Oral evidence: Press briefing of information in the Financial Conduct Authority’s 2014/15 Business Plan, HC 881Wednesday 10 December 2014

Oral evidence, 10 December 2014.

Witness

Simon Davis, Clifford Chance, gave evidence

Chair

One of the Members of the Committee wants to declare an interest.

John Mann

Clifford Chance assists with my Parliamentary summer school, which is a most excellent activity, which I am very delighted—

Simon Davis

I am very pleased to hear it.

Chair

First of all, can I begin by congratulating you on getting the report out? Having done an inquiry, several of us ourselves earlier in the Parliament, into banking, we know how tough it can be to get these things to market. Thank you also on behalf of Parliament, having put in all the hard work that has been involved in producing it, which I am sure is always much more than you think when you set off.

Simon Davis

That is much appreciated and it is not just me; one of my members of my team is sitting right behind me and thanks to her and my team as well.

Chair

It is fair to say that you have come to conclusions that what was going on in the FCA with respect to this was both serious and shocking, is that right?

Simon Davis

Those are not my words, they are obviously yours. I have certainly come to some serious conclusions on the basis that my fundamental finding is that the strategy that was designed and the way it was implemented was high risk and inadequately controlled. Yes, I have come to the view that there were serious failings, as outlined in my report.

Chair

If something is inadequately controlled there has been negligence, has there not, normally?

Simon Davis

Not necessarily. There can be all kinds of circumstances where there are errors of judgment made that do not necessarily constitute negligence. But on any basis, as can be seen from my report, there were serious failings.

Chair

This is not an error of judgment; this is inadequate controls we are talking about.

Simon Davis

Inadequate controls, yes. There are a number of failings I highlight and one of those is inadequate controls but, as can also be seen from the events of 28 March, there is not simply a question of controls but the question of what was done or, more importantly, not done, during the course of the day.

Chair

Do you feel that that is negligent or not?

Simon Davis

It is not a view that I have considered, Mr Chairman. I have come to the view that there were serious failings but—

Chair

Serious failings. In your experience, what action would a regulator take against a private firm if such behaviour, whether negligent or not, were uncovered?

Simon Davis

The starting point would be in light of the fundamental falls in the shares that took place that day, that there would evidently be alarm bells taking place within the company itself and within the FCA. I would expect, in very short order, either the company having taken legal advice to have gone itself to the FCA to say, “Something has clearly gone wrong here and we want to get to the bottom of it and we are happy to co-operate with you and do whatever we can to get to the bottom of it and present to you a report of what we found”. Alternatively, the FCA could proceed on the basis itself and to say, “We don’t like what has happened and we, therefore, want to have some kind of investigation conducted, either by the company or by a separate, say, skilled person”. Then an investigation would take place very much along the lines of that, which I have conducted, which would involve retention of documents, analysis of documents, rigorous interviews and then the culmination of that would be the findings. Following those findings it would then be up to the FCA to decide what, if any, action should be taken as a result, that action—

Chair

What kind of action do you think would be likely in a case where the sorts of findings you have made in this report were made?

Simon Davis

Again, there will be a range available to the FCA and the FCA has available to it the ability to impose fines and there have been all kinds of fines in the past. But I should stress, so far as I am concerned, that the job that I have done—and I hope I have been very much faithful to what I told the Committee at the beginning I would do—is to get to the bottom of exactly what happened, so that anybody reading my report can be satisfied that they know exactly what happened.

Chair

Then they can make their own assessment, is that what you mean?

Simon Davis

That is the point. I have also made—

Chair

Is that what you are saying?

Simon Davis

Yes.

Chair

That is you feel you have got to the facts and now it is for others to make the assessment of what was implied by them.

Simon Davis

That’s right. I hope what I have done and I hope what we have done is set out in a great amount of detail—perhaps for some people’s taste too much—but I thought it important that it was absolutely clear. Following that, bearing in mind the seriousness of these events—taking your words, Mr Chairman—to go into some detail as to what could possibly be done by way of my recommendations to avoid it happening again. Those were very much my priorities.

Chair

The question that I am asking you then has not been a top priority for thinking it through.

Simon Davis

No, it has not.

Chair

No, okay, so maybe we should go elsewhere for an answer to it.

Simon Davis

I think that’s right.

Chair

The protocol agreed for your inquiry provided that you would not share matters of substance with the non-exec directors of the FCA, unless a matter was so urgent or important it needed to be disclosed to them. Did you need to raise anything with them in advance?

Simon Davis

No, I did not.

Chair

Did you show any of your report or recommendations to the board in advance or to any member of the board?

Simon Davis

The answer to that is no and yes. No, in the context of the protocol, I did not share—as I think in answer to a question by Mr Ruffley when I last appeared before you, albeit in private session—my emerging findings in any sense with anybody until we got to the stage of maxwellisation, which is that contemplated by the terms of reference and by the protocol. I am sure that members of the Committee are familiar with the process but if it would help you just tell you, to an extent, the process—

Chair

Before we get into maxwellisation, I just want to concentrate—

Simon Davis

In answer to the second part of it, therefore, the board saw the report in the context of maxwellisation.

Chair

The whole report.

Simon Davis

The whole report.

Chair

Did they see the recommendations?

Simon Davis

They saw the recommendations.

Chair

Why did you feel the need to show them the recommendations in the context of maxwellisation?

Simon Davis

In the context of maxwellisation, bearing in mind what maxwellisation is designed to achieve or to avoid is people not being treated fairly my view was that many of the recommendations that I set out are pregnant with criticisms of the FCA. So far as I was concerned I did not want to get to a position where anybody, at the conclusion of my report, was going to be able to say, “Look at this recommendation, that criticises us, we did not have an opportunity to deal with it”.

Chair

Okay. Did you disclose any of the recommendations to individual members of the board, for example, the chairman of the board, prior to the maxwellisation process?

Simon Davis

No, I did not.

Chair

Did you have any discussions about the conclusions independently of the maxwellisation process or in any way alter them?

Simon Davis

Not before or since.

Chair

Okay. There has been no communication of that type whatsoever between you and the chairman of the FCA.

Simon Davis

No, I set out my recommendations and in the context of maxwellisation I received various submissions from a range of parties, including the FCA itself, but I have had no separate discussions of any kind with the chairman.

Chair

Are they are substantive facts, material facts, that you felt it would have been helpful to have established that you have not been able to establish?

Simon Davis

That is entirely the right question and I think and hope that was behind the—

Chair

I am hoping all the questions so far were the right questions.

Simon Davis

I am sorry. Of course, I am not familiar with the etiquette, Mr Chairman.

Chair

But I will take special credit for having asked that one, yes.

Simon Davis

No, but the reason why it is an important question is because if I had felt during the course of this inquiry that there were material facts, which I had not been able to get to the bottom of, that might have been the kind of point that I would want to go to the chairman or come back to this Committee to say, “Look, I am in a jam here, the material facts I think important: I can’t get to the bottom of it, I need some help” so that is why I thought it was the right question.

Chair

Did you get the co-operation you wanted from The Telegraph?

Simon Davis

That is a more difficult question. The co-operation that I sought and, in particular, bearing in mind the importance of what was said during the course of the interview on the 26th, was that I would have liked to have seen the notes taken by The Telegraph itself of that interview or indeed any recording. That, I considered, would have assisted me. The Telegraph’s position was, as a matter of policy, that they would not share those notes with me, although ultimately they did agree to provide very limited extracts. To the extent that I would like to have been able to see more from The Telegraph the answer to that is yes.

Chair

Have you made everything you think can reasonably be made public about the exchanges with The Telegraph in order to try to secure that extra information?

Simon Davis

Sorry, can you just repeat the question, Mr Chairman?

