Treasury Committee 

Oral evidence: The work of the Financial Conduct Authority, HC 210

Tuesday 12 December 2023

Ordered by the House of Commons to be published on 12 December 2023.

Watch the meeting

Members present: Harriett Baldwin (Chair); Mr John Baron; Dr Thérèse Coffey; Dame Angela Eagle; Stephen Hammond; Drew Hendry; Siobhain McDonagh; Keir Mather; Anne Marie Morris.

Questions 622 - 702

Witnesses

I: Ashley Alder, Chair, Financial Conduct Authority; and Nikhil Rathi, Chief Executive Officer, Financial Conduct Authority.

Examination of witnesses

Witnesses: Ashley Alder and Nikhil Rathi.

Q622       Chair: Welcome to this morning's session of the Treasury Committee evidence on the work of the FCA. We are starting late because of a fire alarm. We are not expecting a further fire alarm, so if the alarm goes off we will have to evacuate the building. I will start by inviting you to introduce yourselves, starting with you, Mr Alder.

Ashley Alder: My name is Ashley Alder and I am the Chair of the board of the FCA.

Nikhil Rathi: Good morning. My name is Nikhil Rathi. I am Chief Executive of the Financial Conduct Authority.

Q623       Chair: Thank you very much. I will start by asking if you have had a chance to look at the report we published on Friday about the Edinburgh reforms and the progress on those. The headline was that so far they have been a bit of a damp squib. Mr Alder, you have been Chair of the FCA for about a year. Do you feel that your organisation is showing the right degree of urgency on the pieces of work that you are responsible for?

Ashley Alder: Yes, I do. One of the things that is quite apparent from the report—which I have read—is the sheer volume of the combination of reform around repealing EU law and replacing it with our own laws plus the Edinburgh reforms. The sheer volume is enormous in reality.

Q624       Chair: Is that volume slowing you down?

Ashley Alder: It has caused us to think very hard about prioritisation and sequencing of the whole reform programme, without any doubt. At the board level, we have a sub-committee that is dedicated to the policy agenda, which is our policy rules committee. At board level, we have been interacting with the executive around prioritisation and sequencing. I should add a further aspect, which is that we have, as you would expect, a great deal of engagement with a range of stakeholders from firms to consumer groups and suchlike. The clear message that we are getting from them, including from the FCA panels, is that from their perspective there is always a risk of policy overload with the pace of change and also the implementation timetables. That is not at all to say that we are moving as fast as we should be.

Q625       Chair: You acknowledge that you are not moving as fast as you could be?

Ashley Alder: No, I think we are. My view is that we are moving at an appropriate pace to think through the content of the policy in front of us, to sequence and prioritise appropriately, and we have been working with the Treasury on that. I agree with the approach of the report, which is basically taking a view of what has been completed, what has been done so far as opposed to what is in the pipeline. Much of it, frankly, is in the pipeline through into next year and the following year.

Q626       Chair: It is a very long pipeline, though, isn't it? If you look at the senior managers regime, which is at the discussion paper stage, that has a date on it of 22 May 2023 but I don’t believe we have seen that actually implemented yet.

Ashley Alder: Yes. As far as I am aware, we will be looking at the senior managers regime and coming out with clear proposals next year, I hope in the first half of next year.

Q627       Chair: The first half, okay. You will be coming out with proposals then?

Ashley Alder: Yes.

Q628       Chair: One of the key reforms in the Edinburgh headline is you, as an organisation, having a secondary objective on competitiveness. I understand that the actual metrics that you will be measured against were agreed and published last week. From those it looks as though we will not be able to see where you are starting from and what your benchmark is any time soon either. Is that fair?

Ashley Alder: Many of the metrics focus on reactions to the secondary objective, which we have heard from industry and elsewhere. That is about the way in which we work as an organisation. That goes to an overall view of how we may be more proportionate in the way in which we regulate. Otherwise, it is the degree to which our operational effectiveness is as it should be. There was a large conversation, which continues to an extent but I think we have come a long way on fixing this, about the speed at which and the way in which we authorise firms. That is associated also with how tough our gate is.

Q629       Chair: Can we see that already in the data, in the metrics?

Ashley Alder: You can certainly see in the metrics around authorisations and other operational performance metrics, that is right.

Q630       Chair: Of the 20 metrics in the report that was published last week, section 3.6, are you already publishing where you stand on those metrics?

Ashley Alder: To an extent but certainly not all of them. We will have to do a lot of work internally to put the data together for reporting against those metrics. We have an obligation to report in our annual report and also some special reports coming up next year. We will be heading towards a reporting timeline.

Q631       Chair: Will this Committee be able to observe any change in any of these metrics against your secondary objective of competitiveness?

Ashley Alder: Of the first two reports we will be issuing, the first will be next year.

Q632       Chair: What time next year? A year is a long time for a business in this sector.

Ashley Alder: I think that there are two aspects of this. There are the metrics that we publish in any event. For example, our authorisation metrics are now published every quarter and we have changed the basis on which we do that.

Q633       Chair: Out of the 20, which are you already publishing?

Ashley Alder: I don't have a list in front of me, I am afraid.

Q634       Chair: Okay, but you are publishing some of them?

Ashley Alder: Yes, our service level metrics across the board including, as I say, authorisations. I think the broader point is that the way in which the organisation works is continually changing. We are particularly focused on the way in which we operate efficiently and effectively. This does not get right into a specific metric but, for example, we are looking now at the way our enforcement division operates in speed, triaging of cases, how it works hand in hand with supervision. From a board perspective, these are the key points. The way that develops, and I hope quickly, may not be precisely reflected in the list of metrics that you have in front of you. That is what we are focused on from a board perspective. I hope that much of what we do is reflected in those metrics.

Q635       Chair: Thank you. Mr Rathi, do you have the list of metrics in front of you in your very compendious binder?

Nikhil Rathi: Yes, I do.

Q636       Chair: I hope you have got it. You know what the organisation will be measuring and can see the detail. Can you give us an idea of when our Committee might be able to measure progress against those metrics?

Nikhil Rathi: I estimate that we already publish around half the metrics. We publish a number of the authorisations metrics quarterly already and a number of the other metrics come out in our annual report. You will be able to see the last set of data in July's annual report and the next set will come out in next July's annual report. The burden of the additional metrics are more detail and authorisation speed, and I have talked about that before.

It is worth drawing the attention of the Committee to the fact that 97% of our authorisations now meet statutory timelines. We have done that alongside toughening the gateway. Two years ago, one in 14 cases would be refused or withdrawn, and now it is one in four. That has been a conscious approach to make sure we have a rigorous gateway to prevent bad actors getting in in the first place, which then means we can be more operationally effective and efficient through the supervision and enforcement approach.

I can assure the Committee that we will be taking these very seriously and publishing them as has been articulated here and according to the frequency agreed with the Treasury.

Q637       Chair: Thank you. Something that you did implement this year was the consumer duty, at the end of July. I have read the announcements that have been made on the implementation since then. How soon are you likely to be considering any enforcement, or are you comfortable that everyone who should have implemented consumer duty by now has implemented it correctly?

Nikhil Rathi: This was one of the most far-reaching, cross-cutting pieces of regulation that we have done in retail financial services protection for a number of decades. I should first and foremost say that I think overwhelmingly the industry, large and small firms, put in a big amount of effort to implement it for on-sale products by 31 July. There is a deadline for closed book products of 31 July 2024—we gave an additional year for closed book products. We said all the way through the implementation process that after 31 July we would take a proportionate approach. We are not going to go in and seek to enforce every technical breach of the consumer duty. We are going to go after the most egregious harms to allow the duty to settle in over the coming period.

I am sure we will come to it shortly, but we have taken action on savings rates this morning with respect to interest paid on cash balances held in pensions and investment accounts. We have issued some communications to firms where we believe they are double-dipping, both charging for holding cash and retaining the interest. We have said that practice needs to stop. We are doing further thematic work on guarantee asset protection insurance and we are engaging sector by sector. If we allow firms time to remedy issues that we identify, enforcement will come some way down the track but I think that is normal when you are doing a very big cross-cutting intervention like this.

Q638       Chair: Thank you. What are the top three things that consumers can see have changed? You have just cited the savings rate point, which as you know is of great interest to our Committee.

Nikhil Rathi: This was a piece of regulation that covered tens of thousands of firms. The positives we have seen in the market are that a number of firms have simplified their language, made their products more accessible, been more up front about exclusions. I don't want to get into naming specific firms, but there are some very significant cases where you may have seen it publicised that they have revised their fee structures and have had to explain that new approach to their own investors. Savings rates communications have stepped up considerably, and we have seen a significant move in consumer behaviour in switching going on there. We have seen a number of firms overhaul their product suitability and talk openly about how the consumer duty is driving that, and seeking new ways to gather customer feedback. Finally, because the consumer duty is so cross-cutting, it is underpinning other very significant pieces of work that we are doing.

Chair, you have taken a close interest in advice and guidance. Underpinning the advice guidance boundary review, which we published on Friday, is a proposal that we can make some quite far-reaching changes to solve what has been a very intractable problem for our country but lean on the consumer duty in doing that. We can lean on the consumer duty in the way we regulate artificial intelligence going forward, because it gives clear outcomes that we expect without us having to be too prescriptive.

Those are some more broadbrush ways in which we are approaching the consumer duty. Consumers will not feel that just yet but it is quite a strategic intervention.

