Treasury Committee
Oral evidence: Appointment of Ashley Alder as Chair of the Financial Conduct Authority, HC 786
Wednesday 14 December 2022
Ordered by the House of Commons to be published on 14 December 2022.
Members present: Harriet Baldwin (Chair); Rushanara Ali; John Baron; Anthony Browne; Dame Angela Eagle; Emma Hardy; Danny Kruger; Andrea Leadsom; Siobhain McDonagh; Anne Marie Morris; Alison Thewliss.
Questions 1 - 55
Witness
I: Ashley Alder, Chair, Financial Conduct Authority (appointee).
Witness: Ashley Alder.
Q1 Chair: I would like to welcome you, Mr Alder, to the Treasury Committee evidence session on your appointment as Chair of the FCA. Would you be kind enough to start by introducing yourself?
Ashley Alder: My name is Ashley Alder. I am currently the CEO of the Securities and Futures Commission of Hong Kong.
Q2 Chair: I want to start by asking the obvious question. You are in Hong Kong; we are in London. This is for a role in UK financial services. I wondered why you were not able to get here in person.
Ashley Alder: I would certainly like to have been there. I agreed with the former chair, or at least through the FCA, that, given the uncertainty around Covid restrictions in Hong Kong and particularly those related to travel, there was too much uncertainty about whether I would be able to get there. On top of that, this is my last two weeks as CEO of the SFC in Hong Kong. I am currently flat out here. It was just that combination.
The final level of travel restrictions was lifted yesterday. It will be a lot easier to travel with certainty from now on. Of course, I finish as CEO at the SFC at the end of the year. January is, for me, free to travel.
Q3 Chair: Are you going to do the role from Hong Kong or are you planning to move to the UK to do this role?
Ashley Alder: No, I am moving to the UK.
Q4 Chair: When can we expect you to move to the UK?
Ashley Alder: It would be quite extraordinary to try to do it from Hong Kong.
Chair: I was a bit concerned, yes.
Ashley Alder: My start date is 20 February. I am planning on moving to the UK permanently during the latter part of January.
Q5 Chair: In terms of all your other roles, can you update the Committee on what your plans are with your existing roles and which ones you are planning to combine with doing this role?
Ashley Alder: My only existing role is CEO of the SFC. As I mentioned, that will end on 31 December. Thereafter I do not plan to take up any roles at all other than chair of the FCA, not least because, although it is advertised to be a two to three days a week job, I do not think it is. It requires more commitment than that.
Q6 Chair: You have had an illustrious career in Hong Kong, and you have spent the bulk of your professional life in Hong Kong. Could you tell us how well networked you are in terms of the key decision makers in financial services here in the UK?
Ashley Alder: I am fairly well networked, partly due to the fact that Hong Kong is not isolated. As I am sure you will be aware, Hong Kong operates as a bridge for capital flows around Asia, in particular China. In that respect, we have a lot of contact.
More specifically, I was chair of IOSCO, which is the International Organisation of Securities Commissions, for six years until this October. Through that, I got to know and work with a lot of people who operate in our field, whether that is the SEC chair; Andrew Bailey, who was at the FCA and is now at the Bank of England; Jon Cunliffe, who I have done quite a lot of work with in the UK; or my counterparts in Europe, whether in ESMA or the national competent authorities in Europe. I have quite a large network internationally.
Q7 Chair: Could you tell us about your professional experience in terms of consumer-focused financial regulation?
Ashley Alder: Yes, Hong Kong is seen, quite rightly in a sense, as being hyper-focused on its role as an international financial centre—that is on the wholesale markets and suchlike. As a securities regulator here, throughout my 11 years in this job, our role has also been as focused on consumer issues. I am a securities regulator, so we would tend to badge that as investor protection as distinct from using the word “consumer”, but effectively the concerns are pretty much the same.
In recent years, we have doubled down on the suitability obligations, which we see as the cornerstone of protection, when it comes to products and advice for online platforms and complex products. We have had particularly difficult issues with products with insurance wrappers, where there has been significant overcharging, which we have eliminated. I could give you more examples, but it is a big part of what we do.
Q8 Chair: In your questionnaire, you said you had begun reading to familiarise yourself with the particular challenges of the domestic UK financial services environment. Can you give us an update on how your reading is going? How much do you currently know about the domestic UK financial services market?
Ashley Alder: I know quite a lot now. It is probably not enough. When I land in the UK, I will be seeing a lot more people in person.
My overall take on it—this is one of reasons why my motivation to do this has, if anything, increased since the summer when the appointment was first announced—is that I will need to look at a combination of things, the first of which is the framework review. In the time available, I have tried to read through what was announced last Friday, the Edinburgh reforms, which cross into the framework review.
There is also a whole set of questions around the FCA, consumers and the cost of living crisis, which I expect will be dominant over the next few months and possibly years. Finally, there is the City’s position as a global financial centre. There is a fair amount to unpack there.
Overall, when it comes to the framework review and the Bill, that suggests the FCA will have a great deal to do. As board chair, there is both a set of opportunities and a set of challenges, not least challenges around resourcing and ensuring that the resources of the FCA are positioned in the right way to cover a pretty large waterfront ranging from the City to repealing and replacing EU retained law and consumers.
Q9 Chair: You acknowledge that the level of your understanding of the domestic UK financial services environment still needs some further work. You have mentioned that you will have some meetings to do that. Is there anything else?