Chair

You have clearly had a series of exchanges with The Telegraph in order to try to secure the information you felt might be of use. Have you put everything that is material about those exchanges with The Telegraph into the public domain?

Simon Davis

Thank you, I didn’t hear that first time. The answer to that is yes.

Chair

Okay, thank you very much.

Mike Kane

Good afternoon, Mr Davis.

Simon Davis

Mr Kane.

Mike Kane

Do you believe that the FCA’s media team exerted, commanded, an undue amount of influence over the organisation?

Simon Davis

Again, that is a difficult question for me to answer. Let me just see if I can try to get it right. My view, having spent hours interviewing the representatives and having seen the exchanges that I have reported faithfully in this report, is that the FCA, perhaps along with a number of other organisations—and as was accepted very clearly by the FCA when interviewed—seek to use the media as a tool of regulation. To that extent, does the communications team exercise influence over the way in which the FCA regulates? The answer to that is yes. Whether it is undue, my own view is that it was not undue because there was consistent collaboration and discussion within the FCA as to the way in which the media would be dealt with. Ultimately, the view I came to is that if you are going to use the media as a tool of regulation then you had better be pretty sure that you are using that tool appropriately in the manner that is controlled and I concluded that it is not appropriately controlled. But it is not undue influence, it is a bit of a long-winded answer to it, Mr Kane, but I hope it—

Mike Kane

The life insurance team said there was a lot of pressure from comms and in any organisation there needs to be a clear chain of command. What has come out of this report is the fact that reports were being signed off by comms and not by the head of life insurance. They were seeing the report, they were then handing it over to comms who were then changing that and then releasing it. Is that just not wrong in any chain of command in an organisation?

Simon Davis

Mr Kane, I have made it pretty clear that there were failings in that respect.

Mike Kane

Okay. Just how junior was this media associate who seemed to be doing all the heavy lifting?

Simon Davis

I have to be a bit careful there because the protocol is very clear that I am not supposed to be identifying junior employees so that is hard for me to answer without identifying the individual in question. He is somebody with a—

Chair

It is up to you to decide who you want to identify. You say you are not supposed to.

Simon Davis

No, and I would not want to identify.

Chair

You make a decision on that and—

Simon Davis

No, I would say it is somebody with a considerable degree of experience.

Mike Kane

Okay. I suppose what I want to carry on with then is, did the left hand know what the right hand was doing in the organisation? The market people who would have had experience of what was about to unfold were not communicating with or comms were communicating with the market people about what could happen, that does not sound good to me. What is your opinion?

Simon Davis

Only to agree with you. I don’t think it was good and I highlighted in the report various failures of communication, particularly on the day where the relevant individuals were not communicating with each other. I agree entirely with the thrust of your question.

Mike Kane

The FCA does operate a pro-consumer agenda. Before I came to this place in February I was chief executive of an organisation called Movement for Change and we were campaigning on payday-loan issues and struggling to get a meeting with the FCA. I, therefore, decided to put 200 people on Brighton Beach with a big banner saying, “Come and speak to us” and they came and spoke to us. Do you think they are media-led?

Simon Davis

Again, my own view, based on the documents and the people I interviewed, is that they are not media-led but certainly extremely media aware. I have already said that the FCA itself proceeds on the basis—and without any kind of embarrassment—that it uses media as a tool of regulation. To that extent, whether the media leads the FCA or vice versa is always going to be difficult to tell.

Mike Kane

That is what Zitah McMillan suggests: it was just one more part of the regulatory toolkit.

Simon Davis

That is on the FCA website.

Mike Kane

Yes, okay. If this was their intention, why were regulators not the people driving the media?

Simon Davis

If this had worked, as was intended—I am just trying to give you a good example—if, let us say, that Mr Adamson had been spoken to and consulted about his quotations, as indeed he was and his team, in relation to the other thematic reviews that were publicised, my view, which I have stated in the report, is bearing in mind the care that he took over quotations is that he would have said, “I am not willing for quotations to be attributed to me when someone else is being interviewed”. If it had worked then you would have seen the two sides of supervision and communications working together effectively but it didn’t work and, therefore, they didn’t work together effectively.

Mike Kane

A systemic problem across the organisation.

Simon Davis

I have said that there was a lack of controls; whether you regard lack of systems and controls as being systemic I suspect I am dancing on the head of a pin. I have concluded that there was a lack of controls and I have gone into some detail in the recommendations to try to make sure that any gaps in the organisation are appropriately filled so this doesn’t happen again.

Chair

Would you be prepared to jump off the pin just for a moment because Mike’s question does seem pretty important?

Simon Davis

With respect to the question the trouble with the word “systemic” has a rather pejorative whiff about it. What I would say and have said—

Chair

There is something pretty pejorative about what has happened here, is there not? Crikey.

Simon Davis

No, what I have concluded is that there were inadequate controls in relation to the control of the media. To that extent the system broke down, that is the way I prefer to put it.

Mark Garnier

Can I develop this point a bit more? But before I do there is just one thing that I want to pick up on before I forget, which is in your recommendations in paragraph 19.60 and this is with regard the use of the press, your recommendations of control within Communications Division. This is a very interesting thing that you suggest here, which is, “The process to be developed may involve use of approved scripts, requirement for quotation approval and possibly even insistence on prior approval of an article.” Can I just be clear that what you are suggesting there is that if we were to re-run this scenario with this recommendation in place, that you would expect The Telegraph to submit its article to the Communications Division of the FCA for approval before printing?

Simon Davis

The reason why I put the words “possibly even insistence on prior approval” is because I am not naive to the extent that the press take as important—and I think rightly so—their freedom to publish as they see fit, then it wouldn’t be my natural instincts to say that a newspaper should submit an article for approval, no. But I have injected the word “possibly” because I can see that there will be circumstances where what was being said to a newspaper had such potential implications that an organisation may say to the newspaper, “I would really like to give an interview on this one but if I do it is going to have to be on the basis that you let me have prior approval” and the newspaper may say, “That is completely unacceptable” in which case the FCA may say, “That is absolutely fine but you understand these circumstances, therefore, I won’t be engaging with you”. That is why I put “possibly” because overall it is a difficult balancing act for the FCA to seek to get across publicly the messages it wants to get across, deterrents, highlighting the existence of scams and the like, but at the same time having to take into account the potential unintended consequences of that action more generally.

Mark Garnier

That is a very helpful answer and I have had one call from the press who picked this up and—

Simon Davis

On the record, I am not advocating the muzzling of the press in any kind.

Mark Garnier

Fantastic, they will be delighted to hear that I know. Getting back to the systemic issues, if you like, regarding the regulator and I want to talk about the development of the FCA’s pre-briefing strategy, which is clearly incredibly important. Conceptually, this whole idea of pre-briefing of journalists on the business plan or indeed anything else, should this not have raised alarm bells within the regulator, given the risks of releasing price-sensitive information at any time?

Simon Davis

The view I have expressed in my recommendations—and I am rather agreeing with you, Mr Garnier—to an extent that pre-briefing is a common form of getting a message across and not just this regulator. By the way, that is why I recommended in the recommendations that the FCA liaise with other comparable regulators to see how they are doing it. Sorry, I have lost my thread, just repeat your question.

Mark Garnier

It should have rung alarm bells that the whole concept of pre-briefing is fraught with risk that price-sensitive information could come out.

