MR HECTOR SANTS, MR DAN WATERS AND MS LESLEY TITCOMB

15 DECEMBER 2008

  Q120  Mr Brady: Would you acknowledge that one of the things that has come out of this problem is the number of people, particularly British expatriates, who felt that the UK's "know your customer" regime meant that they were unable to hold their savings legitimately in UK onshore banks?

  Mr Sants: Technically, that has been a decision for the banks themselves but, as you rightly say, this has been an issue which has been highlighted by this set of events and we would reasonably expect the banks to give consideration to those facts.

  Q121  Mr Brady: Is it not the case though, would you say, that if a person has been told by their bank that they will not take those deposits in a UK bank account, the bank should have told them that others would?

  Mr Sants: It is an interesting question. I think you would have to hesitate to say that it is an obligation on a firm to give advice about other firms' services unless they are setting themselves up so to do. It is entirely the right of a firm to decide it does not want to take on a particular type of business, and unless they have set themselves up as providing general advice, it is not necessarily the case that they have an obligation to refer the business on to a competitor. Dan, I do not know if you have anything to say?

  Mr Waters: I have nothing more to say.

  Q122  Mr Brady: Will you be undertaking further work in the future to ensure that people working offshore are aware that they are able to hold their savings onshore?

  Mr Sants: It is an interesting question, a question maybe for the Committee and maybe for a future discussion as to whether you feel our financial capability objectives extend to UK citizens wherever they are living or whether we are seeking to address those living within our national boundary. It is probably fair to say at the moment our financial capability agenda does not include provision for providing advice services to UK citizens living outside the United Kingdom.

  Q123  Mr Brady: I finally have a couple of questions specifically about the situation of KSF Isle of Man. First of all—and I recognise, obviously, that your Chairman is not here with us today and that may place some constraints on your ability to respond to this. You were with him on 3 November when, in response to a question from me, Lord Turner said of the transfer of funds from the Isle of Man to the UK by KSF, "That deposit became a general creditor like other general creditors." Would you accept that that was not an entirely accurate statement given that the Treasury has taken powers by order that give the Treasury specific control over any payment of that money to a related party?

  Mr Sants: I think he was making a general comment about the status of a wholesale deposit in an administration, so obviously, from the point of view of the UK entity of Singer & Friedlander. Although if I may remind the wider audience—I am sure you are already aware of that—the Isle of Man subsidiary was not a subsidiary of the United Kingdom company. It was a subsidiary of the parent bank in Iceland: so there was no direct connection between those two entities. It is not analogous to the Bradford & Bingley situation, for example. This is clearly an example of a foreign bank with no regulatory connection with the FSA in that sense. That bank had placed a deposit with a UK-regulated entity and the status of that deposit in normal administration would be of a general creditor. That was the answer he was giving. As you say, there may have been subsequent actions away from the general administrative process by the Treasury which would change the status of that deposit but I think he was answering it in the generality, from the point of view of normal administration and with regard to any regulatory obligations we might, or in this case did not have for that deposit.

  Q124  Mr Brady: So it clearly did not take account of the specific legislation the Treasury was taking powers under. That is a very helpful response. Finally, you will also be aware there was a degree of controversy relating to the discussions that took place between the FSA and the Isle of Man regulatory authorities prior to the transfer of the £500 million plus to the UK. Have you undertaken any further investigations internally into the nature and content of those discussions?

  Mr Sants: Yes, I have looked into the matter, and indeed, had conversations subsequent to the sad events with the Isle of Man regulator, and we are satisfied that the answers we have given in the past are absolutely fair and accurate. Namely that there was the normal engagement between regulators but there was no suggestion that somehow or other we had provided any additional reassurances or made any additional communications with the Isle of Man regulator other than that which you would expect in terms of normal exchange of information between regulators, nor have we received any representations from the Isle of Man regulator since to suggest that they take a different view. To confirm, we have had no communication from them suggesting they disagree with that fact set.

  Mr Brady: Thank you.

  Q125  Mr Breed: Ms Titcomb, perhaps we can direct a few questions to you concerning the interesting concept of treating customers fairly. In June in the executive summary you indicated that a paltry 13% had actually met the deadline of March 2008 but you were pretty confident that by the December deadline 80%—which is still, obviously, not 100%—would have done it. We are a few days away now, so how many have complied now?

  Ms Titcomb: I am afraid I cannot answer that question directly. I am principally concerned with the supervision of the small firms within the FSA and the figures you quote relate to the relationship-managed firms, which are larger.