Ashley Alder: That is right. I have done a fair amount of reading, and I have looked at the controversies around, for example, the call-in power. I have looked at the remit letter that was published on Friday, which emphasises what is positioned as a secondary objective around growth in competitiveness.
The work I need to do from now on, particularly, as I say, when I land in the UK, will be a little bit more granular. I also need to establish relationships with stakeholders.
Q10 Chair: At what point will your level of knowledge be at the level where you can really help guide and set the strategy for the FCA?
Ashley Alder: It will be fairly soon, frankly.
Q11 Chair: Will it be by the time you take up the post? Will it be after you take up the post?
Ashley Alder: I would expect that I would be pretty much set to be able to do that when I take up the post. There will always be a learning curve after one joins any organisation. I would hope that it would be as short as possible, because I am coming from the position of already being a regulator and being fairly knowledgeable about the global scene as a result of the international work I have been doing. I do not expect that it will take a long time to get properly up to speed.
Q12 Chair: In your questionnaire, you said it was very important to have sufficiently engaged and motivated staff at the FCA. How would you characterise the situation with staff at the FCA at the moment, with the transformation programme that is being undertaken?
Ashley Alder: The transformation programme is very important. In part, this seems to be rooted in negative perceptions, particularly around aspects of consumer outcomes and, within that category, investments and failures around that.
I have seen that the FCA has put in place a new pay deal. That was not easy. It probably still is not easy, but the impression I get at the moment is that, alongside quite a large measure of staff turnover in the FCA, it is now starting to come out at the other end of what seems to me to be an inevitably painful era of change.
Q13 Chair: The staff survey found that only 33% of employees had confidence in the FCA’s leadership, which is down from 61% in the previous year. What is your take on that?
Ashley Alder: You could only hope that would improve, without any doubt. Optimistically, once the FCA has been through the reset of its pay deal and, once there is greater clarity about the way in which it is going to proceed around FRF—they will need to have sufficient focus, and they are probably nearly there with sufficient focus on the consumer agenda—I would hope and expect that morale would increase, once staff are very clear on the priorities around which they will align.
I found that in Hong Kong. We had a situation in Hong Kong some years ago now that was not far off the situation in which the FCA has found itself. It was basically a siloed organisation with relatively low morale, where there was a lack of clarity around strategic priorities and what staff were expected to do around those priorities. We fixed that. Again, it was not particularly easy to do, but we did succeed. Once we fixed it, we found that morale increased overall to quite a high level.
I am not necessarily saying that can be replicated exactly in the FCA, but I would hope that something like that is either in the process of happening or will happen.
Q14 Chair: I heard the word “hope” a lot there. I wanted to ask you one final question in this introductory section around how you came to be approached about this job. Was it a personal connection or was it through a head-hunter?
Ashley Alder: Initially it was a head-hunter. That was closely followed by a call a few months ago from the Treasury.
Chair: Would that have been Sir Tom Scholar?
Ashley Alder: At the time, it was Charles Roxburgh and Gwyneth Nurse.
Q15 Anthony Browne: My main question is on the retail side, but I wanted to ask a question first about the senior managers regime. You mentioned the Edinburgh announcement that the Chancellor made on Friday. One of the things there was to review the senior managers regime. That comes largely under the FCA.
What do you think about the senior managers regime? Are there any things that should be changed about it to make it work more effectively, in terms of ensuring accountability of bankers to the FCA and PRA?
Ashley Alder: I can tell you what we have done here. It is relevant. Around four years ago, we introduced our own version, which we called the manager-in-charge regime in order to be different. The reason I mention it is that, once they got used to it, both we and the firms agreed that it was effective to reduce risk. We have not taken many actions under it from an enforcement perspective—we have taken two or three—but both we and firms have found the clarity around accountability and reporting lines very useful.
When it comes to the UK, I have heard—again, it is a bit second-hand—that there is a question about whether it is a disincentive because the outcomes of getting it wrong are potentially severe. There is a criminal aspect in the UK, which we do not have in Hong Kong. Whether that is true or material, I am not sure whether it operates as a significant disincentive to attracting financial services professionals to the UK.
The second thing I have heard is a question about the speed of authorisations or approvals around the regime. Other than that, it has been in place for some time. It was put in place as one of the reactions to the financial crisis. As with the other topics that were mentioned or listed on Friday, it is one of those things that could be reviewed to make sure it remains fit for purpose. That is a sensible way forward, but I do not have any fixed ideas about what that review should land on.
Q16 Anthony Browne: The Economic Secretary to the Treasury said recently that he wants to reintroduce the principle of buyer beware—caveat emptor—into financial services to reduce the burden on firms and encourage innovation. I was just wondering what you thought about that. Obviously, you are always going to agree with the Minister. Where do you draw the line in terms of consumers taking responsibility for what they are buying?
Ashley Alder: It is always really controversial. When it has been raised in my career here, it has always been a controversial point. You will never end up with a societal agreement on where the line is drawn between firm responsibility, consumer responsibility and buyer beware. The FCA has now introduced—it has not come into effect yet—the new consumer duty.
Anthony Browne: There will be questions about that later
Ashley Alder: I will just leave that for the moment. There is always a balance to be drawn. I will give you my overall view of how to approach this. What is the purpose of regulation, in particular when it comes to consumers or investors? It is about ensuring that some of the negative effects that can arise through lack of transparency and distorted incentives within financial services are addressed and rebalanced.