Q639       Chair: Thank you very much. Do you want to add something to that, Mr Alder?

Ashley Alder: Only that the consumer duty is, as Nikhil has indicated, a radical change of approach that has certainly been noticed overseas. Many overseas regulators are looking at what we in the UK are doing and taking a lead on. Secondly, more importantly from a board perspective, it is a big test for the organisation because it signifies such a large change in approach. The broad strategic outcome is that it should encourage better competition in the interests of consumers and firms. It should result—we have been talking about this a lot—in fewer rule changes because it is an outcomes-based approach. It should result in fewer cases that then call for redress. It should result in fewer upheld cases in the Financial Ombudsman system. They are all big ambitions in reality.

One of the top issues, if not the top issue, in how the organisation configures itself around the consumer duty, including the reality of the difference that this makes for consumers and the way in which firms handle it and the effect it has on competition, is absolutely critical from my perspective. It will not happen overnight because it was introduced formally in the summer and the next stage for closed books is next year, but it is a major area of focus without any doubt, as you would not be surprised, I would have thought.

Q640       Chair: It just makes me laugh, though, that I got a text from Barclays telling me that there were better savings rates available than on this account that I don't really use and had about 10 pence in. I wondered whether that was implementing the consumer duty as far as the regulator is concerned.

Nikhil Rathi: We have asked the banks to undertake a range of communications to all their customers to make sure they understand that there are better rates available now. I am unable to comment on your specific account but we do know that they have had millions of communications going out. We have seen the deposit levels in instant access accounts at the largest banks go down by around £100 billion in the last year or so, and an increase in notice accounts by a similar amount. We have seen non-interest bearing deposits come down. In June, there was one instant access account in the market that had an offer of over 4%; today there are 173, and 37 of over 5%.

That does not mean there is not more to do on the question of savings. We think that there is still work to be done on off-sale products and closed book products, but it is important that we don't group the entire industry as one. Some have made an effort and have really moved; there are others where we will have some more intense supervisory engagement.

Q641       Keir Mather: I want to turn to the question of FCA independence and its risk taking. The new City Minister has been reported as saying that there is “a natural and perfectly acceptable conflict between politicians and regulators” because of different incentives. Do you feel that there is a conflict and is there sufficient mutual understanding between you and the City Minister as to what the parameters of that conflict should be?

Ashley Alder: My approach to the whole question of regulator independence is fairly straightforward—in fact, it is straightforward. It is absolutely essential that we maintain operational independence in the work we do day to day. That is emphasised when we are inspected by IMF inspectors. The organisation that I used to chair, the International Organisation of Securities Regulators, refers to that as a fundamental principle of regulation. Operational independence, absolutely.

Clearly rules are made within the context of legislation, and the way in which we make rules, particularly now given that we have new rule-making powers, effectively, is absolutely rightly subject to accountability of all sorts. The accountability system, as you are probably aware, or the accountability mechanisms—there are far more of them and they are more intensive than they used to be. That reflects our new rule-making power. Certainly as far as the City Minister is concerned, I have not detected any elements of the relationship that would contradict those principles.

Q642       Keir Mather: The City Minister went on to say that risk, as long as it is sufficiently regulated, is integral to growth and innovation in any part of the economy. Do you agree with that assessment, and do you think that the regulatory regime that you preside over allows enough space for that risk taking to take place in a modern, dynamic, future-focused economy?

Ashley Alder: Many regulators overseas would not do this, in fact, but we have raised this explicitly. Nikhil referred to the whole question of risk tolerance, allocation across risk assets in a speech that he gave in March in the context of potential changes to listing rules. I mentioned it in a speech I gave just before the summer. The reality is that the way in which markets work in the system that we have, and the system that is also the case in many western countries, is absolutely predicated on risk and the management of risk.

I will point to an area of discussion that is relevant to this. People use different terms for it but basically we use the term “productive finance”, and that is this whole conversation of pension fund investments, value for money in pension funds, but right across to the advice guidance boundary that we published on Friday. We may get into this a little bit later because I personally think it is incredibly important, but it is basically about giving a large section of the population who at the moment do not have access to affordable advice access to the right type of advice to enable them to make better decisions.

The reason I mention that is that those better decisions, depending on who you are in demographic age group and suchlike, often involves a different approach to investment that can then embrace appropriate degrees of risk. It is absolutely a conversation that we have within the board of the FCA and I know across the organisation as a whole.

Q643       Keir Mather: Would you describe there being mutual understanding between the FCA and the Government as to what the extent of risk taking should be to facilitate growth, which at present is sluggish?

Ashley Alder: I don’t think it is a question of the extent of risk taking. Risk is not simply a single quantity. It is not like you can top up a glass of risk in the same way as you can top up a glass of water. I think that we are talking about different buckets of risk. The bucket that I certainly am interested in is the ability to better mobilise domestic savings, whether they are pension savings or private savings.

I should mention one other thing, which is possibly self-evident. From my perspective, these absolutely correct conversations about risk do not imply a deregulatory agenda that then undermines the work we do to level the playing field between what can look like, or are, distorted incentives within the industry and also lack of transparency. Those are endemic to financial markets. Putting it very simply, from our perspective this is not a return to light touch or anything on those lines.

Q644       Keir Mather: I will turn to SME regulation. What would be the consequences of bringing more SME lending within the regulatory perimeter at this stage?

Nikhil Rathi: This topic has been debated relatively recently. You may be aware that during Covid the Government and Parliament changed the law to take elements of SME lending out of the regulatory perimeter because of the need to deliver access to finance to a very large number of SMEs at great speed. The concern was that if banks had to comply with all of the handbook of FCA regulation, that would inhibit the accelerated flow of lending to small businesses. This follows on from the conversation that you just had with the FCA Chair about what is the appropriate balance between the scope of regulation and the commercial freedom and risk appetite of the banking industry.

At the moment lending under £25,000 to small businesses, to micro-enterprises and others, is regulated by the FCA, but not above that level, and lending to limited companies is not above that level. We have some role in regulating the debt collection, so when things go wrong in a certain constrained way. The philosophy underpinning that—and the Government are ultimately responsible for deciding this perimeter—is that once businesses get above a certain size, they are able to make their own commercial decisions. This Committee looked at one element of that when it looked at the Greensill issue and supply chain finance. I believe that this Committee’s recommendation also was not to bring that into the regulatory perimeter either because these were classically commercial transactions.

I think that all of these things are a choice about where you strike the boundary and a judgment about when a big business is large enough to make its own decisions without the full regulatory protection. Cost comes with full regulatory protection, so we will obviously then impose compliance requirements on banks and other expectations that they will pass on in the pricing to businesses.

Q645       Keir Mather: Do you have a view on what it would do to the cost and availability of finance for SMEs if you regulated above that perimeter?

Nikhil Rathi: I don’t think we have an elaborated view. The decision that was taken a couple of years ago during the pandemic was done at great speed and we are still not fully out of the really dramatic shift in the market that happened at that point. A very large chunk of lending to small businesses right now is Government-guaranteed lending that was extended during the pandemic, so we are not yet in a normal situation. We have also seen the very rapid rise in interest rates in the last two years.

I am not able to give you a very explicit view but there would inevitably be a degree of additional cost that would be passed on. There would be benefits too and we would be able to get into some of the practices that we have read about in the newspapers recently that concerned certain businesses and certain thresholds, but it was an explicit decision of Government and Parliament to take that out of our remit.

Q646       Keir Mather: Why did you make the decision in the recent review of SME access to the Financial Ombudsman Service to keep the current thresholds in place?

Nikhil Rathi: Having looked at the thresholds and taken evidence, 99% of businesses were covered by the Financial Ombudsman Service. There is the separate business banking resolution scheme that the banks have set up, really as a legacy of the financial crisis of 2008, to deal with those complaints. We felt overall, looking at all of the evidence in front of us, that that coverage, which takes SMEs up to a £6.5 million turnover, was adequate.

Q647       Keir Mather: You said that the closure of the Business Banking Resolution Service “will not impact your policy objective to provide access to the ombudsman service for those SMEs who lack the resources to pursue their claims through the legal system”. This implies that the legal system is the right way to handle these disputes. Is that the case when even the largest SMEs may struggle to find representation in disputes?

Nikhil Rathi: I think that this is again a judgment about the thresholds. The judgment we are making is once a business has a turnover of over £6.5 million and a balance sheet of over £5 million, it is large enough to be able to engage in commercial contracts and make the judgment about who it wishes to contract with for accessing finance, whether a bank or another finance provider. The court system is there, although clearly the court system has had some challenges in recent years. There is still a backlog working through multiple chambers of the court to enable these disputes to be settled, but one would hope that the court system can deal with a company over £6.5 million wishing to settle a commercial dispute without the regulator having to be too prescriptive.

Q648       Stephen Hammond: Good morning, Mr Alder. Good morning, Mr Rathi. Thank you for coming to see us this morning.

In an article in the Financial Times on 19 September, Mr Rathi, you wrote about de-banking, “So far, data from 34 banks, building societies and payment companies does not point to a systemic problem of people being de-banked because of their political views”. That leads to three obvious questions. First, have any persons been de-banked for their political views? Secondly, what have you done to check the quality of the data that was provided to you? Thirdly, I think later on you say you are going to check to be doubly sure; what have you done subsequently?

