Oral evidence: Press Briefing of Information in the Financial Conduct Authority’s 2014/15 Business Plan, HC 881Tuesday 27 January 2015
Oral evidence, 27 January 2015.
Witnesses
John Griffith-Jones, Chairman, Financial Conduct Authority, and Martin Wheatley, Chief Executive, Financial Conduct Authority, gave evidence
Chair
Thank you very much for coming to give evidence to us this morning, both the Chairman and the Chief Executive of this extremely important regulator. Your work is crucial for this country. We need you to do a good job on behalf of the millions of people who use financial services and, of course, the hundreds of thousands of people who work in the industry. We are investigating what euphemistically could be described as “not a good day at the office” or what could more bluntly be described as “a catastrophe” that took place in late March, where the FCA broke its own listing rules, big time. As a result, there were major share movements in some of our important financial services firms and we need to be clear from this hearing, first of all, that we have got to the bottom of what happened and that the lessons have been learnt from it. That is what this hearing is all about. With that in mind I have one question—or possibly a set of questions—to open to the Chief Executive. Mr Wheatley. Do you think that there is anything in this whole episode that is connected with the culture of “shoot first and ask questions later”, a phrase that you came out with in respect to what people—certainly at the receiving end—felt had become the FCA’s supervisory approach?
Martin Wheatley
We do not have a culture of “shoot first and ask questions later” and it is certainly not our supervisory approach. I regret using the phrase but, just to be clear, that phrase was used in the context of responding to a question about how our new early intervention powers would be used. You will remember our early intervention powers are ones where, rather than our usual sequence of analysing, consulting, coming out with a cost benefit analysis and then coming out with a rule proposition, we were given a power to do the opposite to that: to come out with a rule proposition and then use those checks and balances at a later stage. So it was in that context I was asked, “How would it work?” and that is when I used the phrase. But, as I say, it is a phrase that I think has been taken out of context since and used more broadly. It is absolutely not the culture of the regulator.
Chair
None the less, do you think that the industry interpreted it to mean that the FCA was setting a more aggressive tone?
Martin Wheatley
I think “a more aggressive tone” is a subtly different point. We were asked—and we set out in our approach to the FCA document—to be more of a judgment-led regulator, to act sooner, to be less box ticking, and all of those things we have tried to do. So, if that translates into aggressive, it is a different approach and it is an approach that tries to capture and deal with issues before they become the multi-million pound issues that unfortunately we have seen in the past.
Chair
But you would agree that, having used the phrase, the industry might have been forgiven for interpreting it that way?
Martin Wheatley
I have tried to explain, every time I have had an opportunity to explain it, that that is not what the intention was.
Chair
I am asking you whether they could be forgiven for interpreting it that way, whether it was understandable that they did.
Martin Wheatley
As I say, it has been played back in the media a couple of times and each time I have tried to explain, “No, you must not take that out of context”. But I expect them to understand the point about being a regulator that is more on the front foot and that is what we have tried to be.
Chair
So there was an aspect of this phrase that you do not regret?
Martin Wheatley
No, I would separate entirely out the phrase. I do regret the phrase. The thing I do not regret is that we have tried to be—and I think are—a regulator that is much more on the front foot about important issues.
Chair
You do not regret the intention behind the phrase but you do agree that the phrase was not the right one and like all of us in public life, in one way or another, we haven’t always found the language that in retrospect we would have preferred. Would that be accurate?
Martin Wheatley
Again, the intention behind the phrase was to describe a very specific aspect of one of our powers and not anything more than that.
Chair
All right. Well, let us leave that there for the time being. Mr Griffith-Jones, on 28 March the FCA put out a statement, with respect to this extraordinary episode, saying that the board of the FCA would effectively investigate itself and that to do that it would involve an external law firm. In retrospect, do you think that that was a mistake?
John Griffith-Jones
I think that the process that we finally adopted turned out to be a good one. That statement was issued I think at about 5 o’clock, so two and a half hours after the incident had been closed down, and it lacked the precision that you drew our attention to very shortly thereafter. But the statement was made in good faith and it was certainly the view right from the beginning, at the very least, that it was from the non-executive directors. I know the statement came out as “the board” but there was never an intention of involving the executive.
Chair
It was more than just something that lacked precision. This is a statement that any reasonable person would conclude meant that the regulator was investigating itself for a very serious breach of its own rules.
John Griffith-Jones
The intent of the directors at that—
Chair
I am not asking you about the intent. I am not questioning your intentions. I am asking you whether, in retrospect, you realise now that it was a serious misjudgment—I used the word “mistake” a moment ago, but in fact a terrible misjudgment—to put out a press release that effectively was saying you were going to investigate yourself for this.
John Griffith-Jones
I personally do not think I would characterise it as a misjudgment. To the extent that it had the impact that you suggest, it clearly could have been phrased better and, indeed, in the subsequent couple of weeks—
Chair
But you would have been marking your own prep, wouldn’t you?
John Griffith-Jones
It was never the intention that we would write the report.
Chair
I am not asking you about your intention. That is what the press release actually said. The press release said that you would be conducting an investigation into this very serious breach of your own rules.
John Griffith-Jones
It said that we would use an external law firm and it did not say how we would—
Chair
You would seek the assistance; you would have external support actually.
John Griffith-Jones
You have the words in front of you.
Chair
You would involve an external law firm.
John Griffith-Jones
And we did. Sorry, I do not wish to split hairs, my intention—
Chair
This is not splitting hairs. This is fundamental, Mr Griffith-Jones. There is a heap of difference between appointing an independent investigator with carte blanche to work out what happened, without fear or favour, and the board of the organisation that has made the blunder announcing that it is going to investigate itself and seek some external support. These two are as chalk and cheese. I have to say, I am perturbed by the fact that you do not recognise this as a misjudgment.
John Griffith-Jones
I am happy to go with the word “misjudgment”.
Chair
Okay. You and I then had intensive discussions—the Davis report alludes to these—about the terms on which the inquiry would be conducted. As a consequence, an independent reviewer was in the end appointed, Simon Davis. On 8 April the FCA published its terms of reference for inquiry. These again went back to the territory of that original press release. That said that Mr Davis’s work would be overseen by a committee of the non-executive directors of the board and that you would chair it. Did it not occur to you—putting out something like that—that some or all of these people might be perceived to be people who needed to be investigated but that they were going to oversee the work? In retrospect, do you think that was a misjudgment?
John Griffith-Jones
At the time I immediately realised that potentially all of us, including the non-executive directors, could be blamed or subject to investigation in the report.
Chair
Might be perceived to have been blamed, even if they had done nothing, and therefore merited investigation.
John Griffith-Jones
Sure, yes, absolutely. I know what we were trying to say, which—
Chair
The intention is not what I am getting at here. I am not suggesting for a moment that you have been engaged in some Watergate-style cover up. Maybe you have, but I am not at this moment making that allegation.
John Griffith-Jones
Thank you.
Chair
I am asking you much more straightforward questions about whether it was a blunder; a misjudgment. Once again to go back to the very point that, after intensive discussions with you, I thought that we had got across, on behalf of this Committee, that the investigation had to be wholly independent and seen to be independent of the regulator.
