: I don’t want to speculate about what may or may not happen with an amendment that we have not seen yet, but I would say the markets are clearly very volatile at the moment. The actions of the Government and of Parliament are being watched closely. In our view, at times like these, what is needed is stability, evidence-based rule making, consistency, accountability and, as much as possible, particularly at a time when we are introducing new powers to the regulators, including the FCA, a clear plan for how that will happen. It is about doing that in as planned and un-risky a way as possible. That is the lesson.
Nikhil Rathi: The other point, if I may, is that a clear framework is articulated in the Bill, as introduced, around how rules should be made—around how impact assessments and cost-benefit analyses should be done, and then around consultation processes and implementation processes. One of the objectives we are seeking to pursue is being able to be more agile—being able to act faster in making these rules.
Inevitably, given the nature of the work we do—you hear from different interests on the Committee—when we make rules, there is nearly always a constituency that is unhappy with our decision, because we are seeking to balance many different interests. If you then have a situation where the unhappy constituency seeks to approach Ministers to get our rules overturned, the certainty for all parties, market participants and consumers, is eroded, because at some point you have to be able to get on and implement the decisions that have been taken—decisions for which we are accountable to you, very clearly.
Q323 Chair: Basically, the upshot is that it is going to compromise independence and put you in a difficult position in terms of being able to exercise your powers appropriately. It is going to potentially risk the objectivity of the process, and in the current climate, with the mini‑Budget fiasco and the consequences of that, it is important not to unsettle markets and rock the boat. Would that be a good summary?
Richard Lloyd: I would just emphasise the last bit of that, which is—
Chair: Don’t rock the boat.
Richard Lloyd: There is a backdrop here, clearly—economic and market volatility—where it would be unwise to create a perception that rules will be made by future Ministers, potentially overriding the evidence‑based decision making of the FCA board.
Chair: I hope the Chancellor and his Ministers are taking note of what you are saying. We will certainly feed these points through.
Q324 Harriett Baldwin: In this context, I wonder if we could hear a bit from you on the cost‑benefit analysis of the consumer duty. I think your consultation document on that estimated that the cost for firms of implementing the consumer duty was potentially about £2.4 billion. In the rule making you have done on the consumer duty, you have not been able to articulate or measure the potential benefits—obviously, you believe that the benefits must exceed the cost that the industry is absorbing—so could we hear how you are planning to measure those benefits going forward, once this is implemented?
Nikhil Rathi: Absolutely. It is worth remembering that the introduction of the consumer duty came following the most recent Financial Services Bill and the amendment adopted in Parliament inviting us to make such rules by the end of July this year. Going back to the earlier conversation, that is quite an important example of how we are responding to the democratic signals that we get from Parliament.
We hope and anticipate that the consumer duty will set a new standard for consumer protection across all retail financial services in the UK. We have seen from our survey evidence that there has been a gap in confidence and trust in financial services; also, there have been challenges in customer service that consumers have been addressing, and we felt that this consumer duty was necessary to help reset that. We believe it will help us move more quickly in the area of fair value, making sure that pricing decisions are made appropriately and that boards are putting good outcomes for consumers right at the heart of their decision making around products. We believe that its benefits will start to be felt fairly soon, and firms are well on their way to implementing it.
Q325 Harriett Baldwin: So you will measure those benefits on an ongoing basis.
Nikhil Rathi: We will seek to measure it. As part of our overall work in our strategy earlier this year, for the first time we have set a three‑year strategy with outcomes and metrics. For example, some of the metrics that we have put out there are, “Can we deliver a reduction in the number of complaints going to the Financial Ombudsman Service?” or, ”From our survey evidence, what are the levels of trust that UK retail consumers are showing in financial services?” Those are the kinds of outcome‑based metrics that we hope to be able to share with you over time as this comes into force, to start to demonstrate how this duty is operating and working.
Q326 Siobhain McDonagh: I would like to ask you some questions about access to cash and bank branch closures. One in five people say they would struggle to cope in a cashless society. We all know that access to cash is disproportionately important for those on lower incomes, the elderly and people with physical or mental health difficulties. What is your view of the Government’s intention to designate the FCA as the lead regulator on access to cash?
Richard Lloyd: Thanks for the question. This is something I care about deeply. I have been having regular discussions with the Cash Action Group chair, and it is a topic that the FCA board has regularly returned to because, as you say, it matters hugely. It matters to small businesses, which need to be able to deposit their cash, and it matters to communities where they see the withdrawal of services.
We have welcomed the powers in the Bill. Obviously, the structure of this will be that it comes with a policy statement from the Treasury, which we look forward to seeing, but we are not waiting for the power to come in. We have obviously been doing what we can without it to promote reasonable access to cash and to get retail banks to think very carefully about the impact of branch closures, but we do need the power to be able to move forward.
Nikhil Rathi: Within our existing regulatory framework, we have sought to be more proactive, while recognising that the powers will give us a more extensive ability to act. For example, in recent months we have looked at not just closures but partial closures, which are also impacting customers—particularly vulnerable customers. We have asked firms to ensure that before they move in that direction, they have alternative provision in place and working, with appropriate communication so that customers understand what the alternative provision may be.
Q327 Siobhain McDonagh: May I politely suggest that you are a little late to the party? There has been a loss of something like 5,013 bank branches since 2015, which is a rate of about 54 each month, and in the beginning you didn’t seem too interested in it. How will you stop this freefall?
Richard Lloyd: One of the things we have said is that it is not solely about branches; it is also about cashback and the shared facilities that are starting to be put in place—the banking hubs. There is also the issue of cash acceptance. As you know, during covid, lots of small retailers, in particular, started declining cash. It is bigger than how the FCA can regulate the firms that have provided branches, in particular. The Payment Systems Regulator has obviously had oversight of LINK and other parts of the system.
I am sorry if it seems that we are late to tackling this, but we are taking it incredibly seriously. We are in continual dialogue with providers about what they are doing. Some of the more pragmatic solutions—obviously, including the use of the Post Office, which we have all talked about for many years—are now being taken seriously, as far as I can see, by all the players in the system. That doesn’t mean that we can turn the clock back and put back in place branches that were closed some years ago. I regret that.
Q328 Siobhain McDonagh: Post offices are not quite the panacea that everybody makes them out to be, are they? Since the Bank of Ireland lost their contract with the Post Office to provide ATMs, most have had them removed. Many of those post offices are not physically accessible to people in wheelchairs or electric wheelchairs, and do not have the space to make people feel confident about withdrawing cash. I am just not convinced that the FCA will care that there is a kerb or a step, or a lack of safety for our most vulnerable constituents.
I wholeheartedly support the idea of shared banking hubs, but they often arrive far too late. In Mitcham, our town centre has lost three branches in three years. Our Lloyds is left, but I understand that the branch lease will come up in February, so we can predict that Lloyds will go. Do you agree with me not only that Mitcham would make a perfect site for a shared banking hub, but that the idea needs to be put in motion now? We should not be thinking about this once the last branch has left; that would be too late.
Richard Lloyd: I am afraid that I have not been to Mitcham for a little while, so I will not comment on your constituency.
Siobhain McDonagh: You are very welcome.
Richard Lloyd: Thank you. I did used to work down that way, and I would love to come back and see you there.
What we are saying to retail banks right now is that they have to consider their vulnerable customers. If they are thinking about changing provision—to your point on accessibility—we have made it clear that access means access to vulnerable customers. We do not regulate the Post Office; we need BEIS to play their part in this, and we need the Post Office to play their part too. But there is now clearly a proven case for the shared hubs, and that is a really important development. We want that to speed up, and we have made that clear.
Q329 Siobhain McDonagh: The banks can tell you whatever they like, but most MPs, from across the House, will tell you that they close, and all the promises come to absolutely nothing. It is not just about access to cash; it is about access to free cash. Since August 2019, we have lost 12,559 free-to-use ATMs; that is a decrease of nearly 24%. Meanwhile, almost a quarter of ATMs now charge people to access cash. I am trying to amend the Bill to ensure that not just access to cash but access to free cash is within everybody’s grasp. Would you support that?
Richard Lloyd: It is for Parliament to decide. The clearer that duty and the guidance that comes with it—the policy statement from HMT—the better, from our point of view.
Q330 Siobhain McDonagh: We all know that the poorer you are, the more likely you are to not have access to a free ATM. In Pollards Hill in my constituency, there are no free ATMs. When the Co-op came to the parade of shops there we were hopeful that we would get a free ATM, only to find that the lease that the Co-op signed forbade it from having a free machine. Lots of people who live on very limited income depend on cash and get out small amounts on an almost daily basis, only to be charged £2 a time. Do you think that is right?
Richard Lloyd: Again, back to your point about free access to cash, we have to think about the policy aim here. If the aim is to support more vulnerable consumers and avoid the poor paying more, we need to challenge the viability of some of the alternative measures that are being put in place. We need to ensure that the hubs are genuinely accessible. We need to look at the economics behind that. But it is a very real worry for us that, increasingly, there are communities where people are having to go frequently to an expensive machine. Going back to the earlier discussion about the consumer duty, that does not seem consistent with fair value and accessibility of services. I very much hear what you are saying. We want to see this resolved in a way that meets need and is commercially viable. To us, it looks like there is a solution. We want the implementation of that solution to speed up.