Simon Davis

Yes, using pre-briefings as a whole you need to be very careful as to what it is that you are pre-briefing about. I have made it clear in my report that certainly the FSA before it and indeed the FCA as is take the view that it is unacceptable to pre-brief about something that is price-sensitive or risks being price-sensitive, which is the main issue in my report. In those circumstances, yes, care should be taken because particularly where you are the regulator and particularly where the regulator’s words can have quite significant impact in the market that I would say has to be particularly careful about pre-briefing. I have expressed some doubts, Mr Garnier, in my recommendations as to whether it is appropriate to be conducting pre-briefings of thematic reviews with journalists.

Mark Garnier

Given that, is it not fair then that the Executive Committee of the FCA should not only approve this type of thing, specifically where there could be this great risk but also have significant note-taking to prove that they had done that and they had considered this, either as a systemic idea or specifically on individual items?

Simon Davis

Where I got to on that—so far as these kind of recommendations—is rather than being too micro and prescriptive, what I have said is that the FCA needs to go out, consult with other authorities, find out how they are dealing with it, so that the FCA itself and its Executive Committee and board can be reassured that the systems that they then should be putting in place—because my recommendations are there should then be further systems that should be in place—if that kind of note-taking is appropriate I am sure they will do it.

Mark Garnier

Given the fact that it is the UK Listing Authority and who are absolutely charged with making sure that we get orderly markets, this is such a dangerous area to have pre-briefings on this type of stuff that could absolutely infringe their own rules and their own validity as the organiser of an orderly market.

Simon Davis

I agree with that sentiment, which is why my recommendations do, in relation to pre-briefings, express exactly those concerns. I think I used the phrase that if in doubt then erring on the side of caution is putting it quite mildly.

Mark Garnier

There is quite a lot about Mr Adamson and Ms McMillan who were contacted individually about the pre-briefing plans and did not seem to raise any concerns at those times. There are a lot of questions, certainly as I read through your report, that they just did not seem to be on top of their job as individuals. At a personal level what do you think is behind this? Do you think they just had not appreciated that there was a problem with this? Did they have the wrong interests? Were they thinking more about how the wider consumer market perceived there was a regulator, as opposed to their function to make sure there is an orderly market as the UK Listing Authority? What went wrong? As I said, it seems to be focused very much on those two individuals.

Simon Davis

I have made it clear, so far as my criticisms are concerned in relation to Mr Adamson. Excuse me for looking back at my report because having been carefully through the maxwellisation process I don’t want to start with a defective memory setting out the criticisms that I have made and the report should always take preference. If we just take it in the particular chronological sequence, the view I came to—whether you talk about the business plan, whether you talk about the written briefing—was that there was a risk that the details of the “Life Insurance Review”, either just as they were or as they might be reported, were price-sensitive or, put more accurately, that the way in which the information may be reported could have a significant effect on share prices. Taking that as a starting point, Mr Garnier, that was missed. Then if we move on to what happened at the time of the quotations, as I have said, Mr Adamson was unaware that he was out there being quoted or about to be quoted in newspapers because he was not even aware an interview was taking place and was not aware that an interview was going to be taking place with Mr Poyntz-Wright, who was then going to be giving quotations in his name, so all of that he didn’t know about. I do then have the concern that I expressed in the report that when the article came out and was sent to Mr Adamson and he was told that it looked good and that his quotes had appeared prominently, that he did not read the article in question. So far as that is concerned it comes down to the fact that Mr Adamson receives a great deal of e-mail traffic and had been reassured by the opening remarks. I think that is unfortunate. Then in the morning Mr Adamson took the view—as I sat across a table from him, as I am sitting across the table with you now, albeit obviously significantly closer—that he had acted appropriately in the morning, having received the furious call from an insurance company, that he then took steps to make sure that some wording was put together. So far as he was concerned the job was done and I have not agreed with that. It is a combination of points.

Mark Garnier

But it sounds as if it is veering more towards the fault of the individuals within the system, rather than the system itself. There are an awful lot of points and then what you do is a critical path-analysis of a plane crash you can identify points at which it went wrong and you get back to certain points where it is pilot error and it seems to be pilot error in this case, rather than necessarily the structure of the system. Would you think that is a fair comment?

Simon Davis

It is a combination of the two, that, yes, there were individual failings but so far as Mr Kane has already made the point I don’t think it was just a question of individuals making poor judgments.

Mark Garnier

One of things I wondered—one last question, Mr Chairman—is the role in the FCA’s Markets Division and on the basis of the evidence that you have seen, was the director of the Markets Division informed of the FCA’s general pre-briefing strategy prior to this appearance of The Telegraph? Did he know that this was the sort of thing that the FCA was going to do?

Simon Davis

If I take it from the specific to the general, the specific was that he was unaware that this particular pre-briefing strategy was taking place. From memory he had some general awareness that pre-briefings did take place and was indeed involved in a particular conference call about the potential pre-briefing so far as a question of competition was concerned. From that conversation alone he would have been aware that some kind of pre-briefing was taking place. But at the heart of your question is, should not the Markets Division or those who are very knowledgeable about areas of price-sensitive information be aware that this kind of strategy is in place and be aware of the kind of material that is being supplied? The answer to that is yes.

Mark Garnier

Combined, if you like, with my very first question about paragraph 19.60, which is the possible preapproval of an article is not the answer, rather than to try to preapprove a journalist’s article is to write an article that the Markets Division and various other people take a look at, which is then sent out with absolutely everything that the FCA wants to be said so that there can be no vagaries, everybody has agreed, everybody has agreed the things, they have done it, and if the newspaper, therefore, wants to rejig it and turns it into slightly more readable language then that is up to them but anything that is wrong with it will be by the newspaper, as opposed to the regulator.

Simon Davis

Yes, Mr Garnier, I can see that that is a possibility and indeed I have been careful to say all these areas should be up for grabs and should be considered. You have a number of extremes, the one is you have no pre-briefing of any kind, then as you start to move across that you can have a pre-briefing but it must only be in writing. All of these about maintenance of control and when you get to one end, which is that you are having a short interview with a journalist that you agree to be on the record but you have no follow-up about it at all in circumstances where you already know that the consequences, if this goes wrong, could be quite serious, that may be exactly the kind of area where you may think, “Hold on, should this be something we should be doing at all or should we just be doing a written briefing and if it is going to be a written briefing, should we get that cleared by Markets?” Bearing in mind, however, so far as Markets in the UKLA are concerned, is that they are, by and large, experts on what is meant by price-sensitive information. The only people who are best placed to understand—if I can just speak very loosely about the test—is a reasonable investor likely to take this into account in making investment decisions? That is going to be very tough for the markets people to work out. They are going to need to join together with the specialists in the subject matter, rather like by analogy in the private sector you would expect that kind of question to be discussed with brokers and that is difficult.

Mark Garnier

Brokers and lawyers.

Simon Davis

Lawyers are good at saying what the tests are but, ultimately, if in doubt—what the FCA itself says—talk to brokers because lawyers are good at some things but asking a lawyer to predict whether an investor is going to take this into account in his or her investment decisions, that is quite difficult.

Mr Ruffley

Mr Davis, thank you for this report. Would you say, thinking of the evidence you have looked at, that the operatives in the comms area had the necessary technical awareness of market practice? These are press officers in the comms area. Do you think they were qualified?

Simon Davis

It depends on what they are qualified in. If I just—

Mr Ruffley

Technical awareness is what I mean.

Simon Davis

Mr Ruffley, certainly proficient in the PR skills. As to whether they had proficiency to spot whether something risked being price-sensitive or spot whether a newspaper, if they report it in this way, could have an impact, they were not. But I am quite sure that there wasn’t an expectation within the organisation that those people within the media group should have that expertise, which highlights the whole question of you don’t have control; these people don’t know; who is going to be waving the flag.

