Oral evidence: Financial Conduct AuthorityTuesday 4 February 2014, HC 1058
Oral evidence, 4 February 2014.
Chair
Thank you very much for coming to give evidence this morning. Can I begin by asking you, Mr Wheatley, whether you agree with the Governor’s remark about the bonus cap?
Martin Wheatley
I think that the Bank of England have been fairly consistently—including the previous Governor and the current Governor—of the view that trying to impose a fixed percentage against a salary would have perverse consequences and I think that is what we are seeing. It removes the ability that we have always believed in quite strongly in the UK that malice and clawback are important parts of the accountability system. Insofar as they were the comments, yes, I do agree.
Chair
I just want clarification that there is not a cigarette paper between you and the PRA on that issue.
Martin Wheatley
On bonuses in general, I think we have very similar—
Chair
I am asking just about the bonus carrot. We will come on to other things in a minute.
Martin Wheatley
Right. You haven’t said specifically. As I say, in my understanding, the view that the European structure of a fixed percentage is the wrong one—I would agree with that if that was the specific question, the specific reference.
Chair
Yes. You have seen the Governor’s remarks?
Martin Wheatley
I cannot remember the specific recent remarks. I know I have seen many remarks from the bank on the bonuses.
Chair
They were very widely reported, but anyway, I think we have the general gist of the answer to that question. I sent you a letter on behalf of the Committee with a large number of questions a few days ago and I—none of us—cannot possibly expect you to answer all of those fully in written form before this meeting, but I am sure you will get down to it in due course. In the meantime, I would like to pursue one area with you, which relates to remuneration. You fined Lloyds £28 million for mis-selling, and this was sales-based incentive schemes. Is it the FCA’s view that the Lloyds’ sales-based incentive schemes were part of the cause of the mis-selling?
Martin Wheatley
I think it is fair to say that our investigation did not specifically look at the outcomes; it looked at the design of the systems and the control over those systems. Our view was that there were very poor controls, it was a poorly-designed system, but that is not the same as saying that specific mis-sales resulted from the design of that system. There were cases that we found where there were, but we did not, in a sense, look widespread at something like PPI and say, “How far was PPI related to the sales incentives?”
Chair
You have not looked at whether the sales-based incentives caused the mis-selling?
Martin Wheatley
There were examples. What I am saying is we did not look and try to do a widespread review as to whether the sales practices at Lloyds were strongly linked to the mis-selling. I think our judgment was they probably were, but we did not feel that we needed to do that to make the case.
Chair
Okay. I will just try asking the same question in a slightly different way: have you formed a view—it is pretty much the same question I began with—about whether the sales-based incentives played an important part in triggering the mis-selling?
Martin Wheatley
I think that they did. Sorry, if that is the question, yes; I think the answer is yes.
Chair
That was the first question, yes.
Martin Wheatley
Yes.
Chair
Okay, they did. Do you think that those incentives therefore did serious harm to Lloyds’ customers?
Martin Wheatley
I think they resulted in a sales-driven culture that did do serious harm to Lloyds’ customers, yes.
Chair
So the answer to that is yes. Do you think that therefore people who are beneficiaries of such sales-based incentive schemes should be included in the certification regime?
Martin Wheatley
That is a difficult question. As you know, we will be consulting on the senior persons’ regime and the certification regime later.
Chair
We are just talking about the certification regime here. Let us put to one side completely the senior persons’ regime, although we now have to call it the senior managers’ regime, for reasons only lawyers are able to understand.
Martin Wheatley
Our understanding of the way the certification regime will work is that it will extend to people who put the reputation, I guess, of the organisation at some risk. I would honestly say we have not formed a view as to how far that should go down into the organisation. Many of the people that we looked at in the sales incentive structures were, in the broad scheme of things, relatively junior people within the organisations. They were recipients of badly-designed schemes. In many cases I think it is true to say they were not themselves trying to do something wrong, they were simply trying to run their bonuses to the scheme that had been devised for them by the bank.
Chair
The conclusion of the Banking Commission was that all those people who could do serious harm to customers, to the bank or to the market should be included in certification and only those people, not people who could not do harm. Do you agree with that conclusion of the Banking Commission?
Martin Wheatley
Yes, I do.
Chair
In that case, since you have said that these people who were incentivised by the sales-based incentive schemes did serious harm to Lloyds, I cannot understand why you are hesitating about just saying yes, that these people should be included in certification. I am doing the preliminary questions. I want to get to the substantive part in a minute. I just want to be clear at the start about the thinking of the FCA on this point in relation to the recommendations of the Commission.
Martin Wheatley
Okay. I think the thinking is that we have not, frankly, extended it to how would that be implemented in practice. As you know, our aim is that we will consult later this year, so our aim is that, by the summer, we will have published a consultation paper and we will set out in that exactly how we think that should work.
Chair
I want to come on to that in just a moment, but before I do, I want to cover this core question, and I will ask it again: do you think that all those people who can do serious harm should be included in certification and do you still think that—you said it a moment ago, so I presume you have not changed your view—these people in the sales-based incentive schemes did do serious harm, in which case they should be included?
Martin Wheatley
The difficulty I am struggling with is that clearly the system as designed and implemented as a whole did serious harm, but the people who were operating to these sales-incentive structures were very often quite junior people, frontline staff, who did not think or know that they were doing something wrong; they were simply doing what their bank asked them to do. I would not want to be drawn at this stage on should every one of those individuals be included within the certification regime until we have done further work.
Chair
But they were incentivised to sell a product in a way that did serious harm to customers.
Martin Wheatley
If you ask them, I think many would say they did not know they were doing serious harm. They were selling the product that their bank had told them to sell.
Chair
I did not ask whether they knew about it, but they were incentivised to do something that led to serious harm to customers—correct?
Martin Wheatley
It led to mis-selling to customers and therefore created consumer detriment.
Chair
Serious consumer detriment. I am trying to use the phrase that is now in law in the Banking Act. You are moving back to language that is, if I may say so, FSA speak. What I am trying to do is use the language that is now on the statute book as a result of the recommendations of two commissions and I am trying to clarify the extent to which this is now in the bloodstream of the FCA. If I may say so, the messages I am getting back across are not the ones I am hoping to hear. I have only done the preliminaries. I am just trying to clarify whether these are groups of people in whom you, as a result of this fine, will want to be intensely interested in.
Martin Wheatley
Again, if I can, to clarify, clearly in aggregate it created serious consumer detriment, and there will be people in those banks who designed those schemes that in the future we would want to have full accountability, who implemented, who monitored those schemes. I think it is hard to reach from that that every single person who was on the recipient end of that scheme should be part of the certification regime, unless—and as I say, we still have to work through this process—we decide that anybody with any selling responsibility at all should be part of that regime.
Chair
The Parliamentary Commission on Banking Standards looked specifically at the use and the scale of sales-based incentive schemes, and in some detail. We recommended that the FCA limit the use and scale of these and we set out how that should be done: certification supporting the regime that will ensure that remuneration does not mis-incentivise activity; reward should be linked to the maturity of the risk. We set that out in some detail, but your response was—you have touched on it—and I will quote it now, “We are conducting thematic work on sales-based incentive schemes, after which” not within which, but after which, “we will consider the need for high-level remuneration principles for UK staff”. To be frank, that did not give much confidence to banking commissioners that you were taking this forward, and now that you have announced a record fine for £28 million in exactly this area, the sales-based incentive scheme area, it strikes me that you might have been wanting to reconsider the urgency of this work, put it higher up your set of priorities.