Nikhil Rathi: Thank you, Mr Hammond. In an accelerated exercise over the summer we took data from 34 firms to understand the reasons for bank account closures in the period between July 2022 and June 2023. We were looking only at closures, not accounts that remained open where there may be a dispute with the account holder and the bank, but the accounts that have actually been closed. Having looked at that data from the largest banks, we could not identify any cases where there had been closures because of the points around freedom of expression.

I made it clear at the Committee last time that it is against the Payment Accounts Regulations for a personal bank account to be closed on the grounds of lawfully expressed political views. If that was to happen, it would be against the rules. Where firms reported to us that there might be some issue with views, we wrote back to the firms, looked behind the cases to understand what had happened. On further examination, the cases were about customer behaviour, abusive behaviour towards staff and so on. They had been categorised in that way.

We said at the time that this was an indicative report, it was provisional; the work was done at some speed. We are now working with each of those institutions to validate their data to understand, through some sampling and some case sampling, whether we can be satisfied that the conclusions they gave us were correct. So far we have not identified anything that fundamentally changes what we shared with the Committee in September.

I should also say, and I know there was some coverage at the time, that the banks will tell us the answer is what they told us. It is a very serious issue if a senior manager of a bank knowingly and intentionally gives the regulator incorrect information.

Q649       Stephen Hammond: Does that breach the SMR?

Nikhil Rathi: It breaches the SMR. It breaches principle 11 around openness and co-operation. You will see that we have taken in provisional findings, because this is now a matter before the upper tribunal, very firm action against a former chief executive of a large bank because of breaches of the integrity rules. If that does come out—and we have whistleblowing and other channels where we would tend to find out—there would be some very serious consequences for the senior managers involved.

We also brought out a few other points in that report. First, we were seeing inconsistency in the way that banks were accounting for reputational risk.

Q650       Stephen Hammond: That leads on neatly. Can I be clear about what you mean by reputational risk? Is that, as you described earlier, behaviour or threats classed as a reputational risk or is it a reputational risk because the bank is offering an account to someone who is in a group, say, politically exposed or expatriates? Can you define exactly what you mean by the reputational risk and to whom it is?

Nikhil Rathi: The point I was making is that the banks are using inconsistent approaches, which are ultimately commercial choices about the reputational risk they wish to run. For example, we would see it is a legitimate consideration for a bank to consider whether they wish to continue to bank those who are affiliated to a sanctioned individual because of the potential. There have been several hundred sanction designations in the UK in the last 18 months and the bank’s reputational risk committee will want to consider the extent to which they wish to continue to bank such individuals or their close affiliates.

On personal bank accounts, the basic bank account, first and foremost, there are very limited reasons by which an account can be refused, really limited to financial crime or breach of some core regulations around due diligence. The issue of reputational risk comes more into focus when you are talking about charities, political parties, campaigns and campaign groups within businesses.

One of the points that I made in that article and we drew out in our report is that at that moment there is full commercial freedom for banks to make those decisions. That is not in law or regulation. Only Government and Parliament could change that. In some countries, they have changed it and made it a right for a business to have a bank account, but we have not done that here. At the moment, banks can make their own judgments about the political parties, the campaign groups and the types of business they wish to bank. Many have done that for decades.

Q651       Stephen Hammond: Going back to what I was asking earlier, what work have you done to review the treatment of particular individuals, partly people who are politically exposed—obviously there is a commercial decision but there was also a change in the rules recently about politically-exposed people—and also expatriates you identified as being significantly affected? What have you done to validate your conclusions there?

Nikhil Rathi: Through the legislation that came into effect two or three months ago we have committed to doing a review of the way in which banks are dealing with politically-exposed persons. That review is well under way and it will be completed by June next year. We have invited all Select Committee chairs, leaders of main parties and all parliamentarians to give us evidence of any concerns that you may have. It is worth remembering that the origin of the rules around politically-exposed persons comes from international standards around potential bribery and corruption, and that is how they have been implemented in law here. The law was not changed but we want to make sure that it is being implemented with proportionality and care, and not a blanket approach.

On expatriates, we drew out in our report that there are issues with certain categories of consumer who access traditional UK banking services. Expatriates is one and trustees for charities is another. We do not regulate the provision of banking services to consumers, UK citizens, who live overseas. We know that during the exit process from the European Union it differed member state by member state, but in some countries it was no longer possible for UK banks to offer services into that jurisdiction. Notwithstanding every effort between the regulators, the agreements were not reached to make that possible. In other situations, banks have made choices to exit certain international markets. I think that is a challenge.

Q652       Stephen Hammond: You have just said that there are very limited reasons for de-banking. In your article you also say that because of new laws made by Parliament, particularly with recourse to reporting fraud, there is a risk that banks are going to err even more on the side of caution. Given that those are already fairly tight, is that really going to happen? How can you quantify that risk?

Nikhil Rathi: The two main reasons for banks closing accounts have been inactivity and dormancy and then financial crime concerns. The prospective law coming into force talks about taking proactive action to prevent fraud. It moves the dial just a little further in the obligations on actors in the economy. The point I was trying to bring out in the article—and I really value the accountability through this Committee and the Sub-Committee, and it builds on Mr Mather’s questions—is these are risk decisions. How do we as a society balance the very legitimate need to tackle financial crime, money laundering through the banking system, while ensuring access to banking services that are essential and ensuring innovation and commercial freedom? Every society and every country has their own balance there and we shared a lot of international evidence on how other countries are dealing with this. I think this is a critical debate for us to have.

I also pointed out, again building on the innovation theme, that we had allowed a lot of fintechs and payment firms into the country, into the regulatory rooms, and they had grown incredibly fast. That was a conscious risk decision, we need to support innovation, but they were among some of the largest de-bankers because they had not done their checks sufficiently rigorously. There is a choice there between how fast we allow new entrants to come in and grow versus the financial crime mitigations on the other side.

Q653       Stephen Hammond: They were not following the KYC rules fast enough?

Nikhil Rathi: They were growing incredibly fast and their systems around KYC and money laundering were not growing at the same speed. That is not unusual with new technology companies. That is a choice between how fast you want to allow these fintechs to enter the market and we celebrate the fact that we are one of the largest, if not the largest, in Europe for fintech.

Q654       Dr Thérèse Coffey: Artificial intelligence and quantum computing are clearly areas of interest and particularly when thinking of risk, so that is what I am hoping to explore in the next few minutes with you.

Mr Rathi, you gave a speech in July where you talked about how the FCA is training staff to make sure they can maximise the benefits of AI. It would be useful to understand what sort of training that is and where you see the benefits. Then your chief data, information and intelligence officer, Jessica Rusu, spoke a couple of months ago at the City and Financial Global AI Regulation Summit talking about trying to use this emerging technology in enforcement.

I think the broader point is we have talked about risks in a number of different ways, which FCA is leading on, but AI itself presents a number of risks, particularly if the data input is not correct or the so-called hallucinations. What are you doing to mitigate these risks in your own use of AI and in the finance industry more widely?

Nikhil Rathi: It is a hugely accelerating topic and the AI Safety Summit hosted in the UK a few months ago was a very significant moment because it brought together some multilateral co-operation, particularly on the questions of security in the cyber and defence space, which is critical for us in the financial services industry because we rely on the integrity of that infrastructure. We approach this topic with a degree of humility. I don’t think any of us can claim to understand how this is going to evolve, and that is one of the challenges for us a regulator.

There is increasingly rapid adoption of AI among regulated firms and you are quite right to point out the risks. At the same time, there are huge opportunities. I was trying to say in my speech that we would like to be adopting an approach where we don’t jump in and regulate and seek to regulate every dimension of this, not least because we don’t fully understand it and also because that might dampen innovation. The quid pro quo for that is that we need firms to make sure that as they are rolling out the use cases here they are thinking about anti-fraud protections, cyber risk.

I mentioned earlier the new consumer duty. We have moved decisively towards outcomes-based regulation in the UK. In our consumer duty we have set out very clearly what outcomes we expect firms to deliver for consumers. We have market integrity rules around market manipulation and market abuse and we have the senior manager regime for personal accountability. In that sense, I would say that we are differently placed from a number of our major competitors around the world in having that framework. We are saying to firms, “We don’t want you to back away from innovation but this is what we expect from you and this is what we expect in your governance. If as you implement this and you are monitoring you see some problems against any of those outcomes, we expect you to have a system to be able to pull back and stop.”

The other reason I lean on that point is that the serious organised criminals don’t have anyone regulating them and they are making unfettered use of AI, to manipulate markets and target scammers. It is quite important that we don’t take away from regulated firms the tools to counter them to protect markets and consumers. We are piloting a number of things within our organisation. For example, we have a huge caseload; can we use AI to triage effectively, with quality assurance alongside that, what is high risk, what is medium risk and what is lower risk? Then our case officers can go to the high risk faster. Very often two thirds or three quarters of cases have no action and it would be good if we can identify those quicker to enable our case officers to act against them.

We have looked at our document discovery and enforcement. In some of our big enforcement cases we are dealing with over 1 million pieces of digital evidence. There is huge industrial scale needed for disclosure to the defence. We think that some of the technology we are putting in enables us to triage those documents 80% faster than the previous human-anchored systems

Q655       Dr Thérèse Coffey: That is a useful insight on how to use it to its benefits. Jessica Rusu in her speech mentioned that AI-based models can help us tackle fraud and identify bad actors and scam websites. If we think that financial fraud is the single crime that is accounting for the majority of crime in this country now, clearly there is a role for FCA to play in getting up to speed on that. Could you tell us a bit more? You have got stuff here about your digital sandbox in supporting firm innovation, which I welcome, but of course consumers are relying on the FCA to safely manage that risk.

