MR ADAM PHILLIPS, MR NICK PRETTEJOHN, MR SIMON BOLAM AND MR PETER VICARY-SMITH

15 DECEMBER 2008

  Q20  Chairman: How many times since your appointment to the Panel in March 2004 has the FSA changed its mind as a result of the Panel's influence and lobbying?

  Mr Phillips: There are a number of situations where the FSA has been influenced by the Panel; relatively few where you would say that the FSA directly changed its mind. I will give some examples of where we have influenced it and some examples of where we have changed its mind. The recent consultation on the Banking Code has been something that the Panel has been pressing the FSA over for some years. However, in the form in which it has come out, you would not necessarily notice that the Panel had had the influence, because a lot of other people have been campaigning for that too. In a similar way, the work on the Retail Distribution Review: it has been a long-term objective of the Panel to take bias out of the advice relationship. More recently, we felt that the FSA was moving rather slowly to deal with the issue of mortgage repossessions and approached the judges directly, to talk about the requirements of MCOB—the Mortgage Conduct of Business Rules—which are placed on advisers and banks who are seeking repossession. We were able, we think, to speed up the process and, as a result, the protocol was issued by the Ministry of Justice. Another area where the FSA was not doing something a couple of years ago, which we think is very important for a regulator, is in mystery shopping. The FSA now does regular mystery shopping, which highlights the lack of impact that many of its regulations are having on changing industry behaviour.

  Q21  Chairman: Have you been pushing the FSA on payment protection insurance?

  Mr Phillips: We have been pushing the FSA on payment protection insurance for at least three years.

  Q22  Chairman: And nothing has happened?

  Mr Phillips: No, and one of the points we made in our written submission was that the FSA, as a regulator, frequently expresses disappointment about what it is observing, but we would like to see a change in behaviour beginning to happen. The answer is no.

  Q23  Chairman: After four or five years, we want a change of behaviour?

  Mr Phillips: Yes, we do.

  Q24  Chairman: If you were to trumpet your successes with the FSA from the rooftops, would it come out as a squeak?

  Mr Phillips: I would hope that it would come out bigger than a squeak. I do not think that we have done a particularly good job of making a case for ourselves, but I do think that we have been quite influential with the FSA.

  Q25  Chairman: Peter Vicary-Smith, obviously the credit crunch has dealt a severe blow to consumers' trust in the financial services industry. Do you therefore see a need for greater consumer representation on the FSA in order to advise on how that trust can be rebuilt?

  Mr Vicary-Smith: Yes, I think there is a need for that, not just in terms of making sure that the Panel is resourced—because we think that the Panel does a good job within the FSA—but also in terms of some 10 of the 14 members of the FSA board being either company-employed or previously employed in the industry. We feel it is important that a strategic board has a diversity of views. Otherwise, you will come to any issue with just the perspectives and the history that you have accumulated in your lifetime. Certainly if one looks at the board of other bodies—the Food Standards Agency, OFT and so forth—the boards there are much more diverse. The other dimension of the governance of the FSA that is important is where it is accountable to. The FSA is not accountable to the Parliamentary Ombudsman. The National Audit Office has a very narrow remit. When we have talked to the Treasury about issues, we are told that the FSA is an independent regulator and therefore the Treasury cannot really get involved. In fact, our view is that it is this Committee that has performed most of the regulatory oversight of the FSA. While it has done that well, we do not feel that is necessarily a healthy position to be in for such a vital regulator.

  Q26  Chairman: Do you think that there is a conflict of interest at the heart of the FSA, in that it is charged with Treating Customers Fairly and it is charged with prudential regulation?

  Mr Phillips: I think that there is undoubtedly a conflict there. One of the key issues for the FSA is how it manages that. One of the areas about which the Panel is concerned is to try and understand whether the consumer interest is being addressed too low down in the system.

  Mr Vicary-Smith: I would agree with that. The FSA of course needs to have a whole host of people with experience of the industry but, when it comes to the strategic board, it needs to have a diversity of views and a diversity of perspectives, and we think that is lacking.

  Q27  Chairman: And that conflict of interest at the end of the day could be too much for the efficient working of the FSA?

  Mr Vicary-Smith: Yes, I think it could be. It asks a lot of individuals. There was a time when James Crosby was on the FSA board and running HBOS. How you would expect someone to build Chinese walls through their heads and that kind of thing? I think that it must be a very difficult position.

  Mr Phillips: The only thing I would add to that is that I think there is a potential conflict between the need to maintain a prudential system and to look after the consumer interest. A conflictual relationship is not necessarily the best one to bring the best result.

  Q28  Chairman: In June, the FSA reported that only 13% of relationship-managed firms met the March 2008 deadline for having appropriate management information on treating customers fairly. That is a pretty disappointing statistic, is it not?

  Mr Phillips: Absolutely. Terrible. It may well be that the management information systems have improved, but we think that if the FSA had carried out its planned survey/assessment at the end of this year, they would have found that the majority of firms were still not treating their customers fairly.

