Oral evidence: The work of the Financial Conduct Authority, HC 475

Oral evidence, 31 October 2017.

Witnesses

Andrew Bailey and John Griffith-Jones.

Chair

Good morning. Thank you very much indeed, Mr Bailey and Mr Griffith-Jones, for coming in this morning. Perhaps, just for the benefit of the record and for those who are watching, you could just introduce yourselves and then we will get under way.

Andrew Bailey

I am Andrew Bailey. I am Chief Executive of the Financial Conduct Authority.

John Griffith-Jones

I am John Griffith-Jones, and I am Chairman of the Financial Conduct Authority.

Chair

It will not surprise you today that we have a long list of things to ask you. Thanks to the election and the setting up of the Committee, it has been a while since the FCA has been in front of us, so I have asked Committee members to be strict on time. Perhaps I could ask both of you, in terms of answering questions, in the words of the Speaker, to keep things short and pithy, so we are able to get through lots. It will not surprise you to know that I want to start with the RBS GRG report and the interim summary. I want to go briefly through the chronology, because this has been some time in coming. The report was commissioned in May 2014 and originally was intended to be completed before the end of 2015. In January 2016, Tracey McDermott told the previous Committee that they could expect something to be published in early 2016. In April 2016, she said that the FCA had a draft report and would publish something very soon. In November 2016, i.e. almost a year ago, you told the Committee the final report was received in September, but that you were conducting further work and a full account would be published “once our work is concluded”. On 23 October 2017, the FCA published its interim summary and also announced that you will be launching a “focused investigation”. My first question is: what was happening between November 2016 and October of this year that led to the delay in publishing that interim summary?

Andrew Bailey

I would make four points on this. First, the most important thing, going back a year ago, in our view, was the establishment of the complaints ‑handling scheme by RBS, which accompanied the announcement and the brief summary, and that that was put in place effectively and that Sir William Blackburne was established as the overseer. Although we could not mandate that scheme, because it is outside the regulatory perimeter, it was done effectively and we had a lot of contact with RBS on that. The second thing is that, as we said in the summary that we published, RBS does not agree with all of this report. They made that clear to us. We got their agreement to publish the short summary that we published almost exactly a year ago now. It does happen with Section 166 reports, in my experience, that you do sometimes get quite strong agreement between the so‑called skilled person who is the author of the report and the firm. It is not very frequent, but it does happen. We felt that, because of that, we had to do our own work sampling the evidence to ensure that we were confident that what the skilled person had put in was something that we were comfortable with. We spent a good part of the first half of this year going through more evidence than we would have gone through had there been a meeting of minds between the firm and the skilled party. Now, obviously with 166 reports that are not in the public gaze like that, that sort of thing happens. We do it behind the scenes. The third thing was you said that we had just started the focused investigation. That is not quite true; we started it a while ago. That piece of work is under way. As I said in letters to the Committee earlier this year, we would have preferred to publish the summary when the focused work was finished, but we understand why it is sensible to do it now. I am not questioning that point. Obviously the fourth point I would make is that we have been working on correcting the summary. Those are the four headlines I would put it under.

Chair

There are a number of questions arising from that, some of which my colleagues will want to tease out. Perhaps you could just say exactly when the focused investigation started. You said it was a while ago. Was it weeks or months?

Andrew Bailey

The work really started over the summer. The reason I would not date it precisely is there is a bit of a continuum between the work that we were doing on the evidence and then that leading on to the decision that we should do the focused work, then using that work on the evidence in part to inform the start of that work.

Chair

I do not really understand how it takes a year to summarise a 300 page document into 39 pages.

Andrew Bailey

If there was only that one part of the story, then I would agree with your point. The biggest piece of work we have had to do goes back to the second point I made, which is the fact that we had to go back to evidence ourselves. There is a lot of evidence that underpins this work. There is something like 1.5 million records underpinning quite a lot of this work, so I would put more emphasis in terms of time taken on that. You are right that, had we had, to use the words I used, a meeting of minds between the parties early on, it would have been a quicker process.

Chair

RBS has written to me. Ross McEwan wrote to me yesterday, because we asked him to set out where he disagrees with the report. That letter is being published as we speak. It is up now on our Treasury Select Committee website. You had to go back to the evidence; is that because you did not agree or fully support what Promontory had been doing in terms of writing the report?

Andrew Bailey

It was assurance for us. After all, Promontory had done the work, so the whole purpose of a Section 166 report is that we ourselves do not do the work. Unlike the focused work that we are now doing, which is done by us, we had not done the work. In cases where there is this degree of disagreement, we think it only appropriate that we then have to go back, sample the evidence and say what we conclude about it. Otherwise, we are stuck in a situation of whose word we take for it.

Chair

When do you expect the focused investigation to be concluded?

Andrew Bailey

I cannot give you a precise date for that, because it depends where it leads to, frankly. As you are probably aware, it could lead to enforcement action; it does not necessarily lead to enforcement action. As we said in our mission statement earlier this year, enforcement is sometimes slightly overplayed in that sense. It always begins with an investigation. The other point I would make is that it is focused and I am very clear that it must be focused. We are not going to boil the ocean again. Having said that, of course, as you go through this work, we do not close doors down initially. I am afraid we never say to somebody, “We are never going to investigate you.” We never say to the firm, “We are never going to investigate you on this,” because we do not know what we are going to find.

Chair

The trouble, and the reason I read out the chronology at the beginning, is the report has been going on since May 2014. We are now at October 2017. Parts of the report have been leaked, and we know and have discussed that third parties have that report. It is out there, which is why many people still hold the view that the whole Section 166 report should be published. Of course, for many individuals whose businesses have been affected and whose lives have been affected, this has been going on for the best part of a decade at least. John Griffith-Jones, as the head of the board of the Financial Conduct Authority, what do you think this threeyear delay says about the Financial Conduct Authority for those people who need to have confidence in the regulator that swift action is taken when an institution like the GRG is found wanting?

John Griffith-Jones

It is clearly unfortunate that it cannot be done faster. The board has received regular updates on the progress. We are, at the end of the day, a quasi-judicial body and we have to be fair to all parties, including the people who work for RBS, as well as to the victims. Keeping the balance in the appropriate place has proved quite testing, particularly when this case is on the regulatory perimeter, which no doubt we will discuss shortly. I dearly wish it could be done faster. I would say though that the priority has been to get the money back to the victims, which is why we, as the board, and Andrew and the executive in particular, prioritised getting the redress programme in place come last November, by which time we were sure that there needed at least to be that and that had to be agreed with RBS. I am not seeking to condone or explain away the fact that three years seems like a very long time, but I believe we are now in the process of getting the money back to the victims, which, to me, should be and has been the top priority.

Chair

I want to come back to that in a moment. I want first to just understand exactly what updates the board was having and how regularly updated the board was. Do you agree that, in terms of confidence in the Financial Conduct Authority, this sort of issue goes to the absolute heart of whether everybody relying on the financial services sector and on banks has confidence in you, the FCA, to step up when an institution is found wanting?

John Griffith-Jones

The board was updated pretty much at every board meeting.

Chair

Are they monthly?

John Griffith-Jones

Yes, bar August they are monthly. Since last summer, which I happened to ask people to look at, we have had 14 board meetings and we have had an update in 10 of them. We had a substantive discussion at the board meeting immediately prior to the release of the November summary, and we had a substantive board discussion two weeks ago, before we published the summary report. We get a regular update from Andrew at each board meeting, at which we may or may not discuss it in a great level of detail, depending on time, the agenda and everything. The board absolutely has been aware of what is going on. As to your point about how this looks to the public, this is right at the heart of the board’s role and our concern but, as I say, we have to balance the thirst for knowledge and, frankly quite reasonably, people wanting to know what has happened as soon as possible with the administration of regulatory justice, which requires us or at least my colleagues to establish the facts before we get into the blame process. The more complicated the case, the longer it takes, unfortunately.

Chair

I understand about third parties or parties named in reports having to have an ability to comment or to put their side of the story, but it sounds to me, from what Mr Bailey has just said, that the delay in the last year has not been about the third party having its say. It has been about the FCA checking on whether the person they instructed to do the report has come up with a report that the FCA can be confident in. The delay has actually been caused by the FCA not having confidence in who was doing the report, rather than the third party having a say or putting in criticism of the report. Is that right?

Andrew Bailey

I would not use the words “lack of confidence”. The issue is that, where there is such a large dispute between the third party producing the report and the firm, we have to do this process of checking and assuring ourselves that the report is accurate in our view and, therefore, fit for use in the initial instance. Now we have done that and we have concluded that the report stands up. We subscribe to the basic thrust of the report. There is this very broad range of views on this case, from what I would call widespread bad practice to almost conspiracy, to use a loaded term rather carefully. The report comes down more in the widespread bad practice camp. Obviously the firm is in a different place on that and particularly in the interpretation of words like “widespread” and “systematic”.

Chair

The point about widespread bad practice is that one of the FCA’s objectives is integrity: “to promote, protect and enhance the integrity of the UK financial system”. Widespread bad practice by a bank like RBS surely goes to the heart of attacking the integrity of the UK financial system. Before you answer that, I just want both of you to think about the way the report is received by those who have lost their businesses. We do not take up individual cases as a Committee, but we are obviously also constituency Members of Parliament, and all of us have had people coming to us who have been affected by this, including constituents who saw me on Friday who did not know about the compensation scheme. I find it extraordinary that that has been the big thing, rather than getting to the heart of what has happened and uncovering the widespread bad practice. These are constituents who have not just lost their businesses; in many cases, they have lost their homes; they have lost their mental health or are having mental health challenges; they have had family breakdowns. I really wonder how they would look at this report and think it has satisfactorily addressed what has happened to them. Do you have confidence in this report and the reaction to this report, by both the FCA and RBS, in terms of the rather complacent attitude that widespread bad practice is not sufficient to attack the integrity of the UK financial services sector?