Nikhil Rathi: To give you some examples of how we have dramatically stepped up our work in this area using technology, some machine learning and AI-based, some other forms of technology, in 2021 we intervened 573 times to require the amendment or withdrawal of certain financial promotions. We now use technology to web scrape advertising coming into the United Kingdom. We increased by 14 times—

Dr Thérèse Coffey: What was that word?

Nikhil Rathi: Web scrape, so scraping the web, interrogating the websites that are marketing and promoting into the UK retail market. We went from 573 to over 8,500 in 2022 using technology. Year to date—we are not yet at the end of the year—we are at over 10,000. We are able to go in much faster to prevent fraudulent advertising. We can’t stop all of this because these are coming from overseas and they can be set up within hours, but we can get faster at bringing them down. The level of investment fraud has fallen modestly, according to the UK Finance figures this year, from 585 million to 485 million, which is still too high but it is at least directionally where we would like to see it go.

Q656       Dr Thérèse Coffey: UK Finance itself has talked about these hallucinations where AI can produce products that are incorrect but have massively high levels of confidence in how they are done. There are limitations of aspects of that. You were talking about web scraping in different ways and using the benefits of AI. Tell us more about aspects of where human intellect and intelligence comes in to help manage that.

Nikhil Rathi: On the web scraping, one of the reasons we have been able to step up as dramatically as we have done in the number of interventions links back to what I was saying about triaging cases. We are using technology to highlight to our case officers which ones are the highest risk, so looking at the words that are being used and how they are being marketed. Then our case officers can go after the highest risk cases rather than having a lot of false positives that they would have had to work through previously.

It will not be 100% perfect. No system like this will ever be, given the industrial scale of the serious organised criminals, but it enables us to move significantly faster, also supported by the fact, which was underpinned by advocacy from this Committee, that finally the social media firms have stepped up and prevented firms that are not registered and authorised by us from having paid-for promotions for financial services on the search engines like Google and so on. We have seen a near 100% drop in illegal paid-for advertising.

Q657       Dr Thérèse Coffey: Jessica Rusu’s speech talked about the risks of critical third parties. What is the FCA doing to mitigate the dependence on such a small number of technology providers? That is the social media influencer through TikTok but through actual providers of technology, given the financial firms rely on that. Are you looking to expand that market?

Nikhil Rathi: We cannot mitigate the dependence. The Government are considering and are intending to put in place a regime after the legislation has passed for the FCA with the Bank of England and PRA to supervise critical third parties that are systemic to the operation of the UK financial services system. We will collectively provide advice to the Government and the Treasury will have the power to designate who they may be. One can imagine at least three large cloud providers that are global in scale and are used by nearly all major financial services providers around the world. We will be regulating them for operational resilience purposes and be able to collect data on how they function.

It is important that the regime has teeth. These large global companies are not always respectful of national jurisdictional regulation and it is important, given the systemic nature of them to our industry, that we are able to properly supervise and regulate them. I am sure that the Committee will want to look at that as the legislation comes forward on this from the Government.

We put out a paper two weeks ago on big tech and competition. We have been doing some work and I have been meeting all the big tech companies to understand their strategic intent for financial services and their strategic intent for the UK market. They are different; you cannot group them all as one. They have different interests, some payments, some e-money, some other consumer-facing businesses.

On the question of the significance of a small number of small tech firms, each allied to a single AI firm, the ability to collect data at scale globally creates huge asymmetries of data analytical capability that we think will have some competition effects. Addressing that is not an easy public policy problem to solve.

Q658       Dr Thérèse Coffey: Thank you. I have one final question. I appreciate you are a member of the Financial Policy Committee and the Bank of England will do that assessment during 2024. The last time the FCA published a paper on quantum computing was in July 2021. That is also a technology evolving at rapid pace. Do you do enough to keep up with the benefits and also the risks of quantum computing, recognising that UK Finance said that this could break the encryption underpinning the security on all payments, e-commerce and other online systems?

Nikhil Rathi: We published that paper on quantum computing in 2021. Since then, two years ago we joined the Digital Regulators Cooperation Forum, which I am now chairing this year, with Ofcom, the CMA and the Information Commissioner’s Office. We recognise that on major technological developments such as this, working on our own will not be the most productive way forward. Together, the four regulators published in 2023, earlier this year, an insights paper setting out our latest thinking into quantum computing. As technological advances move forward there, alongside the developments in AI, we can see some dramatic acceleration in the penetration impact on financial services.

Also, while understandably the issues that get the headlines are those about risks to consumers—and ther are serious potential risks, as well as potential opportunities to provide better customer service—we are also a markets regulator. We host some of the largest global wholesale markets in the world here in the United Kingdom. The ability for serious organised criminals to operate cross-border, using fake information to move markets and undermine market integrity is very serious indeed. We have already seen suspected episodes of that in some large markets around the world. That international co-operation will be absolutely critical.

Q659       Dr Thérèse Coffey: It is on the agenda?

Nikhil Rathi: It is firmly on the agenda in all the international fora. I refer again to the Bletchley Park summit because, ultimately, cross-border co-operation between governments to put forward a framework for security of our core infrastructure is absolutely fundamental. We as sectoral regulators can build off that.

Q660       Siobhain McDonagh: I would like to talk about some issues about Blackmore Bond. As I have said before, my constituent Sue lost £17,000 to the Blackmore Bond scandal. After retiring from her longstanding service at John Lewis, she invested her pension pot into the mini-bonds but after the scheme collapsed she was left with nothing. Financial promotions for Blackmore Bond claimed that a capital guarantee scheme was in place for each bond issue. It said that it would pay out up to £75,000 to investors like Sue if the firm became insolvent. How much money has been paid out under the capital guarantee schemes to date? If that figure is zero, were the promotions truthful?

Nikhil Rathi: I will first say how sympathetic we are with the distress that investors in Blackmore have faced when they have lost substantial portions of their savings. I wrote to the Committee last week with an update on where we were in the investigation into the financial promotions. Blackmore itself was unregulated and so this is a different situation to the LCF mini-bonds, on which the Committee has done some work previously, although financial promotions to an extent were within our remit. The direct answer to your question is that my understanding from the administrators is that so far no payment has been made from the insurers. The administrators and liquidators need to consider that matter.

On the question of the disclosures in the risk warnings, when we looked at the detail of the material—there was a range of material and so I am speaking in general terms—investors were told, “Your capital is at risk. There is no FSCS protection. You should seek financial advice. Interest payments are not guaranteed and potentially 20% of costs are involved.” Having looked at it in forensic detail, the enforcement team judged that there was not a case for taking forward enforcement action.

Q661       Siobhain McDonagh: Some of the promotions suggested that there was a capital guarantee scheme. Sue was a first-time investor. She had no experience. She was encouraged to tick the box that she was an experienced investor. In a letter to this Committee dated 5 December the FCA states that it “will not take enforcement action over the approval of Blackmore Bond’s financial promotions” and argues the adverts were “largely accurate”. They were not accurate in Sue’s case. Some of the promotions described the firm as “a successful property developer”, claiming that it had “completed specific developments and delivered significant returns from doing so”. It gave consumers like my constituent the confidence to invest. Were those claims truthful?

Ashley Alder: Before Nikhil, can I pick up on one point that you mentioned, which is the question of being asked to certify that you a sophisticated or high net worth? The FCA has quite rightly—and this is a forward-looking policy issue—raised the point previously that that system is clearly open to abuse. Personally, I agree. It is open to abuse and, for obvious reasons, we need not spend too much time going into how that operates or how that could operate. Notwithstanding the fact that that topic has been around for some time, as I understand it, we should refocus on the way that system should operate and, in particular, the responsibility of firms when it comes to the question of whether someone is in fact sufficiently sophisticated or has sufficient assets.

Q662       Siobhain McDonagh: Evidence shows that the people promoting the bonds were telling people to sign the box to say that they were sophisticated investors. Could you address the issue of them claiming that they were successful property developers?

Nikhil Rathi: The team at our enforcement division has looked at a range of evidence and has looked at it in quite considerable detail, including the extensive input we have had from investors, and have come to the conclusion that it did not meet the legal thresholds for enforcement. I recognise that is a distressing conclusion for some who have been affected.

I amplify the point that the FCA Chair made. This system of self-certification is flawed. We have raised this with the Committee and raised it publicly. It came up in the LCF context. The Treasury recently, after this was raised in 2020, put forward some limited reforms that raise the threshold of high net worth from £250,000 net assets to £430,000 net assets, which is significantly lower than equivalent thresholds in major jurisdictions around the world, some of which go up to £1.5 million but the self-certification remains. That statutory instrument was passed by Parliament last week and it goes to the House of Lords next week.

We are concerned about, which goes a little bit to the question around risk and supporting the economy, the argument made that if we tackle that, it will somehow cut off finance to small businesses because SMEs rely on the ability to market—SMEs like the one that was marketed to your constituent—but there has been no impact assessment looking at the incremental benefit to SMEs and the reduction if these restrictions were changed.