Martin Wheatley
No, it is very high up our priorities. We have done a lot of work in this area. The Lloyds fine that you referred to resulted from a piece of work that we started in 2012, where we reviewed the practices of a broad sample of firms across the financial sector. We found very, very poor practice, frankly, across the whole sector. We sent some strong messages to the industry and we took forward one enforcement case, which is the one you referred to. There are two other enforcement cases with sales incentives as part of the case. We published new guidelines in January last year and we have been carrying out a thematic review over the course of last year, which we will publish shortly. What we found is that all the major firms have redesigned their systems substantially, some to take out sales-based incentives entirely, some to reduce the proportion that is based on sales. We have said that as a result of the work that we have done, we will publish our findings and then we will look at whether we need to do further work. But I would not say it is not a priority. We have put a lot of effort into this and, frankly, we have seen a lot of change in the market.
Mr Ruffley
On 20 May last year, The Guardian reports you as saying, “Anyone earning more than £420,000 a year, €500,000, any attempt to cap bonuses at 100% of salary for those people could make it difficult to punish bankers by clawing back payments when things go wrong” but that seems fairly self-evident. Could you tell us where you think the European Court of Justice case is getting in relation to that and other objections to the bankers’ bonus?
Martin Wheatley
Clearly, as in the earlier questioning, the UK has had a different position from the EU in terms of bonuses. I cannot tell you where the case is progressing to, because frankly I do not know the inner workings of the European Court of Justice.
Mr Ruffley
But if we win the case, where will the UK end up?
Martin Wheatley
Were the case to be won, we would end up with a system where the UK might adopt something very different, so its remuneration code would look very different. Frankly, we should not therefore have what is reported at the moment—the incentives of most major banks to increase their base pay to compensate people for not having a bigger bonus, which seems a very perverse outcome—and we would have a position whereby we can claw back and exercise malice, which is the position that we always wanted. That is “if”—I think it remains highly debatable whether the UK will win that case.
Mr Ruffley
In this conference in May last year, you also said, “The last time regulators attempted to restrict bonuses, pay of middle-ranking bank staff, vice presidents, had gone up by 100%”, you are quoted as saying that, “and the same thing will happen again”. Can you just remind us of that occasion?
Martin Wheatley
In 2009, when the FSB had sought to limit pay, there was an attempt to try to cap bonuses and my experience was—and it is anecdotal, rather than being very strongly evidence-based—that most banks were putting up the base salary of the vice president level in some investment banks by 100%. If you believe what is reported in the press, that is happening again. People are finding ways to pay a cash amount which moves people outside the caps that are being structured.
Mr Ruffley
Would you describe this as self-defeating, those who believe in the bonus cap that we currently have in front of us?
Martin Wheatley
I think the reaction has been self-defeating. It has put up the fixed cost within firms and, frankly, we would rather have a bit more flexibility. It has removed the regulatory ability to have a significant impact post the event and I think the UK has constantly said it is not an ideal outcome.
Mr Ruffley
On the current remuneration code, it only applies to material risk takers and those individuals who pose the greatest risk to the financial stability of an institution. The FCA says in its October response to the Parliamentary Commission on Banking Standards, “Applying the code to other individuals would go well beyond the international standards of remuneration”. If we go beyond international standards, can you describe what damage that might do to the City of London?
Martin Wheatley
If I am honest, I do not think it is damage to the City of London per se.
Mr Ruffley
But you are obviously a bit windy about going well beyond the international standards of remuneration. Can you just unpack what you mean by that?
Martin Wheatley
I think just in terms of effectiveness, and again coming back to my answers to the Chairman’s question, what we have been looking at in organisations are not just the very high-paid risk takers who run derivatives desks and the rather complex operations, we are looking at front of house sales staff of banks, insurance companies, asset managers who are operating throughout the UK, not just based in the City of London. Our question was one of proportionality: is it appropriate that the regulator should do the job of assessing what bonus somebody relatively junior in a bank should be paid, or should we set some guidelines and expect the organisations to do that for themselves? It is very much the latter that has been our approach for those people outside the risk-taking category.
Mr Ruffley
How many firms for which you are the regulator have to comply with the bonus cap, as set out in CRD IV?
Martin Wheatley
I cannot tell you the precise number.
Mr Ruffley
Can you help me, Mr John Griffith-Jones?
John Griffith-Jones
No, but it would be the banks. It must be 1,500-ish.
Mr Ruffley
I mean in percentage terms.
Martin Wheatley
Oh, of the total firms that are regulated by us, it is a relatively small percentage, but our guidelines on pay cover all the firms regulated by us, so we regulate 27,000 firms as of today. Even though the CRD IV applies to a very, very small number, our guidelines apply to all those firms, so whether it is wealth managers, IFAs, insurers, asset managers or bankers.
Mr Ruffley
Yes, you have the power. According to your consultation paper, in relation to the implementation of CRD IV, you can deem it necessary to apply a bonus cap to a firm, can’t you? You have a bit of discretion there.
Martin Wheatley
Yes, there is some discretion.
Mr Ruffley
How do you exercise that? How do you decide whether a firm’s staff should be subject to a bonus cap?
Martin Wheatley
We have not as yet, so at this stage we have our guidelines that apply to all firms and we use those guidelines to effectively allow us to ensure that firms themselves operate good practices. We have not decided to extend the CRD IV definition beyond effectively the banking sector, which is—
Mr Ruffley
Okay, you have not made a decision, but can you tell us what factors you will be looking at when you decide to deem a bonus cap appropriate in relation to any business?
Martin Wheatley
I think we would have to form a view that it was significantly distortive of the activities of that firm and therefore outcomes for consumers in order to implement something like that. We would probably want to do it across a sector as a whole, rather than individual firms within a sector.
Mr Ruffley
You said “distortive”. I am trying to get a handle on what criteria you will be looking at specifically, so you have said it would be sectoral rather than individual firms, but what are the options in that respect?
Martin Wheatley
Again, it comes back to evidence, so we would need to have evidence that the existence of a cap was distorting outcomes and creating consumer detriment or the lack of account was creating consumer detriment. We would do that through our normal supervisory work or investigative work if we found that there was cause to suspect that that was the case, but we would not jump to a conclusion that said a cap was necessary to be applied across the entire financial services industry. Frankly, it sounds to me disproportionate.
Mr Ruffley
But there is a considerable amount of uncertainty resting in that answer. It seems to me that there do not seem to be any hard and fast criteria that you will use in deciding whether to apply a bonus cap. How are you going to make this transparent? I can imagine parts of the industry sort of howling when you suggest that a bonus cap is being applied to them because their practices are distortive.
Martin Wheatley
We would be very transparent, and so our approach is that when we reach findings, we always will publish a final decision that includes a lot of detail about that decision. When we carry out a themed review across a sector, we will publish specific findings as to what we have found and the conclusions.
Mr Ruffley
When do you expect your first themed review on this particular point to come out?
Martin Wheatley
I am not sure that we have a particular themed review on this point.
Mr Ruffley
It is quite a big point, isn’t it? You have very wide discretion, as you yourself have admitted, where you can deem it necessary, where there is distortive activity, and you have indicated it might be sectorally-based rather than individual firms, but when are you going to start talking about the exercise of this discretion in your themed review?
Martin Wheatley
We will be consulting on the remuneration code later on this year, so by the middle of this year.
Mr Ruffley
Later in this calendar year, yes.
Martin Wheatley
Later in this calendar year we will be doing a piece of consultation on whether and how far the remuneration code that we currently have needs to be extended.