  Q126  Mr Breed: I will ask one of your colleagues then, who may know: how many firms have now met or are about to meet the December deadline?

  Mr Sants: We laid out when we published the 13% figure that we expected something in the order of 80% to be able to meet it but, of course, obviously, we have not reached that yet, so that will be a question to ask us as we move through the course of next year. We do have an expectation that considerably more than the 13% figure which we reported earlier in the year will have achieved the target. I will remind you that the target is having a formal and appropriate MI framework to ensure that they have the ability to judge whether they are treating customers fairly. It is not necessarily a test of whether they are treating customers fairly.

  Q127  Mr Breed: In general terms, there is a remarkable relationship between late results and bad news. When things are going particularly well, it is remarkable how results are often very timely. On the basis that you do not appear to have got anywhere near 80% perhaps, otherwise you might have indicated to us that that was the case, are you not concerned at this appalling level of meeting this deadline?

  Mr Sants: We would agree with you, and one of the reasons why—and why we disagree with some of the earlier comments—we have brought forward—and it is bringing forward; it is not a new departure altogether—the embedding of the TCF propositions within our mainstream supervisory agenda, supervisory process, is to deliver what we believe will be the most effective way of ensuring that we get results in this area. I am a firm believer—and that is reflected in the changes I have made in the FSA—that we are a supervisor. That means that really important things should be done in supervision. They should not be done elsewhere, in some little programme over on the side. They should be handled by our mainstream supervisors, whose job it is to supervise institutions properly on both conduct and prudential issues—back to the earlier point. Treating customers fairly is an absolutely essential part of conduct regulation and we should have TCF in the mainstream of the FSA, not off to one side. That is responding precisely to the point you have made, which is that we think progress is not as good as we would like and we need to turn up the pressure, get better results, and getting better results means putting it into the supervisory process where we are hiring 20% more supervisors.

  Q128  Mr Breed: What greater intensity of effort have you made in the supervisory process then, bearing in mind this current situation?

  Mr Sants: Precisely the point I have just made. As you know, we are in the middle of a major hiring programme, which, as we reported in our note, we are some 40% of the way through. We are altering our mainstream ARROW framework, which is the review process which firms have really concentrated on to make sure that it effectively picks up this issue. Dan, you might like to give a little bit more detail on how we are doing that. It is a very important point that the Committee rightly should be reassured on.

  Q129  Mr Breed: Just before you do that, can you respond to Lord Lipsey's view of the normal ARROW supervisory process, which he describes as "an unambiguous retreat"?

  Mr Sants: As far as I know, Lord Lipsey has never enquired as to how we intended to embed TCF in the ARROW process but I am sure Dan will be happy to explain it to you.

  Mr Waters: We certainly do not think it is a retreat, ambiguous or not. What is happening is the ARROW framework itself is being changed in a very significant way to require outcomes testing, that is, what is happening in the real world between real consumers and the sales force or the advisers, whatever the interface with a particular firm is, what is happening there, and you are testing that in real terms. Either the firm has its own mystery shopping results or we will go in and look at files, or we may do mystery shopping ourselves in the supervision line to find out.

  Q130  Mr Breed: You have cancelled the whole process of visits based upon treating customers fairly.

  Mr Waters: We have transferred that work into the actual ongoing supervision of firms.

  Q131  Mr Breed: That is the retreat.

  Mr Waters: We do not think that is a retreat. We think that is bringing forward from September—

  Q132  Mr Breed: You mean specialised visits on TCF now being conducted into just the ARROW programme is not a retreat?

  Mr Waters: I do not see why it would be. In fact, it is more important actually to reform the general supervisory framework so it addresses this as part of the day-to-day work. Otherwise, as soon as the project is over, it dissipates. This means it will be built into the fabric of how we supervise, and supervisors need to understand how to do this. My division, which has a conduct risk function, is designed to help train them to do this kind of examination.

  Q133  Mr Breed: By what date will all firms have been looked at or checked for their compliance with TCF?

  Mr Waters: That will depend on the timings of the ARROW visits, so the higher impact firms are on a rolling—

  Q134  Mr Breed: Can you give me a date?

  Mr Waters: I do not know that I have a single date. We have a three-year time period for the smaller firms we talked about before.

