Oral evidence: The work of the Financial Conduct Authority, HC 475
Oral evidence, 15 January 2019.
Witnesses
Andrew Bailey and Charles Randell.
Chair
Good morning, and thank you both for being here. I am sorry we are a little thin on the ground. Anyone would think there was something else going on in Parliament today, but that does not make this session any less important. We are very grateful for your time. I am going to ask you both to introduce yourselves for the benefit of the record, and then we have a whole smorgasbord of issues to raise with you both.
Charles Randell
I am Charles Randell. I am chairman of the FCA.
Andrew Bailey
I am Andrew Bailey, chief executive of the FCA.
Chair
Thank you both for being here. I want to start with mortgage prisoners and the letter that you sent to me last week, Mr Bailey. In it, you said that you would consult on changing the affordability assessment from an absolute test to a relative test. That has been welcomed by people outside, although there is a way to go. It is quite a radical change from the last discussion we had, when we talked about European law impeding the ability to help mortgage prisoners. Can you talk us through how you have got to that potential change?
Andrew Bailey
As we talked about last time, the question was how to interpret the affordability test in the context of the European mortgage credit directive. That has been the subject of discussion for quite a while, as you know. You are right to focus on this point about the shift from absolute to relative. That is a thing we have discussed with lawyers, and you normally ask me if I have discussed this with anybody in the Treasury. Here, yes, we have for the reason I gave earlier, which is the infraction risk. We have reached the conclusion both that it is an acceptably safe reinterpretation of that test and that we are certainly within the spirit of it. We will now take that out for consultation?
Chair
How long will that consultation be? What do you think?
Andrew Bailey
Normally we consult for 12 weeks. That is the norm in Government generally, I think. A few years ago, we had a discussion in this Committee about whether we had been shortening consultations unreasonably, so we normally go for 12 weeks. For the reasons that you gave in the response, there is no reason to hang around on this at all, so we will get on with it. If you remember, in the last discussion we had we discussed the question, which I think I called “can they and will they?”, about the lenders. As I said in the letter, we have also been working on the second leg of this, “will they?”, both talking with the lenders in the context of the other part of this, which is the treatment of those who are with authorised lenders and the arrangements we will come to with UK Finance, and talking with the much bigger group of lenders, the group we are talking about in the context of the revised test, about how they will do this. We cannot impose a non-commercial approach on a lender, but we can talk broadly to them about how they will go about doing this and showing good will.
Chair
Assuming there is a positive response to the consultation and the industry understands the issue, how quickly could the rule be changed?
Andrew Bailey
It could be fairly quick, because the thing that normally takes time is when we ask firms to change systems and so on. This does not involve that. It is essentially a change of process but, in a way, it is relatively straightforward.
Chair
You mentioned a round table in your letter. What was the response from the industry, from the sector?
Andrew Bailey
I was not there myself, so this is second-hand. There is a lot of good will. There is a desire to solve this, so we start from that place but, honestly, we ought to keep coming back to this because, even when we change the rule, we have to make sure it happens to an acceptable degree. I am afraid there is also likely to be a set of customers, particularly those in long-term arrears, for whom this will probably not solve the issue. This is broader than just us; we will need a broader public policy response.
Chair
Have you done, or will you do in the process of the consultation, any modelling to work out how many people any change like this would solve and how many people would still remain stuck in difficult positions?
Andrew Bailey
We have not done any precise modelling, but I could send you some figures based on the rough-and-ready views we have. I am afraid there is a group of people who will not be in this, particularly those who are in long-term arrears.
Chair
I know Rushanara might have some supplementaries on this, because she has asked about it before, but have you received an update about the voluntary agreement for the 10,000 mortgage prisoners who are with active lenders and how many have been moved on to a more competitive deal?
Andrew Bailey
We have not yet, no. So far, we reckon we have about 95% of the lending community signed up to participate in this. That was our first objective.
Rushanara Ali
Good morning, and thank you very much for what you have done so far. People affected have certainly expressed to us the positive outcomes so far. I have a few brief questions. One is if you could tell us, at some point if not now, how many people are in long-term arrears. You correctly raised the point that that may require a public policy response, and I have raised with Treasury Ministers that there is possibly a need, where appropriate, for some support for those people, so they are not forced to lose their homes. That was my first question. The second one related to the sale, which I raised previously, and whether this approach protects any future customers who might find themselves in a similar position. How can we apply lessons from the current number of mortgage prisoners to avoid a future situation, so history does not repeat itself? Given the profile of this story, other customers will be worried about the move from public ownership to private sale.
Andrew Bailey
I have a few points on that. The first question, if you do not mind, I will take away, and we will do our best to come up with an estimation on the arrears point and come back to you. On the point about sales, it will apply to customers who are affected by these sales. That is helpful. As you know from previous discussions, a sale can be made to an unregulated party. A certain amount of servicing still has to be done by a regulated party, but it can be. This is a matter for the contract for the sale, but we have been involved in discussions with Government as to what protections can be put into that contract. You can put in contractual protections, such as the scope to move the standard variable rate around, for instance. You can put in a number of contractual protections to that sale, which is important. Secondly, the people will benefit from any change we make to this, because it is the exit route. Your point about future sales is interesting. In the debate that has gone on, there was an alternative approach, which I am not as keen on and we are not pursuing, which was essentially to set a time bar and say that we can do something for people who had mortgages before the crisis, say. The UKAR book is essentially the Northern Rock and Bradford & Bingley book so, by definition, they must have got those mortgages prior to those two firms failing. The relative versus absolute test has the benefit of being a principle with which to go forward. Anybody should benefit from that; it should not be a question of when you took out the mortgage. I think it is also a better way of dealing with the European point because, rather than saying we can put the test to one side for people who have had a mortgage for a long time, because they have been servicing the mortgage for a long time, establishing the principle is better. What is more, it should be available to anybody in the future who finds themselves in this position, and wants to come out and not increase the size of their mortgage. That is the other test; you are remortgaging and not seeking to borrow more.
Rushanara Ali
Mortgages are inherently long term so, by their nature, any changes need to reflect the fact that people will take out a mortgage at a particular point when they fulfil affordability tests and so on, even the new ones. Then, if the bank shifts the goalposts in the future and rejects mortgages, it puts secured or unsecured mortgages, household mortgages or buy-to-let mortgages at risk. It would be good to have some sort of assessment of what impact assessments will be made to understand where problems might occur in the future, as this sale or any other scenarios like it go ahead, so we are not putting people at risk.
Andrew Bailey
We can do that. Also some combination of the Treasury and UKAR can do that. One thing Charles and I know from our past involvement in Northern Rock, which we enjoyed, is that, if you remember, Northern Rock had this thing called a together mortgage. It was a quite bizarre concept, with up to 120% LTV. You have a secured and an unsecured part. It depends what has happened to the value of your house in the meantime but, assuming it has not risen, there will be a concentration of customers in that book. This is the last element of the Northern Rock book.