Q663       Siobhain McDonagh: I appreciate that all your comments are completely legitimate, but I want to look at whether it is reasonable to suggest that they were truthful in the materials and the promotion of their product. Small investors and first-time investors were encouraged by the company doing the phone calls to tick the box to say they were sophisticated. There were claims that the scheme was guaranteed and if it did not return, people would be compensated. They claimed that they were successful property developers. All this suggests to me, as a layperson, that much evidence shows that they were not truthful.

I have also spoken to other MPs about Blackmore Bond and their constituents. They had the same experience of feeling they were scammed out of their money. One colleague’s constituent invested £40,000 in Blackmore Bond between 2016 and 2018. We know that by 2017 Paul Carlier had already alerted the FCA about the dangers of Blackmore Bond. Had my colleague’s constituent been alerted to these concerns, he certainly would not have invested any more money.

Does the FCA have questions to answer about why it did not act more quickly nearly seven years ago, when this was first brought to the FCA’s attention?

Nikhil Rathi: One consequence of us closing the enforcement investigation is that some complaints pending to the FCA will now be investigated objectively and independently. Seven years ago was prior to my time, but there will be full co-operation with our complaints function as it investigates those matters. An independent complaints commissioner can look at all the material and all the facts.

It is worth bearing in mind that the Insolvency Service also looked at this case and decided not to take action against any directors of Blackmore Bond. That is a different situation to, for example, the LCF, where a Serious Fraud Office investigation is under way and where we have issued a public censure.

Q664       Siobhain McDonagh: Your letter to the Committee also notes that the outstanding complaints about the FCA and its handling of the Blackmore Bond scandal “will now progress”. They have been deferred since June 2021. That strikes me as a long time to wait. Can you give the Committee an update on how quickly they will be resolved?

Nikhil Rathi: The complaint function operates separately from the chief executive, but I know that it is looking at these now closely. It is not an unusual practice to pause while an enforcement investigation is under way as you do not wish to prejudice what might come out of that enforcement investigation, but I am sure that the complaints team, which is fully resourced, will look at these expeditiously now.

Q665       Siobhain McDonagh: I am a bit more used to local government and the NHS, but you would never anticipate that it would take two years to investigate a complaint.

Nikhil Rathi: The balance we have to strike in all these situations is the potential for an enforcement investigation to lead to action, sometimes criminal action, against individuals and the potential for the investigation of an individual complaint to potentially prejudice that action. We strike that balance in causing complaints while enforcement investigations are under way. That is a well understood approach, including with the complaints commissioner.

Q666       Chair: Thank you. On this point about risk, Mr Alder, could you give a sense? Sam Woods from the PRA says that he is not trying to run a zero-failure regime; he is trying to run a regime where, when there is failure, there is a path to follow. With regard to sophisticated investors, is the FCA comfortable with failure in this sector? Assuming you have eliminated the bad actors with your gateway, are you comfortable with firms failing from time to time?

Ashley Alder: We are comfortable with the notion of investment risk, clearly. An aspect of firms failing gets into compensation and the extent of compensation. You may have seen that recently we issued a set of proposals around a polluter-pays principle, mainly for personal advice firms, which links expectations of the potential redress that those firms might be in for with their capital or prudential requirements. The whole question of risk in the system is complex and we are focused on it.

Q667       Mr John Baron: Good morning, gentlemen. I wish to turn to the issue of investment trusts and cost disclosure. My interests are declared in the register.

You will be aware of the concerns around cost disclosure regulation for investment companies. We should remind ourselves that this is quite an important part of not just the market but the economy. More than a third of FTSE 250 companies are investment trusts and there are four constituents also of the FTSE 100. The concern is that the regulations encourage them to double-count their costs, not just the costs of managing the assets but the operational costs, which can make certain investment trusts look expensive. This is a gross simplification but I am setting the scene a little bit. Being expensive, they are therefore withdrawn from platforms. The investment that goes into them—they have been conduits for good private investment into areas like renewal energy infrastructure and smaller technology companies—has dried up quite considerably. This is all part of the mix.

We now have a situation where these listed equity and investment trusts have to declare costs when no other country in Europe has to do likewise. This was born out of EU regulation but even members of the EU do not abide by it. It creates an unlevel playing field.

You will be aware that the Government recognise the problem and are committed to draft SIs. One is on the statute book for the PRIIPS and another one is coming around the corner for MiFID. Although we have had confirmation in an informal meeting, can you confirm for the sake of the Committee that, as far as you are concerned, these Sis will provide enough legislative change for the FCA to act and iron out these problems?

Nikhil Rathi: Thank you for your engagement outside of the Committee room with other parliamentarians who also have interests declared in this matter. We have also been engaging with the industry. I am well aware from previous professional experience of the strength of the UK investment trust market and its uniqueness globally. Indeed, a frustration when we were a member of the EU was the fact that we could not get these passported around the European Union in the way that UCITS were passported into the UK. They play an important role.

You are quite right to point out that the underlying issue in cost disclosure is the legislation. We have been aware of this issue. The Chancellor confirmed in the autumn statement that legislation is forthcoming. We put out a statement not just informally but formally on 30 November. In light of the intention to legislate, we are able to show a degree of forbearance on the current requirements and allow more dispersed disclosures, rather than fully aggregated disclosures. In light of that, the Investment Association changed its guidance as well, which was reported to us as influencing the way some investment managements chose investment trusts. This particular technical set of issues is on its way to resolution.

I always say this about these technical points, and we hear this in the context of the listing regime and other regimes: I do not want to suggest that this technical change in and of itself will address the issue of discounts that have emerged in the investment trust market. We have about 369 investment trusts in the UK. The average investment trust—

Q668       Mr John Baron: May I stop you there? Sorry, Nikhil. I did not discuss the issue of discounts in my question to you because I realise that discounts are not just about cost disclosure, although that is a key issue, but about the state of the market and sentiment generally. That accounts for discounts as well, but it has been a key factor in investment trusts being withdrawn from platforms. In an informal meeting of the FCA, it thought that the draft SIs on PRIIPS and MiFID would be sufficient to do the job. Can you confirm from your point of view that those informal discussions of the FCA are correct in the conclusion that we came to?

Nikhil Rathi: That is our understanding. The intention the Chancellor set out in the autumn statement was to use legislation to solve this issue. It would be a shame if, when it comes through, it does not. We work closely with the Treasury to ensure it is resolved. I mentioned discounts because some of the lobbying around this had a sense that this on its own makes the renewable energy market for investment trusts return to life. Interest rates have gone up to 5% and when you get a return of 6%, the risk calculus has changed in the last two years. There are many reasons.

Q669       Mr John Baron: Yes, I take that point on board. Discount rates have gone up on the back of interest rates, but this still is a factor when it comes to cost disclosure and being withdrawn from platforms and then deeming to be more expensive than they actually are. Thank you for your reassurance that you think the draft SIs will do the job.

Can I come on to the issue of urgency from the FCA? The intention with the SIs is to move this issue on to the FCA rulebook. Is there any reason you cannot start your consultation now, when you know the SIs are coming around the corner, given the urgency of the situation? This accounts in a large part for why investment in renewables and infrastructure companies has dried up. There is a sense of urgency. Can you start the consultation now?

Nikhil Rathi: We set out last week our future approach to PRIIPS and UCITS in light of the Government’s announcements in the autumn statement. I need to look at the detail to understand whether that covers all the points that you raise, but we engage closely with the industry to make sure we address the points. At the same time, it is unusual for us to confirm forbearance. We have put out a statement saying we will not implement the law as it stands so that firms can have confidence in this coming period, until all this is finally resolved through legislation, to adjust their practices.

Q670       Mr John Baron: That was welcomed. I want to come to that in a second, but can I come back to the original question? We have only a certain amount of time to ask our questions.

There is no reason why you could not start your consultation programme, knowing that the SIs are coming around the corner. I am asking because the Government’s policy statement on PRIIPS was declared in July 2020. A year later, the FCA made a statement in consultation and then finally, in December 2022, new PRIIPS requirements were applied. That was a two and a half-year time lag. I am gently suggesting to you, Nikhil, that this is too long in this case given the urgency of this situation. What assurance can you give the market and the Committee that it will not take half as long going forward?

Nikhil Rathi: We are looking at this issue closely and we have taken the unusual step of giving forbearance, which means we do not implement the law as passed by Parliament. That signals to you that we take it seriously and want to see this resolved rapidly.

Q671       Mr John Baron: Let us come to that forbearance. It was welcome as far as it went, but can I seek clarification? Does that forbearance go far enough in your view? Will it allow investment companies not to have to declare through, for example—and one is getting a little specific here—the EMT feed when it comes to cost disclosure and the retail client, so that they do not have to double-count their costs?

Nikhil Rathi: The juxtaposition between the two lines of questioning from you, Mr Baron, and just now from Ms McDonagh goes to the point around disclosure to investors. If the disclosure is disaggregated and each layer of cost is explained, investors can make up their own minds. The problem described to us was that the aggregated disclosure was giving the impression that these were more expensive than other relative investment propositions. We have not gone as far as to say you should not disclose everything at all, but you should disclose line by line and explain what it is. Investors can make up their minds.