Q331 Siobhain McDonagh: The Post Office handled £3.45 billion in cash in August, the highest total since its records began. Do you agree with me that ensuring free access to cash is becoming even more important because of the cost of living crisis, and that the Government seem to be throwing you—the FCA—the hot potato rather than dealing with it themselves?
Richard Lloyd: We are used to catching hot potatoes; they come our way frequently. The broad point, though, is that there are limits to what we can do. We are not able to make social policy—welfare policy. There are lots of other players that we have to and would like to work with closely on solving some of these problems. But there is a broader policy context here, to do with incomes and supporting local communities. We want to play our part and we do play our part, but sometimes the expectation is that if we were given a duty or a power then that would solve problems that are far more complex and involve far more players than solely financial regulation, I am afraid.
Q332 Siobhain McDonagh: We cannot measure access to cash unless we have the data, so I am trying to amend the Bill to make the whole issue more transparent. Which communities have the worst access to cash? How is reasonable provision of access assessed? How many retailers refuse cash—you referred to this earlier—as a means of payment? Do you agree with me that the availability of information like that would be an uncontroversial change to the Bill?
Nikhil Rathi: I certainly agree that data-led decision making, and certainly data-led supervision for our part, is going to be incredibly important. When it comes to the access for cash powers that we get, we want to make sure that we do take a very strongly data-led approach. Our powers will not extend to whether or not merchants accept cash—that is not what is in the Bill—but I certainly accept your point that, for communities to understand the implications of different decisions that financial institutions may make, understanding as much data as possible is very relevant to that.
Q333 Siobhain McDonagh: And you need to understand who is being affected.
Nikhil Rathi: Absolutely, and we certainly saw during the covid pandemic that cash usage was highest in those parts of the country with the highest concentration of low-income people. We are well aware that vulnerable consumers, in particular, rely on cash and, in many cases, prefer the use of cash for budgeting purposes, to your point around the current situation with respect to the cost of living.
We also look to the experience of other countries. For example, the Netherlands have had similar experiences. They have trialled mobile banking hubs and, on occasion, even the delivery of cash to homes—some of the banks have sought to do that in rural areas. This is a policy problem that is present in a number of other countries around the world and I think there is best practice we can look to draw from.
Q334 Siobhain McDonagh: Craving the indulgence of fellow Committee members, I want to ask a few quick questions about Blackmore Bond.
You will have seen the BBC “Panorama” programme about the collapse of Blackmore Bond plc, highlighting the number of people who lost money, the amount they lost and the lack of intervention before the scheme collapsed. My constituent, Ms J, was a retired long-standing member of staff at John Lewis. Without any experience in investing, she invested £17,000 of her pension pot in Blackmore Bond, believing it to be secure. She made it quite clear in all the paperwork that she was an unsophisticated investor. She never presented herself as anything other than what she was. Did the FCA ignore warnings by a finance and banking expert before the collapse?
Richard Lloyd: The first thing I would like to say is that those sorts of stories are appalling, and I am really saddened to hear those personal stories—it is awful.
The case was that Blackmore was not supervised or authorised by us, nor were the bonds that they issued regulated by us. Our way into Blackmore was through the financial promotions that were being made—that is what we are investigating at the moment—and the authorisation of those financial promotions. We took action to close down their website and we shared information with the City of London police, and vice versa, so it is not quite right to say no action was taken. As I say, there is still enforcement action going on in relation to how those financial promotions were approved, which was a regulated activity.
Q335 Siobhain McDonagh: It was my understanding that the FCA had confirmed in writing that there had been a missed opportunity to act.
Richard Lloyd: Always, when these awful things happen, you can look back and see moments when one would have rather seen us step in differently, more strongly or earlier. Between the different agencies that were looking at what was going on in this case—again, we have learned this through, for example, the review of LCF. We needed to be working more closely together, more effectively and more assertively. That is what we have taken from the LCF review and that is what we are now doing. We are also being much more assertive with our use of our powers when it comes to the approval of financial promotions.
I cannot say much more at all about the investigation that we are currently doing in relation to Blackmore, but I can assure you it is going on.
Q336 Siobhain McDonagh: It seems that between 25% and 30% of investors’ money went in direct fees to two owners of the company, including £2.5 million that was invested in Gibraltar as a tax haven. Surely, given the information now available and the context of the collapse, there is a basis for investigating the matter—or do you feel you have missed it?
Richard Lloyd: As I said, there are investigations on foot. We will of course update you and the Committee when we are able to, but you will appreciate that there is not much we can say in public right now.
Q337 Siobhain McDonagh: Is the Blackmore debacle the reason why Mark Steward, the executive director of enforcement and market oversight, has resigned?
Richard Lloyd: Certainly not.
Q338 Chair: Did you want to come in, Mr Rathi?
Nikhil Rathi: I was simply going to observe, in relation to the actions of the directors, that the Insolvency Service conducted an investigation specifically into the directors of the company and ultimately concluded that it did not want to take action.
Siobhain McDonagh: I am ever so sorry, Nikhil; I didn’t quite hear that.
Nikhil Rathi: Sorry. I was saying that the Insolvency Service did an investigation into the directors of the company, as it is the authority with power to investigate directors, and ultimately concluded not to take any action in that specific case. We are looking at those that were responsible for potentially some of the approval of financial promotions.
Siobhain McDonagh: But the promotion is that somebody overheard people cold-calling completely inexperienced investors, and they lost their money.
Chair: Perhaps you could write to us with further detail on whatever it is possible to write to us on.
Nikhil Rathi indicated assent.
Q339 Harriett Baldwin: I want to move on to liability-driven investment, which makes me think of the famous Warren Buffett comment that, when the tide goes out, you find out who’s wearing their swimming trunks. My understanding is that you had been on the record pointing out the risks in liability-driven investing and that there was an absence of swimming trunks around in these leveraged portfolios for pension funds. Given that, can you talk us through what you think has gone wrong and whether the steps have now been taken to prevent something like that from happening again, or whether you are seeking, perhaps, further locus in terms of regulation of these funds?
Richard Lloyd: Could I just make a couple of observations on that and then hand over to Nikhil? We have seen the different players, the different regulators and the Treasury working together incredibly closely in response to this, and—
Q340 Harriett Baldwin: But you had flagged up that it was going to be a problem at some stage, hadn’t you?
Richard Lloyd: We had pointed to the risk, and also that there was a gap in regulation, which is investment consultants, who were advising pension trustees.
Q341 Harriett Baldwin: If investment consultants were regulated, would that have solved the problem?
Richard Lloyd: It is hard to know whether that would have stopped the problem, in particular because the trigger for the particular issue that week was unexpected, to say the least.
Q342 Harriett Baldwin: Yes. With the greatest respect, I cannot see how regulating consultants would have changed this at all, but perhaps you can enlighten me.
Richard Lloyd: It is impossible to speculate on that. The other thing that I saw was that some of the assets in this situation were being managed and supervised outside the UK, so we had to work very closely—or do our best to work very closely—with regulators in Europe. I think there is a lesson there for us about needing to ensure that when there is a crisis of that type—we did our best, and we are still doing our best. Not the whole of the situation is in our hands in terms of regulatory oversight. There are asset managers based in other parts of Europe, for example, where we are reliant on the regulator in that country to give us the data to be able to respond. There are some quite big lessons there about how we co-operate and work together with regulators internationally, and in the UK between the regulators that have different parts of the system within their remit.
Q343 Harriett Baldwin: At what point did it get flagged up to you, Richard, that there was a crisis happening?
Richard Lloyd: Nikhil came to see me.
Q344 Harriett Baldwin: What day was that?
Richard Lloyd: I think it was probably the Monday or the Tuesday, but I can’t remember. It was at least a day before the intervention by the Bank of England.
Nikhil Rathi: In terms of whether the situation could have been prevented, I think you have taken evidence from a number of witnesses, including from the Bank of England. Certainly in that week, we saw movements of 30-year gilt yields that were unprecedented. We had never seen those in the history of the gilt market; they were twice as large as March 2020 and three times as large as any historical norm. It was beyond anything that any of us had experienced before in terms of price movements, and that led to the risk of a self-reinforcing spiral as some of that leverage was being unwound, and as margin calls were being made for derivatives as collateral needed to be accessed. It is difficult to say with hindsight what particular measure may have prevented that situation, as it was wholly exceptional.
Saying that, as Richard has alluded to, there are a number of lessons for the regulatory community collectively to think about and reflect on. There is a pattern when we have seen disruptions during market turbulence of leverage not being managed well enough, causing those disruptions. We saw it with Archegos, where banks lost $10 billion. To some extent, the situation with LME and nickel was also relying on leverage and concentrated counter-party exposure margin models, not able to deal with historical issues. Going forward, we want to see—and we will be working on this—stronger data reporting on leverage and liquidity management.
Q345 Harriett Baldwin: Data reporting to you or to the Pensions Regulator?
Nikhil Rathi: To any of us who have a locus on some part of the system—making sure that we are collecting the data we need, and then that there are proper data sharing arrangements in place.
Q346 Harriett Baldwin: So there was no data out there about which pension funds had a leveraged exposure?
Nikhil Rathi: That would be in the remit of the Pensions Regulator. As I understand it, it does not collect systematic data on pension funds and leverage, relying explicitly on the trustees in its regulatory framework to manage those risks. I think there will also be some questions about margin requirements. There has been a lot of international work to try to manage the procyclicality of margin requirements, so that when prices move in a particular way, you don’t—through the collection of margin—aggravate the situation that you are dealing with. We have been active in that work as well.