John Griffith-Jones
I believe the role that I always envisaged that the non-execs were going to play was to get the report done. Indeed, you and I had some very vigorous discussions as to precisely how that would be done. It was undoubtedly the case that you made some very telling points, which I think we incorporated in both the first edition and in the second edition of the terms of reference. But it was never the case that I, or the non-executives, felt that in some way we were going to write the report but that we were responsible for getting it commissioned and finished. As it transpired we did need to be involved, at least on a logistical basis, which is where we ended up and—
Chair
I will read you clause 11 of the terms of reference.
John Griffith-Jones
This is the original one?
Chair
The one that I have just referred to of 8 April, “The inquiry will be overseen by a committee of the non-executive directors of the FCA’s board” chaired by you. In the reply you have just given you have acknowledged that, outside the FCA, some of those people might be perceived to be people who needed to be investigated, so they were again overseeing their own work; overseeing their own wrongdoing. We are back straight in the quagmire—
John Griffith-Jones
Yes, I understand.
Chair
—that is so damaging to the reputation of the FCA, weeks after the event. You have had nearly two weeks to think about it and you are still coming forward with a crackpot proposal, one guaranteed to erode credibility in the FCA. Do you not see that even now that it was a colossal misjudgment to add clause 11 to that terms of reference?
John Griffith-Jones
Clause 11—and this is absolutely the case—was simply designed to ensure that someone was responsible for the thing coming to an end, which is not unimportant in reports of this nature. I understand again, obviously with hindsight, you are attributing to the word “oversight” some sort of control over what it said. Whereas, I am attributing to the word “oversight” some sort of responsibility for getting it done. I do understand the implication of your view; yes, of course I do.
Chair
But this was not some hastily drafted word that slipped in when it should have been said, “The non-executive members of the board will ensure that in the end a report will be completed, but will have no influence on its content or the manner of its conduct”. That is what you have just implied you wanted clause 11 to say. It says something completely different and you have had nearly a fortnight to think about it, “The inquiry will be overseen” by a committee of the FCA. Do you still not see that that was a colossal misjudgment?
John Griffith-Jones
I know that the word was interpreted completely differently from the intent of the non-executive directors and we changed it in the subsequent version.
Chair
Let us just go forward a little to what happened then. This Committee then had a discussion about those terms of reference in private session and concluded that those arrangements were not acceptable. For the most part this is in the Davis report. I am not lifting the veil on anything in particular or, if I am, it is only in adding some detail and, if I may use the word, it is not my intention either to—and nor shall I, I hope—disclose private conversations that you and I may have had. You then produced a new terms of reference and a protocol for the inquiry, after lengthy to-ing and fro-ing; very lengthy and protracted and difficult, which involved man days of my Clerk’s time and a good deal of my time. At the end of that process, it was agreed that the non-execs would be able to see the relevant passages of the report at the time of Maxwellisation. Is that correct?
John Griffith-Jones
I have a copy of your letter. Yes, I think it is, from memory anyway.
Chair
But the Committee has heard from Simon Davis and Clive Adamson that the FCA board saw Simon Davis’s report as part of the Maxwellisation process; the whole report. Is that correct?
John Griffith-Jones
That is correct.
Chair
Who decided to take that decision?
Martin Wheatley
Simon Davis, from memory.
Chair
Okay. So this was sent to you by Simon Davis. How did he get the idea to send you the whole report rather than each of you the relevant passage for the purpose of Maxwellisation?
John Griffith-Jones
Simon Davis had criticised the board in section 19 and I presume that he had decided that, having been collectively criticised, the board collectively should have a chance to respond to that criticism and his decision was that we should see the whole report.
Chair
After that is it correct that you had an exchange of letters with Mr Davis about one or two of the recommendations?
John Griffith-Jones
We wrote one letter. May I just explain?
Chair
Yes, I am asking you to explain.
John Griffith-Jones
The board met to consider the Maxwellisation version—if I might call it that—and from memory, although I never retained a copy, the criticism of the board in the Maxwellisation version was more or less identical to what was written here. As a board we wrote back and said, “We accept the criticism”. The board decided that what he had written about the board, blaming the board for lack of systems and controls, was appropriate. We also took the opportunity to write to him about four relatively minor amendments to his draft of his proposals, which we felt would make them more easily operable and we wrote in good faith. I rang him up and asked could we meet. He said, “No, you must write” and we wrote. We did not hear back from him but we wrote in good faith saying, “If you say that that will make it very difficult for us to do this”. We did not say “take it out” or anything. It was, “We accept the proposal but it will work better if we make some minor amendment to that” and—
Chair
Well I think we had better see these exchanges.
John Griffith-Jones
It is one letter. As far as I am concerned, the nature of this is completely transparent and I am more than happy to share it with you.
Chair
Does it not cross your mind—even sitting here now—that that could be construed as you trying to influence the outcome of his report? That is the body being investigated, having seen the recommendations in draft, securing alterations to the final report?
John Griffith-Jones
No, because I think—and you will be the judge of that when you see the letter—the suggestions were—
Chair
I have not asked you whether they did; I am asking you whether it would be construed as having done so; the fact that you have had those exchanges. The protocol drafted, and all those exchanges between you and me for over a month, were they not targeted on exactly this problem of trying to avoid exactly what we now have, which is a perception that the FCA may have tried to influence the report in draft?
John Griffith-Jones
I was slightly surprised when Mr Davis said we were to see the report but, having handed the entire process over to him, I did not feel it was appropriate to say to him, “I am now going to supervise how you do this report”. I absolutely can assure you, to the best of my ability, that the board felt that the recommendations could be marginally improved by four specific—
Chair
If I may say, you are repeating yourself.
John Griffith-Jones
I do not know how to—
Chair
There is no need to. We have that firmly on the record and that is very helpful.
John Griffith-Jones
Okay.
Chair
I am asking you a different question. I am asking you about the way this would be construed. You said you were slightly surprised, so when this got to you, did you not think, “God, I cannot see this. We cannot put this to the board. This is going to lead to the wider public and probably the Treasury Committee asking us, time and time again, ‘What on earth is going on? You have had an opportunity to redraft the recommendations before they are published. Whether or not you have taken it you have had the opportunity’”? Why were you slightly surprised? What was the element of the surprise?
John Griffith-Jones
That the process that he had designed, when we finally got there, he felt was best achieved by us seeing the pre-Maxwellised version.
Chair
But what was the element of surprise in all that?
John Griffith-Jones
Well, the memory of our exchange of letters.
Chair
Right. So it did not cross your mind to say, “This isn’t a good idea, Mr Davis. If I were you, I wouldn’t do this. In fact, I think it is a good idea that you try to pick out the errors that are relevant for each of us and not send us the whole recommendations”?
John Griffith-Jones
He did that. He did that—
Chair
After all, you then took advantage of the fact you had it to make proposed amendments to the report—
John Griffith-Jones
I am sorry, we didn’t. No, we took no advantage.
Chair
—compounding the sense that you might have redrafted this.