Andrew Bailey

Can I make a couple of points on that? First, I think the report is strongly critical of RBS. It is frankly unfortunate that RBS has not accepted that more readily. I think they should do. As you say, a lot of time, effort and work have been spent on this. That is important. The second point is you quoted our market integrity objective, which is absolutely true, but I want to come back to a point that John made earlier, which complicates this whole case, which is that this activity is outside the perimeter of our regulatory powers. That is even more so in a retrospective case like this for a reason I will come on to. It is outside the Regulated Activities Order. Also, prior to the senior managers regime—and bear in mind the senior managers regime has been in place for 18 months for banks now—the approved persons regime, which was the predecessor regime, only gave us powers inside the regulated perimeter. The senior managers regime changes that in an important way, but we cannot apply it retrospectively. Now—and I have been very clear on this with some people who have approached me on this issue—RBS’s handling of cases today and the way in which they handle the redress process in particular is covered by that, in my view, irrespective of whether it is inside or outside the perimeter. What we cannot do is go back and apply that retrospectively.

Chair

Mr Griffith-Jones, what do you say to those individuals and those who have lost businesses or been affected by this? How are they meant to receive this report?

John Griffith-Jones

I completely understand where they are coming from. I have always thought the most important thing, as I have already said, is to put them right. At the end of the day, the words are comforting but, to the extent there is money due or it can be put right, that should be prioritised. Inevitably, whether it is 39 pages or 300 pages, you are not immediately satisfied if it does not provide you with the justice that you think you are entitled to. I understand that position. I am very keen for the redress process to take place. If I may just refer back to a similar case in the IRHP, which all of you will be very familiar with, we went through precisely this cycle of maximum discontent, if I may put it that way, closely aligned to the beginning, before any money had been paid out. As soon as the individual cases were handled and people got their personal justice, most people were a lot calmer; I am not saying happy. We are at the point of maximum aggravation.

Chair

It is difficult if people do not know about the compensation scheme. Colleagues are going to ask about the way the compensation scheme is working and how long it is taking, but the other conclusion in the case of those I spoke to on Friday is that they will not touch banks with a bargepole now. They will not ask a bank for money in the future, given the way they have been treated. I suppose it is a question for RBS, and we are going to ask them if they will come and give evidence on this as well, which is whether they realise the damage done to the overall banking sector and SME lending sector by the activities in which they have engaged. I want to ask one more brief question before I hand over to Stewart, which is about the leaks. Andrew, you said to me you are going to do a leak inquiry and I wondered where you had got to on that.

Andrew Bailey

We have done a leak inquiry and we have also requested, and they agreed, that both RBS and Promontory conduct leak inquiries. They have both reported back to me. We have not found the source of the leak. The leak inquiries were extensive, but we do not have the source of the leak, I am afraid.

Stewart Hosie

Andrew, I am conscious of time and I have a lot of questions so, as the Chair said, as brief answers as we can get would be helpful. Are you happy with the redress scheme established by RBS? Are you happy in the sense that it fully addresses the failings identified in the report?

Andrew Bailey

I think it does. It has a number of components to it. They have paid out or made offers of fee refunds of about £115 million. That has been done. As of yesterday, they have received 954 complaints, I believe. By the way, just to address the Chair’s point, one of the very clear things that they agreed to was that it is still open. We were very clear that whatever additional attention was given to this, exactly to your point, it would have been hopeless if we had then said, “Sorry, you are too late.” I would then add two other things. I have always put a lot of emphasis on the role of Sir William Blackburne, who is the independent overseer. He is a retired high court judge. He is very robust. He has publicly criticised RBS for the speed with which they are processing cases, and he and I have both seen Ross McEwan on this subject and told him to get his act together, frankly. They are upping the rate of processing claims. The third thing is that RBS has now published what it is intending to do in its handling of consequential losses. You can see that; it is set out in detail on their website. I would say it is a more robust and more comprehensive proposed handling of consequential losses than in previous cases, but we have yet to get to that point and the proof of the pudding, as it were.

Stewart Hosie

Thank you for your comments about Sir William Blackburne, and pointing out that you and he have asked RBS to up their game. Clearly we will be monitoring that as a Committee to make sure that the rate of processing does not slip back. That is helpful. I will come back to the consequential loss issue in a moment but, given RBS does not accept many of the findings in the report, and that is made clear in the letter from Ross McEwan today, is it not therefore likely that the redress scheme may fail to meet some of the issues that you found in the report—the ones that they disagree with?

Andrew Bailey

I will just come back to a point I made to the Chair on this. I think Sir William would take exactly the same position on this. If we found that RBS were, in some sense, handling cases with that approach, that would be a very serious issue. It would be a very serious issue today. This is not about history; this is about today.

Stewart Hosie

What powers would you have if you were to find that was the case?

Andrew Bailey

I believe, as I said earlier, that we have more powers today in that respect than we used to have, because this is today’s activity, rather than history’s activity. One of their responsibilities under the senior managers regime is to do this thing properly, in my view.

Stewart Hosie

That is helpful. On the issue of consequential losses, the appeals process, for anyone listening, is still open to new claims. It has not closed, as you say, and that is helpful. For complaints regarding losses directly from GRG, but not for consequential loss, would you have preferred to see an independent check on consequential loss claims?

Andrew Bailey

A consequential loss is a really hard issue in these cases, because obviously it involves judgments about what might have happened. If you look at what RBS has set out and the fact that they have offered an initial independent mediation involvement from an arbitration or mediation service—and the backstop is the courts in this case—they have set out that there are legal precedents for handling consequential losses. By the way, I would expect them to follow those precedents. Again, if we get evidence to suggest that they are not, that will be a serious issue. But, if we stand back from this, I do not underestimate the difficulty of the question of how to deal with consequential losses, which arises in corporate cases and on the whole does not arise in personal complaint cases.

Stewart Hosie

It is not for today, but I have many constituency cases where there are personal consequential losses, so I would probably take issue with you that it is primarily on the commercial side.

Andrew Bailey

I think it is more common. I accept your point but, as a proportion of cases, you would probably get more consequential loss cases in corporate cases. We can debate that.

Stewart Hosie

You said there is mediation offered. That is helpful. Would it be more sensible had it been arbitration, so that a third party could have determined what is a consequential loss?

Andrew Bailey

That would be one way of doing it and, since this process is still to come into effect, I do not mind reflecting on that point and we can discuss that point with RBS.

Stewart Hosie

That is helpful because, given that commercial lending is largely unregulated and the complaint scheme has been set up on a voluntary basis, is this scheme as good as it can be or is it merely as good as we might expect it to be? If the FCA had more control, how would you improve it to make it better?

Andrew Bailey

I have been on record for some time in saying that I would much prefer that this process was not done on a voluntary basis. Let me be clear: that is not because I think the firm is doing it wrong, for a couple of reasons. First, I do sympathise with the complainants that you can of course never get away from the fact that, in this set‑up, the firm sets the scheme up. The firm appoints the people who deal with it. Where we do get involved, we go to lengths to say that it has to be done robustly and it has to be done properly. We would be better off if we got away from that. The second point I would make is that it just does not seem to be sensible that, every time one of these things happens, we have to set up something new. It would be much better if we had a standing scheme. We are planning to put out a consultation on this in the near future. I have to say to you there were two broad approaches here. Up until the summer, I was of the view that it would be more sensible, in one sense, to take the route you are going down of a formal system. That would require legislation. I have to tell you that I do not think that is going to happen, in the current situation, so we are going to go down the other route, which, by the way, can be made robust; do not let me suggest that this is inferior. The other route is to propose to extend the ombudsman scheme. That will have to tackle three issues. One is the scope of the ombudsman scheme, because currently it only covers what tend to be called micro‑enterprises. Secondly, it will have to address the question of the award limit, because the limit is currently £150,000. Thirdly, and it goes back to your earlier point, it has to address the question of the ombudsman conducting arbitration or mediation. This is not the classic PPI where you deal with it after the event. Obviously firms need arbitration, not clearing up once the problem has crystallised.

Stewart Hosie

Whether it is a formal FSCS type scheme or a beefed up ombudsman scheme, either/or, there are various options you can have. There is a serious issue, particularly in the ombudsman route, which is the lack of skilled personnel to understand the complexity, even for small businesses, of the nature of break clauses, hedging and all of the other stuff we have seen in various of the other banking products.

Andrew Bailey

Absolutely, you are right there. This would be quite a fundamental change to the nature of the operation of the ombudsman, because these cases are also very bespoke, by their nature. I have talked to Caroline Wayman, who is the ombudsman, quite a bit about this and she is very well aware of this. That will be an important point addressed in this consultation. This is quite a change to the nature of the service that they provide.

Stewart Hosie

Just on the complaints process, you will be aware that complaints can generally only be made by officials of the company presently appointed and listed at Companies House. Many of these companies have gone bust. There are either with liquidators or administrators. Now, I understand former shareholders or officers can complain and that RBS has said guidance will be updated to provide clarity. We are not aware that it has done so, so what power do you have to ensure that RBS tells the officers or shareholders of the companies that had been in GRG and who have a complaint that they can make it?

Andrew Bailey

I can certainly tell RBS to sort it out, I would imagine, and I would be extremely disappointed were it not to do so. One thing we have to bear in mind here is that this process has to respect insolvency law. We may have had previous correspondence with the Committee on this question in the past. We cannot cut into insolvency law.

Stewart Hosie

Can I turn to the Section 166 report? You told us on 11 September that 166 reports are conducted on the basis that there is no intention to publish. “We do not publish Section 166 reports. It is not a thing we do.” However, the FCA requirement notice and the terms of reference for the GRG report published in May 2014 said, “The reports may, subject to Sections 348349 of FSMA, be made public. The skilled person should draft reports in such a way that the contents can be published without the disclosure of confidential information to third parties.” What is the reason for the discrepancy from what would appear to be an intention to publish to no intention to publish?

Andrew Bailey

I have to confess all this predates me. I will put an interpretation on it. There are two contexts in which the question about confidential information comes up. The one that was addressed in the original scoping document was the treatment of confidential information about the firms that were affected by GRG. The intention was that that information would be, in some sense, segregated and, as originally envisaged, put into a separate annex that could then be split off. They did not quite do it like that in the end, but it is easier to split it off. The problem is that does not finish the job. If it was envisaged that this report could be produced without any confidential information about the firm and about individuals in the firm, i.e. those who were responsible for the management of the firm—the management of the GRG—then that would have been a very different report. Frankly, that is not the report we have today and I do not think it would have been a very useful report, because it would have been so bland that we would have all been sitting around this room saying, “Has that been worth doing?” We have ended up with a report that is predominantly made up of confidential information about the firm and about individuals in the firm. The way we have handled that, and this goes back to my letters, is that the summary we have produced has confidential information about the firm in it predominantly. We have both Promontory’s permission and RBS’s permission to publish, as we have to do. The material that is not covered is confidential information about individuals, and there is a lot of that. It is either about specific individuals or generic references that can be traced back. We had extensive advice from counsel when we went down the road of how we were going to approach the question of publication. There was very clear advice from counsel on what we had to do, because of the question of fairness. To go further, we would have to Maxwellise the report and we would then have to get the permission of individuals. That would be very extensive and, as you will understand, this is very extensive in a condition where we are conducting further investigations.

