MR HECTOR SANTS, MR DAN WATERS AND MS LESLEY TITCOMB

15 DECEMBER 2008

  Q140  Mr Crabb: I would like to pick up a couple of points, if I may. You talk about the 20% increase in supervisory staff. That is the 50 extra staff that is referred to in your annual report, is it?

  Mr Sants: No. Since then, as you will be broadly aware, following on from the lessons learned exercise we did on the events of the last 18 months or so, and in particular Northern Rock, we have brought forward further enhancements to our supervisory capacity and technical support and have talked in terms of hiring something of the order of 216 or so extra people, of which half would be in supervision. That is the overall supervisory enhancement programme.

  Q141  Mr Crabb: So will the result of the change to embedding the TCF compliance supervision within the main ARROW supervisory process lead to a reduction or increase in the number of hours spent on TCF compliance, or will it stay the same?

  Mr Sants: It is going to be difficult to do a like-for-like comparison because the nature, going forward, of the initiatives we will take will change in character. I have said this before and it is also reflected in some of that discussion around more principles-based regulation. It does reflect some of the concerns that the Committee has rightly brought up about success in some of these areas historically. We do need to change the balance somewhat in our regulatory style. Our principal focus historically has been on systems and controls, and that is reflective of the discussion that has been had around TCF so far, where we have been looking for management to demonstrate they had the requisite MI, management information, to manage that, take responsibility for treating customers fairly. I think going forward we would like to do more. We have been doing some, as the Consumer Panel kindly reflected, outcomes-based testing, mystery shopping and other related initiatives. I would like to see more of a shift away from systems and controls into outcomes-based testing because, in my view, the best way to ensure that management are doing the job they should be doing is for them to realise that if at the point of delivery it is not giving consumers what they want, we will actually see that and know that, as opposed to making a judgement based on whether or not the management themselves have sufficient MI. So I think a like-for-like comparison between the two activities will be difficult to do. Having said that, broadly speaking, as I said earlier, with that sort of increase, we would expect, conducting regulation in the round, to not see any diminution in our focus on the big issues. I think you will see us focusing more going forward on making sure that we are really addressing the important issues, and maybe not dissipating ourselves quite as widely as we have done in the past. That comes back to the formation of the Conduct Risk Division, which will focus on the big issues like PPI, so we get an earlier and more effective grip on those sort of key issues when they arise.

  Q142  Mr Crabb: Ms Titcomb, you were talking previously about the proportionate level of the compliance burden on firms. Mr Bolam previously very helpfully described to us some of the burdens that he has to face, and he showed us the 16-page document that he and firms like his have to produce by the end of December. Do you regard that as the right level, knowing presumably the size of firm that Mr Bolam operates?

  Ms Titcomb: I do not think I can really comment on a specific firm's situation here but what I would stress is it is not having a piece of paper that is important here. It is having the culture of treating your customers fairly embedded in your firm. So when we go to, for example, look at a small firm in this context, if they employ people, we look at their recruitment policies, their training and competence, how they make their business decisions about which products they are prepared to offer advice on, that type of thing. So we are looking all the time to see the attitude embedded in the firm, particularly in the senior management of the firm, that they treat their customers fairly. That is far more important, to be frank, than the document. The document is one part of the evidence for us but it is by no means everything.

  Q143  Mr Crabb: When your staff make these visits, it is the documents they are looking for, is it not? They want to see those bits of paper. They want to see time spent on completing these documents. That is exactly the evidence they are looking for. That is where the burden kicks in, is it not?

  Ms Titcomb: Not entirely. For example, when my staff do one of these follow-up visits, if we have concerns with a firm and we think they may not be treating their customers fairly, we go in and review customer files as well, and actually see what the outcome is, what advice has been given to a consumer.

  Q144  Mr Crabb: So you will go through the filing system of a small business?

  Ms Titcomb: Not all of them, I hasten to add; a sample, but we do go in and look at files. Obviously, we want to try and see the evidence that management can demonstrate to us, and one of the ways they can demonstrate to us is that they have these documents and so on in place but, as I said, very much the requirement is that they are proportionate to the size and nature of the business.

  Q145  Mr Crabb: This December many of these firms are basically clinging on for dear life, for survival. The last thing they need is—forgive me—you guys turning up and poring through their filing systems and wanting to see 16-page documents.