John Griffith-Jones
We had no authority to redraft it. We had no intention of redrafting it. We accepted the criticism based on—
Chair
That is not in doubt. I have not been raising authority or intent. I am talking about capacity or even perception of capacity to redraft or to influence.
John Griffith-Jones
The alternative would have been just to write saying, “We accept the criticism”, which as I said we did. We took the opportunity in good faith to make these suggestions. I can only stand by: there was no motive of the sort that you are suggesting at any stage.
Chair
It is not a question of your motives. I have not challenged your motives at any point. I am asking you about how these things will be perceived. This is the regulator back investigating itself, at least to some degree, isn’t it?
John Griffith-Jones
It is not.
Chair
You have broken the spirit of the protocol, haven’t you?
John Griffith-Jones
No. I do not believe we have broken the spirit of the protocol at all. In fact—
Chair
Haven’t you compromised the independence of your own report by having these exchanges?
John Griffith-Jones
No.
Chair
Don’t you think that people will perceive that you have, even if you haven’t?
John Griffith-Jones
No. You had Mr Davis in front of you who I think told you very clearly that we haven’t in any way interfered with the report. I do not have his precise words to hand. I trust you believe what he said. I believe the public can balance up his responses with my responses today. As I said, I am very happy to show you the letter. I believe you will conclude that we were acting in good faith to try to get the recommendations into the best possible shape, which he did not have to accept in any way and we had no idea whether he would accept them or not.
Chair
For the sake of the record—so we can have this on record as I hope the answers are going to help the FCA—did you see or discuss or become aware of any part of Simon Davis’s report before it was completed and sent to you?
John Griffith-Jones
No, absolutely not.
Chair
Did you have any discussions with him about his work during the course of his inquiry?
John Griffith-Jones
Under the protocol we were in charge of the logistical support. I had a sub-committee of the board and, broadly speaking, we met with Mr Davis monthly to literally ask him, “Are you getting the information you want? How long is it going to take? How much is it going to cost? Are there any impediments to getting it done?” Those were the only meetings we had.
Chair
Did you have difficulty getting your board to agree to the protocol?
John Griffith-Jones
The protocol? No, very few at all. I think I was largely in charge of the detail of the drafting and the protocol was readily accepted.
Chair
I just wanted clarification on those points. That is very helpful. Thank you.
Mark Garnier
Mr Wheatley, can I turn to the wider subject of using press releases and communications as a tool of regulation. What does that mean?
Martin Wheatley
I think it means being clear about what we expect; about what we think “good” is and what we think “unacceptable” is.
Mark Garnier
Who are you addressing these communications to?
Martin Wheatley
To the regulated firms; to the employees of regulated firms, to the people who consult with them, who advise them; to the consumers of financial products and to broader stakeholders. There are a very broad number of audiences.
Mark Garnier
Yes, but they are also very, very diverse audiences. If you are a consumer of financial products, presumably, the message that you want to be receiving is that the regulator is being effective. If you are a provider of financial services products and you are a regulated entity you want a completely different set of communication strategies. How does this communication strategy rationalise itself between the two opposing audiences?
Martin Wheatley
I think the regulated entities would probably prefer that everything was negotiated and resolved in private, if I am really honest. They would rather not have publicity around some of the things that we have discovered. I think it is our responsibility as a regulator to use multiple channels. The media is only one of multiple channels.
Mark Garnier
Can you talk about the others as well?
Martin Wheatley
The other channels would be our website itself and our e-mail traffic where we talk directly to firms. The channels would be in meetings that we have with firms, both informally and formally, and—
Mark Garnier
That is all 72,000 firms?
Martin Wheatley
Yes. The channels would be final notices that publicise wrongdoing where we have found it and, in some cases, Appeal Court judgments, different levels of court judgments. There are very many channels, is the point I would make, and we try to use them intelligently depending on what we are trying to achieve.
Mark Garnier
Graham Beale of the FCA Practitioner Panel told us there was an attitude within your organisation that headlines are good. He said there was a desire specifically to generate sensational headlines and that is what you were trying to achieve. Is there any truth in this criticism?
Martin Wheatley
There is no objective that anybody has, whether me or the comms department or the press department, which says, “Your objective is to generate sensational headlines”. That is absolutely not part of our culture; not part of any objectives.
Mark Garnier
What about any headlines?
Martin Wheatley
Generating coverage is different. As part of communicating, we want people to have access to forms of communication that they would read. While we would like to think that everybody reads our website diligently or our regulatory round-up diligently, they do not always, so we use a multitude of different media of which the press is one but it is only one. We try to make sure that our stories get covered accurately and dispassionately, and that is our intention whenever we have any communication strategy.
Mark Garnier
What about the Government, are you trying to impress the Government?
Martin Wheatley
Not in particular beyond it being a set of stakeholders, which of course would include yourselves and other MPs as well, but I would not say that the Government has any particular status within that.
Mark Garnier
Again, it comes back to this whole business of who you are trying to communicate to. When you look at the people who are meant to be protected by you, are you trying to impress that audience as much as anybody else? Are you trying to get out there and say, “Your tax pounds are paying”—actually they are not, are they, because you are financed slightly differently—“As a consumer, you are effectively paying fees to the regulated, some of which go out to the regulator. You do not have to worry about us because we are doing a good job. Look at the headlines we are generating” essentially? That is phrased in a cynical way.
Martin Wheatley
No, I would say, quite contrary to that, our objective is to empower consumers to act as their own defence. The best form of protection is somebody who can ask the sensible questions themselves, so when we are talking to consumers what we are trying to say to consumers is, “These are the sorts of things you should be asking to protect yourself”.
Mark Garnier
But they will turn round and say, “Well, you are the regulator”, so why should they be protecting themselves? I completely accept that a well-informed consumer is a good thing because a well-informed consumer will drive better regulation but, none the less, a consumer would not expect that they would be necessarily a key part of the—
Martin Wheatley
I would expect them to. I think if you expect the regulator and only the regulator to provide that degree of protection, we are going to have a losing battle. I would expect consumers to take a degree of responsibility, and a lot of our communications is about telling consumers, as we did yesterday when we put out some communications about the new pension changes that are coming through. We said, “Here are some of the things that we are going to expect you to ask when you are making decisions”.
Mark Garnier
Particularly in a case like this, the insurance market review, do you accept that trying to do that can come at the expense of the reputation of some of the firms that are being regulated? As was indeed the case with this when you saw massive share price movements.
Martin Wheatley
Maybe I could come back to this. The generic point about when the reputations of firms are affected, it is largely—not always—because there are questions to ask about what the firms have been doing. So when we name a particular firm, and we do not do that in most of what we do, we do that on the back of evidence that that firm has fallen a long way short of the standards that it should have set for itself.
