SIR CALLUM MCCARTHY AND MR HECTOR SANTS

22 JANUARY 2008

  Q80  Mr Fallon: Would you expect them to be less?

  Sir Callum McCarthy: I think that I would make a distinction between the issues which have occurred, which you have described in particular terms, and the range of work that the FSA has also done, and I am sure that the Remuneration Committee will take into account both aspects.

  Q81  Mr Fallon: It sounds as if the total might be similar.

  Sir Callum McCarthy: I go back: it is not my decision, it will be the Remuneration Committee's. I cannot help you any further.

  Q82  Mr Dunne: In your comment in your further supplementary memorandum you touch on current market conditions. Have you made any assessment of the impact on UK banks of a default amongst one of the US Monoline Insurers.

  Sir Callum McCarthy: We are, indeed, looking at the impact of that. It is a rather complicated area to look at because the economic effect at the moment of the "wraps" provided by the Monoline Insurers in terms of the underlining security has significantly been discounted in the market already. I think one of the problems in identifying the effect of a failure, were to it occur, of a Monoline Insurer is that it is quite complex to tease the way through the effects, but it is an issue that we are very much aware of.

  Q83  Mr Dunne: Thank you. A couple of specific features of your current work load. We had a memorandum from the Financial Services Consumer Panel touching on the Banking Code of Business Regulations, the potential for dual regulation, and they have said, "We believe it is ironic that our much-praised single regulator of financial services does not, in fact, regulate the biggest financial service, retail banking", which is quite a stark comment. What is your view? Your predecessor, Hector, John Tiner, said in his valedictory that he thought it might be appropriate for the OFT to give up its regulatory oversight of retail banking to cover Consumer Credit Acts. Have you had a chance to consider that?

  Mr Sants: There are a couple of separate points. There is the regulation of credit per se and there is also the issue of the status and standing of the Banking Code, and they are somewhat, albeit related, slightly different points. I am obviously aware, as you would expect I saw the draft, of John's comments in his valedictory speech and, indeed, I think he is right in highlighting that these are sensible questions that we should be giving consideration to. The Banking Code issue is one that it would be within the power of the FSA to change, in the sense that that is to do with us determining where our own boundary is in relation to that framework, and we have already said that that is a matter that we are giving consideration to and we are in discussion with the BBA over it. Indeed, what we might do next, is an item for discussion in the next FSA Board and, depending on the outcome of that, we will take forward that initiative in the way determined by that discussion in the Board. I think at this point I would say it is a matter under active consideration. The issue of credit per se is obviously a much more substantive point and, as you observed, involves the OFT. I have certainly exchanged views with the OFT on that, but have no current plans to suggest any change in the arrangements at the current time. There is a review process built in, of the credit issue in due course in any case.

  Q84  Mr Dunne: Are you not, therefore, participating in the Treasury's consultation on the Consumer Credit Act in relation to mortgage regulation?

  Mr Sants: Yes, we are. That is what I meant by saying we are not proposing to take forward our own individual initiative in that space.

  Q85  Mr Dunne: Thank you. Can I turn to another report that you commissioned from CRA to look into the effects of mandatory disclosure on the wholesale commercial insurance broking sector? The CRA have reported that they think the cost of a mandatory disclosure regime will be some £87 million, a one-off cost, and on-going costs of £34 million, primarily falling on small intermediaries. Given that CRA analysis showed that there are some four main large insurance broking firms who have close to 50% of the market and the costs of a mandatory regime fall mainly on the smaller players, why are you launching further work into this area if it appears to have failed the cost-benefit test that you had set in the first place?

  Mr Sants: As you rightly observe, that survey does support the conclusion that, if you make a narrow deliberation of the cost-benefit analysis for commission disclosure, particularly in respect of small to mid-size firms, that analysis would not provide a justification for a regulatory intervention, a mandatory disclosure of commissions, and that is why certainly our preliminary conclusion was that we are not going to make disclosure mandatory. Having said that, as part of our continuing engagement with the insurance industry and discussion around this topic, a number of other issues have been brought to our attention, not just around whether or not commission is disclosed, but also whether it is disclosed in a way that enables users to make good comparatives, use it easily, and there also remain potentially a number of conflict issues in respect of commission which we do require to be managed and we feel that, some further work in the round to look at this wider, broader range of issues is therefore justified. We have, however, absolutely not reached any conclusion and I concur with your basic point that we should not be intervening unless we can justify it on the CBA, and certainly that piece of work did not justify mandatory commission as stands.

  Q86  Mr Dunne: You will be aware from representations made from representatives of the smaller sector of the trade that they think that this is being driven by the larger brokers, who see it as an opportunity to increase market share because the smaller players will not be able to fund the costs of this exercise?

  Mr Sants: This is one of these areas where everybody has their opinion. There is also, I think, a legitimate view expressed by users of the consumer market that they do not always have as much information as they would like to reach an informed conclusion, so we are trying to take into account all market participants' views in a measured way. There are almost as many views on this as there are market participants.

  Q87  Ms Keeble: I wanted to ask about the sale-and-rent-back schemes which the CML, CAB and Shelter have all expressed concerns about. When I asked you about it last time you said that you would be sending a letter and you thought it was something that should be looked at. I wondered what progress there is on that?

  Mr Sants: As you rightly point out, we do not currently regulate that sector. HMT is taking a look at the issue and we are participating in that review, so we are now part of that procedure and process.