Mr Ruffley

Sure. They obviously met some standard for being good at PR otherwise one presumes they would not have been hired by the FCA. I am not talking about that. That is a given that they were good at PR but do you not think it might be a good idea or an area for people to reflect on that maybe those who are briefing the press are the interface between the regulator and the outside world—the media, in its broadest sense—should be technically able, to use your phrase, to spotlight what might be sensitive in market terms?

Simon Davis

Mr Ruffley, I agree and in the recommendations, again, I have highlighted that. You just need to be careful that you don’t necessarily want to try to turn your media individuals into experts. But they need to have sufficient training and in this case one of the individuals, in particular the media associate, had had no training. But they should at least have enough to be able to ask the right questions and to be able to say, “This doesn’t feel right to me”. I wouldn’t necessarily go so far as to say that they should be turned into the experts on what is or is not price-sensitive information but at least have enough to know that this looks like something that is raising an issue. Agreed.

Mr Ruffley

Sure. The supervision area: one of our arguments for doing the pre-briefing at all was to avoid ambiguity about the scope of the insurance review. Is that an adequate explanation as to why they wanted a pre-briefing—this is the supervision area—because they could simply have made the business plan clearer, could they not, in a very public way and on their website or something like that?

Simon Davis

Again, you are likely to get into various degrees of what is clearer. The business plan was supposed to be, and is, a rather succinct description of what is going to be happening. The moment you start to expand the description of something then whether you are creating more clarity or less is quite a difficult issue. You will certainly have seen, so far as the representatives within the Supervision Division are concerned, a considerable degree of angst, certainly post the Budget, as to whether saying anything at all in those present circumstances was going to work. However, a feeling at the same time is that they were caught in a catch-22, which is if you say something that may be misunderstood, but if you don’t and just simply come out with a reference within the business plan that may, in itself, be misunderstood. Ultimately, we can see what happened in relation to the judgment call that was taken. What may have happened, had the business plan simply come out, is anyone’s guess.

Mr Ruffley

How far do you think the consideration to get a big splash in one national newspaper was the driver in all of this? Was it not the comms function just taking over and trying to justify their own existence by getting a big splash in a big national broadsheet?

Simon Davis

I would agree, Mr Ruffley, that there were two aims that were intended to be achieved by the publication and the risk of being conflicting. The one was to achieve clarification to say, “We are not going to be doing this” but the other, absolutely, was to be able to getting out in the media the kind of work that the FCA was doing very much in the interests of the consumers and to the extent you were seeking, on the one hand, to have a low-key something that doesn’t cause confusion but in the other something that gives profile I think, yes, they were mutually conflicting aims.

Mr Ruffley

Do you think within the comms area, in this case, they were too aggressively pro-consumer to the exclusion of the interests of financial service providers and market participants?

Simon Davis

I don’t think so. My own view is that the combined teams were seeking to strike a difficult balance. They were concerned about effect on the insurance companies, just as much as what benefits there may be for consumers so no I would not agree with that.

Mr Ruffley

Do you accept Mr Adamson’s claim that the written briefing on its own was not price-sensitive?

Simon Davis

As you will have seen from the report I haven’t expressed a view as to whether the contents of the briefing were price-sensitive. Mr Adamson, when I interviewed him, is very strongly of the view that it was not. I took the view that seeking to work out whether something was or was not price-sensitive was rather missing the point here, which was that the FCA was not even thinking about was there a risk of this being price-sensitive and I thought that was more fundamental.

Mr Ruffley

But it is an interesting question. Do you think a reasonable person would have considered the written briefing on its own was or was not price-sensitive?

Simon Davis

A reasonable person, depending, of course, on what knowledge that reasonable person has—

Mr Ruffley

The reasonable bystander.

Simon Davis

The reasonable bystander with a degree of knowledge of the insurance industry would have taken the view that there is a risk here that this is price-sensitive and, following Mr Garnier’s lead, we should stop in our tracks and think whether this is the right thing to be doing at all.

Chair

It somewhat conflicts with Mr Adamson’s view, does it not? After all he had more than a modicum of knowledge and was more than a bystander. You are disagreeing with him, are you not?

Simon Davis

He has a strong view that it was not and my view, to the extent that disagrees with him, is that there was a risk that it was.

Chair

No, you are disagreeing with him.

Simon Davis

Yes.

Chair

Was that a yes or a no? It is very—

Simon Davis

If Mr Adamson was saying that there was no possible risk then I would be disagreeing with him but what he has said to me, his view was that it was not price-sensitive. I have not gone into the particular points with him about whether he would accept there was any risk.

Mr Ruffley

But a reasonable person would have deduced there was some risk that was price-sensitive.

Simon Davis

I think so.

Mr Ruffley

That would be your—

Simon Davis

That would be my view, yes.

Mr Ruffley

In the written briefing there is the statement and I quote, “It would collect information on exit fees to understand if it is an area, exit fees, in which we need to intervene.”

Simon Davis

Sorry, which paragraph?

Mr Ruffley

This is in the written briefing that was put out by the FCA.

Simon Davis

Yes, the paragraph in my report you were just looking at—

Mr Ruffley

Yes. Do you not think just referring to exit fees was something extremely ill advised?

Simon Davis

The point there is that as part of the discovery piece of work, which the FCA was going to be carrying out, they were going to be having regard to the question of exit fees. They would have had to be careful that you don’t want to be giving some kind of a briefing that in itself is misleading, by leaving out something that the FCA may be looking at. I think what the FCA was seeking to achieve through the written briefing was to make it clear this was not the focus of what was going to be taking place and that was what they singularly failed to do.

Mr Ruffley

But it was a journalist who apparently had form on being interested on exit fees, is that correct?

Simon Davis

It was a journalist who certainly had a keen interest in exit fees, which was—

Mr Ruffley

Yes, so it was foreseeable that any reference to exit fees might excite him, would you say that was fair? It was reasonably foreseeable.

Simon Davis

It was probably not just foreseeable but it was the journalist’s interest in exit fees in the first place that led to that journalist being chosen.

Mr Ruffley

Indeed, so it was very foreseeable. Could I just—

Chair

Are you disagreeing with that or agreeing with David on that?

Mr Ruffley

You are agreeing it was reasonably foreseeable.

Simon Davis

I am agreeing that—

Chair

We are asking you if you can agree whether it was reasonably foreseeable, Mr Davis.

Simon Davis

I am not sure whether it was reasonably foreseeable. So far as the choice of journalist was concerned and that the choice of a journalist who was interested in exit fees, the fact that that journalist during the course, Mr Ruffley, of the interview questioned on and on about exit fees, yes, it should have raised the alarm bells and somebody afterwards should have said, “Look, this journalist is most interested in exit fees. We are about to have an article going out there. Should we go back to the journalist and say, ‘You kept asking about exit fees—it is not about exit fees?’” That didn’t happen.

Mr Ruffley

It is very helpful but we take that to be a confirmation that it was reasonably foreseeable on the part of the FCA that this would be picked up. You recommend that the FCA consider recording telephone interviews. Can I just say most politicians, particularly long-in-the-tooth ones like me, work on the basis that whenever we speak to a journalist, on or off the record down the telephone line, that it is recorded. That has certainly been true of my experience of 20 years in politics. Any serious sentient human being in the PR business—and I am thinking about the FCA comms area now—must have understood that if they were not recording an interview, then The Telegraph journalist almost certainly was. I wonder, given what I have said is common knowledge, why you only consider the FCA record telephone interviews with journalists. Why do we not make this just a very hard and fast rule?

Simon Davis

I say “consider” and, Mr Ruffley, it is quite similar to the answer I gave to Mr Garnier that so far as dealings with the press are concerned how realistic it is to say in relation to any interview, “By the way, here is my tape recorder, I am going to be recording it” whether that was going to be something that would, in itself, be acceptable to the journalist. If—

Mr Ruffley

May I just say, journalists—certainly with political animals, MPs, Members of the House of Lords—routinely record interviews. Is it not a quality of arms? The FCA are not going to upset a journalist if the FCA PR person says, “By the way, we are recording this”.