There are operational issues. To address your point about whether the regulation of investment consultants would have made a difference, part of the challenge in some of these stress situations is that sometimes there are operational challenges in managing the situation. We need to see stronger resilience and stronger reverse stress testing so people think about how they would work in a world where the system could be broken, and how they would plan and manage their resilience in those situations. To that extent, if investment consultants were more actively regulated, there would be a greater focus on those issues from those parties, and they obviously play a role in advising pension funds and trustees.
Q347 Harriett Baldwin: So your belief is that if pension fund consultants were regulated by yourselves, this would not have happened?
Nikhil Rathi: I would not go as far as saying that. There are many different dimensions here. What I would say is that there were challenges related to the resilience of the management of the situation by managers and pension funds. Perhaps if their advisers had been more sensitised to dealing with such levels of stress, then some of that risk may have been managed a bit more effectively. I wouldn’t go so far as saying that that, in and of itself, would have prevented such a situation. As I said at the start, we saw a movement in gilt prices that was beyond anything we had experienced in history.
Q348 Harriett Baldwin: Are there any other participants in the market at the moment, as far as you are aware, who are also bathing without their swimming trunks? I know that you are going along to a shadow banking meeting later this week, as I understand it.
Nikhil Rathi: I think the G20 Financial Stability Board, in which I participate, has been sensitising the market to risks of leverage and risks in non-bank finance for some time now. Post-financial crisis, there were significant shifts in the regulation of banking institutions in terms of capital, liquidity and leverage. What we have seen is a very explosive growth in the use of non-bank finance in the manner of intermediation in the financial system. We are concerned to ensure that there is proper liquidity management, be that in leveraged hedge funds, leveraged exchange-trade funds, or securitisation providers. All of those different types of non-bank entities are around the world. These are not necessarily specifically located in our jurisdiction. These are interconnected markets, and if there is stress in one market around the world, it can play back into our system.
Q349 Harriett Baldwin: So would you argue for the UK to go it alone, or would you wait until the Financial Stability Board recommends changes globally?
Nikhil Rathi: There are certain things on which we can take steps. Certainly in terms of our collection of data and oversight and reporting, we can take steps, but, as Richard alluded to, many of these funds—in fact, the overwhelming majority—are located outside the United Kingdom. Many of the managers are located outside the United Kingdom. This requires cross-jurisdictional co-operation, and therefore the important endorsement of the G20 leaders and Finance Ministers, which we hope to progress in the coming days, is important, as is each jurisdiction moving forward expeditiously to bring these rules into place.
Q350 Harriett Baldwin: What I am hearing is that you would like to see investment managers regulated and you would like more data. Is there any other change you would like to see to avoid something like this happening again?
Nikhil Rathi: Those two, and then, of course, the internationally agreed approach to tackling risks in leveraging non-bank financial systems. Those are the three that I would draw to your attention.
Q351 Anthony Browne: My questions are about the housing and mortgage market. Obviously, interest rates are rising. They are at 3% and that is putting a burden on people not on fixed rate mortgages or renewing their mortgages. How worried are you about the ability of people to repay those mortgages? And how worried are you about a repeat of the rise in repossessions that we saw after the 1990s crisis, but not after the financial crisis?
Richard Lloyd: On the state of the market, of course we are worried. On the resilience of households in the round, there was a report published today about the huge number of households that have very little savings. Specifically on mortgages, over the next two years there are 3.2 million borrowers who are on fixed-rate mortgages who will have to find another deal. This is extremely stressful for individuals. It will be stressful for their mental health and stressful for their finances in a way that people have not experienced in the housing market for some time. We therefore need lenders to really step up. We have already held a series of meetings with lenders of all kinds to ensure that they are fully aware of the tailored support guidance that we put in place during covid, and still is there. There are the expectations that we have about how people will be treated if they do get into difficulty, and there is the need for really effective communications and proper support—tailored support, as I have said. We are ready to do more, but at the moment we are at the stage of making very clear to lenders the standards that we expect.
Equally, the consumer duty, as it is coming in next year, will reinforce that effort. It is, I hope, not controversial, but it is nevertheless the case that some lenders are not effective in the way they communicate. We published some data last week about how some lenders fell short of standards when they were dealing with borrowers in difficulty during covid. We have required £12 million of redress. We are not at all complacent about how effectively lenders currently are in terms of dealing with borrowers in difficulty. We want to be very clear with them. We want to be very clear with them; we have been very clear with them about what we expect, and we will be watching this very closely and probably doing more in the coming weeks.
Nikhil Rathi: If I may, Mr Browne, I can take you through some of the statistics, but I echo what Richard said. This has been a very distressing period and it will be a distressing period for a number of consumers who are looking to refinance their mortgages. We do have very clear and strong expectations of banks that they should be proactive and should be acting early to support consumers, to be available to give advice and to, in a customised way, provide forbearance where that is appropriate.
At the end of June 2022, there were 211,000 regulated mortgages in shortfall. That is around 2.4% of all mortgages. Of those, 117,000 were in arrears of greater than 1.5% of the balance of the mortgage. That gives you a sense of the size of the issue. We would say, based on our latest figures, that there are probably around 770,000 mortgage holders that may be at risk of a shortfall in the next two years. That definition of “at risk” is if more than 30% of your gross income is going towards your mortgage payment; that does not necessarily mean that you will miss your mortgage payment because some people can adjust and meet that threshold, but that is to give you some of the data that we have available to us.
In terms of repossessions, the picture is complex because obviously the courts have a backlog from covid, and so the repossession numbers are still working through, but there were 835 repossessions in Q2, which is an extremely low number. Prior to the pandemic, there were typically 1,100 to 1,400 every quarter.
One thing to bear in mind in terms of the economic conjuncture we face at the moment is that unemployment has not risen anything like the situation you described in the 1990s. Households are still in employment. They still have income and therefore one would expect that banks will seek to work with them to find a tailored solution because in most cases it is not at all in the economic interests of banks to seek to repossess a home; it takes a long time and helping their consumers through a couple of years while they find their feet is often the best outcome for them.
One group that is particularly at risk, out of the entire mortgage population, is probably those 18 to 30-year-olds who were first-time buyers in the last few years. They will have, quite often, stretched themselves to purchase a property. They may have got a fixed-rate mortgage at 2% or 2.5%. When that expires, they may be looking at a materially higher rate of 5% or more. Those on Help to Buy may also see that they have to start paying interest on the interest-free component of their purchase, as well as potentially refinancing the mortgage. That is a part of the market that we will need to watch very closely indeed.
Q352 Anthony Browne: Your figure of 770,000—obviously nearly a million homeowners that could end up behind—is huge. There is a narrative out there that actually interest rates are only 3% and we do not know how much further they are going to go but no one expects them to go up to the level they were in the 1990s, when they were 10%, 12% or higher. On the other hand, people have borrowed far more now and I have seen reports that the affordability of interest rates is as bad now—because people have bigger mortgages—as it was in the 1990s. Do you think that what we are about to go through, or have started to go through, is more similar to the financial crisis in 2008, when actually there were not really any repossessions, or is it more like the 1990s?
Nikhil Rathi: I would certainly hope that the resilience that has been worked on for the mortgage market through various measures over a number of years means that we will not actually be dealing with either of those scenarios. To give you some of the numbers and talk a little bit about the guidance that we have put in place, the average regulated mortgage is £116,000. For a repayment mortgage, the average monthly payment is £650, so a 3% increase in interest rates is £173 a month for consumers, and banks have been required over recent years to stress to that level, sometimes higher. Of course, there are other things going on at the moment. It is not just interest rates. There are also energy prices and other dimensions—
Anthony Browne: Food prices.
Nikhil Rathi: There is definitely pressure on households and that is obviously a concern. But what we do not have, which we did have in the previous financial crisis, is the prevalence of products at 125% loan to value mortgages or in excess of 100% LTV mortgages. You are looking at a significantly lower LTV with quite a lot of cash equity. That does not help with the cash flow to pay the mortgage, but it does condition how banks think about how they act in these situations. Through our tailored support guidance, we have certainly made it clear that they should be proactive in thinking about which forbearance measures they should put in place. That has to be through a specific conversation with the customer to understand what the cash flows may be and to help them through this situation.
Q353 Anthony Browne: Obviously, you do not know what is going to happen to property prices, but you do not think that we will get the large amount of negative equity that we had in the 1990s, because there are not all those 100%-plus LTV mortgages.
Nikhil Rathi: As you rightly said, I cannot predict property prices, so I cannot try to venture down that route. The number of customers in arrears that I mentioned at the start of my answer is the lowest figure we have seen since 2007. I am not in any way diminishing how serious the situation is and how challenging this period will be for consumers around the country, but we are going into this situation in a much more resilient position than in some previous cases that you have described.
Q354 Anthony Browne: As you just alluded to, this summer the Financial Policy Committee removed its requirement for affordability tests. That has not had a lot of time to come in, but you obviously still have your own requirements under MCOBs—the mortgage conduct of business rules. Has the removal of the Bank of England affordability test on lenders had much of a negative impact—or will it have—on people’s ability to repay their mortgages?