  Q88  Chairman: Very slowly. They have taken four months to reply to my letter.

  Mr Sants: As I have already said, we agree with you, this is an area that should be looked at, and so we are supportive of the review, and I note your comment.

  Q89  Ms Keeble: That is what you said last time. You also said you would send us a letter. I do not know whether it has come but I have not seen it, but the thing is that this is a major area, like with home reversion schemes, where people lose their properties. It is a very obvious scam, and I have seen some of my constituents go through it. They end up paying more in rent for their own homes than they were paying in mortgages and, of course, once they are evicted for non-payment of rent, which is what happens to them—they do not just wind down and sell their propriety, they get evicted for non-payment of rent, usually through the courts—they are then blacklisted by lettings agencies and by councils, so they end up from being a home owner to being completely homeless and unable to have a property. Do you not feel some sense of urgency about the need to find a solution for this and the fact that it also means that this major investment that people make can be lost without the say-so from the people supposed to be regulating financial services?

  Mr Sants: I am very sympathetic to your point. I remind you, however, that scope (and Callum may wish to comment) is not for us to determine, it is determined by government. We are participating in the review. Clearly, the fact that there is a review demonstrates the belief that there is an issue to be looked into, but, of course, regulatory interventions do need to be justified in the round, but I take your point.

  Q90  Ms Keeble: But you have other ways of intervening: there are the speeches, there is guidance, there are all kinds of ways in which the FSA, short of having a formal role, is able to exert influence. Has the FSA taken any steps at all to exert any influence over this very, very obvious financial scam, and it is a completely outrageous one?

  Mr Sants: As I say, we do respect our scope boundary and we have already observed how difficult, challenging and wide-ranging our tasks are within scope, but I do take your point.

  Q91  Ms Keeble: But you do have reversion plans, do you not?

  Mr Sants: Yes.

  Q92  Ms Keeble: If you are doing those types of products, the sale-and-rent-back is just a different version of ways in which unscrupulous people can get hold of other people's houses. If we look at principle-based regulation, the principles behind this are exactly the same. Why are you making it impossible to do anything about this?

  Sir Callum McCarthy: The legal position is not the same. The point that Hector is making, and it is difficult to make this point without sounding unsympathetic to the very real social problems you are describing, the legal point, is that we are not responsible for it. If the Treasury decides to give us this responsibility (and it has not taken that decision), we would, of course, discharge those responsibilities.

  Mr Sants: We agree with you, we can see that it is right that that matter should be looked into. At the time that the equity release schemes were placed within scope they were consciously excluded. That was obviously a government decision at the time and we execute the mandate given to us. We are very supportive of the fact that that is being re-reviewed, and I note the Chairman's comments about timing.

  Q93  Ms Keeble: Have you at any time expressed any concern about these schemes and also can we have a copy of any evidence that you have given to the Treasury and also the letter that was promised?

  Mr Sants: I think we will revert to you with some general comments in this area as appropriate, yes.

  Q94  Chairman: Thank you very much. In terms of equity release schemes, I well remember the debate a few years ago when the Treasury was saying, "Look, this is not a con in the guise of a mortgage here, so what do we do about it?", but, after a lot of pressure, we got the various departments together, the Treasury came out with a Green Paper and, low and behold, you are regulating it now. You played a very constructive part in that, but given that the OFT, the FSA and Her Majesty's Treasury in this situation could fall between stools, let us try and give it impetous. As I said, Kitty Ussher's response four months after my letter indicated the Treasury were not taking this too seriously. I hope they read the public record today and we can get some movement on this sale-and-rent-back scheme along the lines of equity release and get a solution to it. I think that aspect is very important, and you have played a good role in that. Can I ask you lastly, what is your response to the European Commission's White Paper on Mortgage Credit and what implications will it have for the FSA's current approach to mortgage regulation?

  Sir Callum McCarthy: I think our general approach is that we have never been convinced that there was a justified case for taking an approach towards consumer protection for mortgages on a European basis. All the evidence is that this is a market that is country by country: the extent of cross-border mortgages is very slight. We, therefore, welcome the position that has been taken by the Commission, which has been to draw back from previous proposals.

  Q95  Chairman: Good. Sir Callum, I believe this could be your last appearance before this Committee, because you are retiring in the autumn. Could I take the opportunity of thanking you in advance for your co-operation with the Committee at all times. The FSA has been very helpful to us under your stewardship and I wish you well in your future if you do not come back to the Committee. If you do come back to the Committee we are happy to endorse these comments maybe in a more fulsome way before the autumn, but I would like to thank you. The points made earlier about treating customers fairly, I am very much aware that it was the FSA, under your guidance, your Gleneagles speech, and others, which pushed the insurance industry after the crisis in 2004 and the FSA led the industry on treating customers fairly, so it is very much on the agenda due to the efforts that you and your organisation have made. Can I thank you for your appearance and maybe we do not look forward to your next appearance, but if you are here we will welcome you.

  Sir Callum McCarthy: Chairman, that is extremely handsome of you. Can I just make one comment? One of the obligations on an independent regulator is to try and be as accountable as possible. I have always regarded appearing before this Committee as one of the essential features of that and I hope that you believe that we always try and answer your questions as clearly and as honestly as we can.

  Chairman: You have fulfilled that completely, Sir Callum. Thank you.