Charlie Elphicke
Can I ask you about overdrafts and overdraft charging? You are currently consulting on proposals to ban lenders from charging higher fees and rates for unarranged overdrafts than they do for arranged overdrafts. Do you expect the price of arranged overdrafts to increase as a result and do you see that as a fair outcome or something you would wish to avoid?
Andrew Bailey
We do not wish to see, as a result, a marked increase in arranged overdraft charging. To be frank, we debated this point at great length internally. Interestingly, we start in a position where the charging process for unarranged and arranged overdrafts is completely different. If you plot a chart that links the cost of the overdraft to the amount you have used, you can see a relationship for arranged overdrafts. Basically, the more you borrow the more you pay. For unarranged overdrafts, it looks like someone has been on something and drawn a random colour chart. It is quite amazing. There is no relationship, and the reason is that it is predominantly a fixed fee. It does not matter how much you borrow and how long you borrow it for; you pay the same rate. That means you can end up paying very high rates for small amounts borrowed over short periods of time. There are two reasons for linking the two here, and that is one of them, which is to say that we want unarranged overdrafts to be rationally priced. On the second one, to be honest with you, I started, perhaps as a former prudential supervisor, with the logic that there is a difference between arranged and unarranged overdrafts, in the sense that one is credit and one is not. The problem is that, when we look at the way the banks run them, that view is too logical. Some of them shift the unarranged into arranged and vice versa, so we ended up saying that there is not a great case for splitting the pricing of this product. Moreover, the unarranged overdraft product is so oddly priced that we wanted to anchor it to something. Just to give you comfort on the point you started with, yes, we will be alert to where it moves arranged overdraft charging to, because that is not what we want to say. We looked at the cap. People said, “Why don’t you put a price cap on?” We looked at that a lot. The issue is this. Were we to use the payday cap, it would give a lot of scope to increase overdraft charging and we did not want to do that.
Charlie Elphicke
Let me challenge that. The FCA came round to the merits of a price cap on rent-to-own very late, with the result that you are still consulting on the proposals. Do you risk doing the same with overdraft charges?
Andrew Bailey
We are going to move forward on overdraft charges. We have seen, in previous incarnations, big cases in this area being lost in the courts through not doing the process properly. Some 10 years ago, there was a big attempt on overdraft charging, which was lost in the courts. We have stepped through rent-to-own carefully. You and I have discussed this in this Committee before and I think we agree on the fundamental issue we are trying to tackle. We agree with you that we want to tackle it, and we have set out how we are going to tackle it, but we have to step through this carefully. Let us face it; we are going into this knowing that we are going to affect the business models of the now small number of firms that provide rent-to-own. That is deliberate and we know that, but we have to step through it carefully.
Charlie Elphicke
On the other side of the fence, some might be concerned if you are saying that, whether I arrange or do not arrange an overdraft, I am going to be paying the same. How do you deal with the moral hazard?
Andrew Bailey
I think it will lead to a shift in the way overdrafts are structured. I suspect it will lead to a shift away from unarranged overdrafts, which is not necessarily a bad thing.
Charlie Elphicke
Let us say I am a feckless individual, which your average banker might think this sort of person is, and I run up a massive overdraft of £5,000 completely unarranged. I have not spoken to the bank about it, but frankly it makes no difference to me whether I bother to speak to the bank about it. What is the sanction and how do they stop me running up large overdrafts?
Andrew Bailey
To go back to my original point, the sanction is that the pricing reflects your behaviour, rather than being random. Under the current structure, if you did that you might be one of the people who have a rather lower charge for an overdraft. If you were able to borrow, on an unarranged basis, a larger amount for a longer time on a fixed fee, you might end up with a lower percentage charge than the person who borrows a smaller amount for a short period of time. That is why it is so random. Actually, the moral hazard point is better addressed by having a pricing structure that reflects your behaviour.
Charlie Elphicke
You are saying that there should not be any difference between arranged and unarranged, so how does it work?
Andrew Bailey
At the end of our debate, we felt it was better to anchor the two together, in their pricing structure. We come back to this interesting point as to whether the consequence of this will be more use of arranged overdrafts, as there is in other countries. I do not think that would be bad at all.
Charlie Elphicke
The FCA recently published the Strategic Review of Retail Banking Business Models, which is a very exciting title for a no-doubt very exciting tome.
Andrew Bailey
It was not one of our snappiest.
Charlie Elphicke
It finds that major retail banks have competitive advantages of fewer customers facing high overdraft fees and poor returns on their deposits. Your interventions are limited to the new restrictions on overdraft fees and a discussion paper on cash savings. Have you ducked the opportunity for fundamental reform of retail banking models and the opportunity to deal with the problem of the oligopoly of the banking system?
Andrew Bailey
The reason for doing that piece of work is that I am keen for us, in the FCA, to lay down what I might call a foundation, in terms of understanding and explaining business models. The root of a lot of things we deal with is what is going on with the business model. We have had this debate on free-if-in-credit banking for as long as most of us can remember. You may remember that the work we did came out of this Committee’s dissatisfaction with the CMA’s work. It was a direct product of that and we agreed we would take it on, which we have in a number of interventions. The work on banking business models was not designed, in and of itself, to make proposals for change, but to attempt to explain what we think goes on in these business models. It is useful for us anyway and I hope it is useful for a broader audience. It makes a number of points, but one of the key points is that there is no such thing as “free if in credit”. I have already said this; nothing in life is free. The biggest contributor to funding the cost of current accounts is the deposit rate, because banks manage their net interest margin. The core of retail banking is managing the net interest margin, so deposit rates drive this a lot. The major banks, it is no great surprise, have a considerable advantage there, because they have bigger stocks of non-interest-bearing current accounts.
Charlie Elphicke
Mr Randell, what are your thoughts on this area?
Charles Randell
It is right to say that we have intervened both on the savings side, as we have been looking at the basic savings rate, and on the borrowing side, by looking at the cost of these credit products and trying to ensure they reflect risk, cost and length of borrowing. Those interventions are right and, as Andrew says, if we can help to ensure that the costs and returns reflect the underlying economics of the relationship, it will deal with much of the moral hazard issue. The work that we have done on the review of retail banking business models clearly brings out that we are potentially at a moment prior to significant change through a series of reforms, including open banking. My concern is that, if we go in all guns blazing with some very interventionist measures that try to cap prices and shape markets, we will affect the outcome of open banking. Open banking may deliver a lot or it may not deliver quite as much as we expect but, if we intervene heavily and consistently in this area now, my suspicion is that it will not deliver very much.
Charlie Elphicke
My constituents in Dover and Deal are very concerned to make sure that we continue to have free banking. Do you envisage that it will continue?