  Q29  Chairman: So pretty woeful?

  Mr Phillips: Yes.

  Q30  Chairman: Nick Prettejohn, your Panel's Annual Report expressed disappointment at the FSA's reluctance to conduct a cost-benefit analysis of Treating Customers Fairly, and the FSA responded that it did not amount to a new regulatory requirement. Have your concerns been addressed?

  Mr Prettejohn: We welcome the move to put Treating Customers Fairly as part of the business-as-usual supervision. I think that is the right place for it to be. The ARROW process is the most important process that regulated firms go through with the FSA, and that is the right place for the examination of TCF to be.

  Q31  Chairman: The themed visits on Treating Customers Fairly have now been scrapped. Which of you welcomed the FSA's decision not to proceed with that and to merge it into the ARROW visits?

  Mr Prettejohn: I think that the ARROW visit is the right place for it to be. Our view is that a disproportionate amount of resource within the FSA and within regulated firms was devoted to Treating Customers Fairly. We think that it is an extremely important programme and the overwhelming majority of regulated firms thoroughly support the principles behind it; we just felt that, in terms of the balance of regulatory emphasis, on the margin, Treating Customers Fairly was getting more resources relative to prudential supervision than was appropriate.

  Q32  Chairman: Mr Phillips, I am reminded of the ARROW visits to Northern Rock. I do not think that Treating Customers Fairly would have featured high there, never mind prudential regulation; so it worries me that that has been merged into the ARROW visits. Do you have the same concerns as myself?

  Mr Phillips: It was always the case that at some point Treating Customers Fairly would become part of standard supervision. What we have been trying to establish with the FSA is exactly how they will make sure that these supervisory visits to check on TCF are in fact effective. We think that they have to go beyond straightforward looking at the management information systems and a few cursory checks. We think that there has to be a lot more in there than is currently planned.

  Q33  Chairman: Would you express concern about it being incorporated into ARROW visits, given that Lord Lipsey's memo expressed an outright disbelief that the TCF failings would be identified?

  Mr Phillips: We would have preferred it not to happen so soon. There is no doubt about that.

  Q34  Chairman: What about you, Peter?

  Mr Vicary-Smith: We were disappointed by it, but I would like to pick up one thing that was said there, if I may. The idea that a disproportionate amount of time is being absorbed on looking at TCF I find extraordinary. This is one of the centrepieces of the new regulatory environment. What we have seen in the original March deadline was that 87% of firms did not even have the management information in place. It was not to say that they were even treating customers fairly; they simply did not have the management information in place. There is a long way to go on TCF. In my view, what gets measured gets done. Therefore, if the FSA needs to absorb it into its regular assessments, I think that two questions arise. One is what happens between now and when the next supervisory visit takes place; because that could be many months, and so there is no tracking with those firms as to whether there is any progress being made. Secondly, in the interests of transparency and accountability, I think that the FSA should publish details of the number of supervisory assessments it is conducting each month on this, and how many companies are meeting the deadline; because I think that they really need to keep on top of this.

  Q35  Chairman: To be fair to the FSA, it was the FSA that dragged the industry along on TCF in 2004-05. Do you think that it has lost its nerve a little bit?

  Mr Vicary-Smith: It has dragged the industry along and we are supportive of the TCF approach, but the important thing is that they now need to go further and ensure that it is embedded; that it does not just become a wish.

  Q36  Chairman: Simon, how will small firms' TCF compliance be assessed and how long will this process take?

  Mr Bolam: About 18 months ago, the FSA set up an Enhanced Strategy for Small Firms. This is where they target a particular part of the country and invite all the regulated intermediaries, smaller intermediaries, to complete questionnaires; they are invited to go to conferences and seminars; they are assessed. By going through this particular process—and we are now on to about our third large area—quite large numbers of smaller firms are now being assessed. By doing it in large numbers, this obviously helps. The idea is to see 11,500 firms over a period of three years.

  Q37  Mr Brady: Mr Vicary-Smith first and then perhaps Mr Phillips, to what extent do you share the concern about the number of consumer credit agreements that are not compliant with the Consumer Credit Act?

  Mr Vicary-Smith: I think it is important that, if things are being sold to the consumer, they are compliant. Where we see evidence that things are not compliant, then those firms need to be named and shamed so that consumers know to steer clear of them, and we need to ensure that there is a robust amount of follow-up.

  Mr Phillips: I would hope that the introduction of the Payment Services Directive will give the FSA the powers, which it should take, to ensure that consumer credit agreements are fair.

  Q38  Mr Brady: It has been put to me that obviously we have had 34 years to get the Act right, but that a very high percentage of credit agreements are not compliant. Would you share that analysis, or have you made any estimate of the extent of non-compliance?

  Mr Phillips: We do not have any estimates of that.

  Q39  Mr Brady: Would you say, from your experience of looking at credit agreements, that practice is improving, or is it something which is simply being missed?

  Mr Phillips: Again, I do not have any information on that, I am afraid.