Stewart Hosie

I suppose the real issue is that we are all led to believe that copies of this report exist, which is why there have been umpteen leak inquiries left, right and centre. I cannot imagine it is going to do much for the reputation of the FCA when someone decides to chuck the thing on the internet and everyone can read it. Would it not be better to find a way to publish it in full, so the public and those affected can see the thinking and logic behind the conclusions?

Andrew Bailey

To do that, we would have to Maxwellise it and we would have to get permissions. I slightly bear the scars of the HBOS report in this respect, having taken that through. That was a painfully long process.

Stewart Hosie

It is not finished yet either. Can I just move on?

Andrew Bailey

Can I just finish? I have to say to you this would be a lengthy and difficult process, and it is made more difficult, just to reiterate the point, because in the case of HBOS, as is well known, at the time we were doing the Maxwellisations we were not conducting any further investigations of a formal nature, whereas here, we are.

Stewart Hosie

In that case, we may come back and ask that question again when the formal investigations are complete. I only have two small questions, but I want to get through these. On Promontory, in the introduction to the summary, it says, “Promontory would prefer to see the report as a whole published, with redactions where necessary.” Did they give a reason for that preference?

Andrew Bailey

Their view was that that would give a greater flavour of the report. I have to tell you again we took counsel’s advice on this very question. Counsel’s advice was that we would be on the wrong side of the fairness issue if we did that, and the reason that counsel said that was that they felt that any report that was redacted would have enough clues in it that would lead back to the individuals. You could not redact it in a way that would remove the lack of fairness. That was their clear advice.

Stewart Hosie

This was a legal reason. It was not a question by Promontory that what was published was not a fair reflection of their work.

Andrew Bailey

No.

Stewart Hosie

It was not the case that Promontory failed in their terms of reference and presented to you a document that could not be published.

Andrew Bailey

As you can see from what I said at the beginning of this exchange, there is no question that the nature of what they did evolved over time. As I said at the beginning, I just do not see how you could ever have produced a report that had no confidential information in it. It would have been useless.

Stewart Hosie

Part of the FCA’s oversight into the independent review involved commenting on the review’s distress assessment methodology. Can you describe what those comments were, whether they were taken into account and how, if at all, they altered the review’s findings?

Andrew Bailey

Again, it predates my time. As I understand it, the FCA, as we do for 166 reports, was meeting pretty regularly with Promontory to assess the methodology that Promontory was using, because it was somewhat inductive in the sense that, once Promontory got into the work, they began to realise what the material would look like and how they would go about processing it. There were quite a few discussions about the sample size and what was representative. That was important because, going back to what I said earlier, the sample size had quite a big bearing on how long it took.

Stewart Hosie

Finally in terms of the findings, 34% of cases in GRG were clearly not viable; however, 16% were potentially viable. Does that point us to a flaw in the methodology?

Andrew Bailey

Sorry—is that in the report methodology or GRG’s methodology?

Stewart Hosie

It is in Promontory’s methodology—they looked at that and this is what they found.

Andrew Bailey

No, I do not think so. I do not think that calls into question the representative nature of the sample, in that sense. It was rather different from the sample that was used in the earlier report that was done, which only had a sample of 28 or 29 firms. The view right from the beginning was that that was not a sufficiently representative sample. What was eventually done, as you may know, was 178 plus the 29, so that was the sample size. No, I do not think that called into question the approach.

John Mann

Just to get it on the record unequivocally, your organisation was not involved as an organisation in the leak.

Andrew Bailey

We have done the leak inquiry. No, we have no evidence to suggest that.

John Mann

It was not an organisational leak by you.

Andrew Bailey

No.

John Mann

I will come back to a followup to Mr Hosie’s questions but, just before that, when I asked Mr Sach about exploiting the lack of competition in the market and maintaining profits at the expense of perfectly viable small businesses in June 2014, his response was that their main focus is restructuring and helping businesses. Was that an honest answer?

Andrew Bailey

I do not agree with him on that answer and you were right to ask the question. I believe there was some follow‑up from RBS after you asked that question and got that answer. The reason I do not think that answer is correct is that, as you will see from the report, GRG had two objectives, one of which was, in essence, a financial objective and the other of which was a restructuring and turnaround objective.

John Mann

He lied to Parliament.

Andrew Bailey

I think there has been an exchange with the Committee following your exchange with him, in which RBS sought to clarify what they mean.

John Mann

Nobody was in a better position to understand what GRG was doing at the time than him. Would that be a reasonable suggestion to make?

Andrew Bailey

He was clearly running GRG, at the time, as you rightly say.

John Mann

Let us come back to these figures then. I understand the point on Maxwellisation and individuals. That frankly is an important issue. It is an important issue for you; it is not an important issue for me. The important issue for me is how we ended up in a situation where—Mr Hosie cited the figure—16% of these businesses were viable. RBS is trying to hone that down to 11% that were viable, so let us take the RBS figure. Only 11% of these businesses were potentially viable, so 89% were businesses that were dead and buried already. That is the context we are looking at, isn’t it?

Andrew Bailey

The interpretation of the 11% and 16% is that, of the sample that Promontory used, for 11% they concluded that inappropriate actions by RBS contributed to material financial distress. You get to 16% by taking out those that they considered not to be viable. That is the 11% and 16%. The 16% is the cases of viable firms in the sample where, Promontory concluded, RBS’s actions contributed to material financial distress.

John Mann

The implication of that is the rest were already businesses in huge problems. That has to be the implication.

Andrew Bailey

Businesses went into GRG because, in the view of RBS, they were experiencing financial problems.

John Mann

They did not volunteer.

Andrew Bailey

No, nobody volunteered.

John Mann

Therefore, it seems a reasonable conclusion that only 11% could have been saved by other actions. That is a reasonable conclusion, it seems to me. I am interested in the methodology. What is the methodology that has determined these figures? Who decided the methodology and what scrutiny have you made of the methodology?

Andrew Bailey

I think you are putting a different construct on it. What Promontory said was, of that sample, in 11% of the cases the actions of the firm contributed to material financial distress. It does not exclude the fact that there was material financial distress absent the actions of the firms.

John Mann

There were none that RBS did not deem were financially distressed. That is why they put them in GRG. Those firms are very much disputing. Would it be right to say that a large percentage of these firms were asset-rich and cash-poor?

Andrew Bailey

The qualification I would put on that, and this is where there is dispute, is the context of the time that this review is covering. It essentially runs from the beginning of 2008 through to 2013. The context of the time is the financial crisis, so this is a period in which there is probably maximum uncertainty around the value of assets. That is an important qualification to your point about asset-rich/cash-poor.

John Mann

Let’s take the Clifford Chance review of distressed customers. Was the method used to determine the accuracy of asset valuations an appropriate one?

Andrew Bailey

The Clifford Chance review was done for RBS so, of the four reviews that have been done on this issue—the Tomlinson review, the Large review, the Clifford Chance review and now the 166—the one thing I would say is the Clifford Chance review was the closest to RBS. It was commissioned by them and done for them. It is one of the reviews, but you have to view it through that light.

Chair

Sorry to interrupt. You said earlier on in evidence that what the FCA has been doing for the last year is checking that you backed up the conclusion or you had confidence in what Promontory was doing. What Mr Mann is getting at is did the FCA have to check the methodology Promontory used and do you have confidence in what led to the 11% figure?

Andrew Bailey

That is a combination of something I said to Mr Hosie earlier. As I understand it, although it predates my time, the FCA was involved in going through the methodology with the skilled person as they developed it. This was the point about the contact that was had between the FCA and the skilled person. That is a perfectly normal thing to do in a 166 report but, because of the dispute with RBS over the conclusions of that methodology, there was then further work done on the evidence.

John Mann

This is what I want to see published by you. I do not care what individual did what. That is important but, frankly, I have no interest in seeing that. I am interested in seeing how decisions were reached and what the methodology was. Can we see that? I want to be certain that the decisions made were being made rationally so, if people were valuing assets, they were doing so in a way that is above scrutiny, or if they were charging clients, the charges that were brought in are above scrutiny. That is what I want to see. I cannot see any reason why you cannot publish that, so will you publish that?

Andrew Bailey

We have to come back to the question of where the boundary is between confidential information relating to individuals and that that is not.

John Mann

That is not individuals; that is confidential information about the methodology.

Andrew Bailey

I am sorry, but you referred in what you just said to management. The scope and the definition of individuals are named persons but also management. It is pretty easy to work out who was in the management. We took counsel’s advice on where to draw that boundary and, as I understand it, your counsel has looked at that as well, and that is about the boundary as to where a fair interpretation has to be drawn as to what we could publish under the terms on which we have published and what we could not.

John Mann

This is not good enough, Mr Bailey. There are companies that have gone under that were put into GRG forcibly. I want to know, and I am sure the rest of the Committee and the general public want to know, on what basis. How were those assets valued? Were the majority asset-‑rich companies? Is that the trend that was there? That makes that question even more important. How was the size of fees determined? How does that benchmark against other things that you see? That is what I want to see out there to make a proper judgment on this, and that is why I am concerned that you are not publishing. You are not proceeding with the second phase of the Promontory inquiry into GRG either, are you?

Andrew Bailey

We are. The focused inquiry is the next stage of this. It is entirely appropriate that we undertake that and that it is focused. I can tell you it goes very much to the question of how the valuations were arrived at. Were they done independently? How were they used? You cannot get away from the fact; it goes to the fact of how individuals did it.

John Mann

Will that be published? Will we get that?

Andrew Bailey

What it will lead to is the conclusion of our inquiry, and then we have to decide whether we have scope to take formal action or not.

Chair

It sounds like the answer is no—it will not be published.

