SIR CALLUM MCCARTHY AND MR HECTOR SANTS

22 JANUARY 2008

  Q40  Chairman: If you want to do it!

  Mr Sants: I just go back to one central point which is generic to the general point. There is no evidence at all in respect of the Northern Rock affair that that in any way undermines principles-based regulation. Drawing that conclusion from the Northern Rock supervisory process, in my opinion, would be completely incorrect. There may well be a series of important lessons to be drawn, but not considering properly the consequence of your actions is not the right thing for management to do and to say it is not right that supervisors should be considering properly the consequences of management action cannot be the right way forward. It is about improving principles-based regulation. Customers want to know they are being treated fairly, they do not want lists and lists of pieces of paper describing what that process is, they just want a fair deal as they would understand it in simple terms, and that is what we are trying to deliver them.

  Q41  Ms Keeble: Okay. In terms of the complaints about overdraft charges, you issued a waiver from your complaints handling rules that apply to unauthorised overdraft charges, saying it was needed to "facilitate the [OFT] case", but the OFT has denied that the waiver is of any "facilitatory value". Can you explain why the waiver was needed and were the OFT consulted about it?

  Mr Sants: To the second point, yes, we are working closely with the OFT on this matter. To your first point, in the generality our concern is that the right result for consumers in the round, for all consumers, is to have a managed process here which properly goes through the right series of steps and the waiver was an enabler to enable a legal process to be put in place. We think, as does the OFT, that is the right way forward to get proper clarification and, therefore, ultimate proper resolution of this matter. Really it was a judgment as to what was good for consumers as a whole. We are conscious obviously that as a result of the waiver individual consumers who might otherwise have been putting in a complaint will have to, as it were, hold back in the sense of getting potential benefit from that for the benefit of all.

  Q42  Ms Keeble: Did the banks ask for the waiver? I was looking at the back to see how many complaints there were about charges but I could not find it. Do you have any idea how many cases are held up or how many complaints there might be that would otherwise hopefully be being processed?

  Sir Callum McCarthy: The complaints would not come to the FSA, they would go to the Financial Ombudsman Service.

  Q43  Ms Keeble: I understand that, but do you have any idea as to how many?

  Sir Callum McCarthy: I am sorry, I do not have the figures. They will be a substantial number.

  Q44  Ms Keeble: I have no idea what that means. Would it be hundreds of thousands?

  Sir Callum McCarthy: There will be certainly tens of thousands.

  Q45  Ms Keeble: Tens of thousands?

  Sir Callum McCarthy: Yes. Could I just make clear that the terms of the waiver ensured that the rights of people were preserved, ie the normal time bar was eliminated, and also put an obligation on banks to ensure that in hardship cases, problems of financial hardship, the banks had to meet those cases after two months of the waiver.

  Q46  Ms Keeble: I am sorry, I heard the second bit but I did not hear the first bit of what you said.

  Sir Callum McCarthy: The first was time bar and the second was financial hardship.

  Mr Sants: If they need to, and it is appropriate for them to do, they would still be able to progress those cases after the conclusion of the legal case.

  Q47  Chairman: You made that clear in your statement.

  Mr Sants: That is a very important point otherwise they would potentially be locked out indefinitely which would be wrong in our view.

  Q48  Ms Keeble: When do you expect that to be?

  Mr Sants: The waiver at the moment goes through to July and we will have to give proper consideration at that time as to whether we can extend it. Obviously at that point we will have to make a judgment with the OFT as to where we are with the legal case and the surrounding issues which led us to grant the waiver in the first place. It is not possible at this point in time to forecast the outturn of that consideration.

  Q49  Mr Todd: Financial capability. The NAO, when they looked at your efforts to date, were broadly complimentary but pointed to a lack of analysis of outcomes and measuring the effect of what you were actually doing. Do you accept that criticism?

  Sir Callum McCarthy: We did very carefully set out a baseline survey of the extent of financial capability.

  Q50  Mr Todd: That was your 2006 survey, was it?

  Sir Callum McCarthy: Yes. Which I think has generally been recognised as being in advance of what has been done in any other country. The reality of the speed of change in this area and also the scale of change required are such that it does not make sense to look at this on a monthly or even an annual basis because if we are successful it will take us a number of years to make a shift on the scale required, and that is the basis on which we are approaching this. The reason for setting out the baseline survey was to establish in a way we have never had before a proper understanding of what is the level of financial capability so that in a year or two years' time we can then go and check progress.

  Mr Sants: We certainly agree with the NAO that it is critically important in this sort of area that we seek to have visible, measurable outcomes. As Callum said, I think we have made a good start and made a start in a very tricky area but we will continue, and we are continuing, to see if there are further measures we can bring in. We take the view that we have made a pretty good effort here but we absolutely agree with the NAO that we need to keep teasing away at a very difficult problem.