In that context, there is room for personal responsibility. I am not sure that approaches that involve very extensive and boilerplate disclosure give rise to many beneficial effects when it comes to consumer protection. An outcomes-based approach, which we might get on to and which we have been pursuing here, might be more effective. When it comes to the basics of financial services responsibilities, the FCA on the whole seems to have got it about right so far, but I will be giving that a closer look when I arrive.
Q17 Anthony Browne: I have a question about scams and retail financial fraud. The largest form of crime in the UK is now scams and the FCA has done a bit of work on this in terms of taking out advertising on Google to warn people to protect themselves from scams and the Payment Systems Regulator, which comes under the FCA, are just implementing a mandatory compensation scheme for all victims of fraud. Do you think more could be done by the FCA to help stop fraud happening in the first place?
Ashley Alder: Yes, and what we are all seeing is a massive uptick in online fraud, wherever you are globally. One of the reasons why it is hard to tackle is because of its cross‑border nature, so then you end up looking at how you prevent scams or attempted scams being communicated to the public. The role of, for example, larger tech platforms and social media is really important.
This is not just in the UK. There have been other attempts, some of them successful, to persuade social media platforms to take a more robust approach when it comes to scams and the way in which they are presented to the public, and more work needs to be done there, without any doubt, and we are not anywhere close to it, because the incidence of scams, particularly online scams, is increasing and requires regulators and others to concentrate on this very hard. In the UK, as far as I understand, there is an online harms Bill that has been in the offing for quite some time.
Anthony Browne: There is an Online Safety Bill, yes.
Ashley Alder: Yes, so that seems to me to be a useful vehicle. However this is done and to the extent to which there are potential powers to require social media outlets to address these issues, that is the right direction.
Q18 Anthony Browne: Like a lot of other countries in the world—in fact, most—we have a cost of living crisis in the UK. A lot of the areas covered by the FCA touch on cost of living issues. We also have rapidly rising interest rates at the moment and there is quite a lot of concern, as happens at this time, that banks are passing on the increase in interest rates to mortgage holders—to borrowers—but not to savers.
There has been very little increase in interest rates in easy‑access savings accounts. Is this something that the FCA should be concerned about, because it can be quite difficult for consumers—borrowers and savers, to some extent—to move from bank to bank instantly when interest rates change?
Ashley Alder: My short answer to that is yes. Right now, we are in quite an extraordinary period that we were not really anticipating only 12 months ago. Twelve months ago, it was coming to the tail end of the “inflation as a transitory phenomenon” narrative. We are not there any longer. I am fully aware of the impact of interest rates and the inflation issue in the UK, and energy of course, so there is no doubt that, to the extent that consumers were under pressure, that has got a lot worse.
That then, for the FCA, should mean that the overall rubric of fair outcomes for consumers must be taken seriously. If you have a situation where there is a judgment that fairness is not being delivered because of that differential in interest rates, it is something that should be addressed.
Q19 Anthony Browne: There is concern also on mortgages, with mortgage rates rising, that some people will fall behind. There is concern that that will lead to a rise in repossessions, and in particular falling house prices, which is now happening in the UK, and negative equity as a result. What do you see as the FCA’s role in the mortgage markets? Is there more that the FCA could do to protect homeowners?
Ashley Alder: I have seen what it has done and I think the phrase that it uses is something like “reasonable forbearance”, which is basically making sure that banks look at the individual circumstances of borrowers and operate in a way where there is a sufficient degree of forbearance depending on individual circumstances. That is absolutely right.
There comes a point, when we are dealing with firms that are commercial entities, where what you do not do is throw out considerations of sensible credit checks and similar. You have to bear in mind that the financial system itself and financial stability depend a great deal on banks and others making sensible decisions around credit, but within that context, it is absolutely right that the FCA has direct interaction with banks and firms to make sure that they are ensuring that, in these times, forbearance is a concept that is taken seriously by firms.
Q20 Andrea Leadsom: Hello. Thank you for joining us. It seems to me extraordinary that you are not here, if you do not mind me saying, Mr Alder. In particular, as somebody who has spent their entire career in Hong Kong and is not able or willing to make it to the UK to appear before a scrutiny Committee for a pre‑appointment hearing, I just wonder what you think is the point of scrutiny Committees in the UK? Do you know what we do?
Ashley Alder: As far I understand it, it is really to ensure the person who is being selected is suitable for the post.
Q21 Andrea Leadsom: You think that is what scrutiny Committees do.
Ashley Alder: In order to do that, it is open to you to ask any questions that you feel are appropriate as to my background, competence, independence and similar.
Q22 Andrea Leadsom: More generally, what does the Treasury Select Committee do?
Ashley Alder: Oh, I see. It is very important because it is the main interface between the FCA, including its chair, its CEO and others, and Parliament, and Parliament sets the remit of the FCA. The FCA, and in particular its board, sets the strategy within that remit, and so the interaction and degree of accountability the FCA has vis-à-vis the Select Committee is incredibly important.
Q23 Andrea Leadsom: That is not exactly what the Treasury Select Committee does. I just wonder if you are aware of who sits on it and what the political balance is here.
Ashley Alder: Yes, I am generally aware of who sits on it and the political balance is cross‑party.
Q24 Andrea Leadsom: Do you know how many Select Committees there are in the UK Parliament?