Charles Randell
As Andrew says, the bad news for them is that they are not getting free banking now. They are paying for their banking services through quite low returns on deposits and quite high, sometimes rather random, charges for their overdrafts. The question is whether they know what they are getting and how they are paying for it. If they are given a choice, will they take those choices instead?
Charlie Elphicke
The banks tend to raise the bogeyman: “If you reform our overdrafts, so that we cannot charge people who do not arrange overdrafts money, and if you make sure that we pay a higher interest rate, that will be the end of free banking”. My constituents in Dover are concerned about this. What would you say to them?
Charles Randell
As we have said, there is no such thing as free-if-in-credit banking, but it is a fundamental question that has bedevilled the regulation and competition dynamics in this market for decades. At this moment, I do not have the view that we need to make further change, other than that which we are already consulting on, but it is an issue that will come back again and again, I am afraid.
Charlie Elphicke
Finally, do you both think that new technologies and business models may erode free-if-in-credit banking anyway?
Andrew Bailey
Yes.
Charles Randell
Yes, absolutely. If you talk to thoughtful leaders in the banks, the issue for them is not the free-if-in-credit banking model and regulation. The issue for them is whether new market entry and new ways of targeting their customers and delivering services will erode streams of revenue, both on the savings side and in payment and transaction fees, which will make the free-if-in-credit banking model unsupportable. If that is what happens, that market will work for the benefit of consumers.
Andrew Bailey
There are two things. First, it is important, and I hope this work provides the foundation, that we are able to assess that change as it happens or does not happen. We do not know what pace it will happen at. One thing I thought was interesting about the work was this. Depending on whether your constituent is an individual or a business, they receive quite different rates on their current accounts. The lower rates paid on business current accounts than individual current accounts were interesting and more than I thought they were. There is an argument that we try to pick out about whether business current account rates are, in a sense, paying for other services that banks provide to business customers, but it was quite striking. We talk a lot about conduct towards business lending but, post crisis, we have moved towards a world where businesses are much more depositors of money into the banking system rather than borrowers from it. That point is of increasing importance.
Chair
It will be debated further. I am going to bring in Stewart on something completely different.
Stewart Hosie
You will be aware that the Committee is scrutinising the work of the Financial Ombudsman Service in light of the independent review. What is the FCA’s role in providing proper oversight of the FOS?
Andrew Bailey
Do you mind if I pass this question to Charles, because he is the chairman of the oversight committee? I do not participate in it a lot.
Stewart Hosie
In that case, Mr Randell, what oversight does the FCA provide?
Andrew Bailey
The oracle is sitting next to me.
Charles Randell
Thank you for the question and thank you, Andrew, for referring it to me. Yes, I chair the FCA board’s oversight committee, which discharges its obligations in its oversight of the Financial Ombudsman Service and the Financial Services Compensation Scheme. We have engaged closely with Richard Lloyd’s review into the Financial Ombudsman Service. I have been keeping in touch with him and keeping abreast of his further work with the ombudsman to see how it is implementing his recommendations. The committee has also been scrutinising the service’s plans both to respond to his recommendations and to ready itself for the extensions to its jurisdiction. We have had a number of meetings. I frequently meet with the chair and, because he will be moving on in 2019, with the senior independent director, the chief executive and so forth. I meet them very regularly to make sure they are on track to implement the plans that they need to execute to respond to Richard Lloyd’s review and ready themselves for their new jurisdiction. At this stage, the plans appear to be on track. The oversight committee has discussed with the FOS the levels of assurance it will receive on the implementation of those plans and that readiness. We expect that assurance to be shared with us and all of that will come together in a package, which will inform our final decision in March, so that the green light can remain green for 1 April.
Stewart Hosie
Are you of the opinion then, and it sounds like you are, that the level of oversight you have is adequate at the moment?
Charles Randell
The level of oversight we have is very high at the moment. Can I quickly pause for two commercial breaks? The first is to say that the ombudsman service provides an incredibly valuable service to people who have no access to a dispute resolution service without the ombudsman. The vast majority of people who use that service benefit from it enormously. It is in the nature of what it does that one party to each dispute it adjudicates on will probably feel hard done by, but it does that job and it does it well. It is vital that it does it. It is particularly important in the small business lending area, as it is the only game in town, at the moment, for small businesses to get more access to justice.
Stewart Hosie
Before you do your second commercial break, you say it is the only game in town at the moment. Now, there may be other questions about this later from Catherine, but you will be aware that there is a bit of unhappiness in the SME community that it may be the only game in town when alternative dispute resolution is much sought after. I would welcome your general view and I know Catherine is going to ask about the detail of this.
Charles Randell
I am concerned that we focus on our job and our remit. The big difference we can make in the short term is to ensure that this jurisdiction lands well with the Financial Ombudsman Service on 1 April and then that it builds that capacity. That will potentially lead on to further extensions of its jurisdiction, either voluntary or regulatory, which will further increase access to the ombudsman service for small businesses. There is a real danger at the moment, and I do not want to distract our efforts from delivering that. If I can quickly get in my second commercial break, I mentioned that the chair of the Financial Ombudsman Service comes to the end of his term this year. The process for appointing his successor is underway. It is an incredibly important and valuable role, and I hope we get a wealth of high-quality applications.
Stewart Hosie
Can I take you back to oversight? You said that the level is high. Is it elevated because they are getting new responsibilities? Is it elevated because of the independent review by Richard Lloyd? Is it elevated because of the media and the “Dispatches” programme looking at it, or is it high for good reason?
Charles Randell
I have nothing to compare it with, because I have only known how oversight has operated while I have been the chair. As chair of the oversight committee, I am determined that the oversight we conduct for the bodies we are responsible for overseeing is high. I was not trying to indicate that I have stepped on the gas in some way, but I am satisfied that it is a very high level of oversight.
Andrew Bailey
I can offer a bit of perspective on that, as I have been around for longer. It has evolved over time. My memory of its earliest forms was that it was purely a budgetary oversight process, in which the FCA had oversight of the setting of budgets for, in those days, FOS, the FSCS and the Money Advice Service. There is some history with some of the other organisations. It had already evolved prior to the latest situation with FOS. It is not unreasonable to say that it is evolving further, which I think is appropriate.
Stewart Hosie
On this evolution, you initially said that it was merely a budget-setting thing. The strategic plan and budget for 2019-20 gives details of the consultation on the future funding of the FOS. This is the funding of it and not how it spends its budget but, nevertheless, do you think the current method of funding the ombudsman is sustainable?