Mr Ruffley
I just have one final question, which goes back to the Chairman’s line of questioning. The Parliamentary Commission on Banking Standards said, and I am quoting, “There should be a presumption that fines on banks should be recovered from the pool of deferred compensation as well as current year bonuses. The recovery should materially affect to different degrees individuals directly involved and those responsible for managing or supervising them, staff in the same business unit or division and staff across the organisation as a whole”. Can you point to any action you are taking to ensure that fines are not just something that the shareholders have to divvy up for, but that payment of fines does fall on the relevant perpetrators of misdeeds?
Martin Wheatley
The actions are that each year when it comes to bonus award time, we are given a schedule by each of the major institutions of the awards they intend to make to the individuals, so it is a very detailed schedule by individual, with indications of where clawback or malice is applied. In particular we have seen that over the last couple of years for LIBOR fines, for PPI, where real money has been clawed back, real malice has been withdrawn from people’s payments that they would otherwise have received.
Mr Ruffley
Is there a particular percentage in your mind? Do you say that in relation to fine X for financial institution Y? How do you apportion the amount you levy from the shareholders in relation to the amount you levy from the deferred compensation pot?
Martin Wheatley
To be honest, ultimately that is a judgment call. It is based on, frankly, to some degree, the individuals who remain with the organisation who were kind of reflected in the activities that we fine a bank for; to some degree it will be the seriousness of the activity we have found in a particular bank. That is a discussion we go through and we go through a very formal process to agree it, but ultimately it is a judgment call, that there is not a simple formula that works it out.
Mr Ruffley
Thank you.
Mark Garnier
Mr Wheatley, can I carry on with some of the questions that the Chairman was asking about certification of staff, particularly going back to the Lloyds Bank debacle and the fine the back end of last year? What struck me as particularly interesting about that Lloyds Bank infringement was that it happened several years after the financial crisis, so from 2010 to 2012 was the period when there was this problem going on. Under no circumstances could anybody be given any slack, if you like, for saying that this was anything to do with pre-crisis behaviour that had become endemic in banks. This is absolutely brand new, calculated, thought through carefully, sort of brave new world infringement, with no sign of conscience or corporate responsibility being carried over or lessons learnt from prior to the crisis. Would you agree with that?
Martin Wheatley
Yes. It was quite surprising, from our point of view, that the lessons had not been learnt.
Mark Garnier
Okay. That is very interesting. What troubled me about your answer to the Chairman, particularly about the certification, was your approach to the individual staff who were selling the products. You seemed to be giving almost a sort of post-modern Nuremberg defence that they were only responding to bonus incentives as opposed to obeying orders, but are you familiar with the three lines of defence model that banks run?
Martin Wheatley
Yes.
Mark Garnier
You would agree that the first line of defence, which is where staff deal with consumers, is absolutely about driving the good standards and that is the starting point of good standards?
Mark Garnier
That is a nod, for the record. Getting this sort of, “I was only obeying bonus incentives” argument of these people is completely the wrong answer, is it not? What you want is those people on the first line of defence—those people who should be certificated staff—turning around to their bosses and saying, “Hang on a second. This does not smell right. I do not understand why it is wrong, but it does not feel right” rather than giving them the excuse that they were only obeying incentives and therefore it was okay to do it. Don’t you agree with that?
Martin Wheatley
Obviously, in the Lloyds case, what we pointed to was the most extreme cases. In those cases, you will have seen that there were individuals who, because of the cliff-edge nature of the awards, in the last week or last day would be selling to—in one case—themselves, a colleague, a wife. That is clearly at one end of the spectrum, absolutely, but a lot of the sales practices that we have seen over a number of years were people selling products that were not obviously to them as individuals the wrong thing to be selling or bad things to be doing. They were simply trying to reach their sales target for the month and that is where I would question whether—
Mark Garnier
But my point is this: they were selling product in order to meet sales targets. Should they not have been in a position where they are compelled, if you like, through a certification process to come back to their bosses and say, “No, no, no, this incentive scheme does not work”? During the course of the Banking Commission, it was practically impossible to find any mechanism whereby those frontline junior staff could do this. We checked with the unions to see what they had said, and the unions said, “We kind of understand, we kind of get the problem, but we do not really understand the dynamics, because that is not what we do”. We could not find any mechanism whereby the regulator would be able to pick this up. Whistle-blowing was pretty scant and not very well-supported. Now we have you as the chief executive of the regulator giving us, as I say, this Nuremberg defence for those individuals. This is not going to drive better behaviour, is it?
Martin Wheatley
I hope it is not a Nuremberg defence. Genuinely there are quite diverse ranges of behaviour that happened. There is, at one end of the spectrum, behaviour that clearly should not have happened, should never have happened, certainly should not in 2012, when you would hope the lessons of the past have been learnt. In many, many cases there are people with sales-incentive structures that are not obviously poorly designed, but taken to excess lead to bad outcomes. That is where we have introduced guidelines and where we have seen all the major players revise their structures. If I can come back to the point of certification, I think part of the concern—I cannot give you a more definitive answer—is we are still going through that process. We will consult in the summer and we have not yet been through our own board and internal governance process on how far we should apply the certification process and therefore what we will consult on.
Mark Garnier
All right. Can I turn to the Retail Distribution Review? I have just come from a breakfast with members of the industry. Seven years, £3 billion of costs estimated to the industry and therefore to the consumer. There has been a subsequent impact on innovation because everybody has been trying to be RDR compliant; there has been a cost to growth of the financial services industry. What does the consumer have for all that?
Martin Wheatley
I think the consumer has a much more transparent industry. I think the consumer is much better served by the structure. We have removed the commission bias that meant products were sold by some—not all, but by some—in the industry simply because of the commission that would be paid to the intermediary. We have a professionalised industry where everybody in the IFA space, the banking sales space, is qualified. We have more advisers today than we had a year ago, because we are seeing growth in the industry as well.
Mark Garnier
We have substantially fewer advisers than we had three years ago.
Martin Wheatley
Yes, because there was a significant drop in—
Mark Garnier
All the high street banks have pretty much pulled out of independent financial advisers.
Martin Wheatley
Yes, absolutely. So what we saw was—
Mark Garnier
So there is less available for the consumer.
Martin Wheatley
The mass market took a decision and backed away, so some of the high street banks. The IFA space has seen quite a big increase and we are seeing that growth, and contrary to the point that was made to you at breakfast, I think we are seeing a lot of innovation in the industry. We are seeing new technical models come along, which I think are far-reaching, in any event.
Mark Garnier
No, you are absolutely right. Hargreaves Lansdown is coming up with a new platform, and that is a very good thing, assuming you know what you are talking about. The problem is that there is now widely spoken about this large advice gap; you can reword it and call it a savings gap. If you are somebody with £75,000 of income a year or £100,000 of capital investment, you are unlikely to get any meaningful holistic advice from advisers. Commission bias, just following up on that: there is a legacy of people who have been put into products before the Retail Distribution Review came along with trail commission. Now they are being left in those products, when in fact perhaps the advice would be better to move to a different product, so you have increased commission bias because you have commission lag bias, if you like, because people are sticking with their old products because it is better for an adviser to leave them there than it is to move them on.
Martin Wheatley
A couple of points, and maybe John will comment as well, because I know John has some views on this. In terms of the people who do not get advice, you have named various threshold levels. Certainly from the banks, they worked out that below a certain level, they cannot, in a cost-effective way, provide the sort of advice that—
Mark Garnier
Do you know what level that was?
Martin Wheatley
It would vary by bank, so different banks would have different numbers, but they concluded that they could not cost-effectively deliver an advisory service at those sort of threshold levels. What the banks frankly failed to do, and I think other people are doing, is try to find more cost-effective ways of delivering the sort of solution that people want.