Mark Garnier
I find the whole idea of using the media as a tool of regulation completely bizarre. We know for a fact that communication can be misunderstood. We have just heard a dialogue between the two Chairmen—our Chairman and your Chairman—about the use of the words “overseeing this report”. I think it was related to clause 11, the thing that came out two weeks after this event. You have discussed at great length the difference of intent. You very clearly meant something—and I have no doubt that you are absolutely sincere in what you are saying—but the fact of the matter is it is not what you mean, it is what is being read. When you are using such a crude tool as the media to get this sort of communication out, you run a colossal risk of what you meant being misunderstood at many different levels. You could come up with an idea. Your media team does not quite understand the nuances of what you are trying to say. The media team communicate and the newspaper misinforms that; Chinese whispers. By the time it has got down to some poor compliance officer sitting in the outer reaches of the Outer Hebrides, who is trying to do an honest day’s work as an IFA, how on earth are they supposed to know what they are supposed to be doing even if they do read the right newspapers, which they may not?
Martin Wheatley
I think you are right, of course there are risks. Whenever we publish something—
Mark Garnier
It sounds to me that you are saying they are acceptable risks when clearly they are not.
Martin Wheatley
They are risks that have to be managed, and so we work very, very hard to try to manage those risks.
Mark Garnier
But not hard enough.
Martin Wheatley
As I say, we work very hard to try to manage those risks. We put out—
Mark Garnier
But a lot of people lost a lot of money as a result of you not managing those risks properly. There were a huge amount of people who were operating in that market on that particular day when we saw that very, very false market created by you. Let us be clear, you created a false market in these insurance shares. They lost a lot of money and that was because you got it wrong; very badly wrong.
Martin Wheatley
But we have moved from a generic to a specific point.
Mark Garnier
We have because, when you are looking at generics, you need to use specifics in order to get examples of what is going on.
Martin Wheatley
I agree with that.
Mark Garnier
This is a very, very strong example of how you got it completely wrong at great expense. Some people made a lot of money out of it, I agree, because there is a zero-sum game, but a huge number of people lost a huge amount of money directly as a result of you creating a false market by your cack-handed approach to media relations.
Martin Wheatley
Clearly we did not set out to create a false market, and clearly our 100 to 200 press releases per year do not achieve that. It strikes me that the alternative you are suggesting is that we do not communicate outside the very narrow channels of communication.
Mark Garnier
I think you have to be clear about what you are trying to do. I was a compliance officer on two occasions—once under the FSA and once under the TSC, I think it was, way back when—and I can tell you it is not an easy job being a compliance officer, if you take your functions seriously and recognise the repercussions of getting it wrong, not only to your reputation but also the fact that you can potentially go to prison if you get it wrong or you could do. You worry about this. If there is an approach by the regulator that you should be reading The Telegraph one day and The Guardian the next day, and maybe The Sun the day after, to find out what it is you are supposed to be doing, clearly, you are going to have lack of faith in the regulator. If those people who are being regulated have lack of faith in the regulator, that will transmit through to those people who are being protected by the regulator.
Martin Wheatley
Again, with respect, if you are reading something very different every day in The Sun or The Guardian or The Telegraph, we try to make sure that we have a very consistent message. The industry welcomes our open communication approach. So, notwithstanding that we screwed up on this day in question—and that is why I mentioned the generic point—the industry values the fact that we do communicate and we are clear about what we care about. That is the feedback that we get and it comes through all of the surveys that we do.
Mark Garnier
So you have gone to the industry and you have had specific feedback from firms that they welcome the fact that you are using the media as a method?
Martin Wheatley
Yes, in the last survey that the Practitioner Panel did, 48% of them said they get most of their information from the media channels and they do welcome that.
Mark Garnier
What sort of information?
Martin Wheatley
Information about what our priorities are for the year ahead, information about areas where we have looked at and found both good and bad practice. Not everybody reads our direct e-mails. Not everybody reads our regulatory round-up, so the fact that it appears not just in the national press but the specialist journals, compliance journals as well, people write up the things that we put out and that is another way of communicating.
Mark Garnier
Does that worry you?
Martin Wheatley
Does it worry us?
Mark Garnier
A little bit?
Martin Wheatley
That people use a multitude of journals to get their information? No.
Mark Garnier
No, that some of this information is coming through having been translated from how you determined it in the first place. It is one thing when you send something out. You are the regulator; I am a compliance officer. You send something to me and say, “These are our priorities”. However, if I then get that from—I do not want to name specific newspapers in case they take offence but the point is they may interpret that in a slightly different way. They will highlight certain things that will be more newsworthy than others and you get the wrong nuances from this. It worries me that you think that it is a good thing that 48% of people prefer to read this through the press or think it is a good idea through the press, than to take a direct communication that has not been subject to Chinese whispers or a different interpretation or a different emphasis, when in fact we are talking about a very serious business. We are talking about people’s life savings. We are talking about financial services products. We are talking about huge numbers of people—what is it? 2.4 million people employed in the financial services industry in this country—who are relying on picking up bits of information about how to regulate themselves from the press. Half of them, 1 million people relying on the press to tell them how to regulate themselves properly.
Martin Wheatley
I think it is better than them not picking up any information, and one thing—
Mark Garnier
But you are the regulator. Surely you must be worried about the fact that the alternative to them not reading the newspaper is not reading anything at all?
Martin Wheatley
We send firms the information, so we do send to firms. We have a regulatory roundup that captures the things that we think are relevant. Very specific things we send to specific firms. We know that everybody is busy and that people’s mailboxes get full and people do not necessarily open or forward our communications.
Mark Garnier
But they have time to read the newspaper?
Martin Wheatley
Most people tend to find time to read the newspaper at some point in their day, but it is a broad brush.
Mark Garnier
Again, I would understand it if you were talking about the trade press, the press that is specific about this, and I think any reasonable person would agree that talking to the trade press is an incredibly good idea because a trade press is going to be much more cerebral and less sensationalist or one would hope they would be, but going to broadsheet or tabloid newspapers, who are trying to sell to parts of the mass market, does not seem to be a very good way of relying on people getting this information. When you accept that so many people—half the people that you are regulating—just do not read the e-mails they get from the regulator, what does that say to you about the respect in which you are held by 1 million practitioners?
Martin Wheatley
It probably tells me that they think they know it all already or they are too busy to read another document coming through to their—
Mark Garnier
Do you think they would like to hear you say that they think they know it already?
Martin Wheatley
Well, you are asking me to speculate on why they do not open their e-mails. I do not know, because if we sent them an e-mail asking them why they didn’t, I do not suppose we would get an answer.
Mark Garnier
I have to say that Otto Thoresen and Andrew Turberville Smith both told us that they disagreed very strongly with this approach to communications. Why do you think that they are wrong?
Martin Wheatley
I think they were looking at it relatively narrowly, which is communication with regulated firms. With regulated firms we communicate directly. We write directly to the CEOs. We communicate directly risk with the compliance people. We try to make sure that they pass that information on. But you have just said yourself that there are 2.4 million people who work in the industry. They do not all get communications from—
Mark Garnier
Yes, but a compliance officer is required to pass on this stuff. Every firm has a designated individual and in bigger firms a designated department that is responsible for doing exactly this. It is their responsibility to pass that down. Now surely there is a structure, which is very carefully put in place, to make sure that this gets absolutely to the frontline, absolutely to the practitioner who is out on the street trying to rustle up business and all the rest of it. So that they know exactly what they are and are not allowed to do. You said you have informal meetings and sometimes formal meetings with these firms. You have 72,000 firms. Has your organisation met with every single firm it is regulating?