Charles Randell
The ombudsman has indicated that this is the year in which it needs fundamentally to look at its funding, as it migrates away from a heavy PPI claims workload. We have the PPI claims deadline coming up. As that process works through—and work on PPI will not end with the deadline, of course, as it is the deadline for making claims, rather than resolving them all—and the scale of its PPI activity comes down, its financial requirements and funding structure will need to change to reflect a more heterogeneous flow of cases. It will get new jurisdictions as well. The oversight committee has been discussing all this with the board of FOS. They are thoughtful about it and mindful of it, and it is one of Richard Lloyd’s recommendations to look fundamentally at the sustainability of their funding structure.
Stewart Hosie
Of the options there, an FCA levy, a case fee, a risk‑based levy of 50% or a different sort of levy, where do you think the balance should lie? Which of the options before us would be the best way of funding the FOS on an ongoing basis?
Charles Randell
I am sorry, but I am going to duck that question, because I genuinely think this is work in progress. The FOS is bringing forward its plans for a new funding structure and will consult widely on it, reflecting the change in its business mix over the next couple of years.
Stewart Hosie
I understand that and am not going to push you on that but, in your oversight, you will want to make sure that whatever recommendation it makes for its own funding is sustainable to support it in providing the services it does, going forward.
Charles Randell
That is correct. We need to look at their cost base, the extent to which it is fixed or variable, where it comes from and who should bear those fees. We need to avoid perverse incentives in their fee structures. If you have unscrupulous claims management companies targeting firms, they can try to drive them out of business through the referral fees alone. All of that needs to be in the mix, so it is an important and complex debate, which will be widely socialised, but I do not want to front-run it.
Stewart Hosie
I have a final quick question: when can we expect to know what recommendation will come forward on the funding or when will you know that?
Charles Randell
Can I write to you with the FOS’s proposals on the timeline for that process?
Andrew Bailey
As Charles said, it depends somewhat on the PPI run-off profile.
Catherine McKinnell
As Stewart touched on earlier, I want to ask about SME finance and availability of redress. In your earlier reply, you made clear that there is a role for an extended service for the ombudsman and a financial services tribunal. The Government have made clear that they do not see the case for establishing a tribunal. It would be helpful to have your comments on your position on that, and why you think the Government have taken that position.
Charles Randell
I am focused on landing a successful FOS jurisdiction for SME disputes and building on the successful rollout of that to see whether the jurisdiction can be further extended. The proposals in Simon Walker’s review for a voluntary extension of the jurisdiction seem meritorious to me. As a former lawyer, my gut reaction is that, if the answer involves lawyers, you are asking the wrong question. I am afraid that tends to be my gut reaction to some of the discussions around the tribunal. There is a misapprehension of just how easy, accessible and cheap such a process could be. It also requires a public policy decision, which is outside the hands of the FCA. It is an important debate, but not one in which I personally want to engage, I am afraid, at this stage, because all the focus from my side should be on the successful landing and, in due course, extension of the FOS’s jurisdiction.
Catherine McKinnell
In summary, there may be a case for it, but we are not there yet.
Charles Randell
There is a broad set of questions around access to civil justice in this country, of which medium-sized disputes by businesses is a part, but by no means the only part. That is a series of public policy issues that I am not spending a lot of time on, because the priority for us is to land the FOS jurisdiction.
Andrew Bailey
If I may add one point, which I have made several times before, we have always taken the view that an alternative dispute resolution mechanism such as FOS is not inferior to a legal process.
Catherine McKinnell
I totally appreciate that that is your position, but do you have any concerns that a voluntary access scheme will provide justice for those that seem to fall through the gap, including SMEs? For example, it is being introduced for businesses with a turnover of between £6.5 million and £10 million. What about the businesses that do not fall into that category?
Charles Randell
These are important questions.
Catherine McKinnell
The other issue is whether you are confident it will deliver the cultural change we need to see within the banking sector.
Andrew Bailey
It is important to judge it against what was there before, which was nothing. This is not a question of anybody having failed in this endeavour before. There has not been one, so it will change things in that respect. Going back to what has been said before, the real test of this is that it operates in a different way from the way a classic PPI claim operates, which is an ex post process. As a dispute resolution mechanism, it is critical for SMEs that it can solve it on the ground, to use a loose phrase, so that the company gets a solution and can trade on.
Charles Randell
To add to your culture question, one of the important developments in this area is the rollout of the senior managers regime. Coupled with codes and standards, including those of the Lending Standards Board, it gives us as a regulator a means to judge, then influence and enforce against the behaviour of people in banks who have oversight of these functions. One thing we can do going forward, possibly to an even greater extent, is to use the evidence we see in FOS disputes as one of our indicators of cultural outcomes in banks, and act on it in a supervisory and enforcement capacity. There is a virtuous circle there, which we can get going to an even greater extent than we have seen at the moment. That is one of the things we have been discussing with the Financial Ombudsman Service, which is how we use the view it gets of the world through the difficult cases to inform our supervisory and enforcement activity.
Andrew Bailey
In saying this, I am conveniently going to duck the question of what macroeconomic conditions we have in the period ahead. As things stand today, we may not get a big flow of cases coming through initially because, historically, these small-firm cases are very cyclical. As we know from the issues we have had to deal with, it tends to rise sharply in periods of recession. I would not be surprised if, in today’s conditions, the flow is quite small, but we should not judge that as the system not working. We will see. We may be surprised and there are a lot of idiosyncratic things out there.
Catherine McKinnell
To press you on the initial part of my question, is this comprehensive enough? I totally take on board that something is better than nothing, but there is still widespread concern that the proposed voluntary system does not have the ability to compel witnesses. I appreciate your comments about the legal processes around that. It cannot insist that evidence is disclosed. There have also been reports that the FOS is only dealing with the simpler and not the more complex cases. There is still a sense out there that this is not going to respond sufficiently to the level of demand there is for justice in these cases, or give surety that it will have a long-term impact for businesses going forward.
Andrew Bailey
One of the interesting things about the Simon Walker report was that he and his colleague looked extensively at, and have a lot of experience in, the operation of alternative dispute resolution mechanisms across a wide scope of society and the economy. Their conclusion was that ADR processes can and do work in this country, in most situations. This comes back to the first discussion we were having in response to Mr Hosie. The task for FOS is to set up the infrastructure and capacity to do just that, which is about recruiting people, having governance, good communications and understanding, both with SMEs and the banks, so it is clear how the system operates. To the point about compelling witnesses, how that works in practice will have to be watched carefully. I agree with you.
Charles Randell
It is important to debate the tribunal issue as a public policy issue, but it goes much wider than our powers. It is part of a general debate about access to civil justice. The question that people might well come back with is to ask why there is no tribunal system for individuals who have been scammed out of more than £350,000 of their pension savings, for example. Where does this all lead? There is a need to see it in a much broader context.
Andrew Bailey
Richard Lloyd has touched on this point. One thing that needs to be clear in the FOS process is how it handles appeals. In all these processes, how do you get to the point when the referee’s decision is final and is accepted as being final? We need a system that delivers that.