Simon Davis

Yes, I take absolutely your point, Mr Ruffley, but that is why I say it should be considered. I am not ducking anything; I am not an expert in the area. If it turns out that it is realistic to have interviews with journalists, proceeding on the basis they are going to be recording and you were to record as well, absolutely. I am saying that people who know more about these things and the practicalities should make that decision. I am saying it should be considered.

Mr Ruffley

Sure. One of your main criticisms is that in conducting the telephone interview in the way that he did, it handed control over to the journalist. Is it not logically also the case that in doing a written briefing, it was just put out there, control was given to this journalist who was given an exclusive? Is it not handing over control in both cases, both the telephone interview and the written briefing?

Simon Davis

I think you are right, but it is a question of the degree of risk that you are running. To the extent that you are supplying a written briefing, there is of course always going to be a possibility that that written briefing will be used by a journalist to come to a conclusion or indeed to speculate, as indeed any journalist is entitled to do. The risk of them speculating in a way that you had not expected or desired I think is reduced by ensuring that the written briefing records exactly what you told that journalist.

Mr Ruffley

My final question is this: given the need for tighter controls on future pre-briefings, that really rather assumes that pre-briefings are good things, that we must have them, they are with us, but we need tighter controls. What do you say to the suggestion that some people have that these pre-briefings should be banned altogether? They do not serve any useful purpose. If the regulator needs to say something to the world out there, it can put it on its website. With the pre-briefings, do you think there is a case for just saying they are not necessary, and that in the interests of transparency and clarity, everyone gets the same information at the same time: get rid of pre-briefings?

Simon Davis

Yes. If we just divide it into a number of sections as to whom you are pre-briefing, I think what I have said in my recommendation is I can certainly see that if you are contemplating rolling out some kind of, let us say, thematic review, you may want to pre-brief, say, industry or the ABI or the like. So long as there are appropriate controls, that kind of pre-briefing, I get that. I have said at paragraph 19.59 that we are not convinced that it is necessary to pre-brief the media in relation to forthcoming FCA announcements, including the business plan, and it is the FCA that needs to satisfy itself that such pre-briefings are appropriate. To the extent that it does, it should develop a process that ensures not only that no price-sensitive information is disclosed, but the control remains with the FCA. I think that answers your point absolutely.

Mr Ruffley

Thank you.

Mr Love

Earlier on in answer to a question you said that in your interaction with The Telegraph and the journalist, you had asked to see their notes of the telephone discussion, but in your report you say that you initially asked for a meeting with them, which was refused. The notes were refused. You were given “limited extracts”, I think were the words that you used. They were less than helpful to you. Is that not true?

Simon Davis

I think I answered it with a question earlier, that they did not give me the assistance I would have liked. I cannot really say more than that.

Chair

You could. You could give us some more detail about how they could help you.

Mr Love

What reason did they give you for withholding, not having been willing to attend the meeting, not being willing to give you the notes? What did they say?

Simon Davis

The reason I was given was that it was not the policy of The Telegraph to give interviews, to provide details of their sources. Similarly, I know that the members of the Committee have not had much time to digest my report, but I do make reference to the fact that there was supposed to be a telephone call between the journalist from The Telegraph and the media manager. I asked for the note of that, and again I was told that it was not the policy of The Telegraph to share telephone notes of that kind. It was a policy view that I received.

Mr Love

So you were feeling a bit lucky when you got limited extracts. What were the limited extracts? Did they focus on market-sensitive areas?

Simon Davis

No. The limited extracts that I was provided with, if I just perhaps go to them, are at paragraph 12.19 of the report. I will just let you get that. 12.19. Do you have it, Mr Love? It is 12.19. “The Telegraph has told us in writing”, 12.19.

Mr Love

12.19, yes.

Simon Davis

Sorry. This in fact fits in, I think, quite well with the questions that were being put by Mr Ruffley about written briefings, the difference between written and oral briefings, and the absence of any kind of recording from the FCA, because we can see at 12.17 that the notes that were taken by the FCA were not a complete record, and that there was some discussion along the lines of whether banning exit fees was possible. The response from Mr Poyntz-Wright may have been—again, it is unclear—along the lines of, “That would be a very extreme option”. Then at 12.18, he—“he” being Mr Poyntz-Wright—recalled that he made a number of points clear in the interview with The Telegraph, such as that exit fees could only be removed if there was also evidence of misselling and so on. It is at that point, because as part of maxwellisation I invited The Telegraph to review a number of the passages within the report, those that related to The Telegraph, again avoiding any later complaint by The Telegraph that although I have said I do not criticise them, there were criticisms of The Telegraph. The Telegraph was able to look at parts of my report, was able to see what had been said by the FCA, was able to see the notes that were taken by the FCA, and it is in relation to that that I received some comments from The Telegraph. All of them are reported and recorded in this report. The most significant of which is the one at 12.19, where The Telegraph told us that in its view, Mr Hyde’s notes of the call—the ones that I had asked for and had not being provided with—suggest a more equivocal exchange, and here is where I receive an extract. Those are the ones that we can see dealing with exit charges. Those are the only extracts that I was provided with, and those are advanced to suggest that there was a more equivocal exchange that took place between The Telegraph and Mr Poyntz-Wright on 26 March.

Mr Love

Let me be very clear: they did not initially provide limited extracts. In response to you sending them a copy of your report they commented on the report and they also issued limited extracts as outlined in 12.19.

Simon Davis

That is absolutely right, Mr Love, just with the one clarification that in terms of the maxwellisation process, I did not allow the report out of the building. The Telegraph came into my offices and looked at it there. That was the only qualification. I did not send anything to them.

Mr Love

There seem to be two major market-sensitive areas, the 30 million policyholders and the so-called review of that, and exit fees. To what extent are you confident that The Telegraph clarified both of those issues in terms of the conversation that was held between the FCA and the journalist?

Simon Davis

In the sense of “clarified”, do you mean in the article that was published, or do you mean in these, in the extracts they gave to me?

Mr Love

I am going to come on to talk about and take your view about The Telegraph’s article. But how confident did you feel in interpreting in your report what you believed to be the conversation based on the evidence that was submitted by The Telegraph? After all, we have one side. The FCA has given a full explanation, as I understand it. The Telegraph has given a very partial explanation. How confident are you that you have been able to accurately interpret that conversation?

Simon Davis

All right, thank you. I am as confident as I can be, and the reason why I say that is because The Telegraph, as I said, was invited to come in to read the passages of the report, and they only made three comments. To the extent that what I had set out was what the FCA’s position was, I am quite confident that had the way in which I had outlined it been regarded as wrong by The Telegraph, they would have jumped up and down and told me. The fact that they did not means that I am pretty confident that what I have said they agree with.

Mr Love

Turning to the article, in your view was it accurate in terms of the information provided in The Telegraph? There would be some journalistic licence expected of it, but were the basic facts accurate, as far as you could see?