Martin Wheatley
No. I can almost certainly say we haven’t.
Mark Garnier
Do you know what proportion of them you have met with?
Martin Wheatley
We would have met with certainly all of the 24,000 firms who were regulated prior to Consumer Credit. Since Consumer Credit has become our responsibility, we are now going through a process of authorising those firms. That is a process that is a two-year process so it will not be until another two years that we will have met those, so we are at a relatively early stage of that process.
Mark Garnier
Just a rough idea, of the 72,000 firms you regulate, how many would you have had direct contact with?
Martin Wheatley
When you say “direct contact”—
Mark Garnier
Sorry, a specific communication, one way or the other, preferably a meeting, a telephone call is fine; something that is a guidance-type of conversation.
Martin Wheatley
Again, if I can draw the true distinction because there is a very new community that we are dealing with. Of our 24,000 firms every single one of them would have had some form of contact, not necessarily face-to-face with a supervisor --
Mark Garnier
But you regulate 72,000.
Martin Wheatley
Right. So the 50,000 firms that have come in as part of Consumer Credit, every single one of them has had a specific communication from us to tell them what our expectations are. Every single—
Mark Garnier
That would be a round-robin type of—
Martin Wheatley
No, it would be very specific saying, “You are this sort of firm. You need to get your permission at this date. This is the sort of information we will need as part of that”. So every firm will have had that and we are now going through the process of getting those applications in.
Mark Garnier
But informal guidance?
Martin Wheatley
Well informal guidance and in fact very formal guidance. In the credit industry we have put out some very, very formal guidance as to what we expect to happen. Most recently, just before Christmas on the Credit Bill.
Mark Garnier
Let me put the question another way. If I was to go along to any of your agencies, speak directly of the regulated entities, and say, “How well do you know the firms you are responsible for?” what do you think their answer would be? Have you met them?
Martin Wheatley
It would vary a lot. So you would go to a particular segment where they were looking after wealth managers or banks or insurers. We categorise all firms according to the most important and the least important. Clearly the most important firms we would have a lot of knowledge of. The least important firms we would have much less knowledge of. But that is the fact of having a 3,000 person organisation that is responsible for regulating a very large financial services industry.
Mark Garnier
What it sounds like is my constituents in Wyre Forest would be anybody’s constituencies around this table, who talks to a small IFA. What you have just said is that the regulator does not have any contact apart from informing—
Martin Wheatley
No, I haven’t said that at all. I have said—
Mark Garnier
That is how it has come over.
Martin Wheatley
No, there are different forms of contact they may have had. I just cannot tell for your constituents what form of contact they will have. But we use multiple channels—I think that is the most important point—not just the media.
Mark Garnier
Thank you.
Chair
Did you say earlier not all firms read FCA e-mails but I think you then went on to say that they do find time to read the newspapers?
Martin Wheatley
I cannot be absolutely definitive about the second point.
Chair
Well, words to that effect. Do you disagree with that point?
Martin Wheatley
I cannot be definitive about the second point. I can be definitive about the first point.
Chair
What, that you did say it?
Martin Wheatley
That I did say that: that not all firms open our e-mails. I know that for a fact.
Chair
That is a pretty serious state of affairs, isn’t it?
Martin Wheatley
It depends whether the firm feels it is being able to get its information by some other route. All of our information is on our website, so it may be that firms have come in to our website and found the information.
Chair
When a regulated firm gets a communication from the regulator, do you think the regulated firm should read that communication?
Martin Wheatley
Ideally, yes. But again, can I be quite distinct, there are certain communications that we require a response to and absolutely we make sure, but when we are in the mode of sending information, so we do a regular regulatory round-up, that is for information to the firms of the things that we have been involved in or doing. They may or no decide to open that.
Chair
Do you think that, as a regulator, you need to get to the position where you are not relying on a third party to interpret what you need them to know and that, until you do that, your regulatory effectiveness is at risk?
Martin Wheatley
We do not rely on a third party. All of the information in the—
Chair
Well, you have told us that you do. Indeed you told Mr Davis that you regulate 72,000 firms. You cannot get to them all directly, so part of the reason for press briefing is that you communicate with them via the press.
Martin Wheatley
When we say 72,000 firms, also the 2.4 million employees who do not necessarily get direct communication from us at all.
Chair
Yes. So you are using the press as a form of communication, as a substitute for putting out that maybe subject of interpretation then of course, for—
Martin Wheatley
I would not say it is a substitute. I would say it is a complement. When we use the press—
Chair
You have just said that it is a substitute because a moment ago you told us that you cannot rely on them to read the stuff.
Martin Wheatley
So it is a complement for those who do not open or read our own direct e-mails.
Chair
It is not a complement, it is a substitute. Where firms fail to get the message you are requiring that the method of communication is substituted with another. That is the press.
Martin Wheatley
No, I think the distinction is that they may use it as a substitute. From our point of view it is a complement, because we use both methods.
Chair
You said, in response to another question from Mark Garnier, that you put out 200 press releases a year, and others, and have not created a false market. If you were to investigate a firm that had breached the listing rules with a press release, how would you react if the firm turned around and said, “Well, we’ve put out 199 other press releases this year and nothing went wrong, so I don’t know that this is quite so serious”?
Martin Wheatley
Well, we would not. We would say, “This is the one that is serious and we require you to investigate this”. I am not saying that it was not serious. Please forgive me, if I am saying that. I am saying that is not a reason not to use this form of communication. That is the point I was trying to make.
Mr Ruffley
Mr Wheatley, in The Telegraph case you pre-brief The Telegraph, and they run a story before the FCA has made public its own explanation of its work officially. Can you just explain to us why you take that course of action in some cases and not in others?
Martin Wheatley
The case where we would take that course of action is where we believe we are not releasing something that is broadly sensitive, so that is the only situation in which we would have that sort of conversation with an individual journalist—whether it is The Telegraph or elsewhere—that we believed either the information was already known or of a general description. Where we believe the information was sensitive we absolutely would not take that approach. It would either be released through a 7.00 pm regulatory news announcement or through a very tightly controlled embargo process.
Mr Ruffley
Mr Adamson has told this Committee that reporting a piece of information could itself make it price-sensitive. Is it ever appropriate for the FCA to pre-brief journalists, if Mr Adamson is right?
Martin Wheatley
We have learnt a lot from this, so we clearly got this wrong. This information was taken and became more sensitive than we thought when we went into the process, so we would never do that again. We would not pre-brief something that we thought was sensitive, except in very strictly controlled conditions. That would not be to a single journalist and not absent any very strict embargo around it.
Mr Ruffley
It is not great comfort to the industry, is it, because you thought, or individuals in your organisation thought, that this was not price-sensitive? We all concede—and you concede—that they got it wrong, but in your answer to me just now you are suggesting that you might do this again, that is to say pre-brief, and a story is run before you have officially explained what your work is about. It relies on individuals deciding whether or not the pre-briefing in that way before you have done your official explanation publicly could trigger price sensitivity, couldn’t it? It could happen again, couldn’t it?