Andrew Bailey

I was going to come on to this. We do, at the end of all those processes, publish the outcome, and we will do that.

Chair

In any event, phase 2 is different. Looking at phase 2, it says, “The skilled person shall assess and provide a view.” As I understand it, the focused investigation is an FCA focused investigation; it does not involve the skilled person. Mr Mann’s point is you are not moving on to phase 2. You are moving on to a different investigation.

Andrew Bailey

Yes, because I do not want another four year process. I want a focused process. We have enough evidence from this report to focus this. We do not need to go across the waterfront.

John Mann

What can you give me and the Committee on methodology that we do not have?

Andrew Bailey

I can tell you that there are elements of methodology that are the subject of our further investigations, elements like how valuations were arrived at and what their policies towards valuations were. You will see that what we have published is very critical of RBS. They were very bad at explaining how they set fees. Fees went up as customers went into GRG. They were very poor in explaining how that was done, frankly. It somewhat goes back to your original exchange when you had RBS in front of you. There were clear conflicts of interest in this process, which they did not properly manage. There is always an inherent conflict in that process, but you can manage those conflicts effectively and properly.

John Mann

Will you go back to counsel and ask them whether there are aspects of the methodology that can be released further than what has been released? That would be useful for us to be able to make an overall assessment of what has happened.

Andrew Bailey

I can tell you the question we put to counsel was: have we drawn the line in terms of what we can publish such that it does not cross the boundary of what would not be fair to the individuals involved, given that they have not had the chance that the Maxwellisation process would give? The answer we got back from counsel was yes: they thought we had drawn the line on fairness in an appropriate place. You have essentially re‑asked that question, which is fair enough. I think we have answered that question twice now.

John Mann

I am asking from a rather different perspective, it would seem to me, because providing methodology is not the same. It does not strike me that you have answered that question. You have answered a more generic question. It is an easier answer. Of course, individuals are all over. Individuals will have been using various methodologies, perhaps personally, perhaps group methodologies. The actual methodologies themselves and the mathematics of that are what I want to see, and they are rather vital to getting a clear picture. I am not convinced of that 11% figure. That is not my assessment of what was going on. Therefore, I want to see all these methodologies and how they were calculated, so will you go back and talk to counsel about what, in terms of methodology, can be produced for this Committee, please?

Andrew Bailey

Okay, I will look at and talk to counsel about what we could publish on the overall methodology that was used, but I would caution that we cannot take this to where you want to go in terms of what we publish in terms of individual cases, because it would get into subjects that are covered by personal confidentiality. Quite a bit of that is also the subject of our further investigation. We are not done on that yet.

John Mann

Counsel will have the opportunity to have the transcript from here, so there is no ambiguity in terms of what would be useful.

Andrew Bailey

I should say we have not withheld anything from our counsel. I hope you do not think that is the case.

John Mann

I am not suggesting that. How questions are asked is how you get counsel opinion. One final question/request is that you referred earlier to things being outside the regulatory perimeter. I have heard that before from you and your predecessors, and indeed on a totally separate issue with the Advertising Standards Authority, which is in similar dialogue over your powers in terms of currency exchange.

Andrew Bailey

That is not a perimeter issue.

John Mann

It is indeed. It is an entirely different aspect. In terms of my question, would you be prepared to provide to this Committee—and it might take some time, but we are not in a rush—the precise areas of powers that you do not have that it would be useful for this Committee to consider whether you should have, both in relation to the GRG issue and what you describe as being outside the regulatory perimeter, but perhaps for other issues as well? That is something that we have never had. It is a big piece of work but, for a new Committee coming into a fiveyear Parliament—possibly, legally, that is our presumption and our mandate is for five years—it would be significantly useful to the work of this Committee. I am not asking you which ones you desperately think you should have, and we might come back to you on that of course, but which ones you do not have so that, when you are saying, “We cannot do it,” be it in correspondence or be it in exchange, we are clear, so we can think through what our responsibilities and powers are to change that.

Andrew Bailey

The answer to that is yes. I agree with you it is a good idea. It is a good idea also because, as I said earlier, it has changed in interpretation as a result of the senior managers regime, which we are still introducing by the way, because we have a very big roll‑out of that to the non‑bank world next year, so I agree with you. We know the case we are talking about. The issue with the Advertising Standards Authority is we do not think we have the power to enforce their decision. It is not really a perimeter issue.

John Mann

I am sure in a future meeting we will come to that. The Chair would rule me out if I went on to that now, although it is a very important issue. I would need several questions, so I will defer that.

Andrew Bailey

I would also be happy to take that up with you, any time you want.

John Mann

We can discuss that privately in advance of future exchanges.

Chair

One of the conclusions this morning, you will not be surprised to hear, Mr Bailey, is that you will be back in front of this Committee on a regular basis, because there is going to be plenty to ask you about.

Andrew Bailey

I was sort of expecting that.

Chair

Before I hand over to Rushanara, who wants to return to the issue about GRG objectives, I want to pick up one point on this, which is about the publication. The reason that you have given for nonpublication of the full report is about the naming of individuals. You will know that the Committee appointed its own counsel to review the full report and the summary. That has been published this morning. In the report to us, our counsel has said that the GRG report does not make findings as to the knowledge of specific named individuals, but instead about that of “management more generally”. I think what you are saying, and I want to be clear about this, is that although individuals are not named, in the use of the word “management”, if somebody were to spend the time, they could go and work out who that management was at the time. It is not that individuals are named; it is the use of the word “management” that is stopping you from publishing the whole of that 166 report. Is that correct?

Andrew Bailey

That is true. We have counsel’s advice on that. I suspect that our counsel's advice is pretty similar on this, but that is very clear advice to us, yes.

Chair

Our counsel has not given us advice. They have just summarised the report for us, but I think that people watching who want to get to the bottom of this would find it quite difficult to understand the reason for nonpublication is not because there are individuals—in fact, they are not named—but because of the use of the term “management”. That would tend to support what Mr Mann has asked for, which is that, at the very least, a methodology of how things were worked out could be published. I appreciate you taking that away.

Andrew Bailey

I will go back and look at that, but I have to say to you we have very clear counsel’s advice on this point about management, because it is not a very large number of people.

Chair

We can talk about who it should have been, their skills and experience, at a later stage.

Rushanara Ali

Mr Bailey, I want to move to the issue around objectives. Do you agree with Promontory that the GRG had twin objectives to contribute to RBS’s bottom line and to turn around and rehabilitate customers in financial distress?

Andrew Bailey

Yes, that is a sensible description.

Rushanara Ali

Thank you. I want to focus on the very elegant letter that the Chief Executive of RBS wrote to us yesterday—a letter by their counsel, I suspect. I want to pick out the key points. There are four areas where there is agreement, and then there is a list of points that RBS does not agree with. I want to take you through those. If you would not mind giving your reflections on whether you agree or disagree, that would be really helpful.

Andrew Bailey

Can I just say that I have had very little time to study that letter?

Rushanara Ali

We have as well. It is just to get your initial reflections.

Andrew Bailey

I will give you as much as I can but, if you would like me to write to you with a more reflective view, I would be happy to do that as well.

Chair

That would be very helpful, thank you.

Rushanara Ali

Those that you can respond to would be helpful. On the first one, “RBS did not set out to artificially engineer a position to cause or facilitate the transfer of a customer to GRG,” do you have a view on that? Do you agree with that or disagree?

Andrew Bailey

The general thrust of the Promontory report is that there was not a deliberate policy, as has certainly sometimes been alleged in other publications. There was not a conspiracy to put people into GRG.

Rushanara Ali

That is helpful, thank you. The second point is, “SME customers transferred to GRG were exhibiting clear signs of financial difficulty.” What is your view on that point of that disagreement?

Andrew Bailey

I think RBS had criteria for putting people into GRG.

Rushanara Ali

Point number three is, “There was not a widespread practice of identifying customers for transfer for inappropriate reasons, such as their potential value to GRG, rather than their level of distress.” Would you agree with that?

Andrew Bailey

I think that is also right. I do not think people were put in there to profit from them, which is distinct from the exchange Mr Mann referred to earlier, which is a different interpretation of the word “profit”.

Rushanara Ali

Point number four is, “There was not a widespread practice of requesting personal guarantees and/or cash injections when GRG had already determined that it had no intention of supporting such businesses.” Would you agree with that?

Andrew Bailey

I will write to you with the evidence on that, but Promontory found evidence to support that. I would rather like to write to you on that point, if you do not mind.

Rushanara Ali

Five: “There was not a widespread practice of RBS making requests for information from customers that were unnecessarily burdensome.” Would you agree with that or disagree?

Andrew Bailey

That is far more into the land of judgment.

Rushanara Ali

Do you have a judgment on that?

Andrew Bailey

When a firm went into GRG, there was an intensive information gathering process. In one sense, you would say there would be, wouldn’t there? The question of whether it was unduly burdensome is a very fine judgment. I am afraid it is one where you could well see there were two views. In a sense, the findings that run through the Promontory report are that GRG was very poor at managing customer relationships in that sense—or at explaining itself, frankly.

Rushanara Ali

I have three more points of disagreement. “There was not a widespread practice of RBS acting as a shadow director.” Do you agree or disagree with that?

Andrew Bailey

I suspect and think the evidence is that they took a lot of legal advice on how to interpret the shadow director point. Again, I would probably prefer to write to you on that point, because it is a more technical point and I would like to study exactly what RBS has said in more detail on that.

Rushanara Ali

“There was no evidence that an intention for West Register to purchase assets had been formed prior to the transfer of the customer to GRG.”

Andrew Bailey

Again, I will write to you once I study the context. On West Register, because this is obviously a major plank of the whole issue, the potential for conflicts of interest with West Register was poorly managed by RBS. That is pretty commonly admitted. There is a dispute between RBS and, in a sense, the victims about how West Register behaved. There is not, in my view, grounds for a similar dispute about the need to manage the conflict of interest.

Rushanara Ali

The final point is that “there were no cases identified where the purchase of a property by West Register (as opposed to by another person) alone gave rise to a financial loss to the customer”.