Simon Davis

This is probably the most challenging area of the whole investigation, because what you can see relatively clearly, I think, but with some areas of doubt, which I have set out in the report, is there was some discussion about exit fees, whether that was an extreme step that could be taken. But I have found within the report that the FCA were not saying that they were looking to remove exit fees, and, nonetheless, that was the impression given by the Telegraph article. Therefore, I have made it quite clear within this report that there was speculation that went beyond the pure facts. That being said, I have also gone out of my way to make it clear within this report that enough had been said by the FCA in its written briefing and in the oral briefing to give The Telegraph the leg-up to speculate. It is speculation, as I think is apparent from the article—the use of the words “may” and “would”—a close reader would know that this is speculation, but people in a particular circumstance concerned about their shares are not going to be necessarily reading an article as closely as that. I think the risk of headlines—

Mr Love

Let me just ask you one final question. I have been asked to move on. The interpretation that you have just placed on it—it is on very limited information provided by The Telegraph; they are offered the opportunity to be more forthcoming; they have chosen not to do so—that leaves you with a slight quandary in how confident you can be that you have accurately interpreted the conversation. How confident do you feel in your report about that?

Simon Davis

I think as confident, Mr Love, as I can be, based on the fact that The Telegraph was able to come and see exactly how I had characterised the conversation, and, to be fair to The Telegraph, had made it clear within my report that because notes were not taken and there is uncertainty as to exactly what was said, there was room for The Telegraph to speculate. I am as clear as I can be because I have set out exactly what I was told by the FCA happened, but of course I have to bear in mind that their recollections are not going to be perfect. As far as I am concerned, I have been able to set out what the FCA told me happened, offer The Telegraph the opportunity to look at those passages, and the only ones they have challenged—

Mr Love

Let me just be absolutely clear about that. You are telling us that as far as you are concerned, the message that was given by the FCA allowed The Telegraph to speculate and, therefore, in a sense, we must hold the FCA responsible for not being absolutely clear about what was in both the written brief and the telephone conversation.

Simon Davis

In terms of absolutes, so far as the FCA is concerned, they considered that they were clear.

Mr Love

But do you consider that they were clear?

Simon Davis

I have stated, I think, very clearly in my report that it was made clear to The Telegraph that the FCA were not seeking to ban exit fees. This is the problem, Mr Love, with a thematic review: you cannot predict what the outcomes are going to be. To the extent The Telegraph says there is going to be this review, and as part of it they are going to be looking at exit fees, I think what happened was that the FCA gave The Telegraph enough for them to be able to speculate as to what may happen in the future.

Chair

In a nutshell, The Telegraph did not mess it up. They took a story as they understood it and did what journalists might reasonably do.

Simon Davis

In my report I have explained why it is that I am not criticising The Telegraph.

Chair

That is what you are saying, is it not?

Simon Davis

I stand by exactly what I have said in my report.

Chair

I am just asking you now. Rather than keeping on referring to the report, just tell us. Do you agree with what I have just said?

Simon Davis

I stick with what I have said in my report about the reason I do not criticise The Telegraph. I think that is the easiest thing for me to do, because what I do not want to do, in my enthusiasm to answer your questions, is say something that may not be consistent.

Chair

Do not worry about the inconsistency. You are here to tell us what you think. I am not even particularly worried if you find yourself going beyond your report. We are asking you questions that are of interest to us, which may or may not have been the ones that in all cases are fully answered in your report. In this case I am asking you the question of whether you think what The Telegraph wrote was reasonable.

Simon Davis

That is a difficult question because it is one that I have not addressed specifically in my report.

Chair

That is what Andy has been getting to. Yes.

Simon Davis

I think it is reasonable for The Telegraph to speculate as they did as to what were the potential outcomes of a thematic review. In terms of the headline, I think that the headline that was included when it came out on the evening of the 27th did give a misleading impression as to what was actually intended by the FCA, if that answers your question.

Mr Love

The corollary of that is there were shortcomings in the FCA that allowed that space to be created.

Simon Davis

Yes.

Chair

All right. We know that in the end there was something that was misleading. The question is, was that the FCA’s fault or The Telegraph’s?

Simon Davis

I am trying to say it in a number of different ways, and I hope I have answered Mr Love. I think it is a combination of the two.

Chair

So, The Telegraph did make mistakes?

Simon Davis

I think, so far as the way in which The Telegraph speculated, that that contributed to the misleading—

Chair

The answer is yes?

Simon Davis

Yes.

Chair

All right. It is quite hard work here this afternoon.

Stewart Hosie

Can I turn, Mr Davis, to the events following the publication of the Telegraph article and ask you this? In your view, how quickly should the FCA have been able to produce a statement correcting the misreporting in terms of the contents of its business plan?

Simon Davis

The difficulty with that is that the dots were not being joined on the day. I think the way in which I would have expected this to have worked, Mr Hosie, had they got it right, had they been speaking to each other—there is inevitably going to be some time trying to work out, “Has what I have said to The Telegraph been accurately reported? Is there going to be misapprehension in the market?” I would expect some time. But you are talking about, I think, a few hours, and certainly not the time that was spent.

Stewart Hosie

All right. Let me ask that question a slightly different way. How quickly do you think would a regulated firm be expected to publish a reply, or at least a holding statement, to the market if a similar situation arose there?

Simon Davis

Again, depending on the analysis of the facts, trying to work out to what extent that it is already out there in the market, I think you are going to be within a few hours.

Stewart Hosie

A shorter time than was taken in this case?

Simon Davis

A shorter time than was taken, Mr Hosie.

Stewart Hosie

You have criticised Martin Wheatley for failing to convene an urgent meeting of those involved in order to finalise the statement. Do you think that the FCA as an institution and Mr Wheatley as an individual failed to appreciate the urgency of the situation?

Simon Davis

Let us divide that into two parts. Mr Wheatley, to begin with, was aware there was some kind of an issue, which he thought was a media problem, and also to the extent that when he was briefed as to what was happening, he was also told that a decision had already been taken by Mr Lawton that there was no need for an announcement. I think that when the penny dropped and he realised that there were major price falls and the ABI were concerned, at that stage he was the one who then took action to join all the dots together.

Stewart Hosie

The delay was not caused by his involvement in drafting the statement. The delay was caused because it took some time for the FCA to recognise there was a problem.

Simon Davis

I think, sir, that is very fairly put. It was a failing during the course of the morning for people really to understand whether there was a concern that the piece was inaccurate or whether it was just reporting an interview that had been given by Mr Adamson. Yes.

Stewart Hosie

All right. You have also concluded that the delay—there was a further little delay of almost half an hour between the text of the statement being approved around 2.00 pm and the issue of the RNS at almost 2.30 pm—was due in part to the fact that the process for issuing the statement to the market had not been considered earlier, and it appears in your report that the media manager was unfamiliar with the process. That must have come as a shock to you to find the media manager could not issue a press release.

Simon Davis

I think the point was that so far as the media manager was concerned, if this had been a question of issuing a press release, that would have been absolutely within his territory, but what had happened was there was a lack of clarification as to exactly what was required to be done by way of an RNS. People had been working, I think, Mr Hosie, focusing very much on what the text should look like, and then it got to, “Right, we are ready; what do we do now?” Then it was, “Well, what are we doing?” I think that was more the point.

Stewart Hosie

This issue of issuing it via RNS, I have to say I am surprised, but I will come back to that in a moment. Surely to goodness the judgment should have been earlier in the day and consideration was given to the process, given that the FCA was going to have to communicate with the wider world and the market.

Simon Davis

I would agree with that.

Stewart Hosie

Just one final question. It is in your report and it ties this all together. It is in 15.8. I will just read the first part of this paragraph.

Simon Davis

Yes.

Stewart Hosie

“The issue response team policy does not address a situation where the FCA is required, in response to media or market speculation, to correct a story about the activities of the FCA. Nor does it address situations where information affecting the market has originated from the FCA or processes for correcting widespread misapprehension in the market.” When I read that at first, it struck me that there was either an enormous oversight in the processes of the FCA or an arrogance that they might ever be questioned or called upon to explain what they have done as part of an episode like this. Were you surprised to see that that was the policy of the issue response team?