Martin Wheatley
It will not happen again, because we will not do pre-briefings in this way, and we have a strictly controlled process. People within our organisation do not make unilateral decisions. Everything is centralised through the press office. The press office would talk to the head of the press about any conversations that were proposed, and ultimately that would come to me if it was a sensitive issue, so it would not happen again.
Mr Ruffley
You have said you would not do it this way again. So I am clear about this, does that mean that there will be no occasions in the future where you pre-brief before you have officially explained the piece of work that is the subject of the briefing?
Martin Wheatley
Again, if we can talk about what we mean by pre-briefing. We would not do it on the basis that we did it this time, which is to an individual journalist, without tight controls around it. We might do it, and we did it in fact on the release of the Davis report when we got a group of journalists. We said, “Right, you can stay in this room. Nobody is allowed to use any phones. We will spend an hour talking to you about what this report is about prior to filing any stories” and that very tightly controlled method we might use again, but we would not use the method that we used this time.
Mr Ruffley
A lot of people—and I think there are some on this Committee—think you should cease pre-briefings on forthcoming announcements where you have not simultaneously made public your explanation of the work. Could you explain to us why that is not a sensible course of action, just banning these pre-briefings?
Martin Wheatley
We could do that, absolutely.
Mr Ruffley
You could. I am asking why you do not think in the interests of clarity everyone will know where they are. Everyone gets the same information. What is wrong with that?
Martin Wheatley
The reason being that, as you know, in practice the media is very competitive and people want to file their stories as quickly as possible. If everybody received that story at exactly the same time, you would find some quite wild stories that are filed within two minutes, five minutes, 10 minutes, 15 minutes, so the objective of having an embargoed pre-briefing is to try to make sure that everybody writes about it in an informed way, and we have had a chance to iron out any idiosyncrasies or things that people have misunderstood. It does mean that when whoever has come to that pre-briefing—and that is widely open to people who cover a particular topic—at the point when the embargo comes off they are all able to write an informed story at the same time. I think there are some risks in the other approach in simply releasing it through a regulatory news channel.
Mr Ruffley
Would you concede that it would be clearer if you ceased briefings of those kind?
Martin Wheatley
It would be clearer in terms of policy. It might not be clearer in terms of the messages that people got, or the stories that got written.
Mr Ruffley
Do you not think the advantage of clarity outweighs any potentially damaging effect if you get it wrong?
Martin Wheatley
As I say, as we have seen, the damaging effect of stories going wrong can be very damaging. If people are trying to file a story too quickly without having checked with us first there are damages that come from that as well. All I would say is that we would be very cautious in the future. We have not absolutely ruled out an embargoed pre-briefing, but we would do it on a very controlled basis.
Mr Ruffley
Going back to 13 September, there was a pre-briefing to The Times on the study you were doing into cash savings and introductory rates, marking the introductory rates. On that occasion you pre-briefed The Times at the same time as publicly making clear what that study was about. I am just puzzled as to why you did it that way in that case. It was released alongside the official FCA announcement of what that study was about.
Martin Wheatley
Yes, so there wasn’t the risk that a single journalist could somehow pre-empt the story, but it was an attempt to try to make sure that the story was properly captured. It comes to Mr Garnier’s concerns that it is often quite hard to manage the media who might want to write a particular story, so we spend a bit more time to try to make sure that the story is correct.
Mr Ruffley
When asked whether the FCA had conducted any further pre-briefing since March 2014 Ms McMillan told us that it had not. Is that correct?
Martin Wheatley
Yes.
Mr Ruffley
Ms McMillan also told this Committee that the bank had pre-briefed journalists on the bank’s stress test published in December 2014, but this pre-briefing was made available to all journalists on the bank distribution list. Journalists were locked in the bank and not allowed to publish their stories until the bank had published an official statement of its own. That is very different from what you were doing before March 2014, is it not?
Martin Wheatley
Yes.
Mr Ruffley
Do you not think when Ms McMillan gave evidence to us she seemed to conflate that way of doing things with the pre-briefing activity you did that created the false market in March 2014?
Martin Wheatley
That was not how I read it and I do not think that was her intention. It was simply to say that it may take different forms. The bank’s structure that you described there is a very tightly-controlled form and one that we would be more akin to in the future. It was a different form of releasing information.
Mr Ruffley
Is that a bank model that I have just précised? Is that something that you are actively considering doing?
Martin Wheatley
Yes, it is very important.
Mr Ruffley
Locking people in rooms and so forth, as I have described, are you committing to do that now?
Martin Wheatley
For certain types of things, yes, we would. We do not often have economy-moving announcements to make, so when the bank puts out its inflation report, it clearly has a very wide impact. Most of our impacts are more idiosyncratic than that, but when we have something—
Chair
You have certainly discovered that you have a market-moving announcement to make from time-to-time.
Martin Wheatley
Yes.
Chair
To clarify, you just revealed that you pre-briefed the Davis report?
Martin Wheatley
No. To be absolutely clear, we released it first thing in the morning and then we got a group of journalists in to talk to them prior to them writing their stories.
Chair
So after it had been released?
Martin Wheatley
Yes.
Chair
It was already in the public domain, so the electronic and other media?
Martin Wheatley
I believe that is right.
Chair
There was no pre-briefing of the Davis report? It is very important that you make sure that you correct your earlier evidence on this point.
Martin Wheatley
Yes.
Chair
You are very confident of that?
Martin Wheatley
I am going to come back to you now, because you have made me nervous that I have that right. I think I have.
Chair
I will come back to it after the next series of questions, but you may be able to consult staff behind you. I think it is absolutely essential that we have clarification on whether you pre-briefed the Davis report.
Mr Love
Mr Wheatley, can I come back to the issue of the tone of Authority communications in relations with the industry? Clive Adamson told this Committee that the “shoot first and ask questions later” went too far, and I think you have accepted that with your apology. He also had concerns about the tone of other communications, which were sometimes too aggressive. Do you agree with Mr Adamson?
Martin Wheatley
I think possibly in the very early days of the FCA the tone might have been too aggressive. That was because, as a new entity, we were trying to establish an identity and establish with the industry what we stood for. We had a number of conversations with both the Practitioner Panel and firms about that, and we tried very hard to get the balance right. The Practitioner Panel will not always agree with the balance being right, because frankly, when we are calling out bad behaviour, by and large people would rather not see that called out. When we have to do that—and clearly we have to do it at times—we work quite hard to try to make sure that we get that absolutely right.
Mr Love
I want to come to your relations with the Practitioner Panel now, because we had some interesting evidence produced by them. Before I do that, let me ask you, Chris Woolard made a statement on 11 March 2014—so not at the beginning of the FCA but more recently—that firms must start putting consumers first and stop seeing them as pound signs. Do you think that was overly aggressive and challenging to the industry?
Martin Wheatley
I think it was. Clearly it was trying to communicate, and this comes back to a different question, to a different audience and the different audience would be people who do not necessarily read our website or The Financial Times but who read the popular press, to try to make sure that people were empowered with knowledge that they should think about when they are being sold products. That was the intention behind it, but I know that the industry saw that as aggressive.