John Griffith-Jones
I have spoken to several people and a lot of industry players have been coming to see us essentially to test out what you might call simplified advice models. What they are trying to do is get this automated so that you can go down some form of a checklist and get to an answer that may not be the perfect answer, but which is a cost-effective answer relative to the amount of money. I think talking to IFAs, the sort of cost per hour of advice is kind of £7,500 minimum, so I would not go at £75,000, based on the people I have talked to, but certainly at £25,000, when you are at £100 an hour and you need sort of three hours’ worth of advice, the front-end cost of making the investment begins to weigh heavily, whereas on a computerised machine, once you have done the set-up cost, it is essentially very little. My view is we should encourage the innovation in this area. Ultimately we will have to take the decision, “Is this good enough?” but I do not think we should let the perfect be the enemy of the good when the fundamental problem is the cost of providing advice at all. I would rather have some good automated advice that gets to reasonably simple, understandable products than to have had hidden trail commission in the past. I think it is—
Mark Garnier
The negatives that were being put forward to RDR is that it is increasingly difficult to access advice for the consumer, which we would agree; they have halved the number of banks that are participating in it and the total annual cost of ownership of a portfolio has in fact gone up to about 2% per annum, as opposed to being 1.5% per annum, because this is how the transparency of the cost had been rolled into long-term portfolios.
Martin Wheatley
I do not recognise those percentages. What we have seen is—
Mark Garnier
This is what the investment advisers were saying it is costing, so it used to cost you 1.5% of management fees to run a portfolio and now it is 2%.
Martin Wheatley
Again, my intelligence is that the funds are increasingly creating clean funds and super-clean funds that do not have bundled within them rebate charges that go back to the platform and then back to the individual. You get a very transparent charge of what you are paying to the fund manager. You get a transparent charge as to what you are paying for the adviser. You have seen in the last couple of weeks announcements from some of the big platforms, some of the funds, of pricing structures that they are introducing, which is bringing down the total cost of ownership, so the trend I think we are seeing is that those costs are coming down, but I accept entirely the point about the banks, the mass market withdrawal and what then happens to fill the advice need in that space. That is where, as John says, we are starting to see innovative models emerging in the market.
Mark Garnier
Are you undertaking a review into RDR?
Martin Wheatley
Yes.
Mark Garnier
Is that into the implementation and how that has gone or are you doing it into whether it has been a good thing or a bad thing?
Martin Wheatley
We will do a post-implementation review, so in advance of the—
Mark Garnier
So, has it been implemented properly?
Martin Wheatley
And is it a success against our original criteria, so have we seen professionalism, have we seen the removal of commission bias? It will touch on—I think it has to touch on—this question of whether people are getting advice or not.
Mark Garnier
There is a lot of criticism, as you know, about the Retail Distribution Review coming in. There is absolutely an advice gap or a savings gap, whichever you like to call it. Do you think that this is the beginning of a long-term problem that has not been resolved by RDR or do you think we are bumping along a stony patch in the road as the implementation is introduced, so that once we are over a year or two, we will work through this?
Martin Wheatley
Two things I would say. I think we are in the middle of a long-term problem, that people are saving less. I do not think that is about RDR. If you look at adviser numbers in the US and the UK, if you look at the total number on propensity to save, it has been falling, so I think that is a long-term trend. Our expectation and hope is that the greater transparency that RDR brings and the innovation that will come around it will see some reversal of that trend, but frankly, I cannot claim that RDR will solve all problems. I do not accept the contention that RDR has not been a success. I think in a number of areas it has been; in a number of areas, it is still work in progress and we will continue to see the industry evolve. The one thing I would say is that, certainly when I first joined the FSA, there was a lot of criticism of RDR. Mostly what I hear now are finer points about what RDR has delivered than not, but not the wholesale condemnation of the whole package of measures.
Mark Garnier
Is it the same people who were condemning it who have now left the industry, for example, the banks?
Martin Wheatley
No. I think the most vociferous people commenting were the IFA community, who by and large have just got on with it and made a good business from it.
Chair
Those that are left.
Mark Garnier
Those that are left, absolutely.
Martin Wheatley
As I said, the number of advisers in the IFA space has increased.
Mark Garnier
It has increased over the last year, but if you go back to—
Chair
It is down on pre-RDR levels.
Mark Garnier
Absolutely. In 2012 there was 35,073; there is now 32,690.
Martin Wheatley
That is right. What we saw was a reasonably significant drop at the start, mainly from the mass market players. In the last year, we have seen the numbers start to tick up again.
Chair
It must be to the good to get rid of the trail and to increase transparency. The question is what damage we have done in the process and whether it is going to repair itself. You talked about innovative models, and in particular e-models, for product and this relates also to banking, indeed selling vanilla products like bank accounts or basic savings accounts. Do you have a policy for deciding whether a product sold on the web by a bank or by one of these institutions can constitute an advice sale?
Martin Wheatley
In the general overall scheme of things, we do not preapprove products, so apart from a relatively narrow range of products, we do not preapprove. There are some products that we have taken the view that they should not be sold on anything other than an advised basis or some products that should not be marketed to retail. They are interventions that we have made.
Chair
Are these vanilla products things that should only be sold on the basis of advice? For example, when a bank on the web offers a bank account or a straightforward savings account, should that account be offered on the web only after there has been human intervention, only after there has been advice?
Martin Wheatley
Again, because of the way the Know Your Client rules work, there would have to be a degree of intervention if it is a new customer to a bank; if it is an existing customer, typically not. People would be able to take additional products from a bank without the need for much additional advice or intervention.
Chair
No, it is not the “much”, it is “any”. I am asking you whether this constitutes advice. It is a switch: it is either advice or it is not advice. Are these products advice products or not?
Martin Wheatley
Again, I do not think I can give a blanket answer that covers all, but in some cases there will be products sold through the web-based interface that are not advised products and there will be some that are.
Chair
There are some that are.
Martin Wheatley
Yes.
Chair
Do you require banks and other institutions to say which are which on the web?
Martin Wheatley
The ones that can only be sold on advice, we clearly require that is made apparent, that there is a not self-execution option on those, but not on others. They can be sold on either route.
Chair
So there can be no misunderstanding between the customer and the firm in the cases where advice is not offered?
Martin Wheatley
No. I think that is one of the problems. I think there is misunderstanding.
Chair
Right. I am asking you to think of ways of clearing that up and I have just made a suggestion, which is that the website should always say whether this is an advice-based product or not, and if it is not, then caveat emptor applies.
Martin Wheatley
Yes. The answer is it should be clear. I think a lot of people would feel that once they had been taken a couple of steps through some sort of guided process, they feel they have been advised, and it needs to be clear when advice is given and when it is not given.
Chair
So you think it is possible for a firm to offer advice on the web without any human intervention?
Martin Wheatley
I am not sure that we have seen that model yet.
Chair
You have just said that. That is what you just said.
Martin Wheatley
No, I thought I was saying the opposite. I was saying that, many times, with a service that is a non-advised service, a customer would still go away thinking that they have received advice.
Chair
That is my point.
Martin Wheatley
Yes.
Chair
That is what we are trying to clear up. I am only saying it for the sake of argument, but you are agreeing with me that that does not constitute advice?
Martin Wheatley
I think I am agreeing with you. There are processes, which is a non-advised process in our terminology—
Chair
This is such hard work. Let us just go to square one again. Do you think it is possible to offer advice to sell an advice-based product virtually without any other intervention?
Martin Wheatley
Yes.
Chair
Right. You do not think human intervention is required in order to—
Martin Wheatley
That is a different question.