Andrew Bailey

That is, in a sense, the real substance behind the point I just made. If I could characterise it broadly, RBS’s view of the role of West Register was to put in what you might call floor prices to stop fire-selling to distressed hedge funds, let’s say. West Register never took a property or an asset, in their view, if there was a higher bid in the process. That is the RBS view of the world. The other side of the view is very different, which is that people were pushed into the hands of West Register, which undervalued the assets for the benefit of RBS. Again, it is sensible to write drawing out points that are in the Promontory report on that, because I would like to study exactly what Ross has said on that point.

Rushanara Ali

Could you say a bit more on your reflections on the findings of systematic inappropriate treatment? Again, there are differences.

Andrew Bailey

As I said earlier, the two words I would imagine, and I have seen the letter briefly, are “systematic” and “widespread”. These are the two words. My general interpretation of this sort of goes back to the discussion with Mr Mann. Was there systematic or, certainly, widespread bad handling of these cases? The Promontory report is very clear, and the answer is yes, there was. Two of the other statistics that are widely quoted is 86% of the sample was treated inappropriately, and 92% of the sample was treated inappropriately if you remove those who were not viable. It is the same as the 11% and 16% point. In other words, for the viable firms it is a higher percentage. Those numbers denote why the use of the word “widespread” is not inappropriate. There is a second interpretation of this, which is more if you are alleging a widespread systematic behaviour that amounts to a conspiracy, and that is a different point.

Rushanara Ali

Finally, would you agree that RBS has, in the past, been happy to talk up GRG’s turnaround objectives? Now, given the failures in terms of its more recent reflections, it is falling back on a different definition and a different focus in order to deflect from that assertion and objective.

Andrew Bailey

This goes back to Mr Mann’s exchange of some years ago, which goes to the heart of how they interpreted these two objectives that your first point referred to. As we said earlier, it is incorrect to say that there was no financial motivation behind the operation of GRG. The Promontory report illustrates that. They were clearly operating to financial targets and, in a sense, you would, wouldn’t you? The point is you need to balance that against the second objective. Mr Mann’s question of some years ago was to the point in that sense, which was revealing of the question of how this was interpreted. The Promontory report keeps coming back to the point that they failed to handle what is, prima facie, a conflict between those two objectives. But if it is handled appropriately, it can be managed.

Rushanara Ali

Do you feel confident that, in this day and age, in the light of what has happened, this would not occur again—that these sorts of conflicts of interest would be better managed? It links to the point about what additional powers are required.

Andrew Bailey

It goes back to Mr Mann’s question. We do have more powers now, because the senior managers regime extends to all activities that an authorised firm undertakes. We would have more powers than was the case in the past and we do live in very different times. The painful lessons of these experiences have been brought out. With that said, I always have to say as a regulator “never say never”—that this will never happen again. We want through times when clearly a lot of things happened that should not have happened.

John Mann

Just to tidy up on this bit for our records, has any Minister or special adviser asked or raised any issues about GRG with the FCA during the three years of your investigation? Has any Treasury official or any Bank of England official done so?

Andrew Bailey

I have been very careful. First, we do not discuss live supervision cases with Ministers or officials of departments, in any event. Secondly, the Government own a large stake in RBS, so I was very clear to them and remain very clear that this has to be respected, because we would never discuss a case like this with a shareholder in any circumstances whatsoever. The normal boundaries are doubly important in this case.

Catherine McKinnell

I want to ask a few questions more generally about where we go from here, SMEs and dispute resolution in the banking sector. Just to set the scene, if a bank had acted towards retail customers in the same way that RBS has acted towards SMEs, what would the FCA have done to respond to that?

Andrew Bailey

First, we would have investigated it. I would not be surprised if we had investigated it ourselves. Yes, the Section 166 route is available, but we would have investigated it and, depending on the circumstances, that would have led to formal action and a redress process. The one point to make again is the difference between redress and complaints handling inside the regulated perimeter is we can set the terms of it and that is the ombudsman’s territory as well.

Catherine McKinnell

Presumably that would have been done faster than in the current situation, in addressing these issues with RBS.

Andrew Bailey

I would like to think so but, if I say that, you would, probably reasonably, fire back at me the case of PPI, which has been going on for nearly 10 years.

Catherine McKinnell

That is true and self-incriminating. Some of the findings in the GRG report are really quite concerning: a culture of deal-making that set little store by the interest of its customers but had, as its paramount focus, the generation of income; relations with customers were often insensitive, dismissive and sometimes unduly aggressive; and there was inadequate and inappropriate complaints handling. Do you think that small businesses understand what they might be getting themselves in for when they borrow from banks?

Andrew Bailey

Did they or do they?

Catherine McKinnell

Both.

Andrew Bailey

Based on what the report finds, you would have to conclude that no, they did not. It would be unreasonable to think that a small business should expect that sort of thing to happen, so my clear view on that would be no. Of course, nobody expected the financial crisis and the recession to happen, and it all took place in that period. Notwithstanding that, it is reasonable to expect that not to be the experience.

Catherine McKinnell

What I am getting at is if you think small businesses recognise that they are conducting this business within an unregulated sector.

Andrew Bailey

I suspect they did not, because the understanding of the regulatory perimeter is a matter somewhat for the cognoscenti. This is why Mr Mann’s request is a good one. Moreover, of course, it is not even quite that simple, because some small businesses are inside the regulatory perimeter, if they are very small, and some are not. I suspect, if we did a test of people and said, “Do you know where the boundary is?” we would get a very low response in terms of successful identification.

Catherine McKinnell

Do you think the lack of clarity around this for many small businesses can mean that their relationship with their bank can be potentially exploitative?

Andrew Bailey

In this case, I am afraid we have seen some very bad practice and that is what the report identifies. What comes out of this is a very clear message. This is why I have been very clear in advocating a much more robust complaints‑handling process, mediation and arbitration. Small businesses should expect better, absolutely.

Catherine McKinnell

More generally, do you believe that the treatment of SMEs by RBS via its Global Restructuring Group is not restricted to RBS? Do you share concerns that it is more prevalent within the wider banking system?

Andrew Bailey

This was an issue before my time that has been looked at quite a lot. Obviously we had an even worse case, which is the HBOS Reading case, where there was criminal activity involved. That is being sorted out at the moment. That currently involves exactly 68 small firms. That is a worse case because of criminality. The evidence, which was gone over or alluded to in some of the previous reports, for other banks is patchier. You get occasional cases that come up, but you do not seem to get a consistent story outside of the whole interest rate hedging product issue, which is a well-known piece of history as well.

Catherine McKinnell

You have mentioned in responses today and previously the possibility of setting up a resolution mechanism dispute system for SMEs. What have you done to bring that to fruition?

Andrew Bailey

I have tried to cover that in an earlier answer, so I will be short in reprise of it. There were two ways we, as a whole—because I am afraid it involves you as well—could have gone with this. We could have gone down a legislation route or we could have gone down a route of extending the ombudsman scheme and introducing quite new elements into that. Our judgment at the moment, and why we intend to consult on the second of those, is that it is a more viable alternative in the current climate than the first one. To be frank with you, I am not pinning my hopes on legislation.

Catherine McKinnell

You could include it in your list, in your response to the Committee in terms of legislative powers.

Andrew Bailey

We will cover it in the answer to Mr Mann’s question, yes.

Catherine McKinnell

Do you think that the broadening of the Financial Ombudsman Service could sit alongside a dispute mechanism?

Andrew Bailey

It could do. It certainly could do. As I say, currently the ombudsman covers what are often called microbusinesses, so it would do anyway to some degree. It would be possible to have some combination of the two. It would probably be simpler to have one or the other. What we will do is lay out what can be done with the ombudsman approach and subject that to consultation and a broad range of views. It is a big issue and will be an open consultation. This is not a closed book consultation because, frankly, we are going into unchartered territory here and will see where we get to.

Catherine McKinnell

Finally, one of the key issues here is that complaints and concerns are dealt with in a timely manner, and banking customers have confidence in the system. It is not just banks investigating themselves, which has been one of the big complaints with the IRHP review scheme. What do you suggest?

Andrew Bailey

That is the perimeter issue. The thing we have today is that, if it is inside the perimeter, the ombudsman applies and we, as the regulator, can dictate the terms. If it is outside the perimeter, the firm has to establish it. We do have a line of sight on it. We discuss it with the firm. We give our view on what should happen but, at the end of the day, we can never get around the fact that, in that world, the firm has to formally set up the scheme. We cannot do that.

Chair

Thank you. We are going to move on. I want to ask one final question on this, and perhaps you might like to include the response in your letter, rather than now, but I will ask the question. In the RBS letter that we received yesterday, Ross McEwan says that the “turnaround obligations, inferred or implied by the skilled person, do not in fact exist”. Do you want to comment on that statement? You have just said, in answer to Ms Ali’s question, that the two objectives did exist. If you want to flesh that out, you can write to us about it.

Andrew Bailey

I think that is much better to write on, because I would like to study the thing in more detail, as I said earlier.

Chair

I will get your view on that. We are going to move from GRG to another contentious issue: Brexit.

Wes Streeting

We have gone for an hour and a half without mentioning Brexit, which is possibly a record in this Parliament. You are uniquely placed to have an overview of financial services, in terms of the state of the industry’s contingency planning and what those plans involve, because you have a view, but they are commercially sensitive so we do not have a granular view, at least. You will also be aware of the points at which UK firms relying on passporting, for example, to do crossborder business are having to make potentially irreversible decisions to move people and activity to the rest of the EU. Perhaps we can begin with an overview from you on the state of the contingency planning, what those plans involve in general terms and at what point irreversible decisions are being made.