Mr Love
We have taken evidence from the industry and Otto Thoresen from the ABI told us that he thought the Authority approach of, and I quote here, “being active about its engagement publicly, using the media as a mechanism for telling its story had been”, and these are his words, “accepted and acknowledged as a misstep”. Do you agree that that was a misstep policy?
Martin Wheatley
It is quite nuanced and subtle. I know from the industry’s point of view some of the headlines that they saw they felt were too aggressive. I know from our point of view that we worked very hard to try to make sure that we were balanced in what we were sending out. We did a piece of analysis where we had a media firm analyse our announcements and the statements. What they came back with was that, by and large, the body of the text follows our announcements quite accurately but the headlines seem to take on a life of their own. It was absolutely the case that some of the headlines were quite excitable, but they were not something that we were trying to create. We were trying to create factual reporting of a particular issue.
Mr Love
What I am trying to get to is whether you have made any changes in recognition of the rather aggressive nature of the way in which the industry—and indeed many of your employees—have interpreted the press comments. Have you made changes? Have you accepted the thrust of them?
Martin Wheatley
Yes, we have. We have made changes and we have tried to be even more balanced about the information that we put out. The truth is always that the information we put out will itself—without any obfuscation or us prettying it up—be something that leads people to write quite strong headlines or stories. The fact is that bad things have happened in financial markets and people will write about those.
Mr Love
Mr Griffith-Jones, you are the Chairman. Did you ever have any reservations about the media policy, the rather aggressive nature in which it was quoted and if you did, did you raise them with the Chief Executive?
John Griffith-Jones
Yes, there were two specific instances that relate to the Practitioner Panel where they commented to me about press releases. One was around the risk outlook, in fact I think from memory both risk outlooks but specifically last year’s one. We share an early draft of the risk outlook with the panel. It was their view that the risk outlook was too aggressive in tone about the fact that everybody was trying to do bad things in the industry, and it read very negatively. This was before the event, so it was a January meeting and the thing was published in March. I and one of my fellow board members specifically got on to this and were involved in the drafting of the report. I know that by the time it came out it had materially changed. So there was a proactive intervention. The second one I am aware of was when Mr Beale saw me, I think, on 13 September—so after The Times article that has been referred to—where he was quite upset about the tenor of that article. I did talk to Mr Woolard, and I think I probably talked to Mr Wheatley as well, to say that that read quite aggressively.
Mr Love
Let me come on to the relationship with the Practitioner Panel. In their April 2014 report they said that some members of the board openly questioned the role of the panel. Graham Beale told this Committee that, “Comments that we have repeatedly made sometimes go into a black hole”. They did not believe that they were being listened to. Do you accept that characterisation? Had the relationship deteriorated so much that you were not talking to each other effectively?
John Griffith-Jones
I do not believe so. I talk to Graham quite a lot and I have throughout. His panel write a report to us immediately in advance of our monthly board meetings, as do all the other panels. The board consider those. As you will appreciate, they are advising us, not telling us, what to do, so sometimes we agree and sometimes we don’t. We seek to provide them feedback. The more they disagree with us the more they are inclined to believe that their comment was not listened to. I think that is not fair. If we have failed to communicate very clearly back to them, “I am sorry, on this one we do not agree” we will do better. We had a review commissioned in June—so this is after the events of 28 March—because the relationship with the Practitioner Panel was quite fractious at that moment, basically following on from what happened. In my view we got the arrangements between us back on track pretty quickly. From memory there were three issues that were important to them. One of them remains the tone in the press where essentially we said we take the point, but we are still not entirely in agreement as to what our responsible positioning with the press should be. That continues, but the other issues we dealt with reasonably satisfactorily, I believe.
Mr Love
Mr Wheatley, perhaps you can comment on a discrepancy that we found in the evidence given to us. Zitah McMillan told us that she had not received any direct feedback from the Practitioner Panel, yet Graham Beale said that on numerous occasions they had commented. Indeed, Mr Griffith-Jones has confirmed that they did comment on the media strategy. Who is right?
Martin Wheatley
It may well have been that they did not raise the issue when Ms McMillan was in front of the panel. I do not know, because I was not at the meeting, but I suspect that is what it would have referred to. As the Chairman has said, it is absolutely the case that the issue was raised with us. It was raised with me; it was raised with the board on a couple of occasions.
Mr Love
So the Practitioner Panel is effectively correct in that regard?
Martin Wheatley
They are correct that they have raised it with the organisation, yes.
Mr Love
The overall question that has to be answered is: has this media strategy done damage to the relationship with the industry? I think the panel would say that it probably has. What is your view, looking back now over the period when you had this more aggressive stance? Do you think it has done damage to the relationship with the industry?
Martin Wheatley
Clearly the particular instance that led to this review has done damage. I have absolutely no question about that. That has not helped us and we have had to do a lot of rebuilding since that. Absent that, when the Practitioner Panel did its own survey of firms—and it had around 3,000 responses of firms—all of the categories of their relationship with the regulator, the clarity of our views, their respect for what we stood for, had gone up in the year previously. I think overall our communication strategy—and I do not want to call it just a media strategy—has been successful. Clearly this event has set it back, but overall in the year up to that point it had been successful.
Chair
Zitah McMillan said that she did not know about the panel’s concerns, so that must mean you did not tell her about them. Why not?
Martin Wheatley
I do not have the precise text in front of me, but I do not know if what Zitah meant was it was not raised with her in her session with the panel.
Chair
Why didn’t you raise it?
Martin Wheatley
I was not in that session with the panel.
Chair
So you did not know about it either?
Martin Wheatley
I did know about it.
Chair
Why did you not raise it with her?
Martin Wheatley
I had done, and that is a discussion that I have had.
Chair
So she has just forgotten that she knew about it?
Martin Wheatley
I do not know what the narrow point was that she was responding to at the time, but as a general rule the organisation knew about the concern.
Chair
We may need to come back to it, but it is not a crucial point. Do you have the answer now on whether you pre-briefed the Davis report?
Martin Wheatley
The answer is we invited journalists in an hour before publication to read the report, but they were not able to—
Chair
So the answer is you did pre-brief the Davis report and your first evidence was correct?
Martin Wheatley
Yes, that we had an embargoed approach. They were not allowed to write anything. They read the Davis report. They then came into a press conference that John chaired at 11.00 am and at that point the Davis report was published on our website.
Chair
Do you accept—and indeed I am somewhat astonished, that you have come to a hearing on this subject not knowing whether or not you pre-briefed the Davis report and having to seek staff support to get the answer? This is a report about pre-briefing.
Martin Wheatley
I think, as we have found earlier that there is a distinction. David Ruffley has unfortunately left, but there is a distinction about whether pre-briefing is the same as embargoed briefing.
Chair
We might come on to what exactly constitutes pre-briefing in a moment, the various forms of pre-briefing, but what has clearly taken place here was a pre-briefing. There were a group of people in a room who were told beforehand about—
Martin Wheatley
Well, again, terminology. Pre-briefing I had taken to be the uncontrolled selective briefing of certain information.
Chair
So when you said to us “pre-briefing” in that earlier evidence you meant embargo briefing?