  Mr Sants: Of course, the ARROW framework has full ARROW visits on a three-year framework but there will be additional contact during that period as part of the close and continuous framework. A straight answer is that the longest period for relationship managed firms would be three years and for small firms Lesley will elaborate. Effectively, that is no change from where we would have been under the previous process, so it is not a retreat. If I may add, that is the longstop answer based around the ARROW framework but I think you are missing the creation here of the Conduct Risk Department, which is a key element in our agenda. We are not just moving the process into the supervisory process, where, as I said before, we will have 20% more supervisors than we had previously. We are not just making sure that it is in the key assessment process which the senior management of the banks pay attention to, but we have also restructured the rest of the retail area of the FSA to concentrate expertise in respect of key conduct projects inside a Conduct Risk Department in Dan's area, to give us real delivery in the consumer issues in the conduct area which matter. The reality is, treating customers fairly is a principle. What actually matters is the events on the ground, the outcomes, and the outcomes are around products and events, just like PPI, which we have been discussing earlier, where the Chairman rightly pointed out the FSA has been fairly slow off the mark, which he is absolutely right about. We need to focus on actual failures and the Conduct Risk Department will provide extra resource to tackle real events which are actually affecting consumers in the here and now. So we have a rebalancing of the process around embedding it in supervision to make sure senior management are engaged and putting extra resource into task groups, which will address real problems as opposed to thematic groups looking at the concepts. I think we are moving into the hard, nitty-gritty of real deterrence by beefing up the conduct risk area. I really do think the fears which have been understandably expressed by the consumer areas will be seen to be misplaced but obviously that is a question you can ask us again as the next year or so unfolds.

  Q135  Mr Breed: One last one. We do not want to see TCF going the same way as PPI. Let us put it that way. Your response to the Practitioner Panel contends that the TCF initiative has not resulted in an increase in the regulatory burden. Many of us would find that somewhat difficult to believe. So there is no requirement to carry out any cost benefit analysis. A number of firms, as you know, would completely disagree with you on that. What is your response to them via us?

  Mr Sants: I think the point which we have all explored—and Lesley may want to add to it for small firms—but let us be clear; TCF, as our submission to you made clear, encapsulates a regulatory objective which has always been part of the FSA's agenda. It is part of our 11 principles. We have four principles which are particularly focused on consumer issues. The TCF is a shorthand way of describing what we are seeking to do to effectively deliver on those four principles. We were not creating a new policy agenda; we were seeking to effectively deliver on the mandate we had been given. In that sense, that is exactly the point that has been made to the industry. It is not a new policy initiative. Dan, I do not know whether you want to say anything else?

  Mr Waters: I do not think I have anything to add to that.

  Mr Sants: You might want to add a little more on the small firms' burden, which is an area of principal concern, quite understandably.

  Ms Titcomb: The small firms have two concerns, one of which Simon Bolam brought out very well, which was the issue about proportionality of what we are asking small firms to do. I think it is important to understand that we do ask small firms to deal with this issue and to embed the culture of treating customers fairly in a way which is proportionate to the size and nature of their business. What we would require of a sole trader business is very different to that which we would require of a substantial network, and the MI that we would expect them to be collecting, all that kind of thing, would be different as well. At the same time, we have heard from small firms that what they wanted from their supervisory relationship with the FSA was more face-to-face contact with us, more help from us to understand our requirements, and this is what our enhanced strategy for assessing whether small firms are treating their customers fairly is about.

  Q136  Mr Breed: And that is not going to cost them anything more?

  Ms Titcomb: We have been investing more in it but it has not led to direct fee increases for them.

  Q137  Mr Breed: And it will not do?

  Ms Titcomb: I cannot say that going forward because I do not know what the fee plans are.

  Q138  Mr Breed: So their fears are well founded?

  Ms Titcomb: We have to understand that the burden of regulation on firms is not only about the direct costs of FSA. They are also concerned, as Simon amply illustrated, about the time that it takes for them. We have to have regard to that.

  Q139  Mr Breed: I hear what you say.

  Mr Sants: We have said repeatedly here that we believe the FSA in general—there may be exceptions—should be delivering advice and delivering a proposition which is aligned with good business practice. If there are small firms that feel there is an unreasonable burden being placed on them, Lesley and the team will always listen. That is the purpose of having more face-to-face contact with small firms, which is why we changed the strategy a little over a year ago now, in the autumn of 2007, and launched the revised strategy with many more people on the ground so people can have face-to-face conversations with us. I think that strategy has been well received.