MR HECTOR SANTS, MR DAN WATERS AND MS LESLEY TITCOMB

15 DECEMBER 2008

  Q160  Chairman: Why is it good enough for you, but not good enough for IFAs, come on, get your ambitions up.

  Mr Waters: I would not wish to compare myself to IFAs on that point.

  Q161  Chairman: Okay. What about at your level, Dan?

  Mr Waters: As I say, I think we have sympathy to the view that a higher level over time is probably desirable.

  Mr Sants: The point is well taken. We are consulting and it is a good point.

  Q162  Chairman: The RDR contains many measures to address the supply side issues of retail investment, but there are concerns about the demand side too. Hopefully the RDR will lead to increased trust in the industry, and financial capability may also play a role, but large numbers of young people and low earners will continue to have little interest in taking advice on investing for the future. There was mention made earlier and in our report on restoring confidence in long-term savings in 2005 we mentioned that the savings industry is a middle class industry, we are not getting to everyone. What plans does the FSA have, if any, to encourage the industry to better respond to the needs of these groups?

  Mr Sants: Of course, we have our financial capability agenda, if that is where the question is going, which is designed to be and is indeed a partnership with industry as well as with all other relevant stakeholder groups that can assist us in that endeavour. We have a programme there of reaching out to, as you know, 10 million people or so by 2011. We are 5.4 million into that, so just over halfway through, so we are tracking in line with our expectations, and we do obviously think that a successful retail marketplace requires more than that which is within the RDR framework. For example, it does need to include raising financial capability, financial awareness and the capability of consumers to effectively engage with their saving agenda. We recognise it needs to be a twin track strategy and the financial capability agenda seeks to do that and, of course, now we are complementing it with working with Government on the pilot for what was previously called Thoresen Review of Generic Financial Advice/Money Guidance.

  Q163  Chairman: The vexed question of bank lending. In recent evidence both the Governor and the Treasury to this Committee highlighted the resumption of bank lending as critical to the economy. The Governor also noted that banks must act collectively in their best interest by lending more rather than individually holding cash because that is what the markets want them to do. Do you agree with that position?

  Mr Sants: Broadly speaking, yes. Of course, as a financial regulator we have an obligation also, as you would expect, again referencing previous discussions here about events of the last 18 months, to ensure that they hold the appropriate level of capital which would realistically anticipate any losses that they might expect to incur in the downturn. That has been the purpose of the recent recapitalisation exercise.

  Q164  Chairman: But the Governor also told us that he thought, and I quote: "It was of the utmost importance that the tripartite authorities make crystal clear that regulatory minimum requirements have not been raised and if anything in these circumstances might be lowered because banks will need to see their capital used to absorb losses in order to maintain lending". Now do you agree with his statement and have you been making that clear to banks and the markets if you do agree with that?

  Mr Sants: Yes, we have made a public announcement on the framework that we used over the weekend of the bank recapitalisation exercise in which we made clear that was not a policy shift for the long term, indeed, the policy shift for the long-term would come with the requisite consultation and cross-benefit analysis and so forth. We certainly have not changed our long-term policy framework and, as I have just said, and as the Governor's comments made clear, the purpose of the recapitalisation was to create excess capital or capital above the regulatory minimum which was there to absorb the expected losses. It obviously follows that as the losses are incurred then the capital of the banks will come down. That was the purpose of them having that capital in the first place.

  Q165  Chairman: That is a very important point because I am going on from this meeting to speak in the Queen's Speech economy debate and I am going to quote you saying that you agree with the Governor on the issue of regulatory minimum requirements. Am I going to be fair by quoting you?

  Mr Sants: Yes. I might, if I may, just expand a little bit further. The answer is yes but for the purposes of adding to your background information for the benefit of the comments you will be making, I think we do need to understand, of course, that those capital ratios were designed on the basis of a stress test done by the FSA which was a stress test against the business plans which the banks submitted to us, their expectations of the amount of risk weighted assets they would be deploying over the medium term. We have done stress tests on those plans and ensured that they have sufficient capital to absorb the expected losses against that set of business plans. Obviously it follows that if the banks decided they wished to conduct extra activity which involved extra risk weighted assets over and above that which was in the original business plans then we would have to revisit those capital assumptions. So I absolutely agree, with the Governor that those ratios will come down over time, they are designed to absorb losses, the banks expect them to absorb losses and they are not new capital rules. But if the banks change their expected lending patterns then obviously we would have to revisit their expected capital arrangement.

  Q166  Chairman: You and the Bank have got a close working relationship on that and both of you would be aware and come to a common view on that issue?

  Mr Sants: Absolutely. We share the stress test models with the Bank.

  Q167  Chairman: I can go ahead and say it then?

  Mr Sants: You can indeed.

  Q168  Chairman: That is fine, okay. Now when the Governor was here he made three points, lastly, Mr Sants, on better monitoring, which you will agree with, on the tripartite authorities making crystal clear their intentions, which you have agreed with, and he did say lastly on recapitalisation, "we may not have come to the end of this process". Do you agree with him on that?

  Mr Sants: I think that picks up the point I have just made, in fact, namely that if the plans were to change then the capital might have to change, so that point needs to be borne in mind and, of course, we also need to recognise that the real economy scenario is a set of forecasts about the future, the outturn may not always follow the forecasts.

  Q169  Chairman: I can take that as a yes as well.

  Mr Sants: You can take that as a yes as well.

  Q170  Chairman: Good. Can I thank you very much for your attendance today, particularly the rearranged session. Will you give our regards to Lord Turner when he is back and maybe tell him he was not missed because you did very well, but we do look forward to him coming again in February or March. Thank you very much.

  Mr Sants: I will pass that on to him. Thank you, Chairman.