Catherine McKinnell
Moving on to another issue that you responded to in the SME Finance report, the FCA is well advanced in providing the fuller account of its findings from its investigation into RBS GRG. What progress have you made in the last month?
Andrew Bailey
It has gone out for Maxwellisation.
Catherine McKinnell
I thought you might say that, so when will it actually be published?
Andrew Bailey
I was going to say something else. The Maxwellisation process we are using is the one that emerged from the process this Committee had with Andrew Green. We are very pleased about that and it basically means we have set a time deadline.
Catherine McKinnell
What is the time deadline?
Andrew Bailey
It is 21 working days.
Catherine McKinnell
When is that from?
Andrew Bailey
It is from last week. You will probably accuse me of getting this wrong now, but I think that takes us into the first half of February. They are working days.
Catherine McKinnell
That is helpful, thank you. Can you also provide an update on your investigations into HBOS Reading?
Andrew Bailey
You know there are two HBOS investigations. Last time I was here, I said that we were promised more material. We received more information over the end of the year. I really hope that is the last of that. The team is processing that at the moment and it will then have to go through the legal analysis. I really hope that nothing more is forthcoming and we can take that to a conclusion.
Catherine McKinnell
What kind of timeline are we looking at? The Dame Linda Dobbs review is due to conclude in the second half of this year.
Andrew Bailey
I believe it is, yes.
Catherine McKinnell
Do you envisage the FCA’s investigation finishing before then?
Andrew Bailey
I hope so. Unfortunately, I cannot tell you what is in the information we have received, because I do not know, but I hope so. I cannot tell you for certain, I am afraid. I am also not a decision-maker in the case.
Charles Randell
I would assure you that, from my point of view, having a process that has both integrity and the necessary resources to bring it to a conclusion is a high priority. I have regular meetings with our executive director of enforcement to discuss the resourcing of these cases, to make sure there are no blockages on the resourcing side and to understand the future timelines, but the outcome of these cases ultimately depends on a variety of factors outside our control. While I hope the timeline that Andrew has indicated is realistic, there may be reasons, which we would be able to explain, that it could not be met.
Catherine McKinnell
Putting the timeline to one side, do you remain confident in the fairness of the Griggs review, particularly in light Jonathan Laidlaw QC’s comments that it is “unlikely to provide just redress” to the victims. Has the FCA taken any action or considered that?
Andrew Bailey
We have, yes. You may have seen what was recently announced, which is that there is going to be a review.
Chair
Lloyds is doing its own review of the review.
Andrew Bailey
Yes. I agree with the Economic Secretary, who said in the debate on this, if I remember the phrase he used, that there needed to be more public confidence in that process. He said that the FCA had agreed with Lloyds that there should be a review, and that is correct.
Catherine McKinnell
If the review found that it was flawed, what action would the FCA take?
Andrew Bailey
The consequences would have to be dealt with. I will put it that way. We do not know, if that were the case, what they would be. What it needs to and should look at is the overall approach towards what Griggs calls “distress and inconvenience payments”. Bear in mind that we are dealing here with criminality. People are in jail because of this. The first point is the overall treatment. The second point is consistency within the overall treatment. Thirdly, has the scope been fully defined? It is not a big scope. Relative to GRG it is quite small. It is 60-odd, whereas GRG is about 2,500, but it is critical that people conclude that the scope has been correctly defined. You have probably picked them up, but there are a lot of comments from outside, particularly in areas such as shareholders in companies that have failed. I am not prejudging the review at all, but the reviewer needs to look at that, because it is a live issue.
Catherine McKinnell
Going back to the FOS, its remit and the senior managers regime, you mentioned at the start that there may be a role for regulatory extension to ensure we have fair treatment of business consumers. You have previously told this Committee that you think the Government and Parliament should consider bringing SME lending within a regulatory perimeter. What is your timeline to assess that? How are you going to assess when we have reached that point? What do we need to look out for as a Committee reporting?
Andrew Bailey
As I said to Mr Elphicke when he was here, we are going to do further work following from review of retail business models, because it is not really about lending. I made that point to Mr Elphicke quite deliberately. To assist any perimeter review process—and we have now committed to do a formal perimeter letter at least once a year—we have said we will do a piece of work this year on SME banking, which will pick up the points that I referred to Mr Elphicke earlier. If we only did lending, we would probably miss this.
Chair
You mentioned at the beginning of your evidence the issue about charges and how they differ between business and individual bank accounts, in the way the accounts are managed.
Andrew Bailey
It brings in both the deposit question and the fees and charges question. We are scoping that at the moment and will let you know.
Catherine McKinnell
Will this once-a-year letter be sufficient or do we need a formal post-implementation review, so we can look at this in a more formalised way?
Andrew Bailey
The once-a-year process is something we discussed before. We wrote to you on the perimeter about a year ago. I think it is a good idea, but that is for the whole perimeter. We would pick up all sorts of things there. We would pick up crypto-assets, mini-bonds, which is an issue at the moment, and SMEs. There were a number of things in the letter. To me, that is a good hook to put the whole perimeter issue on. Now, you rightly say there may be issues within that that you, we or the Government wish to pick up. Any amendment to the perimeter is for Parliament and the Government; I am never quite sure which way round to put them these days. It is for the two of you to deal with, but you would expect us to advise on it.
Catherine McKinnell
I have one last question about the FOS. We have talked about a significant workload and you have mentioned numerous times that your focus is to make sure that this process works and delivers for the current voluntary ombudsman service. Are you confident that the FOS has the capacity and skills to deliver everything it needs to? How is your ability to cope with a clearly increasing workload being monitored and assessed?
Charles Randell
To put it in context, the new jurisdiction for SME lending would come in on 1 April, in relation to disputes arising on or after that date. The consequence of that will be a slow build-up in numbers of cases. We will not see hundreds of cases arriving on 2 April. The projections that FOS has shown us indicate that the build-up will be steady, starting some time later and then ramping up, so you would see a significant number of cases in the second year, rather than the first year. It is important to keep that in mind when we look at the way the FOS embeds its jurisdiction and continues to learn from the cases it is handling within it. I do not want to exaggerate just what a huge change this is for FOS. It will be qualitatively different, however, as it is effectively a separate service within the service, which will have a different access point for people who want to use it. To support the process, it will have an expert panel and an advisory panel of people with a lot of relevant knowledge and skills. That is different. On the volume of cases, I do not want to give the impression that an enormous flood will suddenly arrive. In that context I am confident, but we have said to FOS that we want to keep closely in touch with it about the process and the assurance it is receiving, and that is what we will do.