Andrew Bailey

All firms have to have contingency plans, I always say. As regulators, we ask them to make contingency plan for every known risk you can think of and a few you have not, so it would be contradictory of us not do this in the same case here—and they have anyway. Mark Carney has probably made the point in a previous hearing that the contingency plans are essentially, and wisely, all predicated on the basis that there is no deal. You can call it hard Brexit, you can call it no deal, but there is no inbuilt assumption that something good happens in this negotiation and saves the day. In terms therefore of the sequence of the exercise of the contingency plans, the way I would describe it is this: there is no drop-down date on which it flips from one world to the other, in the sense of them taking decisions. They are already taking decisions. The question, as you rightly put it, is the reversibility of decisions. For instance, they are renting buildings in places at the moment. They would regard those sorts of decisions as fairly reversible. Where it really starts to get more irreversible or at least harder, and this is what they all tell me, is in terms of staff. That is in two parts: one is either relocating staff or hiring staff. They are very conscious that, because they have to operate to a 1 April 2019 date, they have to do that in advance. They are also conscious that they have to either persuade people who currently work here to go somewhere else or recruit in labour markets that are often much tighter for the skills they want than the labour markets we have here. That is why they and we tend to take the view that the end of this year/beginning of next year is the point at which these sorts of things will start happening. Each firm will no doubt give you a slightly different date if you push for precision, but that is the sort of date to have in mind when things start to happen that have much bigger consequences. That is why I, and others have said it, think that the transition period, if you think about it in financial market terms, is an option whose value erodes over time because of this. Therefore, there has to be a very strong commitment on both sides to a transition period—and I use the word “commitment” advisedly because I am not optimistic enough to think there would be a signed agreement by the end of this year. Firms will essentially be faced, and you put it rightly, with whether they start to exercise these decisions or not. Q81 Wes Streeting:: Presumably when you say a commitment, you mean something a little bit ‑ and Jean Juncker Claude Juncker saying, “Don’t worry—we have agreed there is going to be a transition.” Presumably people making those decisions are having to justify to their risk officers, for example, why certain contingency plans would be staved off. They need a bit more than just wishful thinking.

Andrew Bailey

You are asking them to put faith in that commitment, so it has to be strong and it has to be strong on both sides. It has to be strong on the other side.

Wes Streeting

What kinds of commitments do you think people are looking for by Christmas?

Andrew Bailey

They in some sense speak for themselves, but I think they would want to see a broad‑based commitment: it is not just a commitment from the UK Government; it is also a commitment from the various parties involved on the other side. Clearly, to use the political science term, there are various veto players on the other side and that is a complicated negotiation. That is what it needs. If I may say so, and I know you have talked to Mark Carney about this, there is another big reason why it makes a lot of sense to get that commitment in place. There are broadly two reasons why you should have a transition period. One is that it would make far more sense for firms to take these decisions in the knowledge of what the final agreement is. That is quite sensible. The second is there are symmetric, for the UK and the EU, cliff edge risks at the beginning. You talked to Mark about the whole question of contract certainty, which is one that he, I and our organisations spend an awful lot of time on. Managing those cliffedge risks would be greatly assisted again by having more clarity in the transition period.

Wes Streeting

I do not know if you picked up last week that Sir Ivan Rogers told the Committee that many people who talk about no deal mean a series of small deals. He could not envisage a genuine nodeal scenario, where people literally drive towards a cliff edge without a care for the consequences. You may have a different view about that risk. If so, I would be interested, but let’s take that as a given. You also sit on the FPC. You have a broad understanding of the consequences of that kind of nodeal scenario for all parts of the financial services industry. You just talked about contracts in the nodeal scenario. We also heard problems about crossborder derivatives.

Andrew Bailey

That is part of it. I used contracts to cover derivatives.

Wes Streeting

In that context, what are the consequences of a no-deal Brexit that keep you awake at night?

Andrew Bailey

The first thing I would say is the cliff edge effects. Again, I do not want to dwell on points that Mark covered with you, but we currently have a situation, in our view as the UK authorities, in which there are contracts that depend on the passport for their servicing. By servicing, I mean in the case of an insurance policy, paying out claims. In the case of a derivative, it could be novation, compression and various other things that are done throughout the life of the contract. If you get a hard‑edged outcome by which the passport ceases to exist and the servicing of those contracts has to be done by a legally authorised entity—if we woke up one morning and the passport was not there—those contracts could not be legally serviced. That is the guts of it. There are solutions to that, but that is the guts of the issue.

Wes Streeting

Come on to the solutions, because it is leading into the next section of questions. What are you thinking in terms of mitigating risks?

Andrew Bailey

Let me just reiterate a point I made. We firmly believe these are symmetric risks, because the passport is symmetric. It goes both ways; it is for the UK and for the EU. You can think about this on three levels. There is a top-level solution, in which you agree this in the Article 50 process, so it is mutually agreed and there is a common solution. The second level is at the state level, the Government level. Each side agrees to do what it would take on its side to deal with this. On the UK side, you have had quite a few conversations with Government about this. It would involve a piece of secondary legislation in the context of the EU withdrawal legislation. It would then require us to regulate it, which we could do, to create a regime that effectively preserved the authorisation, at least for the period in which the contracts are in some form—running to their end, as it were. The third solution, and I think Mark Carney said this but I would reiterate it, is the least preferable. I would not put my faith in this. You leave firms to sort it out. If you leave firms to sort it out, you have to do some form of court process, whether it involves a novation or an insurance. It might be what is called a part VII transfer. That is frankly too difficult to do in the period available, but it is really too difficult to do in any period. This is not a good solution.

Wes Streeting

I am interested in what you said about a scenario in which the FCA might grant interim permission to firms currently relying on passporting. It is an interesting idea, which I would like you to expand on and address the point that, in that scenario, you might not have access to existing arrangements to share firmspecific information between the FCA and EU regulators. In that scenario, to what extent might interim permissions pose a risk in terms of consumer protection and market integrity objectives? How serious do you think those risks are? Are you making a judgment on whether those risks would be worth it, given the other risks of 8,000 firms losing their authorisation?

Andrew Bailey

It is also people in this country thinking that they have an insurance policy and then finding that they cannot claim on it. That is consumer detriment, so this is not an easy world. There are a couple of points you raise there. First, in terms of conduct supervision, in retail conduct particularly, the passport system is far less active. We, the FCA, are far more a supervisor of branches passporting into the UK than would be the case of the PRA, where they do not. It is a slightly different world there. The second thing, more importantly, is the point you raise, which is that all this depends on strong co‑operation agreements between the regulators involved. Here I am more optimistic in the sense that, I have to be honest with you, if the politics allow it to happen, we can do that. We work very closely with these people today. I can tell you that, from the day after the referendum—I moved over to the FCA a few days after the referendum—we made it very clear, and the Bank of England is not in a different place on this, that regulatory co‑operation is important. We are going to be operating in whatever world the process delivers, so strong regulatory co‑operation and international engagement is important. It sounds a bit pejorative to say this but, if the politics allow it, we can do that. We can put regulatory co‑operation around it.

Stephen Hammond

Good morning. Could I just ask about three related but different subjects? First, in terms of the Chairman’s first question to you this morning about your obligation in terms of the integrity of the UK financial system, could you give an assessment of the state of financial crime, bank fraud and cybercrime in the UK?

Andrew Bailey

That is a good question. It is something that we constantly have to watch. Can I separate financial crime and cyber?

Stephen Hammond

Let’s concentrate on financial crime.

Andrew Bailey

I will say something about cyber, because it is important. We are doing a lot more on financial crime. We have more access to information, but I am very supportive of whatever comes out of the Government’s economic crime review. My observation would be that we could get a lot better at this. If I give you an example, which I do not think I would be alone in giving, the suspicious activity reporting system is highly inefficient and very paper‑based. It is ripe for some form of innovation, but it requires a degree of co‑operation to do that. We are doing a lot, but frankly there is more we could do. I will say something about cyber, if you do not mind, because cyber is the big new risk that has come up the league table. If you went back 10 years to when we were having the crisis discussions, we were not talking about cyber. Today we are. I am afraid it is not a risk that you can conclusively mitigate. We do a lot, there is a lot more we will have to do, but it will constantly evolve around us. This is a regrettable fact of life, I am afraid. It is worth saying firms have to be constantly on it and I am afraid it is not going to go away.

Stephen Hammond

I am going to ask two questions following on from that about financial crime, and then come back to cyber. In terms of financial crime, there are two things. One is: do you think we have a bank fraud problem in the UK and are you doing enough to address it? In terms of the Government’s review of economic crime, can you say exactly what responsibilities you have in terms of combating crime and how you are contributing to that review?

Andrew Bailey

Can I ask you to be clear on what you mean by bank fraud? Is that fraud on banks, fraud by banks or both?

Stephen Hammond

I am thinking of fraud on banks by customers, running into cybercrime. Rather than bank on customers, which we have probably done a lot with already, I am really talking about a fraud on a bank and, therefore, the impact it has on its customers.

Andrew Bailey

That does obviously cross over into the cyber-world, as you say. Unfortunately, in the last year or so, we have seen more and more evidence of attempts to do this and we have to be constantly vigilant, accepting the fact that not only does it never go away but it gets more advanced and more difficult, in my estimation, as time goes by. All financial institutions know this. All the major banks know this. We have to work with them and we have to use the expert resources we can get from Government to counter it. It is a never‑ending issue, I am afraid.

Stephen Hammond

Several of the bank chiefs have raised recently that one of the consequences of the ringfencing will be a change of sort codes. They are raising quite clearly the prospect of that being a fairly major potential for exposure to cybercrime and crime on customers. Can you say if you have detected any uptick so far in fraud in that regard and what, if anything, you are doing about that?

Andrew Bailey

This has been a big issue. Interestingly, the so-called sort code programme is now well advanced. A lot of it is done and we have not detected those issues. We did a lot of work with the banks to work out where the risks were and what could be done about them. Interestingly, in the end, to be honest with you, the conclusion we all drew was that the programme has been somewhat overcomplicated. Stripping it back and making it simpler was the thing to do, which is what we did with the banks. At the risk of tempting fate before it is finished, so far, so good.

Stephen Hammond

One final point in this area is that, particularly in terms of banks with their customers, sometimes the line between what is economic crime and what is economic abuse is fairly fine. Have you asked the Government to look at any powers you may or may not need in terms of counteracting abuse against customers or SMEs, by banks?