Chair
It is exactly the same question. By saying that, you have agreed that it is possible to sell a product and offer advice without human intervention.
Martin Wheatley
Yes.
Chair
How do you think a distinction should be drawn and what thought have you given to how to draw the distinction between those that are web-based advice products and those that are not?
Martin Wheatley
I am sorry it has taken a while to get to the heart of the question, but for me it is something we spent a lot of time worrying about. It is a real concern because the distinction between a product which is advised on the web and execution-only on the web is not a distinction that people naturally and easily can determine. We are spending quite a lot of time talking to the industry about whether we need to revise our guidance to make products fall very clearly into one class or the other.
Chair
We are agreed that it is a concern. I am asking you for evidence that you are bringing some clarity to the piece. If we do not bring some clarity, given the mood in the market, don’t you think banks and other firms may withdraw from the market?
Martin Wheatley
The evidence I will give you is—
Chair
After all, why do they want to sell something that they do not think constitutes advice only to find subsequently you decide that it did constitute advice?
Martin Wheatley
There is quite a narrow dividing line between those two and what we are trying to do is work with the industry to work out how we can make that dividing line much clearer to both the consumer and to the adviser. What we are doing in this space is we have spent a lot of time over the six months talking to firms about this issue; talking to them about where it may need to have further guidance from us and structuring a paper that will come out within the next quarter that focuses on that.
Chair
Within three months we are going to have clear guidance on this issue in the market?
Martin Wheatley
To say we will have clear guidance—we will have raised the issue and we will be seeking input on it. Guidance will follow.
Chair
You are going to initiate consultation?
Martin Wheatley
Yes, formal consultation.
Chair
Okay. We are making some progress. Now, when are you going to publish this RDR review?
Martin Wheatley
Towards the back end of 2014. It is a review that we have always committed that we would do this year. It will be nearer the end of 2014.
Jesse Norman
Just a series of quick follow-up questions on points that have been raised already. Mr Wheatley, when you do your RDR review can I request that you include a cost benefit analysis of the RDR itself, however rough that may be, and also a specific analysis of how it has affected specific parts of the market differentially?
Martin Wheatley
Yes.
Jesse Norman
Secondly, will you join me in noting the irony in banks talking about products being cost effective when their own costs are so high and driven by bonuses?
Martin Wheatley
I am very happy to join you in the irony of that, yes.
Jesse Norman
Thank you. When you talk about the Lloyds’ fines that have been levied, what percentage of those were drawn from the bonus pool and what percentage were attributed to shareholders?
Martin Wheatley
The fine was in this financial year and we are in the process of reviewing bonuses at the moment, so I can’t tell you because we have not completed that process.
Jesse Norman
Do you have an expectation as to where it will lie?
Martin Wheatley
Again, I can’t give you any figures on that. It is something that we are going through at the moment.
Jesse Norman
Right, but I take it you share the widely-held view that, first, there should be a meaningful deduction from the bonus pool and, secondly, that deduction should not merely be focused on those who were involved but on the senior managers who might have set the sales incentives and also on others who, although not part of it, nevertheless can feel some of the pain of the misbehaviour of their colleagues?
Martin Wheatley
Yes. The whole concept of clawback and malice is that those people who were involved in the decision-making should suffer the consequences of our subsequent enforcement action.
Jesse Norman
Good, thank you. When you said you looked at the Lloyds situation, you said you had not gone into detail on the relationship between incentives and bad practices. Can I just say I think that is a real shame and I wish the FCA would make a detailed study of the relationship between incentives and bad practices in bonuses because there is lots of evidence across an enormous swathe of products? It is an area in which the FCA, in my judgment, has very considerable experience.
Martin Wheatley
Okay. I should clarify. We did to a degree, but what we didn’t do was a complete drains-up of the entire sales of products and whether that was entirely driven by poor practices. We found examples where we could link.
Jesse Norman
I would go further. I think, not only should you have a detailed understanding; you should have behavioural economists crawling over the different incentive schemes in order to work out how these have been handled and why they have contributed to mis-selling or to customer detriment. Another very quick question. It has been suggested there should be a cut-off date on PPI claims. Do you agree with that?
Martin Wheatley
It is a very complex one because individuals have rights and their rights would be curtailed by any cut-off and, in order to curtail an individual’s rights, there needs to be a strong case as to why we would do that. We would have to make a business case and we would have to go through full consultation about it. It is a complex case that does not lend itself to a simple answer.
Jesse Norman
Only with proper consultation?
Martin Wheatley
Only with proper consultation would that happen.
Jesse Norman
I have had three minutes so far. I am very grateful for your quick answers. We have talked a little bit about conduct. Have you made a detailed study yourself, and also Mr Griffith-Jones, of the circumstances under which the Reverend Flowers was appointed to be chairman of the bank, the FSA’s role at the time, and have you managed to satisfy yourself that such a thing would never happen again?
Martin Wheatley
I think this Committee has already taken some evidence on this. There are two levels of investigation that are underway that we are looking at currently. One is our own internal investigation, and the Treasury have asked for a review. Those processes are ongoing. I can say with some confidence that the processes that allowed it to happen in the past have now been changed and, therefore, would not allow that to happen again. In particular, the ability of somebody with a demonstrable lack of banking experience to end up in such a crucial role within a bank—
Jesse Norman
That process will not shy from referring to the ineptness of the previous procedure to the extent that it finds it to be so?
Martin Wheatley
No, it won’t shy from that.
Jesse Norman
Okay, thanks. I have a couple of specific topics I want to ask questions on. One is the money advice service. You will be aware that has been a topic of great interest to this Committee. When you looked at the money advice service in June 2012 the arrangements were considered to be inadequate by the FSA, but they became inadequate, it appears, with no change other than the appointment of a subcommittee to the FSA board. Is it plausible, Mr Griffith-Jones, that the subcommittee is going to be an adequate way of exercising proper oversight over the money advice service?
John Griffith-Jones
I certainly hope so. We have had, dare I say, quite a significant impact in the 12 months that the committee has been—
Jesse Norman
What is the evidence of that?
John Griffith-Jones
We have a new chairman. We have a new chief executive. We have a new way of doing the handing out of the debt advisory money to people like Citizens Advice. Previously this was done on an annual basis, which meant that the people working for the citizens advice bureaux did not know whether they were going to get the money next year and they were permanently under threat of dismissal. We have moved to three—when I say “we”, MAS have moved to a three-year arrangement, which I think has been very well received.
Jesse Norman
How often does your committee meet?
John Griffith-Jones
We meet formally three times a year and I either nip round and see or talk to MAS pretty regularly in between. There was some correspondence between Lord Turner and the then Treasury secretary about who was in charge of what. There is a board of MAS. It is a properly constituted board. I think there are 12 people on it, six of them non-executives or something like that. I think they should have the responsibility for running MAS well and we should have the oversight of them. I am more confident than perhaps in the report that you put out at the back end of last year that they are now on the right track. You probably saw that—
Jesse Norman
You have had an earlier report, though, which says that the service is not providing value for money.
John Griffith-Jones
No, I think it said that the—
Jesse Norman
Generic money advice, not providing value for money.
John Griffith-Jones
I think it said it was not sure whether it was, rather than it wasn’t, and they put out some statistics yesterday.
Jesse Norman
“Its provision of generic money advice is not yet achieving value for money.” The question is, what consideration have you given that and what specific steps have you taken to address it?