Ashley Alder: No, not exactly.
Q25 Andrea Leadsom: That really just backs up the challenge that we should have as a Committee, because we are here to scrutinise the work of the Treasury, and it is cross‑party. It has a Conservative Chair—a Government Chair—at all times and we are here to make sure that you are able to fulfil the job, which is a critical job not accountable to us but accountable to the UK people.
It just seems to me that somebody who has spent their entire career in Hong Kong is very unlikely to have the corporate memory or background or understanding of UK markets to be able to do a good job. How would you answer that challenge?
Ashley Alder: I have been a regulator in an international market for 11 years. I have chaired an international organisation that includes the chairs or CEOs of all the major regulators globally for six years. So far as the regulatory agenda is concerned, I am knowledgeable and ambitious. When it comes to the UK, I am a British citizen. It is my home, my children are there, and one of the motivations to do this job is to contribute to an organisation that is of extreme importance, particularly now, to the UK population. That is the motivation.
I probably do not have the same level of contact with institutions and others in the UK that someone who has only worked in the UK has had for the last 11 years, but that is inevitable because I have been here.
Q26 Andrea Leadsom: That is very clear from your CV; you have worked only in Hong Kong since you graduated. What is the difference between the relationship between the Hong Kong organisation that you work for and the FCA’s accountability to the UK Government? What are the major differences between accountability to the Government of Hong Kong there and accountability to the UK Government here?
Ashley Alder: In Hong Kong, we are an independent organisation.
Q27 Andrea Leadsom: Do you get openly challenged from the equivalent of a scrutiny Committee made up of Hong Kong Government representatives?
Ashley Alder: Yes. We are an independent statutory organisation. We are answerable to a committee of the Legislative Council and have been ever since we were set up 30 years ago—that is a rough equivalent of the Select Committee—and then more generally we appear, either when it comes to legislation or whether it comes to general scrutiny, in front of the full Legislative Council. Now, there is not an exact parallel because the political system here is by no means identical to that in the UK.
Q28 Andrea Leadsom: Exactly. So what are the things you look forward to in the UK?
Ashley Alder: The first thing I look forward to is the combination of challenges and opportunities, particularly when it comes to FRF but also when it comes to the consumer agenda. They are extremely interesting.
Secondly, of course, people who are in my sort of job want to make a positive impact. That is what we are here for and, generally speaking, although the opportunity may arise to take other paths, particularly after stepping down from a job like this, that is not particularly what I want to do because I want to be able to contribute and make an impact. That is really to do with, effectively, my home country.
Q29 Andrea Leadsom: How will you ensure appropriate operational independence from the Treasury as FCA chair?
Ashley Alder: The board of the FCA itself is configured in order to be an independent board. It sets strategy and it holds the executive to account. Clearly, there is an interaction with the Treasury, and that interaction is being elaborated on in relation to the integration to FRF.
Nevertheless, the way I see it is that there needs to be interaction. In all relationships with not just the Treasury but other stakeholders, you need to be clear that you will be listening but also that you will be explaining, but you also will be needing to deal with all stakeholders at arm’s length. What is interesting is that, under FRF, there is a more elaborate set of oversight mechanisms, including the Treasury. For example, there is an ability of the Treasury to ask the FCA to review rules.
Q30 Andrea Leadsom: If there were a change of Government, how would you cope with that as chair of the FCA? You do not have that experience in Hong Kong, do you? How important is that? To be honest, it seems to me that your understanding of the way the UK scrutiny system works is very slim and you obviously have had a Government that have not changed and will not change, regardless of what voters want locally. How accountable will you be as FCA chair, given your entire career has been spent in Hong Kong?
Ashley Alder: The remit of the FCA is set by Parliament. Looking at the way in which its remit is currently set up and looking at the work it has to do following the passage of the FRF Bill, I would not expect a great deal to change. I cannot guarantee that, but I would not expect it. If the FCA’s remit does change through a new Government or Parliament, that is something we would need to react to, but I do not see a change of Government being necessarily existential so far as the FCA is concerned, provided that we are seen to be effective, and that has been a question mark.
Q31 Danny Kruger: Hello, Mr Alder. I have a couple of questions in a similar vein on accountability in a moment, but I just wanted to ask first about Brexit, given the very significant role you are going to be playing in helping to design a financial services regime post our EU membership. What was your position on Brexit in 2016? Sitting where we are now, what do you take to be the major opportunities and threats for UK financial services post EU membership?
Ashley Alder: I would rather not say right now what my position on Brexit was back then. It is more relevant to look at where we are now, because time has passed. In relation to the main task of the FCA, when it comes to repealing and replacing EU retained law, that is a huge opportunity that should not be squandered. What I mean by that is that we need to do it in a deliberate, prioritised and sequenced way, and in particular to work out which elements of reform are those that are more likely to have the greatest positive impact. I am just narrowing it down to what the FCA needs to be doing.
When it comes to the scope for change, at a relatively detailed level, there is quite a lot. A lot of it was set out in the 30‑odd measures announced last Friday. When it comes to the City and the UK operating on a global basis, both in terms of attracting and retaining global firms or globally active firms to the City and the people that go with them, that is all really crucial, as is this question of UK capital markets attracting and directing investment into productive assets and businesses.