  Ms Titcomb: When it comes to the small firms, we are not just turning up and doing that. We are taking a very focused approach. We are expecting to visit 11,000 firms over the three-year period starting at the beginning of this year. The process is that first all they are invited to a roadshow, which is free. We strongly advise them to come. They learn about what our requirements are. They have a lot of chance to interact with other firms. We then follow that up with an hour and a half's assessment, either face-to-face or by telephone, when we go through a series of issues with them—and we are talking to the principle of the firm here—to understand their attitude. We then follow up with a number of firms where we find the results of that assessment are not satisfactory, and we follow up with a random sample as well, just to check we are being consistent and so on, where we actually go in and do a visit at the firm's premises. We are trying not to impose too great a burden on them. We think it is proportionate for this important issue, because we want to ensure that they are securing good outcomes for consumers.

  Mr Sants: We do have to recognise—and I am sure you do—that we have all been talking about the need to improve the quality of service for consumers, for depositors, for borrowers for savers. We all recognise that there have been significant issues in the past. The Chairman has listed a number of them. We all recognise, and all the previous speakers here have acknowledged that, the need for change in the industry. In bringing in change, that obviously is a burden. Change is a burden. Change requires you to change your practices, but I think there is a collective agreement amongst everyone, from the consumer perspective, the industry perspective and the regulatory perspective, that change is necessary. We do not disagree that change runs the risk of being a burden. We are trying to do it as sensitively as possible. The reason we put extra capacity into the small firms sector, which was welcomed by the Small Firms Panel, was because we do believe face-to-face contact is a much more sympathetic and constructive way to take it forward. Wherever possible, we are trying to coach and help firms. We are not trying to put them out of business; we are trying to help them to adapt to what we believe will be a better structure and a better industry, delivering a better result. Obviously, it is a tension between delivering change, which carries cost, in a time of economic difficulty for the small firms. We have to try and manage that sensitively.

  Q146  Mr Crabb: Finally, Mr Sants, your Financial Risk Outlook identified as a priority risk the potential for firms to reduce their commitment to treating customers fairly. Can you back that up with any evidence at this stage about what we are seeing out there?

  Mr Sants: I will let Lesley answer on the small firms, which is a key area, I think.

  Ms Titcomb: In previous recessions you would have to have observed that one thing firms may do in order to try and improve their income stream is, for example, if they are finding it difficult to advise on mortgages, they will try and go into other forms of business to try and maintain their income stream. They may get into products that they are not very well qualified to advise on, that type of thing. The other thing which is obviously observable in recessions is that fraud can increase. We have identified a number of areas, particularly working with Dan's new Conduct Risk Division, where you can see the potential for enhanced risk in an economic downturn. Diversification into unfamiliar products is one. Another one would be in the area of mortgage arrears and how mortgage lenders treat people who are in arrears. We go through an exercise, as the FRO shows, and then focus on that.

  Mr Sants: As you say, we are trying to anticipate events here and I think it is important that we try to anticipate events. We agree with you. I think going forward this whole issue of consumer detriment in a difficult time has to rise up the agenda of the regulator and of the authorities in the round. It is more us seeking to anticipate potential issues rather than saying we have identified them so far.

  Q147  Mr Crabb: So at the moment it is assumptions based on previous experience rather than any hard evidence that you can show the Committee at this stage?

  Mr Sants: Primarily, yes, but, as I say, I think you would expect us to try to anticipate issues.

  Q148  Chairman: Mr Sants, the criticisms about the with-profits approach of the FSA—you have our comments from our report and Which?, as we heard, as well. What progress has been made in the past six months, if any?

  Mr Sants: I think we need to recognise the set of circumstances which we are in. We clearly set out in our submission back to this Committee that we see this as a two-stage process. We are committed to reviewing how that reattribution regime works, the practicalities of the operational processes, and that would pick up, for example, the effectiveness of the with-profits committees and so forth. We will be doing that, and I think it is appropriate to do that when we have some case histories to look at. So we committed ourselves to doing that on the conclusion of, assuming that were to be the case, and it is an ongoing process, the reattribution issue. I think we feel we need to do that at the appropriate time, but we are committed to doing that at the appropriate time. We have also made reference, both when I was here the last time on this topic and on the submission that we made to you, that we do need to keep the general policy regime under review. Good practice for all regulators is to keep their policy regime under review and at the appropriate time we will do that, but I think it is important we are not seen to be constantly moving the goalposts. I think it is also important to recognise, as I have said a number of times here before, maybe not necessarily persuaded everybody who has heard what I have had to say here but I still believe it to be true, namely we need to be very careful if you move the dial in this process to where it is entirely in favour of the consumer then I think the product would cease to be a viable product for the industry and we would expect to see considerable repercussions from doing this. Any regime has to be a pragmatic compromise that delivers a viable product or else one should just acknowledge upfront that the regulatory objective is to say the product is not a suitable product, which is not our view. Having said that, we have committed ourselves to the first stage review. We committed ourselves to keeping the second stage review under review for the appropriate time. Then, thirdly, of course, we are in the middle of consulting on the specific issue of mis-selling. I think out of the four points that were mentioned on the list which was just discussed, we have specific action points for two and a commitment to review the other two in due course.