Richard Lloyd: It does not appear so to us. Obviously our affordability tests remain. We discussed this with the Bank at the time, and the backstop—the tests that we have in the market—should be sufficient.
Our experience of dealing with this issue during covid taught us a lot about how proactive we need to be with lenders. We did a lot of very fast, effective work with lenders to respond to that crisis. This is different. This time around we are not looking at the kind of blanket measures that we put in place then—in some cases, so quickly that it was unprecedented—but, as a system, ourselves, the PRA and the lenders now have a much better-established way of looking not only at our standards and what we expect, but at whether there are things about our rules that are impeding best practice. That means that we can have a rapid response to anything that lenders might be misinterpreting as preventing an effective response to a borrower in difficulty; plus, we just have much better data now.
That is not to say that we are at all complacent about this situation—as I started off by saying, it is extremely worrying for people at the current time—but we are working extremely hard to ensure that we do not have the kind of crisis for individuals that we saw in the 1990s and after the crash.
Q355 Anthony Browne: It is obvious that you are being proactive with the lenders. You have talked about your requirement that lenders communicate well with customers. What other things would you like them to do? For example, there are measures such as rescheduling mortgages, extending the limit of mortgages, and having zero-interest periods. Are there other interventions like those that you would want from lenders?
Nikhil Rathi: There is a whole range of interventions, including extending the term. Sometimes it could be moving to interest-only for a temporary period, or straightforward forbearance and payment holidays. More generally, it might be enabling customers to move to a fixed rate earlier than they may otherwise have anticipated, or looking at the fees charged for early repayment. Many things can be done, but it is necessary to look at each case based on individual circumstances to work out what is right for a particular household—in different circumstances and of different age groups. There is no one-size-fits-all solution, which is why we moved towards tailored support guidance.
Let me add to your previous question about the affordability rate. We still test at 1% above the reversion rate, but of course that stress does not apply for mortgages in excess of five years, so fixed rates of five years are tested at the product rate. In the current climate, there is an increasing take-up of longer-term fixed-rate mortgages.
Q356 Anthony Browne: Last question on the subject: do you think that there is a case, or might be a need, for Government intervention to help people who fall behind on their mortgages, perhaps with financial support as with energy bills, to stop an unacceptable rise in repossessions, or do you think that the industry with the measures that you have been suggesting will be enough?
Nikhil Rathi: I do not think it is for us to comment on the necessity for Government intervention in this area. The Government are weighing up a whole range of choices on the cost of living pressures that households face. What we can do is share with you the data, which demonstrates that there has been resilience in the system, but we need to monitor it closely. Of course, on the other interventions that the Government have announced, for example with respect to energy prices, mortgages will help to relieve pressure on some of those households.
Q357 Chair: To pick up on that, are you reviewing the charges by banks on those in arrears? Do you have much on that at the moment?
Nikhil Rathi: We have our rules on treating customers fairly. Under the new consumer duty, firms must demonstrate the fair value of their products, particularly for consumers in vulnerable circumstances. We will be monitoring all those steps very closely.
Looking beyond the mortgage market, in May we wrote to 28,000 high-cost lenders to make it clear that they must not have misleading information on advice and what happens when people fall into difficulty. We followed that up with 3,500 letters to vendors in June, including for the first time writing to buy now, pay later lenders as well. We will be watching those practices closely and carefully.
Q358 Chair: One more thing: in answer to Anthony’s questions, you mentioned some of the differences in terms of loan to value, but we did not talk about the Bank of England stating that we are now in recession and likely to be for the next two years. Have you done any analysis of how that could impact on mortgage holders on top of all the other issues, including your point about unemployment being low at the moment and what happens when it starts to creep up again? If you have not, will you send us anything you have done or are likely to do on that?
Nikhil Rathi: Obviously, we rely on the Bank of England analysis. We use it for our own scenario analysis, to consider what might happen. We regularly publish a mortgage update. I will look at what we can share with you.
Richard Lloyd: This is an important point. At the moment, the board is looking hard at the economic situation that we find ourselves in to ensure that we have the right resources pointed at the right problems. We are having a fresh look at the risk of consumer harm in the market, and obviously putting a lot of effort into post LDI and ensuring that we are doing everything we can in wholesale markets and asset management. A lot of redirecting of our resources is going on. On top of that, we are thinking carefully about how we can manage the transfer of retained EU law on to our rulebook and at what pace.
The point I make is that we are looking regularly at the economic data and at our response to what we see in front of us, in terms of the risk of harm, in the context of everything else that is coming at us. The answer is that there is not much slack in the system if are to be able to navigate effectively through what looks like a two-year recession.
Q359 Harriett Baldwin: Moving on to a related area, the cost of living and consumer credit, I will then touch on buy now, pay later. On consumer credit, we have been in an extraordinary cycle. During the pandemic, household savings rose significantly, but now people have got out their credit cards again. What particular data do you monitor on the sheer behaviour of consumer credit? I know you are on top of the date, Nikhil.
Nikhil Rathi: We look at aggregate data, as you described, which is looking at savings levels, the use of credit cards, unsecured lending and other forms of lending. However, as well as looking at aggregate data, you have to look at the distribution.
I think that while the position was as you described during the pandemic, it was generally higher-income households that were able to save, and you see more vulnerable and lower-income households now drawing down on any spare cash they have, and potentially at the end of the month not having very much left, if anything at all. So that distribution is really important for us to understand where the real pressure is going to be.
Q360 Harriett Baldwin: On that timeline, what do you see as being the main shifts, referring specifically to consumer credit here?
Nikhil Rathi: I think that we are seeing signs of consumers drawing on buy now, pay later, and there is a rise in the use of buy now, pay later, which is why we have—
Q361 Harriett Baldwin: I will come on to buy now, pay later, in a minute; I meant just in terms of mainly unsecured credit cards and things like that.
Nikhil Rathi: For the lower-income households, there has been an overall decline in cash balances and a modest increase in access to other forms of lending through the regulated financial system—
Q362 Harriett Baldwin: How does that compare to previous financial crises?
Nikhil Rathi: At the moment, we are not at the kinds of levels that we may have seen in previous experiences. Again, I will just draw your attention to the fact that the unemployment rate remains relatively low, so consumers are still in work, which I think is obviously the key determining factor as to how much their households can fall under stress and how much they need to draw on other sources—
Q363 Harriett Baldwin: So most of the stress that you are observing is among those who perhaps do not have anyone in work in the household. Are you picking up particular stresses in that area?
Nikhil Rathi: Yes. I think that with vulnerable consumers, you don’t have anyone in work, but this is also affecting those on lower incomes as well. There is stress emerging in that area too.
However, you asked me to compare with the previous crises. I don’t think we are at the kinds of situations we saw a decade or so ago.
Q364 Harriett Baldwin: Are you getting a good response from those who provide that credit, in terms of the letter that was sent out by the FCA—advice on how to deal with struggling consumers, and so on? Are you happy with the response you have had from the industry on that?
Nikhil Rathi: Generally, we are seeing the majority of industry players being receptive and proactive. As always, it is a very large industry; as I said, we wrote to 28,000 companies. There are pockets of bad practice and we have been very public about that. Where we have gone and done targeted supervision work, we see some firms not properly considering how consumers can benefit from debt advice, not being available to answer questions, and not being available to share with consumers all the possible options available to them.
I would not say that it is a completely positive picture, but in those areas where we see that bad practice, we are taking action as early as we can and proactively, to make sure that firms sort themselves out.
Q365 Harriett Baldwin: And is that bad practice worse than in previous financial crises, or is it just an ongoing problem?
Nikhil Rathi: I think that, overall, the measures we have taken, and the fact that the industry can see that the consumer duty is coming into force in July and companies are all busy working to ensure that they are ready for that, particularly the emphasis on vulnerable consumers, mean that the practice and conduct feel like they have improved, as compared with previous experiences.
However, that does not mean that we do not have situations where the practice is not good enough. That is why we need to be as vigilant as we are being.
Richard Lloyd: I think that a difference this time around, and I attend these meetings myself because I think this is so important, is that there is the collaboration between the Money and Pensions Service, ourselves, the Financial Ombudsman Service and the Financial Services Compensation Scheme, to try to ensure that there is consistent and joined-up messaging about what to do if you are in difficulty.
We have acted much earlier to try to respond with a joined-up communications approach, to try to ensure that there is enough free debt advice coming into play, but also—from our point of view—to address the poor end of the market in terms of debt packaging.
These things have been put in place much, much sooner throughout the course of this year, so I hope that together the system will be much better at addressing what, sadly, looks like being a really tough year next year.
Q366 Harriett Baldwin: I think I am right in saying that this is the first of these crises we have gone through where these lenders have been specifically regulated by the FCA. One of the debates at the time was around how people would turn to unregulated doorstep lenders. Are you picking up any evidence of that in the data?
Richard Lloyd: I was with the Stop Loan Sharks team in Cardiff two weeks ago to explore exactly that. Again, there is much closer collaboration between the local authority-based teams that are trying to deal with illegal money lending. The answer from them was that they are not seeing a big spike in that. What they are seeing is, as Nikhil said, signs that people are starting to turn to credit for essentials, and in particular, buy now, pay later, because it is ubiquitous. So right now we are hearing from the frontlines that there has not been that worry—well, there is always the worry that it may happen, but they are not seeing an explosion in illegal money lending in the way that we were concerned about. However, we are keeping very close to them.