Andrew Bailey

This probably comes back to Mr Mann’s question again, as to how we think about the perimeter. Much of my focus has been on the complaints ‑handling and resolution process. There is a very interesting question, so let me just say something else that we are planning to do on this front. I have mentioned the big change that is also happening is the senior managers regime, which gives us powers in respect of senior managers outside the perimeter that we did not have in the old regime. Of course, that still does not get to the fact that we do not have any rule base in that world, so you very reasonably get the question, so that is useful, but what are you judging it against? Now, you can go down one or two routes there. You could go down the route of a standing perimeter and then we could go into the rules world or there is another idea, which is industry standards and codes. This is something we are also going to put out for consultation and ideas, because this goes to the wholesale markets as well. It goes to things like FX as well, where obviously there have been issues. The history of industry standards and codes is not brilliant, frankly. They tend to get put together in great waves of enthusiasm, then sit on shelves. Things go wrong and they are pulled down, and then everybody says, “Where was it when we wanted it?” On the other hand, industry standards have the benefit that they are tailored to the market. As a general observation, which slightly goes back to the Brexit point here, I would say that one of the debates that we are going to have to have in this country, whatever the post‑Brexit outcome is, is to what extent the future of regulation in this world is going to be more of the civil code, continental rule system or to what extent we are going to go back to the common law, principles‑based world. That is a big debate, but it is conditioned by wherever Brexit leads us to. If you did go down the standard and principles route, we have an option, which is what I call hooking them up to the senior managers regime. This is what we are going to put out there for consultation and ideas. If standards had developed that we would find acceptable to meet, what about saying to a firm, “Okay, you adopt that standard but do not put it on the shelf. Guess what? Part of your responsibility under the senior managers regime is you are going to follow it. If you do not follow it, there is then a consequence.”

Stephen Hammond

You touched on a postBrexit world. There are two other issues and principles for the FCA in terms of a postBrexit world. You have spoken many times about global standards and regulation. At the moment, there appears to be a concerted attempt, particularly from the US, whereby we are likely to see divergence in standards rather than more global standards, as you have been suggesting. I wonder how the FCA views that problem.

Andrew Bailey

That is a really interesting question. I would say my experience so far with the US is that there is a long history of the US being suspicious of what I call multilateral institutions. It is a different case when you deal with the US bilaterally.

Stephen Hammond

A number of people heard less than a month ago Chairman Giancarlo’s comments in London, which seemed to be suggesting a more systematic attempt by the US regulators, across the regulatory environment, to move standards and potentially decrease regulation in the US.

Andrew Bailey

It is interesting; if you talk to Chris Giancarlo, who is the Chairman of the CFTC, about this, and I talk to him a lot because we work together a lot, he would say about Dodd‑Frank that he supports most of it but there are some parts of it that he does not think work well and, in some cases, are a bit egregious. However, he always says he supports the guts of it and what has happened in his area. We work very closely with the CFTC and, I have to say, the working relationship with the CFTC today is as good as it has ever been.

Stephen Hammond

There is another postBrexit issue we are going to face. You are aware earlier in the year the Treasury told the FCA that there should be some consideration towards competitiveness in the market in the formulation of policy. It brings together the question of, in a postBrexit world, how competition and also macroprudential oversight fit together. How do you see that fitting together? Secondly, in terms of my earlier questions about economic crime, how might you formulate competitiveness into your objectives? Where would the two objectives fit, in terms of primary and secondary?

Andrew Bailey

Let’s be clear. There is a difficult history to this competitiveness point, because the FSA had a competitiveness objective. The common view is it did not end well. What the FSA did not have was a competition objective. What the FCA does have is a competition objective, which is quite unusual for a financial regulator. It is a very good thing. I am reasonably new to the world. I think it is excellent. There is a strong view in our institution that the best thing we can do for competitiveness is competition. I have to confess not everybody agrees with that view. There are people who think that we should, in a sense, promote the UK, and firms in the UK in some cases, which would cut across competition. I strongly disagree with that view. If the UK wants to be competitive in international markets, it will be based on firms that compete strongly and serve customers and investors well. I know that we may well be heading towards this debate in a bigger way.

Kit Malthouse

I had a follow-up question on the fraud issue. On bank transfer scams, do you think banks would put more effort into combatting it if they were on the hook for the money?

Andrew Bailey

Something is going to be coming out on this very shortly in terms of the Which? super-complaint and the push-payment scheme.

John Griffith-Jones

You will recall Hannah Nixon and I were in front of you in November. We are, within the next two weeks—

Kit Malthouse

It is taking quite a long time.

John Griffith-Jones

It is coming out in the next two weeks. There has been a major piece of work, including working with the banks. It is all being tied together as we speak now.

Kit Malthouse

When the super-complaint came in, we were told six months.

John Griffith-Jones

It came in a year ago.

Kit Malthouse

Yes. It has been a year now, but I think we were told six months. You are saying within the next two weeks there will be an announcement.

John Griffith-Jones

There will be an announcement, yes. There has been some real progress made, particularly in quantifying the scale. One of the issues when this was raised was that we did not have any reliable statistics about how big this problem was. The banks have got on top of the collecting of the data. Then there is a joint effort, if I may put it that way, as to what can be done to ameliorate the likelihood of this happening going forward.

Kit Malthouse

You are not going to tell us what this resolution is today, I guess, but will the banks be happy or unhappy?

John Griffith-Jones

The banks are playing an important part in helping with the resolution. I would hope that they would be content, if not unduly happy.

Chair

It is a good topic for a future appearance.

Alison McGovern

Also relating to the post-Brexit scenario, I wanted to turn to the UK listing regime and a subject that you will be very familiar with. The current premium listing rules require firms to list 25% of themselves. It has been reported that Saudi Aramco want to list just 5% of themselves. Under the law as it is, the FCA has the power to allow it. I have got a series of questions on this, hopefully very brief, so only brief answers are required. Has the FCA ever used its power before?

Andrew Bailey

Sorry—used which power?

Alison McGovern

The power to allow the reduction of 25%.

Andrew Bailey

Oh—to allow the relaxation from 25%. I do not think the FCA has done it. I could come back to you on whether the FSA or indeed the Stock Exchange, if you go back that far in time, has done it.

Alison McGovern

As far we know, in relation to the FCA, no.

Andrew Bailey

I think I set this out in the letter. It is not a rule. There is an established principle. It is a judgment.

Chair

I think it is in the listing rules. It talks about 25% free float.

Andrew Bailey

It can vary. It is not a hard and fast rule.

Alison McGovern

Without getting into philosophical discussions about the nature of a rule versus a principle, perhaps I might—

Andrew Bailey

Can I just make a point? 25% of one company is vastly different from 25% of another company in terms of liquidity and scale. That is the point.

Alison McGovern

With that mind, perhaps you might say what it is about the potential £1.5 trillion listing of Saudi Aramco that might encourage the FCA to lower the minimum listing requirement for what sounds like the first time.

Andrew Bailey

This is the 25% point. We have not addressed this issue in that case. Let’s say it is 5%—the number that you gave. We would have to be convinced that created a sufficiently liquid market. That is the point. We are talking about a very large entity in this case. I want to make clear this policy is not about one company. I know it is frequently presented as that, but it would be a policy for all time.

Chair

Is the answer to Alison’s question liquidity?

Andrew Bailey

It is liquidity, yes.

Chair

That is the deciding factor.

Andrew Bailey

It is market liquidity, yes.

Alison McGovern

That is interesting. What would be the right circumstances then? Could you say a little more about what you are trying to achieve?

Andrew Bailey

If we felt that a sufficient level of market liquidity was ensured with the proposed level of the flotation, i.e. let’s take 5% of the company in this case, then that would be the test that we would have to apply.

Alison McGovern

Norges Bank Investment Management, the world’s largest sovereign wealth fund, has been critical of the proposed changes. It has said that this could be a regressive step in terms of investor protection. Do you agree with that criticism?

Andrew Bailey

First of all, as I say, we put it out for consultation. We welcome all receipts. As has been reported, and it is an accurate piece of reporting, we are now in discussions with some of the recipients—and no doubt will be with more of them as time goes on—to exactly know where they came from in terms of their comments and what lies behind them. As I set out in the letter, what we have proposed is that it is a separate category of the premium listing. It is not chucked into the general pool. There are two particular changes to the rules envisaged within that, which reflect the particular situation of a sovereign owned company. That is separate from the 25% one, which is different. I am very open to the responses and we will discuss them. Your letter was very clear on this but some of the reporting has not been. We have had lots of responses on both sides of this argument. One of the other reasons we have had to go back to some of the firms that responded, particularly the buy-side firms, is that within the same firm they have responded on both sides of the argument, which is interesting.

Chair

It shows the Chinese walls are working.

Andrew Bailey

Yes, but it is interesting to say, “Would you please give us both sides of the argument and explain how you reached this point?” We are now open to taking it forward. We are not close-minded about this. As I said in the letter, we do now have, as Parliament laid down, the letter that the Chancellor writes to us. There is a point in there about London as a financial centre. It slightly goes back to Mr Hammond’s point about the future. What we propose fits within the spirit of that, but we are open to consultation. Sitting suspended. On resuming—

Alison McGovern

As you were introducing the Chancellor of the Exchequer to our discussions, I have a couple more questions on that. You said in your letter to us that you have had no conversations with Ministers on the subject. Have you had conversations with Government officials about the Saudi Aramco IPO?

Andrew Bailey

We have had one or two conversations about timetabling. Let me explain why. The Treasury have also put out a consultation during the course of this year on what they call patient capital, so we did have a number of conversations making sure that we were both aware of when each of us was putting things out. Otherwise we tend to get accused of looking disorganised. That was the thrust of those conversations.

Alison McGovern

For the record, you also said that you met with representatives from Saudi Aramco.

Andrew Bailey

Yes, I did.

Alison McGovern

Who was at that meeting?

Andrew Bailey

That was on 27 January. It was the chief financial officer of Aramco. I have said this in public in a speech recently: we meet people. That is what we do.

Alison McGovern

Mr Bailey, I am merely getting the facts on the record. To return to Stephen Hammond’s point about competitiveness, could you tell us what representations the Treasury has made to you on that subject?

Andrew Bailey

Do you mean on competitiveness?

Alison McGovern

Yes, with specific reference to Saudi Aramco itself.

Andrew Bailey

On Saudi Aramco, none. On the competitiveness point, you can see what is in the letter the Chancellor sent to me earlier this year. We tend to call that the remit letter, probably wrongly these days. It sets out the point about London as a financial centre. I do not think it uses the competitiveness word, if I remember rightly. That is the formal exchange between us, but I have not discussed it with the Chancellor, no.

Alison McGovern

Fine. Finally, to your knowledge, has the Prime Minister been involved in trying to encourage Saudi Aramco to choose London for its IPO?

Andrew Bailey

Not to my knowledge. That is a question you would have to ask the Prime Minister.