The point I would like to make is that, operating internationally, we need to be quite careful about the degree to which we diverge from international standards or might do, and diverge to an extent from where Europe might be going. I have noted—I think it was last week—that the European Union announced consultations, or something like that, in relation to some areas that the UK is looking at. We do not operate in a static environment in the UK. We have to be very well aware of what others are doing.
I saw that the EU, for example, is looking at research. They are looking at prospectus simplification and listing, and we need to be quite clear around some of the continuing risks around ambitions to pull more activity, people and suchlike away from the UK. Now, I do not have any specific answers around that right now, because the question is, “How do you work this out going forward, as we reform?”, but it is important.
Q32 Danny Kruger: Thank you for that. That was a very helpful answer. To try to summarise it, I think you said that you see a major opportunity for the UK in post‑EU financial services regulation, which is encouraging. There is an opportunity to redraw the rules, but you are concerned to maintain alignment with the EU as a priority. You also see the EU itself making some moves to align with the UK, potentially to adapt its regime to reflect what might be a more pro‑enterprise, more nimble financial services regime in the UK. Is that accurate?
Ashley Alder: I do not think the EU is doing this to adapt to the UK. It is doing it because, periodically, most financial centres or regions will look at their rules and attempt to work out how they interact with the way in which businesses are attracted and investment is increased.
Q33 Danny Kruger: They are competing with us, partly. They are competing with everywhere, but they are responding to an independent UK regime.
Ashley Alder: Yes. My point is, first, that it is not a static environment and, secondly, we have to be aware of the fact that, yes, FRF is a big opportunity and it needs to move reasonably fast because, after all, we get a new ability to be a bit more agile than we did prior to Brexit.
On the other hand, we need to be really quite sensitive to the way in which firms view the City, and larger firms in particular. Whenever we speak to them here, their basic view of life is that, “We do not like the complications arising from fragmented regulation,” and by that I mean significantly different regulation. There can obviously be differences, but not too significant.
Q34 Danny Kruger: Let me move on to the relationship with the Treasury. There are going to be new powers for the FCA and new accountability arrangements. As I understand it, the new rules are really that the Treasury is going to have the power to ask you to do certain work, whether to have a consultation or to review rules. You will be required to respond to its recommendations, to publish information, to do cost‑benefit analyses and so on.
Is that more or less the right balance? I want to come on to this question of a call‑in power in a second, but in terms of the new accountability rules that are going to be introduced, are you satisfied with those? Do you think that they go too far or not far enough?
Ashley Alder: They do not go too far. My only concern, having gone through them all, is that there is a lot of it. Now, conceptually, that is okay, because clearly there is a relationship between new powers to the FCA and a greater degree of oversight, and that is the core principle.
Many of you have pointed out that I am speaking from a distance here. Yes, I am, and I am looking at this possibly from a semi‑outsider’s perspective. The concern is the degree to which the detail of scrutiny or the process can get in the way of agility.
For example, the cost‑benefit analysis panel is part of this. In principle, that is okay. It is very difficult to object to the idea of a panel that will be attempting to reconcile the consumer approach to cost‑benefit analysis and industry, which is always a conversation. Nevertheless, if there is a panel around this when the FCA is also expected to publish its framework for CBA, and on top of that there are the interactions with the Treasury and others, that is quite a lot of process.
Q35 Danny Kruger: That is understood. Would it not be simpler to have less of that kind of process but have this call‑in power in an emergency, as the previous short‑lived Government were proposing, which could perhaps strip away some of this complication but ensure that, when there is an emergency, the Government have the power to direct your work to a degree in certain restricted areas, perhaps?
I just put it to you that there is some value in that approach, given the enormous importance of the work that you do. You have a very significant policy lever in your control. Should that not be something that, ultimately, a democratically elected Government have the power to use?
Ashley Alder: It is not a substitute at all for the sort of accountability we have been talking about, which is interactions with the Treasury and interaction with panels, stakeholders and this Committee.
The call‑in power, as it was covered in the media, seemed to be positioned at some point as being as something more than just used when there is an emergency and you break the glass. That then gave rise to concerns as to what it was for. Was there a concern that the regulators were not, in some way, acting in the public interest? That would be a rather odd proposition, given that is all they are meant to be doing. There were concerns around what the guardrails would be and what the public interest criteria and threshold would be.
Q36 Danny Kruger: No, I do understand that. Because I am out of time, I am just going to quickly press you on that. Are you suggesting that it might be appropriate in a defined emergency, rather than as a general power, for the Government to be able to intervene and direct your work?
Ashley Alder: The emergency would need to be extreme. We have one here. There is effectively a call‑in power in our legislation in Hong Kong. It has never, ever been used and the reason for that is that it is seen to only be used in extreme circumstances, which have not yet occurred.
Q37 Chair: It is such an interesting question because you were offered the job at the end of the July, when the prospect of a call‑in power was very much, as you say in your questionnaire, something that you were aware of. What evidence has the acting chair of the FCA and the chief executive of the FCA given to this Committee on the call‑in power?
Ashley Alder: They were emphasising the value to confidence in UK financial services and the UK’s financial centre that rests on independence of the FCA. I hope I have not mischaracterised what they said.
Q38 Chair: You were prepared to take this job with the risk of that independence, as they framed it to us in their evidence, being reduced.
Ashley Alder: I was willing to take the job because the broader point around taking the job is the one I mentioned earlier, which is doing something where you feel as though you have an opportunity to benefit the UK, both as a financial centre but also when it comes to a situation where consumers are under pressure. For me, that was an overriding point.