Rushanara Ali
I have two sets of questions, one about IT failures and the other about the tuna bonds scandal. I will start with IT failures. You have just talked about FOS and, from your own assessment of IT failures, firms reported a 138% increase in technology outages. Brexit aside, where does this rank for both of you among the financial services issues that keep you awake at night? Does it worry you that this is one of the areas where FOS will have to pick up more complaints? To highlight the TSB example, there were 100,000 complaints when we looked at it last year. There are major issues still outstanding. We have not had the report that was supposed to be produced by December; there have been more delays. How can you be confident about FOS and, in your ranking, where would you put it among your areas of concern?
Andrew Bailey
Putting it into perspective, I tend to say that, 10 years ago, we were here totally focused on the crisis, credit risk and systemic risk in the system. If you had talked to us about operational risk, we would have said “not really”. Looking at the league table of risks over the 10 years that have elapsed since then, operational risk, in its various forms, has come right up the league table, in my mind. As we have hopefully mitigated some of the key risks of the financial crisis, the relative standing of operational risk, both growing as a risk in its own right, and as we have mitigated other things, has come up. This is why we, together with the PRA and the Bank of England, issued the discussion paper towards the end of last year, which signifies it as an issue for both of us. It is an issue that we have to work together on, because many of the things are common to the objectives of both of us. It takes various forms. Cyber is one of them but, as you rightly say, there is also what I would call a non-cyber operational risk, which is technology in its quality and its assuredness. Looking at the shorter run, if you ask me to look at the last year or two, the thing that has come up my mental league table is data as a part of that story and the risks around data. They are twofold. One is losing it and the second is how firms use it. It can be used for good and it can be used not for good. If that is a helpful view of the landscape, yes, it has come up a lot and it takes various forms.
Rushanara Ali
Mr Randell, do you still feel confident, given your own assessment of the risks with technology and the problems we have had already with TSB—and there are others—that the FOS has the resources and the support it needs? It is not that we do not think it is doing good work, but is it fit for purpose to cope with future or emerging challenges that are growing very quickly?
Charles Randell
It is a great question, because both we and the FOS need to challenge ourselves continually about fighting the next war, rather than the last one. That is what Andrew has been saying, in a sense. Both at the FOS and at the FCA, it is a question we should be continually asking ourselves. With the TSB type of failure, you see a heavy level of regulatory intervention, including on the question of customer redress. That helps to mitigate the risk of hundreds of thousands of claims suddenly turning up at FOS, because you will tend to see that, when failures happen at that sort of scale, we will be very close to them. Individual losses or losses that are less widespread than the TSB type of failure can find their way to FOS very quickly. They can include misuse of data, for example, which will be a growing issue.
Rushanara Ali
I have one more question on technology. We understand the benefits—we all benefit from technological developments—but as customers are encouraged to operate online, there is a reduction in branch access. We found that in the TSB case, where people were being referred to their local branch, but there was no branch, and weddings were being disrupted and people could not bury their relatives, because they could not get the money. These were appalling cases. Could we expect the FCA to be less tolerant of IT outages and what sanctions will you use to make sure companies understand that there are consequences? Based on the evidence sessions we had with TSB, even though we had a reluctant resignation, the consequences were not felt by the leadership of that bank. Should there be a stronger compensation response, driven by the FCA, to make sure senior management in companies that are making these large-scale changes, with big IT programmes, mitigate the risks? If there are proper sanctions in place, such as fines and large amounts of compensation, it might enable them to get their act together.
Andrew Bailey
I will say two things on that. First, it feeds through into the remuneration policy, so we expect banks’ policies on variable remuneration to reflect operational reliance. It is part of that and it has to be. In fact, if we find it is not, we will act, because it is important that it is. That goes to the second point, which is that it is a responsibility under the senior managers regime.
Rushanara Ali
That has not come in. If those arrangements had worked, would we have the issues that we have?
Andrew Bailey
This is a judgment that has to be made and is still probably quite hard to make. Let me put the counterargument. The thing that happened last year that nobody talked about was the implementation of ring‑fencing. When we had these discussions in past years, certainly before Brexit—what is the biggest thing that is going to happen in 2017?—it was ring‑fencing. We had a lot of talk in this Committee about governance and management, but it came down to a lot of hard, technological change and it does not seem to have caused any problems. It happened. Some things go okay.
Rushanara Ali
I appreciate that.
Andrew Bailey
The challenge we have comes back to a point made earlier. Let me give you a number. The number of technological incidents reported to us in 2017 was 164. The number reported to us up to the end of November last year was 631. You can draw one or two conclusions from this. Either a lot more is going wrong or a lot more is being reported, or it is both. You could get all sorts of combinations.
Rushanara Ali
The FCA itself admits that it is still underreporting and there is an issue about whether in smaller companies IT failures are happening because they are not as well equipped to deal with this.
Andrew Bailey
We have raised the bar and the reporting has to catch up with that. Yes, you are right; we do not necessarily find out as much about what goes on in some of the smaller firms, because in the big firms it is very high profile.
Rushanara Ali
You deserve credit for the things that have gone right, so I am putting that on the record, but we are focused on the areas where we need to anticipate and learn from what is emerging.
Andrew Bailey
We agree with you on that.
Charles Randell
It is very important that our response is a balanced one, because some of the technology changes firms are making respond to requirements we have put on them for things we want them to do. Some of them respond to their need to upgrade and update systems that, frankly, have been underinvested for a long time. They have a big legacy system problem and they need to migrate to a new generation of systems that will provide the sorts of services that consumers need. As a regulator, we need to have a level of intervention that ensures the management of a firm does not sit there saying, “This is such a nightmare; I will leave it to the next lot”. We need to be a bit thoughtful about that.
Rushanara Ali
Frankly, the TSB case was full of incompetence. We can all agree that there were management failures and the response to this Committee was dire, frankly. We have a situation now where the Slaughter and May investigation has been delayed. How concerned are you about that and what impact will it have on your investigation?
Andrew Bailey
It will not have any effect on our investigation. That is separate. The latest I have heard from the chairman of TSB, who is also chief executive at the moment, is that they are expecting a first draft next month. It is a bit of a reflection of the wider issues. You were mentioning the Dobbs report earlier. What tends to happen, and we see it with our investigations, is that once you get into these an overwhelming amount of information heads your way and you get a lot of people who want to be interviewed. I know they are working through that, but we need them to get on with it, as we need to get on with our investigation.
Rushanara Ali
They reported 100,000 complaints. Do you know how many have been resolved? By the time of the second appearance there were still 75,000, I think.
Andrew Bailey
I heard 180,000. I think the number is 180,000. The last number I had, which I think is for the end of November, was about 70,000 still to be done. They were hoping to have those done by the end of February. They have had to take on a lot of people to do it within TSB.