Q672       Mr John Baron: Nikhil, one has no problem with disclosure. Transparency is important, but when it comes to the EMT feed and the disclosure of management costs to the retail investor, these companies look unduly expensive. For example, Aberdeen Private Equity’s charge rises from 1%, roughly, to 6% on that feed. That looks unduly expensive. It is not realistic, although they are listed companies. Every listed company has operational costs, but those other listed companies do not have to declare their operational costs in such a way.

Can I be clear? Is it your understanding that the forbearance that you have given, while being transparent by way of fact sheets for all costs and reporting accounts, when it comes to the actual disclosure of costs to the retail investor via the EMT data feed—which is key and which determines what costs are shown on the platforms, to a large extent—that these investment trusts will not have to then double-count their costs, as they do at the moment, on such a platform?

Nikhil Rathi: I will need to come back to you on the detail of the EMT data feed. I do not want to give you an inaccurate answer. I am not completely across that specific point. I am happy to come back to you on that.

I make a more general point. Of course, you want to have proportionality. You do not want to have double-counting. Also, though, as we move in the listings environment—and we are about to come out in the coming period with some quite far-reaching reforms that we have been consulting on and those will be coming out before Christmas—to a more disclosure-based system, there will be more onus generally, beyond investment trusts, on disclosure. That will bring a degree of additional risk into the system and an increasing onus of stewardship of investors when they make investment decisions and an ability to discern for themselves what the disclosures tell them and inform themselves.

Q673       Mr John Baron: Okay, fine. I look forward to receiving that. Finally and more broadly—and this is where, Mr Alder, you could perhaps come in—investment trusts are listed companies. They are listed equities, at the end of the day but I sense, and many others sense, that the FCA sees them as collective investment funds when it comes to disclosure.

I suggest to you that, given that you trade the share price and not the assets, the share price already reflects the costs that are declared by the company because earnings per share and NAV get adjusted downwards accordingly. Therefore, given that we trade the share price and not the asset, unlike open-ended funds, why should they disclose their costs at all, other than how other companies like Marks & Spencer or Glaxo declare theirs?

Nikhil Rathi: They market themselves as retail savings vehicles. They advertise, “Invest in our investment trust, £250 or £500 a month”, and compete with other savings vehicles. This product is not unique to the UK but has a strong heritage in the UK and has been used as a core savings proposition for hundreds of thousands of consumers for decades in the UK. They market into the retail savings market. But they are listed too. They are—

Mr John Baron: But they are listed equities. Mr Alder?

Ashley Alder: All I was going to add is that, generally speaking, the disclosure obligations on exchange-traded funds of various types, which are in a sense collective investment schemes, do tend to be somewhat different to those on standard commercial listed companies because of the—

Chair: To be continued, we will say, about this section. Drew, also, to be continued, your section.

Q674       Drew Hendry: Thank you, Chair. I want to move on to the mortgage charter that has been agreed between you, the Government and the mortgage providers. It has been in force for about four months now. How has it performed?

Nikhil Rathi: The mortgage charter was built on steps that had already been taken since the pandemic, in particular our tailored support guidance and our guidance on how lenders should support borrowers in financial difficulty. The take-up so far has been modest. The latest data I have from the largest institutions between July and October is that there have been 17,841 term extensions and 59,189 switches to interest-only across the banks that we survey.

Q675       Drew Hendry: How many mortgages are falling into distress now and how many has the charter prevented from falling into distress?

Nikhil Rathi: Those are the numbers that have taken up the provisions. Some of those provisions were available irrespective of the mortgage charter. The mortgage charter augmented them somewhat. Our message has always been that if you can afford to pay your mortgage, you should continue to do so. We recognise that that has been a—

Q676       Drew Hendry: How many mortgages have fallen into distress?

Nikhil Rathi: The level of arrears at quarter 3 2023 was that around 138,000 mortgages have over 1.5% of the balance in arrears, which is up from 117,000 at the equivalent point last year. That remains, though, around 1% of the overall mortgage market and significantly below where we were in the last financial crisis and before the pandemic.

Q677       Drew Hendry: Okay. How many of those 138,000 has the mortgage charter prevented from—

Nikhil Rathi: The mortgage charter is not available for customers that have fallen into arrears. There is a separate set of rules around supporting borrowers in financial difficulty. Lenders can offer forbearance options and other options, but a component of the mortgage charter was for customers who are on the verge of needing support but have not already fallen into—

Q678       Drew Hendry: How many have been prevented from falling by the mortgage charter?

Nikhil Rathi: So far, July to October, if I add them up between extensions and interest-only switches, just over 75,000 mortgage holders have taken advantage of the charter.

Q679       Drew Hendry: Are there areas where you feel that the mortgage charter could do more work and could perform better?

Nikhil Rathi: The overall experience we have in the mortgage market is that this has been a challenging period. Around 400,000 mortgage holders come off previous fixed rates every quarter, adjusting from a median rate of around 2% to around 5.5% to 6%. Overwhelmingly, in light of the relatively strong income growth in the country, the majority of customers find a way to manage. That is not to say that it is not stretching. It is challenging for households, but the overwhelming majority find ways of managing.

At the moment, we see arrears levels starting to rise but they are nowhere near previous episodes. The latest repossession level was 720 in the last quarter that we have data for, which again is significantly below where they were before the pandemic.

Q680       Drew Hendry: I will come back to some of that in a moment but you talked about people switching to interest-only payments. There were fears at the launch of the charter that many people might make that switch and end up paying much more in the longer term. Are those fears being realised?

Nikhil Rathi: We were clear that you should take advantage of these extensions or switches only if you cannot afford to pay your mortgage. We also switched off some of the provisions that required banks to check repayment vehicles, which they normally did, to make these automatically available. That was the context of the mortgage charter provisions.

It will be important once the market has settled down and, hopefully, as inflation comes down that the lenders and those who have switched to interest-only for a period have a good conversation about their repayment plans in the long term. These are often long-term mortgages of 30 to 35 years.

We have in recent months published an update on interest-only mortgages generally to show the state of the market and the numbers—I do not have them with me but I can share them with you—of consumers who do not have a repayment plan. We want to avoid those numbers accelerating. It is worth bearing in mind that the average level of equity in a UK mortgaged home now is significantly higher than it was 10 or 15 years ago.

Q681       Drew Hendry: You mentioned there having discussions with mortgage payers about what they will pay in the long run. In March you told us that 32 institutions had not treated mortgage holders in financial difficulty fairly. In July you told us, “We are not seeing the scale I described to the Committee”. Has the trend continued? How are these institutions treating people?

Nikhil Rathi: The number of institutions and levels of redress we have required to be paid has mildly increased. My overall sense is, though, for the largest banks and building societies us that, in general—and this is not perfect across the board—they have been proactive in engaging with their customers. They have explained the options available. They have made additional resources available to talk about the mortgage charter. As you can see from the number of repossessions—712 repossessions in the second quarter—they are being thoughtful before they move to that ultimate decision to repossess.

I wanted to highlight one point. You will see a challenge in the numbers in the coming months. Repossessions are low and the level of arrears is rising somewhat faster. One reason is that when a household is in such distress that it will not be able to get back on its feet, sometimes selling the property is a way for them to get their debt cleared. As repossessions happen much more slowly, the arrears will build up by the time the property is sold. We have to think through that trade-off.

Q682       Drew Hendry: You talked about mortgage providers thinking about how they will treat these things. What do you expect to see from mortgage providers to ensure that mortgage holders facing repossessions are treated fairly? What are you doing to enforce those expectations, other than just having expectations?

Nikhil Rathi: We expect repossession to be considered as a last resort with the appropriate notice periods, the appropriate options offered individually in advance of that, looking at the individual circumstances—

Q683       Drew Hendry: What does that mean, though? What do you mean by “appropriate”?

Nikhil Rathi: Each case will be different but in some cases the earning members of a household have lost employment and there may be a case, for example, for allowing payment holidays for a certain period while they have a bit of time to get themselves back on their feet and see if they can find alternative employment. There may be a case for reducing payments for a certain period, looking at their savings—

Q684       Drew Hendry: I appreciate that you are trying to give me as clear a response as possible, but there seems to be a lot of maybes and expectations. What actual actions do you expect of them? How long is that payment holiday, for example?

Nikhil Rathi: We learned during the pandemic that we have to look at each individual situation. There are different options. There is forbearance. There are payment holidays. The length will depend on an individual’s circumstances, their savings and their income profile. We expect every bank with these cases going into repossession to have done individual assessments and to have offered a range of these forbearance options. As far as we can see, the largest institutions do that.

Q685       Drew Hendry: We understand that and we do not expect you to micromanage these things. That is not where I am going with this, but you must work to some sort of guidance or scale, surely.

Nikhil Rathi: Yes. We issue our tailored support guidance. We get regular reporting from the banks on how they deal with customers in difficulty, including the numbers in arrears and the numbers repossessed. When we see outlier data and it is concerning, we will follow up individually with the lender. As you said at the start, when we have seen some problems, we have gone after those lenders and told them to fix it, including paying redress.

Q686       Drew Hendry: Do you expect repossessions to be rare?

Nikhil Rathi: I expect repossessions to be rarer than they were in previous periods of economic challenge in the UK. At the moment, they are substantially below where they were before the pandemic. Before the pandemic, there was no recent quarter when there was fewer than 1,000. We are still at fewer than 1,000.

Q687       Drew Hendry: Do you expect that figure to rise?