Alison McGovern

Do you think that, if it was necessary to maintain our reputation for world-class governance, the FCA would be willing to turn away Saudi Aramco’s listing?

Andrew Bailey

We should be prepared to turn away anybody on the basis that they do not meet the standards that we want. This is all about what standards we want, and then we make the judgments accordingly.

Alison McGovern

Finally, given your experience and your instincts, do you really believe that it is across the board good for our country for Saudi Aramco to list here?

Andrew Bailey

We have to judge it through our statutory objectives as given to us by Parliament. We have to make the judgment on market integrity, in essence. The judgment is: do the proposals we have set out, which would create this special category, satisfy that? They would not require it to be in the FTSE 100, for instance, or to be purchased by people. I am open to that debate, as is happening. Any other views on Saudi Arabia and Saudi Aramco to do with other issues that are not in our remit are not ones for us.

Alison McGovern

I want to ask a couple of very quick questions on an entirely different subject, firstly on open banking. I believe open banking has great potential for our financial services sector to innovate to the benefit of consumers. What kind of resources do you have at the moment working on open banking?

Andrew Bailey

We have quite substantial resources, because we are having to implement the European directive PSD 2, which is in essence what creates the framework for open banking. As you may know, we are also very active supporters of innovation, so we have Project Innovate and we have our sandbox. Quite a lot of the innovation that could, in a sense, foster open banking comes through those channels, so we are very actively involved. Going back to Mr Hammond’s point, we are trying to balance the innovation benefits of open banking with, frankly, the data and cyber-risks.

Alison McGovern

You mentioned the sandbox. How much does it cost?

Andrew Bailey

I will have to let you know that. It is not very expensive, put it that way. It is not grand in that sense.

Alison McGovern

You can let us know.

Andrew Bailey

I can let you know, yes.

Alison McGovern

I have a final question on cryptocurrency and initial coin offerings. In September the FCA issued a consumer warning. Can you give us your reasons for that, your general view on ICOs and cryptocurrency, and what stance you believe the FCA should be taking?

Andrew Bailey

We are not alone as authorities in doing that. We are very concerned about people buying into cryptocurrency instruments. The capacity to lose money in those instruments is substantial. What we said in the warning is you have got to be prepared to lose everything on these things. Some authorities have gone further and bound them. We have not done that yet, but we were very concerned. I am generally very concerned about retail offerings that involve cryptocurrency.

Alison McGovern

In a post-Brexit world, the UK position on fintech could be crucial to our future earning potential as a country. What do you see as the guiding principle in terms of deciding how we should maximise the benefits and minimise the risks?

Andrew Bailey

It is quite interesting. It is a caricature of regulators—but, like all caricatures, there must be something in it for it to exist—that we spend our time saying no to people: “You cannot do this. You cannot do that.” Project Innovate predates me, so I give the credit to John and others who came up with this, but it turns the whole table round, as it were, and says, “How can we foster innovation within the objectives and safeguards that we want to see?” Rather than saying, “I do not like that. I do not like that. I do not like that,” it says, “What can we encourage and enable?” I always use the verb enable, because we are not picking winners and losers here. That is not what we do. It would be a bad outcome if we did that. It is about enabling change. It is a fundamental cultural change, which is a good thing.

Charlie Elphicke

Can I turn from the things that affect great matters of finance and the very rich to the many in our society who do not have a lot of money? In particular this is looking at your speech on challenges for the regulator you gave to the City Banquet just under a month ago? I would particularly like to raise with you the issue of rent to own. Do you think that having interest rates of 70% in this sector is acceptable or justifiable, considering the lending base?

Andrew Bailey

There are many practices in rent to own that we are very concerned about, which is why we have already taken action. It is also part of our review of high-cost credit that we are doing. You may have seen what we announced last week, or what BrightHouse announced last week technically. We have taken previous action in terms of disclosures. As part of the high-cost credit review, we are going to come back to the whole cost-of-credit issue. If you say to me, as a general principle, “Is it right that people who are less well off are paying so much more for basic household essentials?” I would say no. Anyone who tried to persuade me of that argument would struggle.

Charlie Elphicke

To give you an example, one woman went to BrightHouse to buy her autistic son a computer. It should have cost her about 600 quid if she had gone to Currys, but with repayments that turned into £2,287 over 26 months. I put out a call on Facebook last night. A constituent came forward and said they paid 70% of the value of a television. They missed one payment and it was taken away by a very rude person. That was the end of that. Is this industry behaving in an acceptable way?

Andrew Bailey

We have already taken action, which suggests that we do not. Could I make a second point here? I think I said this in the speech, and this goes somewhat beyond our boundaries, but I am prepared to play a role in this in terms of facilitating. I have said a lot of times in this consumer credit debate that people in that position do need access to some credit. There are very good reasons why. This is about smoothing income, being able to afford things that you pay for over time. However, I do not think we have a sustainable means of providing them with that credit at the moment in this country, hence we had payday loans. It is a lot less than it used to be, but we have still got some. We have got rent to own and we have got one or two other really bad things. One of the biggest issues that the FCA has dealt over the last three years, since it took over consumer credit regulation, is coming to terms with some of this. A lot of consumer credit is very different. It is perfectly above board, but coming to terms with some of these parts of the industry has been very a big thing. We need to investigate what is a sustainable provision of credit, on acceptable terms, to this section of society, because it is a really important question.

Charlie Elphicke

How is it I can go down BrightHouse and get a 70% interest rate and yet DFS will give me 0% APR for four years, Currys will give me 19.9% APR over a long period of time and Argos 29.9%. There is definitely a problem here, isn’t there?

Andrew Bailey

Yes, but of course they will not do if you are the sort of person who goes to BrightHouse, because, presumably, you would have tried to get the deal at those other places, not got it and ended up at BrightHouse. That is the problem. I was in a constituency in Yorkshire last Friday doing a visit that was based on this subject and I met some customers. One of them was very eloquent with me and said, and this goes to your example, “I know it costs me two or three times as much, but they presented it as you pay £10 a month and it looked affordable.” The thing you have to bear in mind is how many months you are paying it for.

Charlie Elphicke

These people are ending up repaying about three times or more, and you said in your speech to the City Banquet the cap on payday lending at two times maximum has been effective and people have lost out.

Andrew Bailey

Yes.

Charlie Elphicke

Why are you not doing it with this sector?

Andrew Bailey

That is what we are doing with high cost credit. We are looking at a number of sectors. That is one. We are looking at what is sometimes called doorstep lending or collection lending. We are also looking at catalogue credit. We have work on credit cards for those who have long term debt on credit cards. We are doing all of that, because I agree with you the issue is real.

Charlie Elphicke

Could I ask you to take away as a message that there ought to be caps in this sector, just as in payday lending?

Andrew Bailey

Good point. That will be in the frame in terms of what we look at as terms of solutions. Caps work better for some products than others, but I want you to be very clear I am not ruling this out.

Charlie Elphicke

It is not just predatory lending here; we have got lack of competition. BrightHouse is 70%, PerfectHome is 70%; Buy As You View is 69%.

Andrew Bailey

Actually, they are in administration, but yes.

Charlie Elphicke

Exactly, but these are all the same per cent. It is not a competition, is it? It is a cartel.

Andrew Bailey

That is why I come back to the point that we also need to look very carefully at what is a sustainable and better supply of credit, to facilitate the sort of activity that is needed, than the one we have today.

Charlie Elphicke

Are you still going to give an authorisation to BrightHouse?

Andrew Bailey

We have done a lot of work on BrightHouse in terms of their terms of lending, as you saw from what they announced last week. There is a lot of work and we will no doubt still have work to do on BrightHouse.

Charlie Elphicke

Do you think my constituents think you should be authorising these kinds of people?

Andrew Bailey

We have had them in what I might call interim authorisation for a long time while we have been sorting issues out with them. I think there is a bigger question, which is: is that the sustainable model for providing this credit?

Charlie Elphicke

Let’s move from rent to own, which I think is a 70% ripoff against poor people who are mainly on state benefits, to car finance, which is the province of much richer people. For them it is great. You can get 0% deposit and 0% interest for years and years and years. Are you not worried that this is driving a £58 billion debt bubble?

Andrew Bailey

Car finance is more than one sector. We are talking here about new car finance, not the other section of consumer credit that we inherited, which is second‑hand cars. There has clearly been quite a major structural change in car finance in this country in the last however many years. Again, Mark Carney talked about it when he was here. The effect of that structural change is far more to treat the car as either a leased or a rented asset, rather than an owned asset. That is really the effect of the so‑called PCP contracts. It has gone on in the US for some time; it is not a particularly new innovation in that sense. As I said in the speech at Mansion House, I do not think that is illogical from the point of view of owning a car.

Charlie Elphicke

With respect, that is not my question. I can go to Interest Free 4 Cars, get a used BMW for £35,000, no deposit, 0% APR for 72 months. That is an incredible deal—no deposit and interest free for years. Is that really responsible? I suppose it is a good deal, but does it not drive a debt bubble? Others are like that too. I have got several examples, but my point is whether this is driving a debt bubble. Is this not inherently risky?

Andrew Bailey

That is subject to the terms of the deal being really what they say they are, which is not always the case and is a very important point, by the way, on our work on the car market. There is a section of the population who will say to you, “That’s a really good deal and I would like it, please.” The bigger point there, as Mark Carney said, particularly in the PCP market of course, is that you can hand the car back at the end and the debt goes back to the provider. That is why the FPC, of which I am a member, is concerned about the impact on balance sheets of lenders. Mr Mann asked this question at a previous hearing: is it driving constantly increasing levels of debt? Well, it has clearly reduced the cost of financing. As I say, it is possible to hand the car back at some point.

Charlie Elphicke

Can I ask you what checks are done on the sales practices of car finance companies? Is the FCA actively investigating any firms for misselling?

Andrew Bailey

This is another part of the consumer credit landscape that we have taken over. We inherited 30,000 odd firms in this landscape. We are doing more work on car finance. We announced that earlier this year, and it includes looking at credit sale practice by firms. It is a bit of an oversimplification; there is a new finance market and there is a used finance market, and there are obviously sales practices in both of them.

Charlie Elphicke

You are investigating. How many?

Andrew Bailey

In a sense, we supervise everybody. We have a set of firms that we are looking at.

Charlie Elphicke

How many are you actually investigating?