Simon Davis

I was not surprised when I looked at it because what I appreciated was that it was approaching the position from the regulator looking outwards. It was the regulator thinking about some kind of problem occurring with a firm. Apparently, from the document itself, the FCA had not considered that it might be in the position of the one whose actions need to be reviewed or corrected.

Stewart Hosie

What recommendation have you made in relation to that, if any?

Simon Davis

I have made a recommendation that there should be a proper emergency action plan. If we look at 19.62, I have said, “There is no plan in place to assist the FCA in dealing with the situation where the price movement in question may have been the result of the FCA’s own communications”. I have said, “We recommend the FCA” and so on, so I have recommended—

Stewart Hosie

Obviously that relates to the FCA, but that could equally relate to any other regulator whose actions also delivered a price movement in the market in the areas where they are responsible.

Simon Davis

Yes, and I have said also there in relation to that that input should be obtained, not just from the Markets Division, but one or more parties to the Industry Regulator Guidelines, which are exactly the guidelines that do deal with that kind of—

Stewart Hosie

That is helpful. Thank you.

John Mann

To clarify—I am still a little unclear—are you certain you said that the FCA had contacted The Telegraph? Are you certain it was that way around? I think I heard you say that. Is that a fact or is that a guess?

Simon Davis

That is a fact.

John Mann

There was no pre-lobbying by The Telegraph in order to get an exclusive?

Simon Davis

No.

John Mann

Of any kind?

Simon Davis

So far as I am aware, based on my questions, looking at the documents, looking at the e-mails, speaking to the individuals concerned, this was an approach made by the FCA to The Telegraph, and it is one of the reasons why I have not criticised The Telegraph here, where the FCA were the ones who reached out to this particular individual to offer him an exclusive.

John Mann

Yes, but I am just trying to guide us. Knowing the ways in which these financial journalists work with us, I just want to clarify that there was no possibility that The Telegraph had not actually been lobbying previously during that day for an exclusive.

Simon Davis

I am as confident as I can be. Unless I was being misled or told a falsehood by the interviewees, I am confident that it was the FCA who reached out to The Telegraph and not the other way around.

John Mann

That is clear. You alluded, I think, but you have certainly not—I am lending you the chance to be more specific. It seems to me rather an odd concept that the FCA should want to give an exclusive. The whole notion of that would seem not to fit with anything rational and logical.

Simon Davis

The logic of it, which I do understand—bearing in mind what the FCA was seeking to achieve here was a piece that would explain what the thematic review was and was not about—was that they would give an exclusive to a journalist on the basis that if a journalist is given an exclusive, then he or she is more likely to write about it.

John Mann

We give exclusives to journalists, and the higher up you are on the political chain, often the bigger the exclusives can be. They are given to people knowing the spin they are going to put on it. You do not give an exclusive to somebody who is not going to give the spin that you want on it. That would be counterintuitive.

Simon Davis

I think here the assessment that was made by the FCA was that they had chosen a journalist who would give it the right characterisation, and that turned out not to be the case.

John Mann

This is the bit I struggle with, the FCA’s whole culture and approach, because that is a calculated decision to give it to a journalist, a newspaper, going to give a particular spin, with a clear outcome that would come from that. Otherwise you would not give an exclusive or you would give it to a heap of other journalists who would be happy to give something like this a high profile. It is not as if they are struggling to get it out.

Simon Davis

No, but that is why they chose a journalist who they thought had an interest in exit fees and, as a result, would be somebody who would understand the message they were trying to get across.

John Mann

Have you explored at all this culture of media management by the FCA and whether they believe it to be appropriate?

Simon Davis

I explored it in my report to the extent that I was saying that there was very much a view taken by the FCA that using the media as a tool in regulation was appropriate. I have said, to an extent that that is the view, that there should be further “input obtained—this is at paragraph 19.57—from the PRA and one or more other regulators, such as those party to the Industry Regulator Guidelines, on how other public bodies pursue communication strategies consistent with statutory objectives”. I am saying yes, I am placing that very much in issue.

John Mann

Further, had the FCA handled it in a more collegiate way with the media and put something out to everyone at the same time, perhaps the next day or whatever day, The Telegraph could still have put their own piece out with the same spin, the same headlines. Would that have had an impact on the market?

Simon Davis

That is very hard for me to tell. It must have been a possibility.

John Mann

That is rather critical to your report, though, is it not? If that would have had an impact on the market regardless, it makes some of the seriousness of your report less relevant.

Simon Davis

It is impossible for me to tell what may have happened. Certainly you can see the concerns, and dealing straight with the point that you raised, certainly at least one of the members of the supervision team was saying, “Surely we should hold and now wait and then come out with our answers in response to any media coverage, assuming that some comes out”. The view that was taken was that the best way to seek to control the message was to get out in front through the exclusive briefing of The Telegraph.

John Mann

After the FCA clarified matters, the market did not respond back to its previous day’s equilibrium, did it?

Simon Davis

It came back, if we look at the charts, pretty much, which may well suggest, to the extent there was not a full recovery, that there may be—I think I make the point that it recovered, but not completely.

John Mann

If we take some actual figures, if we take Legal & General, Legal & General started at 212p and ended the day at 205p, so it came down 7p. Aviva started the day at 493p and ended at 483p, so it came down 10p.

Simon Davis

Yes.

John Mann

If we go further, because you do say that there were other issues in the market at the time, if we take the day the Chancellor gave his budgets, if we take Aviva, they start at 515p, but the next day they are down to 490p, so we have a market that is already in problems. Despite the FCA’s correction, Aviva went down 15p after the Chancellor’s statement; it went 10p down after the FCA’s. If we take Legal & General, they go down 19p the day after the Chancellor’s statement. They go down 7p after the FCA’s. You have drawn in two concepts. First is clear in what you state, so there is no ambiguity, that it is a false market. Is it a false market just on that day, or is a false market during that week?

Simon Davis

The question that I was answering is very much with reference to the piece in The Telegraph.

John Mann

I understand that. I understand your brief. Therefore, I understand your difficulty answering the question, but I think it is a relevant question, nevertheless. You stated it is a false market. I can see your logic in doing that. Is it a false market from the moment the Chancellor spoke?

Simon Davis

That is not something I have looked at, and I think, so far as I understand, there was a very significant difference from the announcement by the Chancellor, because the announcement by the Chancellor was made to the market all at the same time, so far as I am aware.

John Mann

Yes, but with the FCA’s clarification—come back to the earlier model, the FCA’s clarification—so were the FCA’s. In terms of how you looked at defining “false market” for the day—which is what you have done, for the day— would the same logical reasoning give a possibility that someone might conclude that in fact there was a false market throughout the week?

Simon Davis

I do not think so, because the reaction of shareholders to the Chancellor’s announcement seemed to me—although I have not looked at it in any detail, based on the Chancellor’s announcement to the market—the view that I have given at paragraph 17.16 is that a false market existed on 28 March prior to the issuance of the FCA’s statement via the RNS. What I have focused on is the period prior to the clarification statement, rather than the period thereafter.

John Mann

Only prior to that statement?

Simon Davis

Yes, absolutely. I am sorry if I did not make that clear.

John Mann

Just to clarify, you do not hold that there was a false market after that statement?

Simon Davis

No, I do not.

John Mann

In relation to it being disorderly, your report is commendably crystal clear, other than on this one point. I am unclear, having read it, whether you think that there was a disorderly market prior to the FCA’s statement or not.

Simon Davis

Yes. I have tried to add some clarification in circumstances where there is not a definition of “false” or “disorderly”. To an extent I am making my mind up based on texts and the like out there, but the view that I have come to—now my report is out in the public domain, there may be learned authors who will seek to disagree with the definitions I have come up with—but what I came up with was, so far as I was concerned, as set out at paragraph 3.20—

Chair

Just tell us roughly.