Nikhil Rathi: There is a lag with any interest rate moves and so I expect that as arrears go up, over time repossessions will go up in both the residential market and the buy-to-let market.

Q688       Drew Hendry: Do you have any indication or thoughts about what that level might reach?

Nikhil Rathi: It is difficult to make predictions. I cannot predict what the interest rate environment will be in the foreseeable future. You will have to speak to the Bank of England on that one.

Q689       Dame Angela Eagle: I want to ask about your fit and proper regulations with respect to non-financial misbehaviour. I will start with the letter you sent to the Chair about Odey Asset Management. You say that you have closed your investigation because the firm has announced that it is winding down. Then you say, “It remains open to us to consider enforcement action in the future in relation to matters concerning our investigation”. Can you say a bit more about that? It sounds to me like you have just left it.

Nikhil Rathi: We certainly have not just left it, Dame Angela. We took the exceptional step of disclosing to the Committee, given the significant public interest in this case and the importance of our accountability through this Committee to Parliament, that we were investigating both Odey Asset Management and Mr Odey. In light of the fact that we had disclosed that we were investigating, we felt it was appropriate when we reached a certain stage in the investigation to let you know where we stood with that.

In the case of Odey Asset Management, as you said, the firm is winding down; it is closing down. The individual remains under investigation. As I said in the last paragraph of the letter, when we are in these live investigations, it is quite important that we are respectful to all parties and follow the evidence and allow the legal processes to follow their course. The moment we are able to update you with the outcome of that investigation, we will do so.

Q690       Dame Angela Eagle: All right, but you have closed it and so there will not be an outcome; or have you just said, “That is it. Because the company is winding down, we will put that to one side”?

Nikhil Rathi: We have closed the elements of the investigation into Odey Asset Management. If new evidence appears about that company, we reserve the right, of course, to reopen it. The investigation into the individual, who was of course the controlling shareholder, remains live.

Q691       Dame Angela Eagle: We know that Mr Odey passed the fit and proper tests all the way through his 30 years at this company. We know now from the investigations that were launched by the Financial Times that the scale of his misconduct and his treatment of women is quite breathtaking, up to and including serious allegations of rape. How did he manage to pass the fit and proper tests all the way through this period?

Nikhil Rathi: If you will permit me, Chair and Dame Angela, I am unable to comment on a specific live investigation. As I mentioned in my letter before the last Committee, the police have been engaged at different points during this process. The individual is not on our register and moving from being a senior manager, which was approved by us, to certified at a certain point in the process. That is all public information. Certified does not mean approved fit and proper by the FCA; it is by the firm itself.

These matters are all subject to the investigation. At the right point, I hope we will be in a position to give the Committee more information, but I should stress that we have to conduct these investigations in a manner that is fair to all parties. You will be aware that the individual denies all the allegations that have been made against him.

Chair: Of course. We will publish your letter this morning and we will move on to the wider points.

Q692       Dame Angela Eagle: We have had some evidence to our sexism in the City inquiry, which we have taken in private to protect the women in firms across the entire financial services sector from the consequences of them being open about the behaviour they face at work. It is fair to say that those of us who sat on those roundtables were shocked and alarmed at the evidence we took. Are you worried about this? What can you do? It is clear from the evidence we have taken that there has been no improvement whatsoever in the barrage of problems that female workers in the City face at work in the last 20 years. It is just as bad. Some of it is truly alarming.

Nikhil Rathi: Yes, we are concerned about these reports. We are concerned to ensure the UK financial services are safe for women to work in. We have been clear that we consider non-financial misconduct to be relevant to the assessments of fitness and propriety and our judgments around the governance and culture of firms. We are probably the most proactive conduct regulator in major jurisdictions with the approach we have taken. I am not saying it is sufficient but we are the most proactive.

We have to work with questions within the legal framework as to how far we can go. We touched on one case last time about child grooming, which is different to the evidence that sexism in the City has looked at, where the court was not with us when we sought to determine that that conviction was relevant to fitness and propriety. We were able to prohibit the individual on other grounds. We have to demonstrate that the conduct is specific to the activity that an individual is seeking authorisation for.

That is why, as part of our diversity and inclusion consultation, which is open and subject to vigorous debate, we have put some proposals to clarify our criteria around non-financial misconduct so that we can have some tighter guidance around this. We recognise that at some point that will be tested in the courts.

Q693       Dame Angela Eagle: You have targets around diversity, which are good as far as they go but they do not impact on this issue. They refer only to companies that have 250 or more employees, whereas we saw clearly in our evidence from the roundtables that smaller employers have the same, if not much worse, issues with sexism and misbehaviour at work.

We came across the phrase the entire time, “bad apples”. We are talking about sexual assault here, sexual harassment, bullying that comes after that. The bad apples are known. Everyone knows who they are. If there is an event, the person who has complained about it effectively gives up her career. She has to leave the company. The bad apple may also be moved on, either to another department or to another firm. There is no way of preventing that trail of destructive behaviour carrying on.

Ashley Alder: A problem that comes through clearly is, from a woman’s perspective, when she encounters this sort of behaviour, who does she turn to? We have noticed that without doubt women can turn to a number of authorities. They can go to the police, a labour tribunal and suchlike. That is not helpful at all.

Looking forward, as Nikhil as said, I am sure we are at the forefront of financial regulators around this. First, our DNI consultation has a section dealing specifically with the question of non-financial misconduct, including this sort of misconduct, and fitness and properness. Second are the obligations around this that we believe should apply to firms under their threshold conditions to operate. Third is the question of whistleblowing.

Q694       Dame Angela Eagle: I will come on to whistleblowing. We talked to women who have been subjected to this and have tried to support other women who have been subjected to bullying, sexual harassment, sexual assault and worse in some cases at work. It seems that the entire burden is put on them to whistleblow or somebody who is supporting them to whistleblow and that that is like a nuclear button, because if they whistleblow they lose their careers. Dealing with this in that way cannot be acceptable. You are saying, “If this happens to you, you have to leave the industry,” because that is the effect of whistleblowing. Then the bad apple moves department or moves to another company and carries on. Can we deal with this more effectively rather than asking the victims to give up everything on the off chance that it might have an effect?

Nikhil Rathi: A whistleblower certainly should not feel that their identity is under threat and, as a result of blowing the whistle on misconduct, feel that they should leave the industry. We seek to make clear that we assess all whistleblowing reports that come to us. We protect confidentiality. We seek to deal with the situation sensitively. We have different mechanisms. One is—

Q695       Dame Angela Eagle: But can you see how difficult it would be for an individual woman who is subjected to this, who might want a career in the City and finance, to have to go to the regulator to whistleblow about her own company, which may well destroy other people’s careers? There has to be some way of dealing with this more coherently. We know that in the last 20 years none of this has got any better, even though women’s experiences in other areas of the labour market—not necessarily this building—have got better.

Nikhil Rathi: Employment law in the UK requires, first and foremost, companies to have strong procedures in place for these issues around bullying, harassment and sexual misconduct to be reported within the organisation and—

Dame Angela Eagle: I am talking about outcomes, not procedures, because procedures can exist and not be effective.

Nikhil Rathi: The issues you describe are societal and perhaps not just for the financial services sector, although we are certainly attuned—

Dame Angela Eagle: They are worse in the financial services sector.

Nikhil Rathi: Absolutely, which is why we have come forward with our consultation. It is a consultation and you will have heard a range of views about the extent to which the regulator should or should not step forward here. We have put a set of proposals out.

I hear what you say about 250 employees and the fact that our data requests go only for the largest companies. The non-financial misconduct proposals apply to everybody, large and small, but there is always a debate about the proportionality of asking for data from small firms because the relative cost to them is significantly higher.

We are open to hearing the Committee’s views on this. We recognise that we are entering contentious territory. We have been following your inquiry and the evidence that has been public closely. We will be interested in how you think we should go forward here, as one of our key accountability stakeholders.

Q696       Dame Angela Eagle: Briefly, perhaps tougher consequences for those who break the rules might be a good start.

Nikhil Rathi: We need the courts to back us up.

Chair: Thank you very much and we will definitely continue this given that our inquiry is still open.

Q697       Anne Marie Morris: First, Mr Alder, we all welcome your consultation on the new FCA rules on maintaining reasonable access to cash, but a couple of areas do not seem front and centre of this that perhaps I might raise with you for you to consider as you finalise these rules.

The mechanics to ensure that when a bank branch closes a community continues to have access to cash is exercised first through LINK, which decides whether a hub is appropriate, and secondly through Cash Access, which then in theory delivers the hub itself. I have practical experience, which I would like to share with you. In Dawlish, we are endeavouring to put in place a hub, but the challenge is that Cash Access and LINK have no contractual link.

LINK is regulated by you. Cash Access is not regulated by you. No contractual arrangement ties Cash Access to LINK. Consequently, no key performance indicators or mechanisms hold Cash Access to account for delivery, which means that the mechanics are not there, albeit the intention is that we have a seamless process—a branch closes and then we have, ideally, a permanent hub or, worst case, a temporary hub. The timelines and the protocols for communication are not there.

In our case in Dawlish, there are potentially three spots, which is good news, and three businesses impacted, but instead of a protocol for communication, a lot of whispering goes on, which has damaged the commercial interests involved and damaged the local community, who do not know what is happening. I am asked what is happening. I have endeavoured to contact Cash Access. I get no response to telephone calls, letters and emails. It is, it seems, probably under-resourced.