John Griffith-Jones
Quite a lot. I think they have an incredibly important job to do. They obviously had a strategy, which was to build, as you know, this automated computerised advice service. That links, quite interestingly, to what we have just been talking about. I don’t think it is perfect but they have had, as you probably saw in the press this morning, 10 million hits in the year—their year runs March to March. They were heading for 12 to 13 million hits. I can’t tell yet and nor can they, rather frustratingly, whether someone coming off the website gets what they want or changes their behaviour as a result of it, but I have to believe, from a cost benefit basis, that a computerised system that is widely accessible and that has a good reputation is a major step forward. Some people disagree with that.
Jesse Norman
I find those numbers hopelessly opaque. I have no idea what they mean. Can I ask you a question about competition? It is obviously an FCA requirement now to promote competition as one of its objectives. You have told us that you will make a specific commitment to act as the champion within the FCA of competition. You are part time. You are a non-executive, Mr Griffith-Jones. How can you do that and what steps have been taken to promote competition?
John Griffith-Jones
That was the commitment. I think I volunteered it and, if I didn’t, you wrote it in that I was volunteered and very happy to accept the responsibility. That was 15 months ago now. Things have moved a lot. I am no longer the only champion. I think we have generally a strong record of achievement.
Jesse Norman
What are the examples of that? Just give us some examples.
John Griffith-Jones
Okay. We have recruited two very strong people as joint head of our competition department. We have 25 people working for them, towards a target of 45. We have launched three market studies: one on GI add-ons, one on teaser rate bank accounts and one jointly with the OFT on SME banking. Those are all due to report in the first half of this year, March I think. I don’t know whether they will all come out in March. Most importantly, our board has Amelia Fletcher on it, who is a professor of competition from East Anglia University, and I would like to think that we are well on the way to injecting competition into everything we do, which is possibly the most important cultural change that we need. That is nine months. I don’t think that is too bad. Maybe it is base camp rather than summit, but it feels like we are heading in the right direction.
Martin Wheatley
Can I just add to that? We are also appointing David Saunders, who is the CEO of the Competition Commission, who will join us as a senior adviser. That is another very important, senior hire for us.
Chair
How many days a week will he be working with you?
Martin Wheatley
Typically, senior advisers, three days a week but it can be more, depending on the issues.
Chair
So you have the lion’s share of this man’s time?
Martin Wheatley
Yes.
Chair
Okay. That is very interesting and helpful. Thank you.
John Mann
Mr Wheatley, in the whole new system of financial services, oversight and regulation, the whole paraphernalia that is there, where is the consumer champion within it? Which organisation should I be looking for to find the champion of the consumer?
Martin Wheatley
I think you should look to the FCA. We have been set up as a consumer champion.
John Mann
Good. Have we or have we not just had the biggest series of quantifiable wrongdoing in the history of our financial services industry?
Martin Wheatley
Yes, we have.
John Mann
Is there any other industry in recorded history in this country that has had a comparable level of quantifiable wrongdoing, to your knowledge?
Martin Wheatley
Not to my knowledge. I don’t know what other industries have suffered, but certainly not to my knowledge.
John Mann
We have had a bit of a problem there. You are the consumer champion, but I have not heard you say anything yet about consumers. It has all been a bit dry.
Martin Wheatley
I am sorry. A lot of our work is necessarily technical and when we are in front of the Committee we get drawn into technical areas. The RDR is all about consumers. The work on remuneration structures in banks is all about consumers. It is all about getting a better deal for consumers.
John Mann
Good, because 10 minutes ago, of the 15 people who are the general public here, seven were texting and one was asleep. That is natural. I thought it was getting a little bit dry and I just wanted to make sure I was at the right meeting. So you are the consumer champion. Now, David Lawton stated in November that the Financial Services Act 2012 did not give the impetus for a radical change to the way we approach market supervision. Why is that, Mr Wheatley? You have been there all along?
Martin Wheatley
I think it was drawing a distinction within our organisation as to which bits were more affected and which less. Market supervision is effectively the oversight of, in our terms, formal markets—equity markets, debt markets, credit markets—and which are the areas that have been less affected. I do not think he was using “markets” in its much broader sense of markets for mobile phone insurance or markets for low-value home insurance. All of those markets have been massively affected. I think that was a context that was just—
John Mann
But my question is, why is your organisation saying that the Act in 2012 was not good enough when you were there advising on these matters all the way through?
Martin Wheatley
As I say, because we are a technical organisation we tend to lapse into technical language and I think you will find that David was talking about formal regulated markets like the stock exchange or the debt market. Our view is that the Act does give us significant new powers and significant new powers to benefit consumers. If you use “markets” in its much broader sense of what people buy, things like mobile phone insurance or assets insurance, those markets are radically affected by the new powers.
John Mann
He did go on to then outline the consumer protection objective. Dr Carney in Davos emphasised that one of his big challenges is legacy issues of past mistakes. Has he indicated to you, in your role on the FPC, what precisely these mistakes are in relation to your work?
Martin Wheatley
To be honest, he very much looks to us to inform him as to what those mistakes are. In terms of my role on the FPC, a large part of that is trying to make the FPC aware and, therefore, the banks aware how much of a problem that legacy is likely to create and whether that is a source of systemic risk, which is primarily what the FPC is concerned about.
John Mann
You would say to us, would you, that the consumer should feel far more confident than they could have felt in previous years about the ability of your organisation to protect their interests?
Martin Wheatley
If you are asking me, “Do they feel more confident?”, frankly, I think all the bad news about the industry does not engender confidence. It does not build confidence.
John Mann
Should they feel more confident?
Martin Wheatley
In practice, yes. The answer is yes and we have made interventions in the banking system where we have required that the banks give power to consumers to cancel their continuous payment authorities; one of the problems that payday loans were creating for individuals. We have asked the banks to not immediately put a debit on to an account if a payment does not go through because a salary cheque has not gone in. That saved the consumer £200 million. We have made the mobile insurance industry deliver real benefits and real clarity about what the products are that they offer and that is, again, hundreds of millions. Consumers have benefited hugely and that is not to count the £16 billion and counting that the consumers are getting back from the work on redress that we have done on PPI.
John Mann
It is just that in the first hour we did not hear the word “consumers” mentioned once. Mr Griffith-Jones, with your new role, is there a consumer detriment due to the incestuous nature of the relationship between financial institutions and the top accountancy companies?
John Griffith-Jones
I don’t believe so.
John Mann
When Mr Tomlinson, for example, suggests that this is a major problem, he is wrong then?
John Griffith-Jones
As you know, we are looking into the Tomlinson allegations and the Large report and we will wait to see what they say. I am not sure I would use the word “incestuous” myself, but I will wait to see the evidence that they come up with in those cases.
John Mann
Obviously you have no remit for the Tomlinson report but you have chosen to look into it?
John Griffith-Jones
Yes.
John Mann
The relationship between the top accountancy companies and the financial institutions and particularly the big banks, what are the fault lines there? What is the weakness in the system?
John Griffith-Jones
I think a lot has been done. Obviously there was an exposed weakness as a result of the crash or at least the accounting profession did not see it coming, along with everybody else. A lot of work has been done, as I am sure you are aware, by the FRC and the EU around rotation and on audit services. I do not think it would be appropriate for me to give a precise comment on either where that should or will end up.
John Mann
Of course it is. You are the consumer champion. Mr Wheatley has just told us you are the consumer champion. It is consumers who are losing out. That is what Mr Tomlinson’s report is all about.
John Griffith-Jones
I do understand that. As consumer champions, I think we have a far more direct way of protecting consumers than going via the relationship between the auditor and the banks.
John Mann
There may be other ways but what precisely are you going to do about the relationship between the top accountancy companies and the banks that Mr Tomlinson and others have highlighted as a fundamental weakness that causes a consumer detriment?