Simon Davis

The essential point is a false market is where the market is proceeding on the basis of a widespread misapprehension, and a disorderly one, what I came down to is it is where there is an inequality of information in the market.

Chair

Yes, that is more helpful.

Simon Davis

In circumstances where they may not be inequality because everyone has it, it is still possible—because not everybody is going to be reading what was in The Telegraph or the pieces that came in the wake of it—there may still be an inequality of information in the market. That is why I am saying “possibly”.

Chair

John, one more thing, and then we will move on. I agree with you—

John Mann

This is the one area where, I am afraid, in my view you are vague. I understand your rationale and logic: “false market”. But “disorderly market”, your explanation there is not at all convincing. A disorderly market must require somebody to have some preferential knowledge, and you cannot simply say, “Somebody listened to the Chancellor’s budget and someone did not: that creates a disorderly market”. Or, “Someone read The Telegraph and somebody did not. That creates a disorderly market”. For there to be a disorderly market, does there not have to be some evidence of someone having some information that others could not have?

Simon Davis

I have said that a disorderly market may be said to exist if some but not all market participants have access to information that is material, and it is for that reason, Mr Mann, that I conclude that it is possible. I am not in the same position as with the false—

Chair

We are repeating ourselves now.

Simon Davis

Sorry.

Chair

One last, quick go. I quite understand; you have come to a view, you are expressing it.

Simon Davis

I have come to a view because in circumstances where the material information is out there in the market, whether that is now disorderly—I have said it is false, and possibly—I cannot really go much further.

John Mann

No, but just to clarify, your evidence base for that is based on that some market participants may have seen The Telegraph article and some may not. That is your evidence base.

Simon Davis

I think I am saying something along the same lines. What I am saying is that to the extent that this definition is right, the disorderly market is one where there is an inequality of information, and I have said it is possibly disorderly here if some people were making their investment decisions based on something other than those who were making their decisions based on what they had heard about The Telegraph article. I do not regard this as easy because there is no definition. That is why I have said “possible”.

Chair

Absolutely.

Simon Davis

I am more in a more definite position with “false”.

Steve Baker

Mr Davis, you have mentioned in passing the use of media as a regulatory tool.

Simon Davis

Yes.

Steve Baker

Do you believe that the board understood that that was what was being done?

Simon Davis

The board collectively, I am not so sure, because what I have said is that to the extent the media strategy was being dealt with, that was being dealt with at the executive committee level. I would say there is little doubt, bearing in mind what you can see—I think it was Mr Kane who referred to something on the FCA’s own website—that the FCA board would be aware because it would see it in the newspapers that the FCA is seeking to get out messages. Whether the individual members of the board would be familiar with it I am not so sure, because I have not asked them about it, but certainly the chief executive did; certainly a number of the other people who would be involved in pre-briefings and the like would be aware.

Steve Baker

When I look at The Telegraph article, it says, “The intervention marks a victory for The Telegraph’s long-running campaign for action over rip-off charges” and so on. It seems to me that the FCA must have known The Telegraph had this long-running campaign. Therefore, you would have thought that it would be very clear to them that The Telegraph would pick up whatever information was given to them and run with it and that that would have very distinct effects on the market. Do you think that that is a fair summation of why they spoke to The Telegraph, and do you think that fits into a strategy for communication with the media that the board was aware of?

Simon Davis

No. I think that what the FCA was seeking to achieve was controlling the message in the media about the thematic review, with a view to making it clear what the thematic review was about and was not about. The view that was taken, particularly by the media associate who was familiar with the journalist, was that this was a journalist who would understand the message that the FCA was seeking to get across and would deliver that message, but the board were entirely unaware that this briefing was even taking place.

Steve Baker

Where I am going with this, I am trying to drive towards the responsibility and accountability of the board, and I have some very specific questions. It seems to me that they are exercising quite large amounts of discretionary power, which moves markets, and that they are relatively insensitive to the consequences of moving markets. All of that seems to tie into this book, “The Black Swan”, which it seems to me is altogether too influential in regulation today. What I am wondering is whether the board realise, in holding them to account, that they have this discretionary power and just how powerful it is, and the extent to which they have assessed the degree to which they can control these stories once they are released.

Simon Davis

If I just look at paragraph 19.56 what I have said is, “In circumstances where the FCA is using media-handling as a tool of regulation, it is fundamentally important that it controls to the extent it possibly can the manner in which that tool is exercised and takes into account any possible unintended consequences”. I rather agree with you—

Steve Baker

That they have not adequately considered—thank you.

Simon Davis

—that the unintended consequences—

Steve Baker

Thank you. I will just move into some of the specific things. We have talked about their collective responsibility to the extent that they had not considered the control of price-sensitive information. Could you characterise just how serious a failing that is?

Simon Davis

Insofar as the seriousness is concerned, I have made it very clear in this report that to the extent that the risk that this information could be price-sensitive was simply not considered, I regard it as extremely serious, and I think I have made that very, very clear.

Steve Baker

How would you expect the FCA to react if a regulated firm behaved in a similar manner?

Simon Davis

This was very much like the opening question from the Chairman, which is I would certainly expect there to be the kind of rigorous investigation I hope that I have delivered, and at the end of it somebody would have to take a view as to what would be an appropriate sanction, disciplinaries and the like, and the terms of reference make it clear that disciplinary action is something that will be considered at the end of it. I have no idea what disciplinary action, if any, has been taken.

Steve Baker

The Parliamentary Commission on Banking Standards included the following: “The reality that responsibility that is too thinly diffused can be too readily disowned: a buck that does not stop with an individual stops nowhere”. That is what the Parliamentary Commission said. Do you think that an individual member of the FCA board should take ultimate responsibility for the absence of proper controls?

Simon Davis

Certainly I know—not as well as a number of the members of your Committee—the recommendations by the commission, and I know because I sit through numerous presentations being given by my firm on the senior managers’ regime as that goes forward. I get very much the idea of having responsibility maps; it makes sense. In this situation, apart from the FCA obviously not being a financial services firm, but leaving that to one side, what I found was that there were a series of failings and there was not simply one that could be tied to a particular person, which is why I took the view, and as far as I am aware the FCA have not challenged it, that I allocated individual responsibility, and to the extent there were multiple failings I have attributed collective responsibility to the executive committee and the board.

Steve Baker

How should that collective responsibility be met if it is not going to fall to individuals to take responsibility in the circumstances?

Simon Davis

It takes the risk to the extent that no particular individual is going to be accountable, that the board itself will be carrying the can.

Steve Baker

I will put it another way. Is the process through which we are currently going an adequate way of holding the FCA board accountable for this set of failures?

Simon Davis

What I have done is set out the facts, set out what went wrong, set out my recommendations for the future, and I am now seeing, although I am not involved, a wholesale reorganisation of the FCA. Although I am not involved in that, the FCA is—

Chair

You are now being asked your view on this specific question, so we would really like you to give your answer to us now, to Parliament now, on that point.

Steve Baker

How can the board be held accountable for these failures?

Simon Davis

I think that the Chairman has just answered the question appropriately, which is to the extent that I find failings, I find failings by the board, by the executive committee, by individuals, that certain consequences will follow in relation to the individuals by the FCA. To the extent there are more fundamental failings, I think it is a matter for your Committee and HM Treasury, as those are the ones to whom the FCA is accountable.

Chair

We will do that, but what we are doing is we are asking you for your judgment of this particular question in the light of the fact you have been looking at the evidence for some months. Should we try to identify individual responsibility? You may want to answer the question phrased as Steve Baker has.