Q367 Harriett Baldwin: Again, something that you are very expert on, with your Which? experience, is the reform of the Consumer Credit Act. Is it your understanding that the Government are still committed to bringing in a new version of that, which will give you a lot more responsibility for regulating in that area? Is that how things stand with the new Chancellor?
Richard Lloyd: That is the need. As you know, it is an Act that is rather aged now and we want to see it updated.
Q368 Harriett Baldwin: But is it your understanding the Government are committing to do that?
Nikhil Rathi: I think we will have to wait until 17 November, when I understand there will be more announcements about the current Minister’s approach to financial regulation.
Q369 Harriett Baldwin: Oh, you think we will get that on the 17th as well?
Nikhil Rathi: I don’t know, but I think the overall approach will be clearer later this month.
Q370 Harriett Baldwin: Obviously, the section 75 stuff is an area you will be focusing on closely, I would imagine, Richard?
Richard Lloyd: We certainly would be, yes. I don’t think we can say more about that until we see the new Chancellor’s overall strategy towards financial services.
Q371 Harriett Baldwin: But you are making the point to the Chancellor that you do want to see changes to the Consumer Credit Act?
Richard Lloyd: We certainly do. We have been very clear about that for some time now.
Q372 Harriett Baldwin: Moving on to buy now, pay later, I listened very closely to what the Minister had to say last week in Committee. I am sure you were following that as well, Nikhil. What is your sense of where we are with the buy now, pay later side of things, and your responsibilities?
Nikhil Rathi: I will split that into two sections: first, what we are doing already under our current responsibilities; and secondly, what we would like to see in the future.
Notwithstanding the fact that we do not yet have regulatory powers, we have sought, using our competition powers under the terms of the Consumer Credit Act, to ensure that buy now, pay later firms correct what we felt may have been misleading terms and conditions. A number of firms have done so voluntarily.
We have also sought to take action where we can through the financial promotions regime, to ensure that there is clear, fair communication to consumers. Of course, buy now, pay later is not regulated as a substantive product, and we set out our view on that two years ago. There has been a consultation and there will be a further potential consultation from the Treasury. We are waiting to see what the Minister’s position on that will be, both in terms of the substance of regulation and timing. Both of those are important for us, because there are big operational issues for us in bringing a new sector into regulation, so the sooner we can understand what the position is going to be, the sooner we can get ourselves ready in terms of writing rules and systems. We are waiting to understand what the Minister’s position on that will be.
Q373 Harriett Baldwin: From what the Minister said last Thursday, it did not sound like that was going to happen in the current piece of legislation that is going through Parliament. Is that your understanding?
Nikhil Rathi: We have not had confirmation either way on the position.
Q374 Harriett Baldwin: You are ready to go?
Nikhil Rathi: The bringing of buy now, pay later into the perimeter is a matter for Government and Parliament, so we can only go if there is a legislative change. We have been clear on what we think should happen, and we have been very supportive of the work and the consultation—and we have recognised there are lots of technical issues to work through. Ultimately, it is a political choice as to when and whether to make the change.
Q375 Harriett Baldwin: How big would the resource issues be for you if you were given the additional powers?
Nikhil Rathi: It entirely depends on the scope of those powers. There are some versions where it could be a very small number—say, third-party lenders—and others where, if you bring in merchants, it could be several thousand, if not more than 10,000. That was the subject of the most recent Treasury consultation, and I know that the Treasury is reflecting on what that scope would be. Clearly, the larger the number, the more lead time we need.
We have talked previously about recommendations we have accepted from other independent reviews that we have been very rigorous in bringing to the gateway. On funeral plans, which we brought to the gateway for the end of July, we were very robust and rigorous in that gateway, to make sure we tried to sort out those who could make it through and those who could not, recognising that, very sadly, some consumers were left with funeral plan providers that went into administration, but they were not fit to come into the regulatory perimeter.
Richard Lloyd: That said, I would not want you to get the impression that we are sitting back and waiting for the legislation. As Nikhil alluded to, we have used consumer protection regulations to remind buy now, pay later lenders of their duties not to be misleading in their advertising. We have worked closely with the Advertising Standards Authority on enforcing financial promotions. We are also starting to use our section 21 financial promotions legal powers in relation to buy now, pay later. We know, and we hear from agencies like Citizens Advice very clearly, that people are turning to buy now, pay later to pay for essentials, and it is crucial that nothing is left undone that we can do with our existing powers to ensure that the way these products are sold and promoted to consumers is not misleading and is not fooling them into thinking that, somehow, this is a free lunch if you go over the term of the loan. So we are doing what we can with the powers that we currently have.
Q376 Anthony Browne: I have some questions about savings and investments. Obviously, interest rates are going up. I have had constituents complain to me that banks are passing on interest rate rises far more quickly to mortgages than to savers. Richard, I suspect that, in your previous job at Which?, you would have been making similar complaints, but I do not want to put words in your mouth. Is there a concern about the banks not passing on rising interest rates to savers? Is this something that you monitor, and is it an area of concern?
Richard Lloyd: You will be unsurprised to hear me say that that is of course a concern. We have been looking closely at the data and engaging with banks on this. Again, I know that we have said the words “consumer duty” repeatedly, but the fair-value element of the consumer duty is clearly there to ensure that the most egregious failure to pass through, in terms of savings, does not continue.
The other thing we did, of course, was to put down the single easy-access savings rate during covid because, at the time, the spread was not there. With the other things we had in front of us, we thought that was the right thing to do. But we were clear at the time that if we see a loyalty penalty, effectively, in the savings market when the Bank rate is going up, we may return to the issue.
So the short answer is yes, we are looking at the data and we are thinking carefully about what we might need to do. That said, the data we have seen so far suggests that the pass-through is not as bad as we might have feared. Nikhil, you might want to say a bit more.
Nikhil Rathi: Yes, I think it was a slow start. As interest rates started moving—
Q377 Anthony Browne: A slow start for savers but not for borrowers?
Nikhil Rathi: For savers. There has now been a greater pass-through, particularly on fixed rates, but it has not been as fast as for mortgage rates. I just echo what Richard said. I saw over the weekend, Mr Browne, that you said the FCA should keep its “beady eye” on the banks on this. I can assure you that that is what we are doing.
We would also encourage consumers to actively consider switching. If consumers vote with their feet if they feel they are getting very bad value from a bank or building society, that has an effect. The new consumer duty specifically enables us to take action on fair value that is not sector specific. In insurance, for example, we had to do a sector-specific thing on loyalty penalties; once the consumer duty comes in, we can go broader. That will be a possibility for us if we feel there is a case for doing that.
The consumer duty also enables us to be more vigorous in tackling things like sludge practices. If a customer wishes to switch but barriers are put in their way, it takes too long or there are processing issues, we hope the duty will help us get on top of that more forcefully in the future.
Q378 Anthony Browne: During the pandemic there was a lot of enforced saving; people could not go out and spend their money on holidays, eating out and so on, and savings rates went right up. Did that lead to a change in consumer behaviour? Particularly as inflation has risen to 10% a year, causing their savings to lose value, have people gone for higher rates of return from investment products?
Richard Lloyd: That was very much the fear—that high-risk investments would start to look even more appealing—and that is precisely why we have put much more resource into tackling misleading or, frankly, at times illegal promotions of high-risk investment products. Cryptoassets, property assets—there has been a real search for yield, as you know. We have given that the priority it deserves in our plan this year and for the coming two years to try to ensure that, if people have built up a pot of savings and it is sitting there not earning interest or a return at all, they get access to the right sort of guidance to make the right sorts of decisions about how to use that money more productivity, but also absolutely not to go anywhere near the Ponzi schemes that have been promoted on the wild west that is the internet. That is certainly a really key risk of harm that we have been really anxious to bear down on.
Q379 Anthony Browne: Has there been a rise in scam schemes? I have seen figures suggesting there has, but is that what you have found?
Richard Lloyd: Yes. Sadly, whenever there is an economic downturn there is more of it, so the numbers are going in the wrong direction. We are spending a lot of money on getting warnings out to previously unreached audiences, in particular younger audiences, and, as I said earlier, we are working in concert with our partners across the regulatory landscape to get warnings out there. But the schemes evolve, as you know, and there is a really important role for the industry to play there as well. Obviously, through the APP scam measures that have been taken, there are now much more live warnings as people try to make a transfer, but there is way more that we could all do together to warn people and try to ensure that there is enough protection of people who might be considering a really unwise investment in something that is too good to be true.
Nikhil Rathi: To give you a sense of some of the things we have done, we have toughened up our gateway. In the previous financial year, one in 14 firms did not make it through; this year it was one in five, so we have been more rigorous at the gateway.
We have spoken extensively at this Committee about our work with Google. Google changed its policies in August last year to make sure that financial advertisers had to be registered with the FCA. Since that change, based on our latest data, we have seen a very sharp drop in scam adverts on the Google platform, and we are strongly encouraging the other major providers, in particular Meta, to get their skates on and put in place similar measures.
APP fraud has gone up, and therefore we are working, to a large extent with the Payment Systems Regulator but where we can with the banks, to make sure that further measures are put in place to try to tackle that particular type of fraud.