John Griffith-Jones
What I suggest we should do is analyse the evidence in the first instance and then take whatever action is appropriate once we have a firm handle on whether the allegations are substantiated and the extent of the damage.
John Mann
We have had six years since the financial crisis. The evidence is there. I am not asking you to analyse the evidence. I am asking what you, as the consumer champion organisation, are going to do about it.
John Griffith-Jones
I have to go back to where I started. As the consumer champion—and, please, I certainly take that seriously as the main job—when we are looking at detriment across the whole panoply of things we are asked to look at, I would not go to the relationship between the banks and the accountants as the most important way of making sure that customers get a good deal from the banks.
John Mann
You are ducking the question, with respect. No one is asking you to define that as the most important. I am not asking what the hierarchy is.
John Griffith-Jones
Right, okay.
John Mann
I am asking, on that issue, what your organisation, the consumer champion, is going to do about it. You obviously regard it as important because you are looking into Tomlinson, even though you don’t have to. What precisely are you going to do about it?
John Griffith-Jones
As I say, I think we have to get the evidence from Tomlinson substantiated by our own investigation and then, to the extent there is either inappropriate behaviour or inappropriate linkage between the banks and the accounting firms, which of course is detriment to the consumers, we will act on it.
John Mann
Can we expect a report from you on what you are going to do on the consumer detriment of the relationship between the top accountancy companies and the big banks?
John Griffith-Jones
You can certainly expect a report from us around Tomlinson in general and I agree it should cover this part of the market as well.
Mr Love
I want to come on to consumer credit, but I would like to start with a question going back to sales incentive schemes in branches. Mr Wheatley, you said earlier that you had asked the banks to revise their structure of remuneration. I am being told that, while on form structures have changed, the ethos and the atmosphere in branches has changed little. The way that that has been characterised is that meetings attended by bank staff are now being used as a crude proxy for products sold. Are you aware of these concerns and are you speaking to the banks about it?
Martin Wheatley
In terms of the first part of your question, yes, the banks have responded by taking away a large part of the sales component; sometimes 100% and sometimes 50% of the incentive structure. That part has been achieved. The point you make about, “Well, has it really changed?” Yes, I am aware of that. We have had whistle-blowers. We have had reports to us of that. Where that is reported to us, we go in and directly look at those firms and look at those branches or regions where we see that to be the case. If we find that frankly it has not changed except in name, we will take strong action with banks.
Mr Love
Is that happening? Can you give us an example of a bank where you have taken robust action to deal with the failure to respond to your revision of the remuneration structures?
Martin Wheatley
I can’t give you public examples of that because obviously our new guidance came in in the early part of last year and so any cases would still be working their way through our system, but I can assure you that it is something we are very focused on and we are spending time looking at.
Mr Love
Can I come then to consumer credit, particularly high-cost credit? In October last year you published a document on your assumption of responsibility for consumer credit. At that time, Europe Economics estimated that between 25% and 30% of high-cost short-term lenders would leave the market. You are now being asked to introduce a price cap in tandem with those recommendations and, indeed, you may be strengthening those recommendations as a result of the consultation. What estimate do you make of the number of firms that are likely to leave the market as a result of the overall approach that you are now taking?
Martin Wheatley
To deal with the first part first, we took our consultation out to the market. We have completed that process. Later this month we will publish our conclusions and, therefore, initial rules. Under that initial impact, we estimated that between 18% and 30% of available consumer credit may withdraw from the market. That was the initial calculation based on the changes to rollovers, changed continuous payment authorities and the new affordability rules. The cap we have not assessed yet. We are in the process of trying to work out what that cap would look like and what its impact would be. Undoubtedly, if the cap is going to have any success, it would reduce the availability of credit to the market and we will have to balance the additional protection we can give to the consumers against the loss of a service that, for many people, is a valued service, and that is a very difficult equation. We have been given that challenge to introduce that by 1 January 2015—so next year—and that is a tough ask for us and I can’t yet tell you what our assessment of impact will be.
Mr Love
Is there a level of market excess above which you would be concerned that there would be consumer detriment from that?
Martin Wheatley
It is a tough call. I think our latest figures show there are around 2 million people in the UK who use short-term high-cost credit. I am told from MAS figures that 1.2 million took out payday loans over the Christmas period. That sounds like very high numbers and, clearly, for us to have an impact, a number of those people would not have access to the service, but we do not yet have a figure as to what level of impact we would find acceptable.
Mr Love
The Government has asked you to introduce this cap. Indeed, I think the initial indications you gave were that you were not convinced that a cap was necessary. Are you now convinced that the cap is necessary or—“forced” is probably the wrong word—are you being persuaded that a cap will improve the situation for the consumer?
Martin Wheatley
To go back to the first point, we were unconvinced because we simply did not have the data. Until we start regulating the industry and getting under the bonnet of how these operations work, where the profitability is or what causes the real detriment, then we would find it hard to reach a strongly interventionist policy. That interventionist policy has now been mandated to us. It is not a question of whether we agree with it or are being forced. That is now the law and we have to implement that as best we can.
Mr Love
Let me come on to the fee structure. Statistics show that the number of people seeking debt advice has increased sevenfold over the last five years, so there clearly is a need for debt advice. Are you sure that the proposed fee structure is proportionate to that need?
Martin Wheatley
I think so. We have tried quite carefully to make sure that the fees are proportionate. We have tended to align our fees to the highest risk end of the market. We see the high risk end of the market being debt collection and payday loans and that is where the fees will be paid. There has been a significant growth in demand for debt advice and I think that will grow even more, not least because, as part of our proposal, we will make it a requirement that access to debt advice is much more clearly signalled.
Mr Love
The overall pot of debt advice money, you are suggesting, should be kept the same, even when consumer credit comes over. Is the vast increase in the need for debt advice taken into account as a result of the transfer of consumer credit to your organisation? Is it appropriate that you should keep that pot steady, reducing the amount of money that has been raised from the industry to provide that advice?
John Griffith-Jones
This is the MAS £35 million, from memory. It is a genuinely interesting question. MAS obviously put their budget together. We review it, but they put it together with a steady state number for the year starting based on their work around this three-year deal, as opposed to the one-year deal. I am minded to ask them during the course of this year to look at that again to say, “Is that enough or not?” but I do not want to pre-empt the facts that they have by just sitting here saying, “More is necessarily better”, as opposed to, “More may be necessary”. I am not being evasive. I think it is an open question.
Mr Love
There has been a sevenfold increase in the number of people accessing debt advice. If you hold steady state on the amount of money that is provided by debt advice, they have been asked to do a great deal more with the same amount of money. Surely that is perverse?
John Griffith-Jones
They are on the frontline of this and they have looked into the efficiency with which the advice is provided. My understanding, I think confirmed by the NAO, is that we are in a value-for-money position, but there is always a policy option to increase the amount allocated to them.
Mr Love
Can you reassure the Committee that this is something that you will look at?
John Griffith-Jones
Absolutely. I think we should be looking at this. I would like to see exactly what our proposals are on the payday lending and the cap and some more work on the likely outcome from that and then, if we believe that genuinely there will be more hardship or more need for face-to-face debt advice, the logical response is to give MAS more money to allocate, but I don’t want to commit to that without hearing the MAS view and seeing the figures.
Mr Love
Let me ask one final question, which relates to the criteria under which the levy is sought. They are suggesting that it will be a combination of total lending and write off levels. Now, we know that payday lenders don’t write off. One of the reasons why there is considerable consumer detriment is they will chase people. You are giving a whole sector a perverse incentive to chase people rather than write it off. Is that not a concern relating to the experience of consumers, particularly in relation to the high-cost sector?