Rushanara Ali
On the Credit Suisse tuna bonds case, we had the Bribery Act. I know it is not your lead, but you have guidance on how banks should operate and mindfulness of their requirements under the Bribery Act. This is an interesting example. It is worth $2 billion. Was it three people who conspired with Mozambique’s former Finance Minister to borrow more than $2 billion to fund a state fishing fleet and divert some of the proceeds into bribes and kickbacks? The implications go beyond the key players. It affects a country and the IMF has suspended lending to that country. The implications for the population are huge. The context is also the Malaysian case with Goldman Sachs, and that is $7.5 billion that the Malaysians are seeking. The US Department of Justice charged the three. They are London-based bankers. The FCA, on the other hand, I understand, downgraded its investigation in August last year from a criminal to regulatory investigation. Can you explain why that is?
Andrew Bailey
Yes. You mentioned at the start the Bribery Act. We are not a designated prosecuting authority under the 2010 Bribery Act. That is the police. We lost it from that point of view.
Rushanara Ali
I acknowledge that.
Andrew Bailey
It is important to explain where we are. We looked at it to see whether we could bring a case and concluded that we could not bring a criminal case within our powers.
Rushanara Ali
Have you had a discussion with the police?
Andrew Bailey
Yes, we have, but it is for them to decide. We cannot determine what cases they take and what they do not.
Rushanara Ali
Which police force would that be? We had a session last week and they were not even aware of this case.
Andrew Bailey
It would be one or two. It would be the National Crime Agency and the Serious Fraud Office you need to talk to about that. This is a simplification, but I find it helpful. I am not a lawyer and you are not one any more either. Our criminal powers really go to what I call the source of money—that is, laundering—not the use of money, which is for the police. As far as we can tell from this case, it is more about the use of money. The source of money was in the markets. It is fairly open, how that was financed. However, as you said, while we concluded we could not bring a criminal case, our regulatory powers still apply, to both the individuals and the firm. That would be in respect of systems and controls in the firm, and in respect of fitness and properness of the individuals. I hope that helps to explain why we could not take the criminal case forward, because we do not have the vires in that case.
Rushanara Ali
We should pursue these questions with the police who would have looked at this.
Andrew Bailey
That would be the appropriate place to ask that question.
Chair
They could tell us where it has gone.
Rushanara Ali
Do you think these arrangements are sufficient for us? The US is leading on this. What does it mean for future situations like that? Despite the financial crisis, these are two significant cases and, despite the Bribery Act, something is going wrong here. We are talking about billions of pounds. What needs to happen to ensure that we are well placed to lead prosecutions? Is it that the police are not resourced well enough? What is stopping Britain taking a lead when the bankers are in Britain?
Andrew Bailey
I am afraid I cannot answer that question. I can only say it is very reasonable to ask, “Why is the Bribery Act not being used?”, but, unfortunately, I cannot answer that for you because it is not in our remit. The only point I would make is this: the parallel with the US is that the case is not being brought by regulatory agencies in the US; it is being brought by the Department of Justice, so it is in the criminal prosecution ambit in the US. You raise an interesting point, and it is not the first time we have had it: what is the remit of the US in respect of this case versus UK authorities? Because it is a criminal prosecution, it is not really one we can easily answer.
Chair
I am afraid we are going to get on to the Brexit word. We have done pretty well to avoid it for most of this session, but let me start with MiFID II and compliance with it, because last June we discussed it at an appearance you made before the Committee and you said you were prioritising supervision to achieve compliance. What is your assessment of how well firms have adapted to the MiFID II requirements?
Andrew Bailey
We have done supervisory work. We are fairly shortly going to be coming out with the conclusions and we are going to publish something on this.
Chair
What does “shortly” mean?
Andrew Bailey
I mean a month or two. We have three things going on here. The first piece of work, which we have done, is on costs and charges. That is probably the most relevant one, in a sense, to the discussions that have been had in public. Then we will do work this year on new product governance and research unbundling, where there has also been an issue as to how that works. All that work is a product of our supervisory work as to how effective the application of MiFID II has been.
Chair
Would we then expect to see enforcement action? Are we expecting to see enforcement action?
Andrew Bailey
If we find things that meet the test, yes; if we do not, no.
Chair
Is there enforcement action in train? Are there any cases?
Andrew Bailey
Not at the moment, no. We have been focused on supervisory action.
Chair
In November, you wrote to me providing an update on your work on the risk posed by the use of private polling data to the integrity of UK financial markets. You said you hoped to arrange meetings with the British Polling Council and the Market Research Society. Can you give us an update on those meetings?
Andrew Bailey
We have the meetings arranged now.
Chair
They are in the diary.
Andrew Bailey
They are in the diary, yes. This has taken a while, I have to say.
Chair
Again, what timescale are we talking about?
Andrew Bailey
One of them is next week and the other one is in the second week of February, I believe. There was a medical reason. Meanwhile, we have been giving it quite a bit of thought ourselves and this is about how, as we have discussed before, the market abuse regime bites here. This is not a world where you can be authorised. Everybody is. We are all affected by this, if we hold or have access to inside information of sorts. We are giving thought at this stage, and the meetings I hope will help here, to whether we could usefully issue guidance, not to change the rules, but on the application of the rules and particularly on this question about the handling of inside information. I think it was in the Committee in its previous incarnation, but we have had this before where we have taken action. Probably the most notable action we took was with the ONS. It wanted to stop the pre‑circulation of official data releases, to the extent that happened, and we helped it to get that outcome using the market abuse regulation regime. It struck me, with the correspondence you had and thinking about it, that this might be somewhere that guidance can help.
Chair
Presumably you will have the meetings first.
Andrew Bailey
Yes.
Chair
Moving on to the financial services register, again, you wrote to me in October about the register. You said, “One of my concerns after becoming chief executive has been that we overhaul the register and make it fit for the now larger remit of the FCA”. I am interested in your views on the current state of the register and your aim for it, because we get a steady stream of emails and cases coming to the Committee. We do not investigate individual cases, but people have looked at the register, believed they could rely on some information there, and then that has been found not to be accurate.
Andrew Bailey
You are right. I hope you got this sense from the letter I wrote. I did not know a lot about the register before I became CEO. It is a legal requirement that the register exists, but it was fairly neglected. It did not seem to have very high priority and profile within the institution, and things have come out of the woodwork that are not good. I hope the letter explained what we are doing. We have done more since we wrote the letter, in terms of taking those various initiatives forward. I have been very clear that the priority is both getting it sorted out and then maintaining it. There are still issues that we have to address. One of them is slightly parallel. I wrote a “dear CEO” letter on it last week. As you know, we authorise activities. We give permissions for activities, strictly speaking, and we come across firms that, in their presentation of their authorisation, give the impression that they are authorised for absolutely everything they do, whereas in fact what they do is mostly not regulated, and they have a small authorisation somewhere, but they give the impression to consumers that they are authorised. That is a source of great concern to me, because people are being misled by this. Secondly, we have to make sure we are an institution that keeps the register properly up to date and we do not get problems that way. It has happened in the past. Thirdly, Brexit is going to put us through a somewhat interesting period, wherever it comes out. I do not know. We could end up in a world where we have various other sorts of authorisations knocking around again. It is very high priority and you are right to focus on it, because it has not had the high priority historically that it should have done.