Q39 Chair: If you had been chair at the time when the acting chair gave us this evidence, would your opinion have been a different one?
Ashley Alder: No.
Q40 Mr Baron: Mr Alder, thanks for joining us. You will be fully aware that the FCA’s new consumer duty is a new standard for consumer protection across all retail financial services in the UK. Our understanding is that the FCA has high hopes but little quantifiable evidence as to the benefits consumers will receive following the implementation of this duty. What do you think success will look like, how should the FCA achieve it and what are the hurdles going to be along the way?
Ashley Alder: I will start with what success would look like. I will draw on some experience here. We have moved to a so‑called outcomes‑based approach. That is really around fewer rules, an emphasis on principles and an emphasis on outcomes, which, as I understand it, is pretty much what the consumer duty is about.
Now, the challenge for firms is a high degree of nervousness around what the actual expectation and the content of the duty is, particularly when it is not positioned as a series of granular rules, where you can check the box, as it were. However, when it comes to success, you should end up in a position where there is a good level of understanding of what the duty requires in terms of firm behaviour and an acceptance on the part of firms that that will ultimately reduce the size of the rulebook.
When it comes to consumers, I mentioned in my reply to the questionnaire that there seems to be a degree of confusion around consumer protection and where the limits are. That seems to go, to an extent, around some quite difficult issues around perimeter, financial promotions and suchlike. Again, I would hope that the consumer duty would be something that would be either a whole or partial answer to that from a consumer’s perspective.
Q41 Mr Baron: Very briefly, what do you see your role as, therefore, in helping to assuage companies’ concerns about this. Do you think the timetable of implementation, both with regards to existing companies and also with regards to new products and services, is realistic?
Ashley Alder: The timetable, I think, is into next year. You may have to remind me. I think it is the middle of next year.
Q42 Mr Baron: Firms will have until July 2023 to satisfy the consumer duty for new products and services, with a further year to apply it to existing ones.
Ashley Alder: I do not have enough information to say whether that is right or wrong. What we tend to do, and what I would encourage the FCA to do, is this. Usually, what you need to do is to work with firms in order to ensure that they are ready and they are sufficiently confident to be able to go forward with it.
You do not do that in a lax way and you do not defer the timetable without any good reason, but when you are heading towards a deadline, you have to be sensitive as to whether what you would expect the firms to do is going to be delivered. If it is not, you need to look at whether, for example, there needs to be more guidance or there needs to be a reset on the timetable. That is fairly normal regulation.
Q43 Mr Baron: You see yourself or the FCA as being very proactive in this area, to help companies as best as possible.
Ashley Alder: Yes, absolutely. It is a different approach, and it has to be. It is a bit of a litmus test.
Q44 Mr Baron: Can I take you back to something you said in your questionnaire response? You said that, “From what I have seen to date, many of the criticisms of the FCA’s performance centre on real or perceived failures to secure adequate protection for consumers, particularly in relation to investment products and advice”.
Just following on from your comments about seizing on the opportunities from us having left the EU, can I just bring you to the issue of investment trusts and the fact that the Government have said, “We are going to abolish the EU regime”, and are now looking to the FCA to step up to the plate with regards to consumer protection in many respects? May I just, first of all, ask what you know of investment trusts? Do you know what they are?
Ashley Alder: Conceptually I do, but not a great deal in terms of what the proposals might be.
Q45 Mr Baron: Investment trusts, very briefly, are closed‑ended funds with a limited number of shares, like a Shell or a Marks & Spencer, but instead of managing the assets of oil or clothes, they manage investments on behalf of the holders of those investment trusts. Four investment trusts are on the FTSE 100 and investment trusts comprise over a third of the FTSE 250, so they are quite important to the UK economy, not only in helping investors outperform markets—they have a good, strong record of that—but also directing funds to where they are most needed to help the economy, whether it is renewable energy, infrastructure or even things like social housing and so forth.
Now, each investment trust had to produce what was called, under EU regulation, a key information document—a KID—as part of the PRIIPs regime. We saw last Friday the PRIIPs regime was going to be abolished. That is a welcome move, but the problem is that these KIDs are still in existence and they can be misleading, particularly when it comes to the assessment of risk, the protection of returns and the comparison with open‑ended sister funds. The media have been against it. The consumer champions have been against it. The trade body, the well‑respected Association of Investment Companies—the AIC—has advised investors to burn the documents before reading.
What priority are you going to give to this area, given that everyone now is looking at the FCA to step up to the plate, sweep away this confusing mish‑mash of disclosures and put in place a fair and transparent framework?
Ashley Alder: I now understand what the question is. I am aware of the problems with PRIIPs, which were apparent to me quite a few years ago, because we were looking at that when we were looking at our own investor disclosure rules in Hong Kong. One of the areas around it—I was going to say it is “suboptimal”; it is much worse than that—is it encourages the sort of disclosure that is too long, and therefore the average consumer will simply not pay any attention, so therefore it does not have any useful beneficial effect. Secondly, and more seriously, it can be misleading; this is the part that we looked at here, which is around projections of future returns.
Mr Baron: Correct.
Ashley Alder: That was quite worrying when we looked at PRIIPs itself. As you might have guessed, we did not do that here. We took a different approach.