Q380 Anthony Browne: I think Alison is going to ask some questions on that. I was going to raise the fact that you have appeared here before talking about Google advertising fraudsters and Meta—Facebook—doing the same. Do you think that there is a case for Government to get involved with this in some way, or are there other things you think Government should do to help tackle fraud? It is extraordinary to most people that online platforms—perhaps not Google, but others—are still openly advertising clearly fraudulent investment schemes and profiteering from it.
Richard Lloyd: We need to see the Online Safety Bill and the measures targeted at that issue introduced as quickly as possible. More broadly, fraud is now the most-reported crime, but in no way commensurate with the amount of crime being reported is the resource going into the system trying to address it. We play our part through the National Economic Crime Centre, and there is much better collaboration now, but the sheer scale of the problem dwarfs the system that is trying to deal with it. I would very much like to see the Government give that the priority that it deserves—the resourcing commensurate with the scale of the problem.
Q381 Alison Thewliss: I will start with authorised push payment fraud, since it was mentioned. The Payment Systems Regulator has published the consultation on authorised push payment fraud reimbursement. There is no formal role for the FCA in this new scheme, but do you believe it should have a role?
Nikhil Rathi: I do not think we are pressing for a role. The Payment Systems Regulator takes the lead on this, and we are happy to support.
Q382 Alison Thewliss: Does the FCA have adequate powers to sanction a payment services provider that was, for example, perennially disputing reimbursements against customers in bad faith?
Nikhil Rathi: There is a mechanism for disputes through the Financial Ombudsman Service. This is not just linked to authorised push payment fraud, because if we see a regulated financial services provider not taking seriously a ruling of the FOS, that is of course a supervisory and conduct matter.
Q383 Alison Thewliss: What would the consequences be?
Nikhil Rathi: We could take a range of actions, but we would take a perennial refusal to pay settlements as determined by the FOS to be a sign of not treating customers fairly. It depends on how serious that is as to what sanction we would seek to apply.
Richard Lloyd: Just to reassure you, there is regular data sharing between the FOS and FCA teams to see whether there are indications of firms behaving in that way. I also meet the chair of the FOS regularly and that is discussed. Again, that joining up is much better than I saw some years ago.
Q384 Alison Thewliss: The issue of addressing authorised push payment fraud is now nearing the end of a six-year-long process. It was only acted upon once Which? made a super-complaint in 2016. Do you think it reflects badly on financial regulators that such a large and damaging issue was not originally identified, either by yourselves or by the PSR?
Richard Lloyd: I should probably declare an interest here—
Alison Thewliss: I know; it would be interesting to hear from you given your sort of poacher-turned-gamekeeper role here.
Richard Lloyd: I was at Which? when the super-complaint was being developed. I think it is a really good example of where the regulatory system is required by statute to respond to evidence from organisations that can see harm that is not being addressed. At the time, there was quite a widespread view that this was not the kind of problem that we now recognise it was, so I am grateful to my former colleagues for raising it.
Equally, and legitimately so, the financial services industry is looking to the communications industry, the likes of Google and Meta in particular, to play its part in stopping this. Directing the super-complaint at the Payment Systems Regulator clearly triggered a response, but we now need to see this much broader strategic action, including resourcing that is properly aimed at dealing with the root cause of the problem, which is criminals.
Nikhil Rathi: Going forward, this has been one area where we believe technology can make a very big difference. There have been steps around confirmation of payee and making sure that providers take that up. We hosted a three-day joint tech sprint with the PSR a couple of months ago to think about how we can use data from not just banks but communications regulators and others to get ahead of fraud earlier. We are also looking at how we can use machine learning and artificial intelligence techniques to move the industry ahead. We will be very proactive in seeking to support innovation in this area, and in using big data and technology to help us get around the problem.
Q385 Alison Thewliss: There was a voluntary, industry-led scheme to begin with, but that failed. Have the regulators proved that they cannot be trusted to sort such problems? Do we need regulation, rather than regulators trying to sort things themselves?
Richard Lloyd: Again, I should declare an interest, because I was involved in trying to bring about that industry code. I do not think that it is fair to say that it failed. It did not have the effect that—
Q386 Alison Thewliss: It didn’t work, though, did it?
Richard Lloyd: Well, it led to a very large number of people getting reimbursed who previously would not have been. It also led to people at the most senior levels of the industry taking this seriously. However, it is right that this be now brought into legislation, that formal powers be given to the Payment Systems Regulator, and that we follow up as Nikhil described, not least because a weakness of the voluntary code that we all acknowledged was that it did not reach far enough across the industry. It was voluntary, so while it required some players to get involved and be engaged, others who were in the room frankly did not get involved or engage effectively.
Q387 Alison Thewliss: Are you satisfied that vulnerable customers will now be protected?
Richard Lloyd: We’ve got to see what the legislation does, but I am much more confident that when things are on a statutory footing, we will stop seeing the variation in treatment that we see under the voluntary code, because there will be legal consequences otherwise.
Q388 Alison Thewliss: Let me move on to the Government’s review of the regulations surrounding the Office for Professional Body Anti-Money Laundering Supervision, which I will refer to as OPBAS, because that is easier. Four options were presented. At the extreme end, the FCA might lose its AML supervisory responsibility. Which of the four options do you favour?
Nikhil Rathi: I would approach that question in the way that I approach other questions on our responsibilities here. Ultimately, these are matters for Government and Parliament to decide. We have supported OPBAS, which has played a very important role in sanctions implementation by corralling professional body supervisors.
More broadly, we have stepped up our engagement with money laundering. We took the first criminal case against a bank—against NatWest Group. We have also taken civil cases more recently. We will not express a preference for a particular model. Whatever model is decided on, we will make our full contribution to making sure that it works. This is a cross-institution, cross-agency issue, and it requires partners to work together.
Q389 Alison Thewliss: Were you consulted before the Treasury released the review?
Nikhil Rathi: Yes.
Q390 Alison Thewliss: Your most recent report concerning OPBAS, from September 2021, stated: “The vast majority (just over 80%) of PBSs had not implemented an effective risk-based approach. Only a third of PBSs were effective in developing and recording in writing adequate risk profiles for their sector”. Where do we stand on that now?
Nikhil Rathi: I don’t have the latest data with me. Can I write to you on that? On direction, my sense is that there has been significant improvement. On the implementation of sanctions, there has been a very proactive response generally from the professional body supervisors, including those that perhaps were not as engaged previously.
Q391 Alison Thewliss: A significant improvement would be welcome, because your report identified gaps, inconsistencies and significant weaknesses in the regime. The fact that it is being reviewed would suggest that it has not been particularly effective.
Nikhil Rathi: Money laundering more generally is one of the biggest risks to our system. Increasingly sophisticated operators, and serious organised crime gangs, use multiple techniques to launder money across borders, and that includes, most recently, significant use of cryptoassets and so on. It is a major strategic issue for the cleanliness of our markets and our financial system.
Q392 Alison Thewliss: Is there a risk in farming anti-money laundering responsibility out to other organisations?
Nikhil Rathi: There is always a balance to be struck between how much is directly regulated by a regulator such as us, or another regulator in the system, such as HMRC, and how much we rely on professional body supervisors. That plays into the whole question of regulatory burden, which I know is debated here and by Government. Of course, I think there is a risk with relying on professional bodies. At the same time, are we or another agency necessarily going to be in a position to directly regulate tens of thousands of solicitors’ offices, for example, right around the country and directly enforce against them on money laundering? That is a very big task. You are talking about tens if not hundreds of thousands of firms being brought into the regulatory perimeter.
Q393 Alison Thewliss: A lot of the evidence given to the Economic Crime and Corporate Transparency Bill Committee, which I am on at the moment, speaks to the woeful enforcement of current laws and regulations. Is there anything in that Bill that you would like to see strengthened?
Richard Lloyd: The first thing to say is that we are all very keen to see the Companies House dimension improved as rapidly as possible. We use Companies House data routinely. With the prevalence of phoenixing and the quality of the data that we can draw on as we scrutinise applications for authorisation, that cannot come quickly enough.
By the way, we are often criticised—quite often publicly—for being slow with authorisations. As Nikhil said, we now refuse one in five applications; it used to be one in 14. There is a very simple reason for that. We are probably slower because we are looking very hard at preventing the kinds of bad actor from coming into the market that were one of the root causes of the LCF problem. I think we are at times unfairly criticised for being slow when we are being safer and preventing problems that would emerge further down the line. Better data from Companies House, therefore, is an absolute priority for us, as is closer working with them.
Nikhil Rathi: One technical issue we would like to get fixed—I think we have shared this with the Committee before, particularly in the context of your inquiries into the Greensill matter—is the situation where, if a company deregisters under the money laundering regulations, we lose our ability to enforce. That is also a situation that exists in other domains. Being able to carry on our investigations and enforce, even if we need to take somebody off the register, is therefore clearly beneficial for the ability to secure penalties.
Q394 Alison Thewliss: Is there anything else it would be useful for us to know about the interaction between your register and the Companies House register?
Nikhil Rathi: We are investing, through our data strategy, in a project that enables us to not only look at the regulatory reporting that comes to us and the attestations that come through our register, but interrogate other public data sources, including Companies House, information published by the Information Commissioner and the list of tax defaulters published by HMRC, and bring that all into our environment and use our analytics to help us to work out where some of the most at-risk firms could be. We certainly welcome the proposals to strengthen the Companies House database—that will help us all, I think.