Chair
Mr Randell, is it something that has been discussed in FCA board meetings? It has implications in terms of compensation being paid out.
Charles Randell
This has been extensively discussed at FCA board meetings. Our audit and risk committees have also been very concerned about it. We have received presentations from the team who have been rolling out the new beta version of the register, to see the functionality and talk to them about the assurance checking that will be done. It is a source of frustration to all of us that the register has had the problems that it has had and we would be the first to acknowledge those. The complaints function in the FCA reports into me and, if I need to be reminded of it, which I do not, I get a regular reminder through that channel about it. I can assure you it is very high on my list.
Chair
It is an area where more resources are going to be needed? You mentioned it has perhaps been neglected in the past.
Charles Randell
We have already done that. The board was very clear that resources should not be the blockage.
Chair
Moving on to Brexit, statutory instruments and the powers of regulators, should the worst happen and we leave with no deal at all when we reach 29 March, the Treasury published a paper last year on temporary transitional powers to be exercised by UK regulators. We are now expecting that to reach us in the form of legislation. Perhaps you can outline the discussions you have had with the Treasury about the powers you would need in the event of a no-deal Brexit and any audit you have done of additional powers you think you might need in that scenario.
Andrew Bailey
In our world, we have on the latest count 62 statutory instruments in varying stages of going through, which is what we tend to call on‑shoring the EU. Of those, 43 have now been laid in Parliament, 16 have been made, another 10 have been published in draft and we have about nine to go. About 50 of those are the Treasury’s and about 12 of them are other Departments’. The whole purpose of that, in the event of the outcome you described, is that by the end of March we have translated the EU rulebook into UK law. That has been done on the very strict basis that the only changes we can make are what are called the “inoperables”, i.e. where it would not work if we just did a literal write across. It is important for Parliament, I know, that the controls and discipline over what is an inoperable are strict, so that we are not delving in and doing a few things that we fancy doing. That leads to another issue, though. Given the very short timetables, we are not consulting for as long as we normally do. In fact, we are not consulting much at all at the moment, although we and the Treasury are involving the market and have had a lot of very helpful input from firms in the market. There is a second issue. Where we have had to change things because of the so‑called inoperables, quite a lot of those are very straightforward to implement for firms on the spot. Some of them are not because they involve systems changes. The question then is this: if the change cannot be made effectively in practice at the end of March, what do we do? The proposed solution, which you have probably been written to about—and I will slightly caricature this point—is to say, although continuing the EU arrangement is inoperable, the most realistic thing to do is to lock down what I call the 29 March treatment, say we would have the power to override the inoperable for a period of time, and say, “It is going to take this long to do the systems changes or whatever, so in the intervening period firms should continue doing what they were doing on 29 March”. I realise that that sounds quite tame; put it that way. It is quite a big intervention. It is over to you in a way, but we want the transparency and accountability of the use of this power to be as sensible as it ought to be. I would only ask, because a lot of this is in the wholesale market, an area where we have to act quickly, that it be ex post rather than ex ante. I am more than happy for it to be as accountable and transparent to you as you would like. As you discuss and debate it, I am very happy to agree and discuss whatever accountability and transparency you as Parliament think would be appropriate in the use of that power, should we have to do it.
Chair
We as a Committee will particularly look at that side, given how broad the power is. You mentioned the consultation and said you were going to respond in January. Again, recognising timescales are very short, is there anything particularly from the consultation that was noteworthy? Was there broad support across the sector: “Do what you need to do to keep things moving”?
Andrew Bailey
There was very broad support. I say “very broad support”; obviously the sector hopes that this is not going to come about, but take that as given. There is very broad support for it. In fact, the sector had wanted to get its sleeves rolled up and get involved for some time. We have had very broad support for it. We have had a lot of constructive input. This is consultation in the best sense: “How are we going to fix these things?” With that is the overarching discipline that we and the Government have had to impose, saying, “Look, you have to understand this is very constrained”.
Chair
I do not necessarily want to get into the politics of today, although perhaps that is easier given the absence of some of my Committee members with different views. Let us assume that different models have to be looked at to avoid this no-deal scenario. Are the Government asking you to consider whether there are other models that could be negotiated?
Andrew Bailey
Yes, we discuss those, subject to the fact, as you know from the hearing we had in December, that we do not take a position on Brexit, but we are very happy to give technical advice in respect of our objectives and our experience.
Chair
One particular part of the sector was insurance companies. I know that there is a lot of restructuring and good progress has been made on that. The courts have probably never been as busy, in relation to schemes of arrangement, as they have been over the last 18 months or so. Is there an update you can give on that work? Let us take it right down to the consumer, who is a UK citizen living in the EU and, day one, needs to claim on the insurance. Is it going to work?
Andrew Bailey
We discussed last time the question about progress on the continent, in terms of insurance. The Bank of England has published on this, and the numbers of policyholders are big. We have made progress since we had the December hearing. It has not yet resulted in concrete agreement, but I am more optimistic on two fronts. As you said, the courts are making good progress, but, as we said in December, realistically, they are not all going to be done in time. We know that, and it is not the fault of the courts, because they are doing a great job. We are making progress on two fronts. First, this has to be agreed, but the EU is becoming more amenable to a sensible arrangement by which it recognises that servicing contracts on a continuous basis until such time as the court arrangements are done is the right outcome. We took a strong line, as you know, on Lloyd’s of London thing. From the point of view of our objectives, as I said in December, of course you have to go on servicing claims. You will be on the wrong side of our objectives if you do not, and it does not matter where the consumer is domiciled. The second thing we have made progress on is this. The EU understands that, for life contracts, it should not adopt a strict approach, and should find some way to carve those out and say those are contracts that should be serviced. It is yet to be sealed and done, but I am more optimistic than I was in December that we are making progress on that front. Again, the sensible thing is for us to keep you in touch with that, because time is of the essence.
Chair
Rushanara asked you earlier whether, Brexit aside, IT failures were keeping you awake at night. Is there anything on Brexit that keeps you awake at night, Mr Bailey?
Andrew Bailey
It keeps you awake at night, literally. I do not lose sleep over it. Brexit is a dominating issue for us at the moment, yes.
Chair
Thank you very much indeed for your evidence this morning. I am sure there will be more to come, particularly in relation to that SI point, but for now we are very grateful to you both.
Andrew Bailey
Good luck in whatever else you are doing.
Chair
It is a quiet day, yes. Thank you.