Martin Wheatley
Yes.
Chair
Do you think it was a good idea to do embargo briefing about a report on pre-briefing that might easily be perceived as pre-briefing, which had gone catastrophically wrong? Why did you not just get the guy who wrote it, in this case Mr Davis, to publish it and let him get on with it?
Martin Wheatley
Again, coming back to the concerns that Mr Garnier has raised about the press, the press typically—and particularly in the world of wires—rush to file stories. That is just the nature of the competitive press. If you have to file a story within two minutes, five minutes of first seeing a document there is a high likelihood that you will miscommunicate the content. The approach to embargoed briefing is to try to make sure that when people write they write an informed piece.
Chair
What is the answer to my question? Why did you not leave this to Mr Davis to decide how he was going to publish his report?
Martin Wheatley
I think that the protocol had been set up that he would deliver the report to us.
Chair
Yes, but why did you not say to him, “You publish the report. We can’t do embargo briefing or something that might look halfway to pre-briefing or a report on pre-briefing. You had better do it yourself. You can do it in the manner you think best”? Why did you not do that? I would rather have an answer from the Chief Executive because this was clearly a decision at least partly for you.
Martin Wheatley
It was a decision that it was an important report that would be very critical of our organisation and we wanted it to be understood properly and properly reported on. That is why the approach of an embargoed—
Chair
You did not have confidence that Mr Davis could accomplish that?
Martin Wheatley
He might have done, but I did not think that was part of his brief. I thought his brief was to deliver a report to the FCA.
Steve Baker
Good morning. Who is ultimately responsible for the FCA’s communication strategy?
Martin Wheatley
I am.
Steve Baker
Did you personally originate the FCA’s chosen approach to communications?
Martin Wheatley
When you say “originate” it was something that I discussed with the Head of Communications, Zitah McMillan, but it absolutely had my strong support, so it was very much my strategy.
Steve Baker
Thank you. So, Mr Wheatley, do you think that the members of the executive committee were as engaged as they needed to be with that strategy?
Martin Wheatley
Probably slightly less so than me, but as engaged as they needed to be, yes.
Steve Baker
When I had an exchange with Mr Adamson I asked, “Did the ExCo discuss the risk that the FCA’s communications would substantially move markets?” and he said, no, it did not. Is that correct, that the ExCo did not discuss the risk that the FCA could substantially move markets?
Martin Wheatley
Again, if I could put it in context, if it was in the context of when the approach on the business plan was taken the assumption going into that was that we did not need to have that discussion because it was only safe stories that were going to be briefed. So in a sense the pre-selection of the stories were ones that would not move markets. Accepting that we did not get that right, but that was the going-in assumption.
Steve Baker
Do you think that conversation was properly understood by the executive committee, including the assumption that every briefed story would be incapable of moving markets?
Martin Wheatley
I think, and I know from the Davis report, that there were some different recollections about how and when that discussion had happened. I do appreciate that not everybody had fully said, “Yes, I understood that was the case” but certainly from my perspective that was the discussion that we had had.
Steve Baker
So when I think about the regulator, I quite often refer to a brilliant book I have found called “Big Players and the Economic Theory of Expectations”. It makes three points about your kind of organisation. You have discretionary power: it is for you to decide what you do; that you are relatively insensitive to the discipline of profit and loss; and thirdly that you have the power to shift markets. The particular book makes the case that when such big players are active you get instability in markets. What I am very surprised about is that Mr Adamson was able to tell me that no, and I paraphrase, the executive committee did not discuss the risk that the FCA’s communications would substantially move the markets. Given your expertise in price sensitivity is that not extremely surprising?
Martin Wheatley
It is surprising. It is especially surprising since the business team responsible for insurance spent probably the two weeks prior to this announcement negotiating over every word of the announcement to ensure that it was not disclosing sensitive information. There was an absolute focus from the people in supervision to try to ensure that what got communicated was not going to be misleading and was not going to move markets.
Steve Baker
What explanation can you give specifically for a failure of the executive committee to consider the issue of whether communications would move markets?
Martin Wheatley
I think it is a difficult question because we did not explicitly have a debate about this part of the strategy. It was reported to the executive committee as something that we would be doing. We would be doing that having had the business area—in this case the insurance area—shape with us what would be a non-controversial piece. In a sense it was not a discussion that the executive committee needed to have because it had not been set up that we were trying to do anything that was particularly sensitive or market-moving.
Steve Baker
That is a very interesting point, because in the course of my journey into this place—and learning to be a politician, not an engineer—I remember somebody telling me that there were basically five categories of newspaper stories: scandal, danger to the community, novelty, human interest and sport. It seems to me that a newspaper story that is relevant to your sphere of operations is likely to be either a scandal story or a danger to the community story. That tells me, then, that more or less anything that a newspaper finds worth reporting about what you are doing is likely to be at least susceptible to being cast as a danger to the community or as a scandal. Do you ever have conversations in these terms about the categories of newspaper story that are run, and how you expected your communication strategy to fit into the reality of how newspapers will present a story to sell a paper?
Martin Wheatley
Yes. Most of the enforcement activity that we do is in your scandal category. It is backward looking. It is something that has happened. It went wrong and we are reporting what went wrong with the purpose of trying to make sure that people learn from it and it does not go wrong again. Most of our forward-looking work is in our threat to the community, if I can use your terminology. In this case, though, what we were trying to say was nothing more than there would be a number of areas that we would turn our lens on over the incoming year, and these are what those areas are. They ranged from cyber crime to package bank accounts to insurance back books. What we had not expected—and we got this wrong and it is a big learning for us—is the fact that we would look at an area, not that we had findings, not that we were stating we had concerns about it, but the fact that we would look at an area would itself become such a big story.
Steve Baker
You have been very clear that you got that wrong. Mr Griffith-Jones. Do you think that the FCA board was engaged as it needed to be in the communication strategy, with the benefit of looking back and seeing what has happened?
John Griffith-Jones
Yes, but. Yes, in the sense that I think the two documents that you have been sent, “Truth and Proof” and “Proof of Concept”, the year 1 and the year 2 strategies, both came through the board. The board, including myself, believe that the public perception of us, both stakeholders at large and particularly the firms, was in a wholly unsatisfactory position at our inception. We had a survey, the Practitioner Survey, which was scoring—and I know these are rather vague numbers but they are statistically quite interesting—4.5 out of 10 for effectiveness of the regulator. To me, from a private sector, you cannot run a business when you are getting a customer score of 4.5 out of 10. Within a year that had gone up to 6.5 out of 10. I know from doing such surveys in the past that that is a hugely significant change in 12 months. It is fair to say that the board believe that some sort of communication strategy was important and the board, after the first year, believe that in the round we had made an improvement in the view of our effectiveness. Whether that meant that we didn’t pay enough attention to the specifics of what was being done, with hindsight and with this case in mind, I suppose one has to say “yes”. In good faith we did believe that the strategy was broadly appropriate and we supported it as set out in those slides.
Steve Baker
In the course of reaching that view, to what extent did you discuss the risks involved in the strategy?
John Griffith-Jones
The risk of moving markets was not discussed, from memory.