Q395 Anthony Browne: I have a quick follow-up question on the issue of push payment compensation in the legislation that is going through. One of the questions is on the criteria under which banks would be required to compensate customers. You have mentioned one of the problems with the voluntary scheme, which is that only nine organisations are in it; the other problem is that those organisations decide when they do or don’t compensate, and some compensate a lot and others compensate very little. The Payment Systems Regulator is, I think, consulting on this at the moment. The bar for compensation would be gross negligence. There is concern in the industry that that is so high that they would always have to compensate, which would effectively mean that customers would never have to worry about doing anything, because they will always get compensation. Do you have any views on where the bar should be for when compensation is or is not paid? I know that that is a PSR consultation, rather than yours, but you oversee the PSR.
Richard Lloyd: This has obviously been hotly debated for some years. I think part of the answer needs to address whether this is clearly explicable to customers, whether it can be applied consistently across firms, what the common understanding is, whether there is fairness and whether responsibility is being fairly applied. I don’t think we should say more than that, as the consultation is pending.
Obviously a clear response to the consultation needs to be done, so that the industry can get ready. Leaving aside the faults of the voluntary code—and confirmation of pay was not a voluntary measure—we have seen what we hoped with the voluntary code. It incentivised the banks involved to resource and take action against mules, for example, and other risks in the system. Wherever that bar is set, it needs to be set in a way that maintains that incentive to keep preventing and supporting consumers to do the right thing. It is a difficult judgment, and we will see what the outcome of the consultation is.
Chair: We’ll move back to Alison to finish her questions.
Q396 Alison Thewliss: I have some questions around the transformation programme. Mr Rathi, how is it going?
Nikhil Rathi: I think we are making good progress. As I said earlier, we now have a clear three-year strategy with clear outcomes and metrics for the first time. We have been clear that we have three pillars to it, including going hard after harms, setting higher standards and promoting competition and positive change. We are seeing progress in each of those dimensions. We talked earlier about the new consumer duty.
In terms of our governance, we have made changes to enable our authorisations and supervisions teams to intervene earlier and faster, and we have seen an uptick in the level of interventions since we put that in place. We have also streamlined our governance so that we are more able to move resources around the organisation in response to changing priorities. The board has made some adjustments so that we are ready for the future regulatory framework on how we operate.
We have shifted our legal risk appetite and posture. I think that has been significant. We are starting to see the benefits. Last year we intervened on 573 financial promotions. Year to date, that number is over 5,000. We are taking action more assertively and quickly. We have talked about the gateway as well. In the case of appointed representatives, the numbers have come down from 40,000 to 36,000 as we have taken action. We have also been more proactive in using our redress powers.
There has been significant change in our leadership team, drawing on new capabilities we brought in, such as operational, data and commercial capabilities. Those have been beneficial with the new pay framework. While it has been difficult as we have gone through those discussions, I am very grateful to all our colleagues who have worked with us through that process. It puts them on a very strong footing for the future in terms of our talent, and I mentioned that we are seeing expansion in Leeds and Edinburgh.
We expect the transformation programme to move into a “business as usual” phase from March, and we have seen significant progress in our tech investment. We have moved to the cloud. We are using a data lake, and our single view per firm is now rolled out for half the portfolios, which enables supervisors to take more rapid action.
Q397 Alison Thewliss: Richard, you were already on the FCA board before becoming interim chair. What are your thoughts on the transformation programme and how it is going?
Richard Lloyd: I have been on the FCA board for three-and-a-half years now. When I joined, the plans for changing the organisation were just being put in place. What I have seen since Nikhil has arrived has been a speeding-up across the board and greater effectiveness of those change plans. We have now moved our data into the cloud. We now have the basic foundations we need in place to be a more effective regulator. I have been championing the changes we see since I joined the board.
We are not there yet, but we are a different regulator today than when I joined the board in 2019. Like Nikhil, I would like to put on record my thanks to the team that have worked through a very tough few years—with covid, the invasion of Ukraine, and the cost of living crisis now—and have been changing the organisation at the same time.
We have been dealing with extraordinary events and, at the same time, we are becoming more effective. We are clear that this is a work-in-progress; there is more to do. In particular, as we get better at gathering and using data and basing our resourcing decisions on a much more effective picture of the harm we see in the market, that is where we need to get to next, and rapidly.
Q398 Alison Thewliss: What tangible impact have the technology and innovations had on your services so far?
Nikhil Rathi: To give you an example on sanctions implementation monitoring, we now use a database of 100,000 entities, which we can send to firms to test their systems against. Immediately, we can see if they have vulnerabilities or weaknesses. That is in contrast with the much more manual process of on-site inspections and other things that we did previously. We now scan 100,000-plus websites every month and use analytics on top of that to identify which websites we think are most at risk of causing harm to UK consumers, and we move quickly to have them taken down. We are using, again, some analytics and intelligence techniques on our unauthorised business processes, where we get tens of thousands of reports every year, to help us triage those cases much more quickly. Some 70% of the cases can now be dealt with by our more junior case officers, allowing the more senior staff more time to deal with the more complex and difficult cases where some of the biggest harms have occurred. In each area, we are looking to roll out data and technology to support the tackling of harm.
Q399 Alison Thewliss: I will move on to staff issues, some of which have been well, and publicly, documented. You introduced a new employment offer in March this year and following that, strikes were held by Unite members among FCA staff. What impact is that having on pay and conditions?
Nikhil Rathi: First of all, I repeat what I said earlier and what Richard also said: I am immensely proud of our organisation and my colleagues, and how hard they have worked during what has been a very challenging period and how they have stuck with us during this period where we have been making some very difficult reforms. These are reforms that have been in gestation, in actual fact, for a number of years at the FCA, but we took the decision with the board’s support to move forward with them over the last year.
Since the consultation started in September 2021, and it concluded in March, we have seen approximately 1,200 people join our organisation. We expect a further 400 to 500 to join us over the coming months. We are expanding as we grow our remit and as our investments take shape. I have been encouraged by the breadth of talent that has been joining our organisation from many different parts of the UK and, indeed, the world. That is not to say there are no stresses or strains—the labour market in the UK is challenged and we have to be vigilant about that—but our overall headcount is the highest it has ever been, and I feel that we have a good overall resourcing picture to enable us to deliver against our strategy.
Q400 Alison Thewliss: You are talking up the number of people who are joining. Unite claims that about a quarter of your staff—around 1,000 people—have left.
Nikhil Rathi: Our turnover fell sharply in the year after the pandemic to around 6.8%. Our typical turnover prior to the pandemic was about 10% to 12%, so it did fall sharply. Like many organisations, it rose once the pandemic had subsided. In an overall two-to-three-year period with an organisation of 4,000 to 4,500, you would expect around 400 or 450 people to leave every year—if not slightly more—at a 10% to 12% turnover. We have seen some increase in the last year or so.
Q401 Alison Thewliss: Is that 1,000 figure accurate?
Nikhil Rathi: A thousand since when?
Alison Thewliss: In the past two years.
Nikhil Rathi: I think at the time that figure was released, it wasn’t accurate. I think now—several months on—it is, and it is consistent with what we would anticipate being the case.
Q402 Alison Thewliss: It sounds like quite a lot of churn, really. Do you do exit interviews with your staff? Do you understand why they are leaving and where they are going?
Nikhil Rathi: We do. When our staff leave, they are given the option to fill out a survey on their reasons for leaving. There can be many different choices. Some of it is career progression—very often, it is career progression.
Q403 Alison Thewliss: Because they cannot get that with you?
Nikhil Rathi: Well, not everybody will get promoted. We have had 700 promotions in the FCA over the last 12 months. Not everybody will secure a promotion in the organisation, and sometimes colleagues will find opportunities outside. In some cases it may be relocation, and in others it may be early retirement—there can be many different reasons—but the main reason tends to be career progression; that is consistent with what we see in financial services generally. For example, graduates historically—many years ago—may have stayed with an employer nearly for life. These days, with most employers, you will typically see a tenure of about four to five years before a graduate will look for alternative employment and to stretch themselves in different organisations. Actually, we actively encourage a number of our colleagues to seek experience, at least in our regulatory partners, because we believe that that brings value to us as well.
Q404 Alison Thewliss: Unite paints quite a different picture in its briefing. Some of the testimonies that it has gathered from FCA employees are quite harrowing. One of them says, “After eight years of working extremely hard, trying to constantly prove myself, I feel degraded, undervalued and like all of my hard work was for nothing.”
Nikhil Rathi: It has obviously been a very challenging period, with what we have been going through. As I said, I am grateful to our colleagues, who have worked incredibly hard through this period. As we have been through with this Committee, we have had to reset our culture and deliver higher performance standards collectively and individually; that has meant that we have been more rigorous than we have been in the past, perhaps, in assessing performance. Those are challenging conversations when they happen, because the standard and the bar are moving up. When I have previously been before this Committee, that was something that you also pressed quite hard on, in terms of addressing the culture of the organisation, and you pressed quite hard on timing as well. In previous interactions with the Committee, that has been part of the reform work that we have been on.
Q405 Alison Thewliss: Do you have any concerns about the high turnover and vacancies, particularly in specialist or technical roles?