  Q149  Chairman: Okay. You mentioned the appropriate time but you have promised to report on the information gathering exercise and how management are implementing your rules by the end of 2009. The question I would ask on behalf of quite a number of people who have contacted the Committee is how does kicking this issue into the long grass tie up with your assertion that the with-profits sector remains high on the agenda?

  Mr Sants: We are not kicking it into the long grass.

  Q150  Chairman: The end of 2009?

  Mr Sants: It is just that I think realistically if you want to review how something has worked in practice you need the principal elements, they are not the only elements but the principal elements, to come to conclusion. We do have a reattribution process in train and it is our intention to allow that to complete and then to see the lessons to be learnt from that. We have to be very careful about revisiting frameworks in the middle of processes. I think that might well then prove to be detrimental to the consumers.

  Q151  Chairman: Mr Sants, it was this Committee that undertook a very short inquiry into inherited estates which was seemingly, by all accounts, welcomed by people because it moved the agenda forward. It seems that the end of 2009 is a heck of a time to wait for that information gathering exercise. Surely you have got the staff and expertise to do that and if you do not have the staff and expertise then maybe it is a case of saying, "Look, we are inadequately resourced and we had better look at this again".

  Mr Sants: It is not a question of staff and expertise, we are perfectly adequately resourced to do that review.

  Q152  Chairman: Okay.

  Mr Sants: It is a question of doing the right thing at the right legal time.

  Q153  Chairman: Can I ask you then why do you get a consumer panel and why do you get Which? and all the representations from people being dissatisfied with yourselves?

  Mr Sants: I think because they have some deep-seated views over the effectiveness of the regime. We recognise that they hold deep-seated views, not all of which we would agree with but we absolutely recognise that they hold them. We agree with this Committee that in the light of that, it is right to look at the operational effectiveness of the regime. I am just pointing out, however, that doing that in the middle of a reattribution process is not realistic or desirable.

  Q154  Chairman: Okay. I do not think we are going agree. Your long answers are not helping us. We will come back to that again. The minimum level qualification, you have heard mention in the previous session that we cannot afford qualifications to be too high and I hope you do not accept that view. I just wonder if you would agree with Lord Lipsey, that quiet shrinking violet who does not seem to say anything to you, when he asserts that advisers should be qualified to QCA level 6, the full degree level.

  Mr Sants: I think we heard Nick Prettejohn on this point earlier and Dan may want to add on to this in a moment. I do think we need again to be practical, pragmatic and sensible. We are trying to evolve the industry at a pace which it can achieve. The answer is I think our proposals are appropriate for the short-term, we are still consulting on them. I think longer term you would aspire to a higher level than that.

  Q155  Chairman: Okay. Dan, John Blackmore, an IFA, has written in and told us, "The proposed solution of CII level 4 for all could hardly be more inappropriate. It is not demanding enough for independent advisers and yet it is unnecessarily complex for sales advisers. IFAs need to be qualified to a far higher standard and sales advisers to a much lower level". Why do you think the one-size-fits-all approach is appropriate"? Surely in this day when, as I mentioned earlier, the Government have got aspirations for 50% of all school leavers to be graduates we should be having that level for IFAs?

  Mr Waters: I guess a couple of points, if I may, Chairman. We think it is wrong to establish a new regime that would set a lower standard for people who are giving advice in tied services. They have responsibilities of suitability, they have responsibilities to act in the interest of the client. Admittedly, there is a limited range of products on offer but those duties are clear. We would not want to lower standards or provide a safe haven for people to move into that kind of space. I think it is also true to say at the other end, if you like, that there are many advisers now who have much higher qualifications than level 4, and there will be specialist qualifications for specialist kinds of product services being provided. That is sensible and ought to continue. I think we also have sympathy with the idea that over time level 4 probably is not high enough, but we are talking about a transition.

  Q156  Chairman: If that is the case, Dan, would you expect them to be at graduate level? Would that be your aspiration?

  Mr Waters: I think in the long-term we are looking at that.

  Q157  Chairman: What is the long-term?

  Mr Waters: We have not set that out, that is what we need to talk about. Once we get these stakes in the ground and this process moving forward then you look at the longer term. If you want to have a profession that is a profession you need to attract the best of your young people to come into that profession. There is a lot of talk today about people exiting, it is important to know who is going to enter this market as well.

  Q158  Chairman: Can I ask you what your qualifications are, Dan?

  Mr Waters: I have a doctorate in law. I am a lawyer by training.

  Q159  Chairman: At graduate level?

  Mr Waters: Yes in the US.