Q46 Mr Baron: Can I just press you a little bit, Mr Alder? First of all, I should declare my interest in this sector. I apologise for not doing this previously. I do not know how far I have to go down this road of declaration, but one has business interests outside politics in this particular sector and one has written The Financial Times Guide to Investment Trusts and all the rest of it, so hopefully that disclosure is as far as we have to go, but it is all entered in the register anyway.
Can I just pick you up on your point? It is the misleading aspect for those investing in investment trusts that is the most wearying thing, because they extrapolate past returns, as you have suggested. Because KIDs produced in a bull market will produce forecasts of strong returns, whereas those produced in a weak market will go the opposite way, it is encouraging an investment behaviour that should be discouraged—buying high and selling low.
The FCA has said previously, “It is down to the EU. We cannot do anything about it”. The ball is now in the FCA’s court. I just want to understand what priority you are giving to this issue now, because the whole industry is looking to the FCA to step up to the plate, protect the consumer and investors, and deal with this issue once and for all. These KIDs, these documents that have to be produced for every single investment trust, are grossly misleading, yet all the platform providers say they should be read by investors before these investment trusts are bought or sold. What priority are you going to give to this and what do you see the FCA doing?
Ashley Alder: It must be a priority if—and from what we saw, I think you are right—an element of disclosure that is positioned to be really important is misleading. It cannot not be a priority. In addition, in any event, the PRIIPs regime across other areas of disclosure—it is not simply confined to that area; it is quite broad—is one of the areas that we are going to be explicitly looking at, because it was mentioned on Friday.
Q47 Mr Baron: You are going to treat it as a priority and you realise the impetus for reform in this area.
Ashley Alder: Yes.
Mr Baron: That is brilliant. Thank you.
Q48 Anne Marie Morris: Can we turn to the City of London and its position internationally? You have touched on it a little bit in earlier questions, but London’s stock market now looks like it is falling, close to being overtaken by Paris. We have always been seen as the international hub for equity, foreign currency and derivatives. Now, the evidence seems to show that on foreign currency and derivatives we still have the edge, but on equities not so. To what do you ascribe that and what can we do about it?
Ashley Alder: I do not think there is a single reason why that might be taking place. When it comes to diagnosis, if you look at the make‑up of the stock market in the UK, it is very different to Hong Kong. Therein may be the problem. It tends to be, for want of a better word, a bit old economy. That is very different to the experience in the US and the experience here, which is heavily biased to new economy and related firms.
Secondly, as I understand it, there is an issue around the way in which pension funds, and possibly insurers and others, look at equity markets as distinct from other sources of investment, in particular fixed income. Now, that is not an issue that can be directly solved by changing listing rules and similar. That is a deeper issue, and I am not sure the extent to which that falls within the remit of the FCA. I suspect, in the most part, it does not and there are other incentives or disincentives around domestic institutional investors.
When it comes to the market itself, I have seen the proposals dating back to what was the Hill review and then, more recently, on secondary markets as well around the listing market. Frankly, I do not think any of them are necessarily radical. They should be followed through. We have done some very similar things in Hong Kong, as our stock market here is very ambitious, as is, again, London. I worry whether, unless some of the more fundamental issues around investor preference and particularly institutional investor preference are addressed, those changes are going to make a very significant difference.
Q49 Anne Marie Morris: If I understand what you are saying correctly, there are a mixture of things at play here. Clearly, there are economic drivers but there also are structural, regulatory drivers that are impacting our attractiveness. Given your new role, how do you think what you do and the discussions you have can influence the steps that we take to fix this problem?
Clearly, there are things we need to do to make us attractive as an economy, but we also need to deal with some of the regulatory structural issues. I am interested in your comment on the Hill review and others. You did not quite say it was conservative, but that it was very much steady‑state rather than innovation.
Do we need a more innovative “big bang”‑type approach to become more attractive, or is it much more about saying, “Steady as she goes”, and trying to make sure we just are more efficient and effective, and to sort our economy, which clearly the Chancellor is endeavouring to do?
Ashley Alder: In relation to the stock market and equity markets in London, I have not seen any proposals that I would say are “big bang”, and I do not think, really, notwithstanding the reviews that have been done, that anyone has really come up with any that might be.
Just going back to your question, the role of the FCA will focus primarily on the listing environment, when it comes to listing rules and similar. As I mentioned earlier on, it is not a static environment because Europe, among others, is looking at prospectus requirements and elements of simplification. My view, as a regulator, having looked at aspects of the Hill review and the secondary markets review, is that we get on with it, to the extent that it needs to be implemented. I cannot really recall anything in it that I think is, from an investor protection perspective, objectionable.
We have gone through a similar process in Hong Kong with things like weighted voting rights. It was a little controversial at the time, to say the least, but, nevertheless, we navigated through that with a framework. We have been through the SPAC era as well in Hong Kong. That did not really do a great deal, frankly. There are fundamental issues, as was picked up in the Hill review, about forward‑looking statements and how they may operate for listings.
Overall, there should be a general approach or strategy that starts from the perspective of saying, “Okay, what are the markets for in London and, in particular, how can rules be configured to make sure that they are far more effective in converting investment to productive assets and productive businesses?”
It is that starting point that is really important. That is the context in which any regulatory reform should be viewed. What tends to happen, frankly, in relation to reforms of listing rules and so on, is they tend to be a little bit siloed and, therefore, they do not necessarily hang together around a single strategy around investment into productive assets.