  Q51  Mr Todd: While accepting the introductory comments that Sir Callum made, nevertheless it would be wrong to just pour the money in and hope that it is achieving the outcomes that you are seeking. There has to be some monitoring and evaluation process however slow the gains may be. What methodologies are you planning to use?

  Sir Callum McCarthy: We are basically monitoring the processes and scale of penetration, looking at the number of schools that are covered, the number of young adults who are not in education who are covered, the number of seminars that we run, the number of particular publications, either electronic or paper, that we distribute. We can look at all these against targets that we have. We believe that we are on target in terms of the coverage but the vital question, which is how do we actually change people's behaviour, is one that I do not think we will be able to measure year-by-year very easily.

  Mr Sants: That is what the baseline survey is trying to tackle.

  Q52  Mr Todd: There are two points, are there not? There is how do you change behaviour, but how do you build knowledge as well: an evaluation of whether people actually know more about the financial world around them and their own finances and then what they do with that in terms of their behaviour (so there are two steps there), and I am slightly concerned that the measurement appears to be on the number of packs that you distribute and the number of classes that are provided with the material, so an accounting process which does not attempt to work out whether these particular products are delivering a material gain. How are you evaluating that?

  Sir Callum McCarthy: We can evaluate, as you know—

  Q53  Mr Todd: You elicited, rightly, the bean counting side?

  Sir Callum McCarthy: Yes. I would not quite dismiss it, if I may say so, as bean counting. I do absolutely accept that what we are measuring is our progress against targets that we have set about the extent of coverage. In relation to any one of those we can also do follow-up studies, ranging from asking, after a seminar, "Did you find this useful or not?" to trying to examine how behaviour has changed as a result of that, but it is actually a difficult area and it is one that we are trying to tackle.

  Mr Sants: We can really prove that you need to do both and, ultimately, the second is the most important.

  Q54  Mr Todd: What, the behaviour change?

  Mr Sants: Yes, behaviour change and knowledge of the individual consumer, and that is ultimately what we are trying to change, and if we are not achieving that, then, as you say, we are not actually delivering what we are seeking to deliver.

  Q55  Mr Todd: In terms of the partners you work with, do you produce your own material essentially or do you work with those with pedagogical skills that are used to providing material to the relevant age groups?

  Mr Sants: We work with relevant specialists. Indeed, as I am sure you are aware from previous discussions, this is an important topic. All along we have seen our financial capability agenda as one that can only be achieved through working in partnership with the various bodies and individuals who have the particular and specific skills that are necessary to take the programme forward, so when we are designing material we do seek to take advice.

  Q56  Mr Todd: Let me be more pointed. There are people who make their business out of producing materials to appeal to young people and to improve their knowledge in particular areas, and if they do not do it terribly well they do not stay in business. Are you actually working with those who have a clear benefit from the partnership with you and, therefore, are motivated to achieve or are you getting consultants who, I am sure, can give you a lot of advice on what appears to be a reasonable way to design your material?

  Mr Sants: We believe we are working with the right people. Maybe, if this is the case, we could write to you setting out the problems we are looking at, and any comments we will be delighted to take on board.

  Q57  Mr Todd: I would be interested. I am intrigued by the partners you are working with and whether they are actually delivering what you seek. You appointed Chris Pond to head the financial capability work. He is familiar to some of us. What are his priorities?

  Mr Sants: As you already know, we also have—

  Q58  Mr Todd: Or is he writing his own?

  Mr Sants: No, we already have, as you know, set out very clearly the deliverables we are looking for out of the Financial Capability Agenda through to 2010, so we are not proposing to change that strategy which was put in place over the previous couple of years. John Tiner was very instrumental in that and we are looking for Chris Pond to take that already designed agenda forward. Again, the National Audit Office rightly pointed that out, and I have been very focused on that point as well. That we also need to make sure that we identify where we go after that. The early part of the strategy being, as you know, effectively to seek to create, as it were, a ground swell from the bottom, a variety of different deliverables to see which works best, build the necessary partnerships and effectively create a kind of seed-corn type approach. We need to work out what is the right way for delivering a strategy on a sustained basis across a wide base. That is the challenge for after 2010 and Chris Pond will, obviously, have to be a central part of making the future strategy.

  Q59  Mr Todd: I have noticed what I would see as a fairly scattered strategy of a variety of different approaches to this subject, which I do not criticise, I think it is a new area and probably difficult to work out which things work best, but the thing I am hinting at is the need for critical evaluation of which are working and which are not and then focusing around success and developing on those. I must admit, from the report I did not get that impression. I got the list of the things you were doing, but not any evaluation. There were one or two references to seminars.

  Mr Sants: I completely agree with you, and I think, when you see the business plan that is due out shortly for the current year going forward—