Nikhil Rathi: As I say, in aggregate the available resourcing picture is increasingly encouraging. We have been recruiting very successfully in a very challenging market, and that says something about how interested professionals are in what is happening in the FCA, the mission and strategy that we are delivering, and the move to being a more innovative, adaptive and assertive regulator.
The areas where there is pressure and stretch are not that different to those that I have discussed with the Committee before. Technology and data skills are in high demand in the United Kingdom; we have a skills shortage in that area in the UK. One of the reasons that we have opened our office in Leeds, which is now up and running, is so that we can attract data scientists from not just London and the south-east but other parts of the United Kingdom. We have talked before about the expansion in Edinburgh, and we are on track to double our headcount there as well so that we can attract more colleagues from other parts of the country. The legal market in the UK—although it is now subsiding—has been a very hot employment market, particularly in London. Salary levels went very high immediately after the pandemic, but that is now calming down, and we are getting the people that we need.
Q406 Alison Thewliss: Are there particular roles and skillsets that people have left disproportionately?
Nikhil Rathi: I would say that the highest turnover, as is the case for most financial services-anchored organisations, has been in the technology space. Those skills are hugely in demand. Notwithstanding that, we have expanded our overall complement of staff there. In that space, we have also seen an increase in the number of colleagues moving from other parts of the organisation to data and technology, as they wish to broaden their skillsets and capabilities. That was a key part of our pay and reward reforms—to enable much more mobility across the organisation. If you remember our previous conversations, there have been concerns about silos in the organisation—about a lack of collaboration, a lack of sharing intelligence and a lack of common culture across the organisation. Part of encouraging mobility to different parts of the organisation is to help us to improve that.
Richard Lloyd: Since I have become interim chair, I have talked to hundreds of FCA staff. As those of you who have come to see us will know, the thing that has been a constant through these last few years has been a really strong sense of purpose and wanting to make a positive impact for consumers and the market. That is still right the way through the organisation, like writing through a stick of rock.
However, obviously, as with many big employers who had people working from home during covid, for some people there was a need to come back and reconnect with the organisation. What we have been doing this year is working intensively with groups of our people to figure out how we can make the organisation stronger and the culture more effective and how we can ensure that the voice of our people is heard, and seen to be heard, more effectively.
There are things we are doing to ensure we reinforce that culture, sense of public purpose and belonging. I was in our Leeds office a few weeks ago, and there is a brilliant team there working across all the different disciplines; it is the same in Edinburgh. Like any employer that has come through covid, which was a really tough time, and that is now facing a really stretching time as well, our message to our people is, “We care about you and we want to take care of you, but we need to figure out better ways of engaging with you and hearing from you.”
I think—and the board has been supporting this right the way through the change programme—we have moved to a system where really good performance is now well recognised and we have raised the bar for what “good” looks like in the organisation. In the end, that has got to be good for consumers and for firms in the market.
Nikhil Rathi: Just to add to that, the change we are making is hard—it is difficult. The scale of the issues we were dealing with was challenging. We have achieved so much great work over the years, but there have been some challenges.
We are also moving really powerfully to tackle some underlying issues around diversity. We are very close—I think Ms Baldwin is aware of this—to 50% of our leadership team being female. Part of the motivation for our pay reforms was to tackle very challenging pay gaps. We used to have a gender bonus gap of around 30%; that will no longer be the case. The ethnicity gap came down last year following our reforms. For example, black colleagues, who are on average typically paid lower, got an 8.5% increase versus 6.6% for white colleagues. That is a painful process to go through, because those colleagues who may be below the central level feel unfairly treated until they get there, but those above, who think they are seeing a slightly lower increase than others, may also feel uncomfortable about that change.
We are dealing with issues that have built up over a number of years. In the next few years, I think we will see the FCA, unlike a number of financial services organisations, really delivering progress on tackling some quite long-standing issues in our organisation.
Q407 Alison Thewliss: Is it still the case that you do not recognise trade unions?
Nikhil Rathi: We went through a process earlier in the year where we received a request for recognition from Unite. There was no information received in that request in terms of the detail or the number of members. Therefore, in line with the legislation that Parliament has set, that was considered by the central arbitration committee, and that committee said that the specific request for all 4,000 colleagues below head of department level to be recognised did not have the necessary level of support.
Saying that, we have said that the conversation is not over for us. What we are doing right now is recognising the broad spectrum of opinion in our organisation, from colleagues who wish to be represented by Unite, colleagues who wish to be represented by a union but not Unite, and colleagues who do not wish to be represented by a union at all. There is a diverse range of views in our organisation. We are trying to work out, between the two extremes, what the right set of mechanisms should be to enable everybody to feel that every voice is being heard.
That work is under way. Certainly, I want to make sure, and I know the board wants to make sure, that everybody coming out of this is able to feel that their voice is heard and that we can find a way to reflect the diversity of views that exist in our organisation on this topic.
Q408 Alison Thewliss: The only turnover that is greater than the staff turnover you have mentioned is that in your executive committee. Why is that?
Nikhil Rathi: We have made some changes to our executive committee—from past conversations with the Committee, I understood that there was general support for that—to bring in new skills on technology and data and stronger operational experience. We have changed the leadership of the supervision division. It has been an important and significant shift for us to move to a new mode of operating there, with the supervision, policy and competition functions merged together.
This week, my colleague Nausicaa Delfas, who was previously an executive committee member at the FCA and who was seconded to the Financial Ombudsman Service, has returned to our organisation after that secondment. I am pleased with the strength of our executive leadership and the quality of the talent that we have brought into the organisation at the two levels below, from all around the world. We have people from the United States and New Zealand moving to work at the FCA in senior roles. That has been very encouraging.
Q409 Alison Thewliss: Finally, a quick question. I appreciate what you said earlier about authorisations, but why is the FCA seemingly getting worse at processing appointed representatives, approved persons and payment services authorisations? Is that related to the staffing and the other issues you have faced?
Richard Lloyd: The work in progress in authorisations has come down by 50% overall. There are several areas within that. For example, I met the team that are doing authorisations for crypto firms, and that is solely on anti-money laundering. That is our remit. They are dealing with firms that are not used to dealing with regulators—in fact, their product is designed not to be regulated.
Beneath those headline numbers, there is a real, publicly stated appetite on our part not to let firms that do not meet our standards into the market, because that will lead to problems further down the line. Secondly, there are more innovative firms that simply don’t cut the mustard. We put many more staff—I think 100 staff—into authorisations, recognising that the delays have not been acceptable in the past.
It is not as straightforward as saying that being slow is being bureaucratic. At the board’s explicit behest, this is us being thorough and careful, to protect consumers and the market.
Nikhil Rathi: Let me add to the statistics. Mid last year, our overall case load was 12,500. We have brought that down to around 6,000 today, so we have brought the overall caseload down by 50%, and we think that, by the end of this financial year—by the end of March—we will be broadly on track to meet our voluntary and statutory service metrics.
Two areas that you picked out are approved persons and the agents for payment services, where we have five and 10-day turnarounds respectively. We said publicly—I think we shared this document with the Committee—that we probably need to look at those standards, because we don’t think we can do the job as rigorously as we need to do it in five days. We are looking at that, and we will come back to you in our next hearing to let you know where we have got to on those points.
Q410 Chair: I have two brief questions. Feel free to write to us if you are not able to address them right now. How quickly will the 400 to 500 people who are new to the FCA come up to speed? If you want to answer that briefly, please do.
There have obviously been delays on the Online Safety Bill. If that continues, will you push the Government to use the Financial Services and Markets Bill as a vehicle for putting in the changes that are required, given the ongoing issue of online advertising and fraudulent financial products being hosted by online companies?
Nikhil Rathi: On the first question, the new colleagues joining the FCA are joining at every part of the organisation. They will come with different levels of experience, so it is hard to give a single answer about how long it takes for them to come up to speed.
Q411 Chair: Perhaps you can write to us with some more granular detail. That is a lot of people.
Nikhil Rathi: On authorisations specifically, we have a three-month training programme, and then a case officer is onboarded. On the specifics there, I can give that answer. On online safety, there was always the option of using the Financial Services and Markets Bill, but the Government chose the Online Safety Bill. As I understand it, the Financial Services and Markets Bill also has quite a demanding passage, in terms of time through Parliament.
Q412 Chair: Okay, but do you want to see the provision—
Richard Lloyd: We want to see it.
Q413 Chair: The question was about the Online Safety Bill. If there continue to be delays beyond a month or so—there has been lots of chopping and changing—are you going to push for it to be done through the Financial Services and Markets Bill?
Richard Lloyd: I personally would say to Ministers, “Please find the legislative vehicle that will give us the powers we need as quick as you can.”
Q414 Chair: A couple of other things. Could you write to us please on mortgages? I have raised the issue of mortgage prisoners over the years, as has Kevin Hollinrake. There are others who have become mortgage prisoners because of cladding and the failure of the building safety fund to be allocated quickly enough. Millions of people are waiting for that to happen before they can qualify for EWS1 certificates and so on, and now their rates are going to come up for renewal, along with others. That puts them in a really difficult position. If you could look at those two groups in particular and give this Committee any insights in writing, I would be very grateful.
Nikhil Rathi: We are happy to write to you on that topic, Chair.
Chair: Thank you very much. Unless anyone else wants to raise anything, I bring this meeting to a close. Thank you very much for giving evidence this afternoon.