Q50 Anne Marie Morris: We have seen an increasing number of takeovers and some have ascribed that to a fall in the value of sterling. Some have ascribed it to Brexit. What is your view with regard to Brexit and the Brexit dividend? What you have been telling us is very much that it is clearly a direction that the UK has chosen to take, but nonetheless you are more inclined, I think, to look at how we can align ourselves rather than be leaders. Would that be fair, or do you feel there is and there should be a real Brexit dividend and we should be taking a leadership role in how we structure our approach to listings and regulations?
Ashley Alder: No, I think we can take a leadership role, frankly. The fact that we are able to act quickly and autonomously when it comes to FRF and all the EU files that we are looking at gives us an opportunity provided that, quite obviously—I have mentioned this in the reply to the questionnaire—that we maintain standards. That is a pretty obvious point, as I say. Provided that we do that and it is demonstrable that we do that, then you have a fairly wide ambit to describe a system of regulation that is fit for purpose for 2022 and thereafter. We have an advantage there, without any doubt.
My point in relation to divergence is that we have to be very aware that, as a global financial centre intermediating global capital flows, extreme divergence, or possibly even moderate divergence in some areas, could then have an anti‑competitiveness effect or would not be good for competitiveness. You have to be very sensitive to that. I am not sure I am making myself clear, but that is my point.
Q51 Anne Marie Morris: You are making yourself very clear. Clearly, one of the opportunities in terms of becoming more effective and competitive is a lower regulatory agenda, but with that come risks in terms of good corporate governance. Where do you think that balance is, because the sense is that the Financial Services and Markets Bill’s introduction seems to be pointing towards a lower-regulation agenda? What would be your view, particularly if the Bill introduces a secondary objective to promote international competitiveness and medium to long‑term growth?
Ashley Alder: Overall, when it comes to regulatory reform—I think your phrase is “lower regulation”—the approach I have taken for years now is that you maintain high standards because confidence in a financial centre depends on high standards and a degree of certainty and predictability around that, but you identify where there may be unnecessary burdens, without departing from high standards. There is usually a set of burdens, depending on which area of the industry you are talking about.
Just going back to an earlier question, the KID or the PRIIPs point is a situation where, arguably, the information that is being produced is burdensome without a beneficial effect for the buyers of a product, and even, potentially, a harmful effect, which is obviously unacceptable. That is the balance.
We have a conversation that happens in Hong Kong and happens in other centres, which is, “Where is the balance between market development and regulation?” I always feel that is a false dichotomy. You should be in a position to ensure that standards are high—they need to be for an international financial centre—and unnecessary burdens are eliminated. By dint of that, you will ensure that there is competitiveness.
Incidentally, on the competitiveness objective, I agree that it must be a secondary objective. It should not conflict with consumer protection outcomes and it should not conflict with market integrity objectives.
Q52 Chair: Just in wrapping up, I wanted to ask you a couple of questions about crypto assets, because we are currently doing an inquiry on those. I know China is taking a very strong stance and FTX itself was previously headquartered in Hong Kong, so you must have had some interaction with FTX at the time. Can you just tell us, very quickly, what your view is overall in terms of crypto assets and cryptocurrency? Do you own any? Should they be regulated further in the UK?
Ashley Alder: I do not own any and they should be regulated further. The point is this: when it comes to crypto assets, as distinct from the underlying blockchain, our experience to date of platforms—whether FTX or others—is that they are deliberately evasive. They are a method by which money laundering happens at size.
More importantly, from the public’s perspective, the way in which they bundle a whole set of activities that are normally segregated in conventional finance gives rise to massively untoward risk, whether it is segregation of assets or conflicts of interest. There is a whole raft. It is also an unintermediated business. One of the reasons I need to be in Hong Kong is because one thing I want to get out before I step down is a comprehensive approach, under the mantra of “Same activities, same risks, same rules”, to crypto platforms.
Chair: That is very interesting.
Q53 Mr Baron: Coming back to your point about protection for consumers, particularly when it comes to investment products and advice, I trust you are aware of the extent of greenwashing in the UK retail sector, i.e. companies—all companies, to a certain extent—claiming ESG credentials and this being potentially misleading to consumers. I hope this is something that you will also have time to look at and treat as a priority.
Ashley Alder: Yes. It is really serious. We see it here and we see it internationally.
Q54 Chair: What is the FCA currently doing on this subject?
Ashley Alder: There are a few things. One thing I am aware that it is doing is looking at—I am not sure if you are aware—the ISSB, which is the global standard setter for corporate‑level disclosure. That is one area and that is initially to do with corporate‑level climate disclosure, TCFD‑style. I am not quite sure when that is programmed for, but, certainly, it is in the FCA’s docket and also there is a whole approach to fund labelling and the way in which asset managers factor climate and other issues into their work. My view on greenwashing is relatively straightforward, which is that I think it is serious. The ESG ratings industry, for example, is part of this and I think it is so serious that it threatens to undermine the credibility of the sustainable finance effort, frankly.
Mr Baron: I would agree.
Q55 Chair: Thank you very much, Mr Alder. We are going to end the public session now. Thank you for your time. We will go into private session and prepare our report, which will be published shortly. Thank you.
Ashley Alder: Thank you very much. Again, I am sorry I could not be there, but I will be next time.
Chair: Thank you.