Martin Wheatley
What we are trying to do is not incentivise people to create more consumer detriment through the debt recovery methods that they pursue. We will be supervising the debt management and the debt recovery part of the industry and if we find that our rules or tariffs are creating a change to that then clearly we will have to reflect that and change that again. I mentioned earlier that we regulate 27,000 firms today. One of the challenges for us frankly is we will have around 50,000 firms becoming subject to our regulation as part of this new structure, but then those 50,000 firms will also be subject to recovery of tariffs, which includes recovery of debt advice charges as well. So there is a bigger pool to contribute to debt advice in the future.
Mr McFadden
PPI is at one end of the conduct scandals that have occurred in recent years. Benchmark price fixing is at another end. We have seen the inquiries into LIBOR rates. I want to ask you about foreign exchange. Mr Wheatley, do you think that the way that foreign exchange rates are fixed can be trusted?
Martin Wheatley
It is quite interesting because the methodology of foreign exchange rates would, to most people, seem a much safer methodology than LIBOR because it is trades that are real trades, not somebody’s view of the price at which things could happen, in a very liquid market. I think the surprise for all of us as regulators is that the allegations have become so strong about fixing of those trades, collusion between traders in that market. The elements that are different from LIBOR are that it is a much deeper and much more liquid market based on real trades. The elements that are similar to LIBOR—and this is purely on what is reported—are the suggestions of collusion between individuals at a number of firms and the use of chat rooms and phones to collude to influence prices, but we are still in the investigation phase. I can’t comment too much on any findings other than to say the allegations are every bit as bad as they have been with LIBOR.
Mr McFadden
I am going to try again. Do you think that people can trust the way that rates are fixed?
Martin Wheatley
Again, given what has come out, no. People will not trust the way that rates are fixed. I am chairing a group at the FSB level and also at IOSCO, which are the global bodies that look at this, to introduce a new standard that all rates operate to. We are trying to change the method, but in truth, no, people will not trust it because of what they have seen and the stories that they have seen come out.
Mr McFadden
You said in October, and I am quoting from the FCA press release, “We are conducting investigations alongside several other agencies into a number of firms relating to trading on the foreign exchange market.”
Martin Wheatley
Yes.
Mr McFadden
Can you tell us which banks you are investigating?
Martin Wheatley
I think around 10 banks have themselves volunteered information that said they have been asked for information. I can’t remember the 10 banks. I am sure we can write to you and confirm that afterwards.
Mr McFadden
Can you name any of them here today?
Martin Wheatley
I would rather not because I don’t want to inadvertently name a bank that hasn’t itself. We have not named banks. That is not something we would do as part of an investigation until we reach a final stage. I would not inadvertently want to name a bank that has not itself confirmed talks.
Mr McFadden
Who is leading this investigation? Under the LIBOR investigation, it appeared that the American authorities were leading and that we were in some ways following. Who is in the lead? Who is in the driving seat?
Martin Wheatley
Again, under the LIBOR investigation, it was a combination of us with the CFTC and then, more latterly, the Department of Justice in the US. In this case it is those again, but also FINMAR, the Swiss regulator. It is a number of national regulators. When you say, “Who is leading?”, the activities happened here in London. So we have the lead position in terms of access to information and access to traders, but the firms themselves will be UK firms, Swiss firms and American firms.
Mr McFadden
But we are such a large foreign exchange market, presumably you accept that the UK regulator should be leading this and should be the consumers’ champion. I am not talking about holiday money for the beach, but this is very important for businesses in this country that import or export and need honest foreign exchange rates, or indeed pension funds which may make investments in a number of countries and they need to know these rates are honest. What I want to know on their behalf is, is the UK regulator at the forefront of trying to ensure honesty in the way that these rates are fixed?
Martin Wheatley
Yes.
Mr McFadden
Can you tell us anything about the timescale of this investigation? When should we expect a report?
Martin Wheatley
If I am honest, these investigations are very complex because they cover a number of jurisdictions and a number of traders. I would be surprised if we got to conclusions within this year. I do not think we will get to final conclusions within 2014. I hope that we will next year, but again the nature of these sorts of investigations is that it is very hard to predict.
Mr McFadden
We have had LIBOR. We now have question marks over the foreign exchange markets. Are there any other benchmarks like this, which are fixed here in London, that you have concerns about or are investigating?
Martin Wheatley
Yes, there are. Those investigations are not public. I can’t tell you what the investigations are, but there are a number of other benchmarks. London being the centre it is, there are a number of benchmarks that operate in London that we are investigating because of concerns that have been raised with us.
Mr McFadden
Why is it a secret that you are investigating other benchmarks? Why can’t you tell us which ones you are investigating? You put a press release out in October saying that you were investigating the foreign exchange markets.
Martin Wheatley
Yes.
Mr McFadden
Why can’t you tell us which other benchmarks you are concerned with?
Martin Wheatley
The difficulty always is that, with any announcement, people and the press will typically jump to a conclusion that says, “Well, there is clearly a problem”. We like to get our facts and clarity as to whether the allegations are substantiated.
Mr McFadden
I appreciate that and nobody is asking you to prejudge an investigation, but you have not reached the end with foreign exchange and yet you have announced you are doing it.
Martin Wheatley
Yes.
Mr McFadden
Why is it a different process for other benchmarks that you are concerned about?
Martin Wheatley
Because foreign exchange was so widespread and there had already been public comment. There had been substantial public comment about concerns in that market. We felt it would boost public confidence if we could make a strong statement that we were investigating that market. In the other cases there has not been.
Mr McFadden
When do you think you will be in a position to tell us which other benchmarks you are investigating?
Martin Wheatley
As and when we reach a conclusion and I can’t give you—
Mr McFadden
With other benchmarks that you are investigating, you will not tell us that an investigation is even underway until it has reached its conclusion?
Martin Wheatley
Until we think there is a case to answer, no. That is our approach and I think that is the correct approach. Otherwise, essentially it is guilty until proven innocent because as soon as we make an announcement there is an assumption that there is a problem and whoever is involved is guilty.
Mr McFadden
There is an assumption that there is cause for concern, but there is not an assumption that anyone has been proven guilty.
Martin Wheatley
I beg to differ. I think very often that is the response whenever we publish any investigation that we have underway.
Mr McFadden
But you would not be investigating these benchmarks unless you had a cause for concern.
Martin Wheatley
Yes, that is right, but we have to be evidence-based in substantiating whether that concern is mere tittle-tattle or whether there are genuine problems.
Chair
Can I go back to one of the earlier questions that Pat McFadden asked there? Are you leading these investigations?
Martin Wheatley
The term “lead”—there is no formal definition as to who is leading. We are putting in significant resources. We are calling meetings to get other regulators together. We are in the lead in terms of conducting interviews and seeking information, but there is no formal structure as such where one regulator seeks sovereignty over another. That structure does not exist.
Chair
In that case, an institution might find itself with a procession of the regulators, one by one, coming through asking the same questions. Is that correct?
Martin Wheatley
It is a possibility and one of the things we are trying very hard to do is to make sure, with other regulators, that we use our resources as regulators efficiently.
Chair
This is exactly the point that I am trying to get to. Have you agreed an arrangement whereby one of you is in the lead for collecting this information?
Martin Wheatley
No. It would typically operate on an institution-by-institution basis where we would try to agree that a certain institution would be something that the UK would take a lead on and another institution may be one of the other regulators.
Chair
Right. You do informally identify people who take a lead on information gathering?
Martin Wheatley
We try to as far as we can, subject to legal constraints.