If this is to deliver, we need to look at those contractual regulatory arrangements. Mr Alder, is that currently in scope? If it is not, might it be?

Ashley Alder: You will have seen that we issued our consultation paper on this topic on 7 December and so that in earnest kickstarts the drive towards the point at which banks are designated around the concept of reasonable provision of free cash deposit and withdrawal services. We operate within that envelope.

We are clear that the local area mechanisms or triggers around how that develops in practice are fairly complex because, as you say, it involves a number of actors, whether it is the designated banks or the LINK system for the ATMs and so on. Speaking from an FCA board perspective, how those triggers operate in practice to ensure that the organisation supervises effective co-ordination and how that is delivered—it could be contractual, it could be other mechanisms—will be crucial.

We know the intent of this and the desired outcome. How we achieve it within the framework that has been decided is absolutely crucial. We know the distinction between policy objectives and implementation and execution. We will look at that carefully. From a board perspective, that is all I can say right now because we are heading towards the point at which that will happen next year.

Q698       Anne Marie Morris: I will move on to another challenge with how the current system is set up. The current position when you look for a site is that it has to be leasehold, it has to be a maximum size and it has to be ground floor. There are all the usual things you expect in today’s world to ensure that everyone has access, whatever their abilities or disabilities. In many high streets—and in this case I look at Teignmouth, where I am also trying to establish a hub—we find that freehold properties are available but not leasehold properties. People do not look to take it on. They want to dispose of the sites that they have if they are getting out of the high street.

The second challenge is the number of feet, which I am sure has been purposely designed as the minimum and the maximum that could be afforded, which is why the limits have been set where they are. As a consequence, if you cannot find a premises that is leasehold and falls within the size parameters and location parameters, you end up unable to satisfy the obligation to deliver a hub.

Will there be built into the rules a way of flexing those requirements? I appreciate the financial implications because the pot is provided by the banks together and the spending is to come from within an envelope, but finding that you cannot deliver the hub because you cannot find the property puts you in a difficult position, particularly with the policy objective.

Further, there is no real thought as to how, if you cannot find a property, looking at temporary accommodation might be achieved because many people do not want suddenly to lose the income they currently generate for a temporary contract. It might sound like an easy fix but it is not. If you do find temporary accommodation, how long is that for? At what point do the rules have to change to ensure that a permanent site can be found?

Is it in scope to look at the rules? Their inflexibility and their lack of relationship to what happens on the ground may result in an inability to deliver the policy objective.

Nikhil Rathi: Thank you for looking at our proposal in such detail. We have it out for consultation until February and so we will take away all the points you have raised this morning and consider them.

The fundamental point is that, ideally, regulation should be the last resort. We want the banks to get on with this and get on with the establishment of banking hubs. Yes, we are putting in a regulatory framework where we can act if they have not done so. We have written to them previously to say that banking hubs should be accelerated. Now that message is starting to land and some acceleration is coming.

We are not putting in rules around leasehold and freehold and particular tenure of premises. We are putting in rules around outcomes. We are asking the banks or the designated co-ordinating bodies to make sure those outcomes are delivered. Within their frameworks they may have agreed between them that they will focus on one type of property, leasehold. They are one of the fastest-growing tenants on the high street at the moment. We need to think about whether that gets in the way of delivering the outcome, listening to what you described, to make sure they deliver on the regulatory obligations.

I cannot go further now without understanding the details more specifically, but I emphasise the underlying point that they need to get on with it and they do not need to wait for us to put rules in place next year.

Chair: Can you make one of the rules be that Cash Access agrees to meetings when MPs ask for them?

Q699       Anne Marie Morris: I have one final question still on the cash piece. A frustration many of us have is that, currently, if the last bank standing does not provide services to the business community, there is no entitlement to a hub. It seems to me, and to many of us, that precisely that community needs to be serviced. Will you look again at the nature of the last bank standing and potentially look at a hub offering, whatever the bank is, what nature it is, what it offers, so that every community can access a hub? Few communities do not have businesses.

Nikhil Rathi: I will take those two points. Actually, Chair, parliamentarians will be able to make requests.

Chair: You can make requests, but just not successfully.

Nikhil Rathi: In law, there will be requirements. Interested parties can make requests and they will be required to respond within a certain timeframe. I hope that ameliorates to an extent the issue that you describe.

We have specific proposals for the last branch in town situation, where there needs to be a more involved Cash Access assessment. Part of that Cash Access assessment includes the availability of deposit services for businesses and considering the options, whether that is a post office or a specific deposit hub. That is not in force at the moment. We are consulting on these rules. It closes in February. We will hear all the feedback and then, in light of the legislation empowering us and the Treasury’s national policy statement, we look forward to making rules as soon as we can in 2024 to address exactly that question.

This is not just about retail consumers. This is about businesses, too. Businesses being unable to deposit cash causes great difficulty for customers who want to use cash in local businesses.

Q700       Anne Marie Morris: Can I clarify that that will extend to the potential of a hub? For businesses, the facilities that a hub potentially offers are a lot more than just the ability to deposit cash.

Nikhil Rathi: It extends to the outcome we expect to come out of the Cash Access assessment and the arrangements put in place. The outcome needs to deliver deposit services as well as withdrawal services. That outcome could be through a hub, a post office or other available mechanisms. The years ahead will see more innovation. We focus on that outcome being available for local communities using the range of options on the table.

Chair: Thank you. It has been a long session and we still have important topics to cover, but you will be relieved to know that I will follow up some of them with you in a letter. Do any other colleagues want to catch my eye at this stage?

Q701       Dr Thérèse Coffey: Briefly, looking at your annual accounts and other reporting, the loss overall, which we assume is by the pension scheme, is concerning. I am sure your officials will be delighted to know what plans you have to counter that deficit.

More concerning is the staff turnover rate at 17%, which is still significantly higher than pre-pandemic levels. What are you doing about that and why is it particularly high? You have reported that 13% of ethnic minority staff received a bonus compared to 24% of white staff. Could you explain a bit about that?

I am thinking about your people because, ultimately, you need the best people to help manage the FCA for consumers and companies more broadly.

Nikhil Rathi: If I take the pension deficit question first and then go to the people questions, of course we stand behind our pension scheme. There is no issue with existing pensioners being paid. We have a plan to ensure it is fully funded by 2030. We expect to achieve full funding before that, as agreed with the trustees. You will be aware from your previous roles that the regulation does not expect a deficit to be sorted out in one year only because that would detract significantly from the operations of the organisation. We have a reasonable plan and we are comfortably on track to meeting that.

Overall, on staff turnover, we have been through significant change over the last two years. We had low staff turnover in the year of the pandemic. It rose the year afterwards. We went through some significant reforms, including around pay and performance management and reward, including withdrawal of our bonus scheme. You will see that our overall pay gaps last year for gender came down from a median of 20% to 14% and the ethnicity pay gap came down from a median of over 20% to 17.5%, which are significant moves in light of the structures we have put in place. We have been tackling those pay gaps.

In the 12 months to the end of November, our voluntary turnover was just over 9%. It is falling month by month. I anticipate that this financial year it will be around 8%, potentially even lower, which will take us to the lowest we have seen, other than the pandemic year, since the FCA was established.

Chair: Thank you very much. Anne Marie, you had one last question?

Q702       Anne Marie Morris: Yes. It will be quick. Mr Alder, I do not expect you necessarily to have an immediate answer to this and I am happy for the response to be in writing.

Is the work of Flood Re and its efficacy currently in scope? The FCA has a role under various bits of water legislation and financial services, financial markets regulation to regulate the insurance market. Flood Re is deemed at one level a success in that an average of five offers is available to those in flood-prone properties, but there does not seem to have been much of a measure of the take-up, which from the evidence I have seen is lower.

As you rightly said on the cash question, it is all about outcomes. If the Flood Re’s operation means that the people who need to be covered are not being covered and if we see, as we do, a challenge of putting in place flood prevention, which was going to result in Flood Re ending in 2039 but is now changing, that probably also gives rise to the need to review any future Flood Re after 2039, when it technically comes to an end. Is it in scope? Would you welcome if I articulated on paper the concerns that I have about its operation?

Ashley Alder: Sure. I will need to come back to you on that, but we will.

Nikhil Rathi: I can add a little bit. Flood Re is authorised and regulated by the FCA and PRA for reinsurance purposes. The data we have shows that so far 99% of householders in properties at high risk of flooding can still find quotes from 15 or so insurers, but there are some inclusions. This scheme runs until 2039 and so we need to think about what will happen in the longer term on it. Some recommendations have been made to the Treasury about how it may wish to take this scheme forward. We can follow up on the detail with you.

Chair: Thank you very much. On insurance, it would be wrong for me not to flag that we get a lot of complaints from constituents at the moment about the increases in policy costs, which I am sure you are well aware of. Also, when you can get a renewal from an insurer, you can then find much more cheaply, from the same firm, the same policy on one of the comparison websites or renewals from insurers that automatically renew you for a massive increase in premiums or renewals from insurers that have substantial hikes quite surreptitiously. I flag to you that although we have not had time to give that justice today, it is an incredibly important topic.

I will also write to you on the securitisation consultation, which we are interested in, and on the money laundering reform. As you know, we could have spent time with you on a vast range of topics. We started late and I appreciate that everyone’s time is precious. I will bring this oral session to an end.