David Ruffley MP questions Financial Secretary to the Treasury

Tuesday, 8 November, 2011

Witnesses: Mr Mark Hoban, MP, Financial Secretary to the Treasury, and Emil Levendoglu, Deputy Director, Financial Regulation Strategy, HM Treasury, gave evidence.

Q205 Mr Ruffley: The strategic objective of the FCA, "Protecting and enhancing financial stability in the UK financial system", has come under quite a bit of flak. The FSA says that that definition overlaps significantly with the responsibilities of the FPC and the PRA, and we also have the potential confusion for consumers. The FCA, the OFT and the FSA say it risks confusion in the authorities themselves, in regulated firms and among the public, because the super complaints go to the OFT under your regime, I think. They do not go to the FCA. Because of the kind of criticism you are getting, are you going to review significantly the strategic objective of the FCA?

Mr Hoban: As I indicated to the Chairman earlier, we will look at it.

Q206 Mr Ruffley: In which direction is your thinking turning?

Mr Hoban: What is important is that the strategic objective, as with the operational objectives, sends out a very clear signal as to what the FCA is there to achieve, and it is a conduct regulator.

Q207 Mr Ruffley: Forgive me, Minister, but the whole point is that the FCA speaks for all of us when it says, "The formulation does not adequately capture the distinctive nature of the FCAÕs responsibilities" and it is confused about competition, such as the example I gave of who gets the reference of super complaints; it is the OFT, not the FCA. What do you say to that?

Mr Hoban: There are two aspects here. One is, what is the right remit for the FCA around competition? That is a topic that this Committee has opined on. It is an issue that has been raised by the Independent Commission on Banking, and we have signalled our willingness to listen to that. Once you recast, if you choose to do so, the operational objectives of the FCA around competition, we then need to ask, "Are the powers of the FCA proportionate to those operational objectives?"

Q208 Mr Ruffley: Let us just stick with the strategic objective. The argument is that protecting and enhancing the confidence of the UK financial system certainly overlaps with the PRA.

Mr Hoban: It is how consumers feel confident about the service they get when they buy products or access services from the providers of financial services. That is why it is important you do not just see the strategic objective in isolation from the operational objectives, and it is the operational objectives that give the meat to the bones and set out what the FCA will do.

Q209 Mr Ruffley: There is also an argument that having that over-arching strategic objective-forget the operational objectives-could enhance confidence in markets that may inadvertently lead to the risk that the regulator continues to support and build confidence in a market where confidence in the market is misplaced.

Mr Hoban: I do not think you can prise apart the strategic from the operational objectives. The strategic objective is an umbrella statement about the role of the FCA. It is amplified through the operational objectives, and that, I think, gives a clear remit for the FCA.

Emil Levendoglu: Mr Ruffley, I just want to expand on what the Minister said, because the way the objectives operate is that the action taken by the regulator must be consistent with the strategic objective and at the same time advance one of the operational objectives, so it would be difficult, if not impossible, for the regulator to act in a particular way in advance of the strategic objective, which was nevertheless contrary to its consumer protection mandate, for example.

Q210 Mr Ruffley: On that point, there is another thing you have missed out, but I will mention it, which is the requirement in the discharge of general functions to do it in a way that promotes competition. That is another limb, isnÕt it, after you have the three operational objectives and the over-arching strategic objective? Can you tell us about that?

Mr Hoban: Yes. That is the duty that the FCA has in trying to fulfil its strategic operational objectives. Can they be fulfilled in a way that increases competition, or can you use competition powers to deliver those operational objectives? That really is in response to the concerns that this Committee and others have raised about the role competition will play in the toolbox, as it were, of the FCA.

Q211 Mr Ruffley: On the discharge duty which you have referred to, that explicitly is to do it in a way that promotes competition.

Mr Hoban: Yes.

Q212 Mr Ruffley: When we go to the operational objective, it is a slightly different formulation. It does not use the word "competition". It says, "Efficiency in choice is the operational objective". I want to know why you do not take the advice from this Committee, and also from the FSA and others I could list, which is to have an explicit duty to promote effective competition? Why do we use woolly words like "efficiency in choice", which is three words, when one word, "competition", would be preferable?

Mr Hoban: There are two points I would make. The first is that the way in which the operational objective is articulated focuses on the outcome of competition. Competition should lead to better choice for consumers and better prices for consumers, and we are trialling this in heading up the FCA to focus on good consumer outcomes, and I think competition should lead to better choice and greater efficiency in pricing. The second thing I would say is that the duty you refer to is not just in relation to the efficiency and choice objective. That duty applies to all three operational objectives, so we do not see competition purely delivering on a single operational objective. We should see the way in which the FCA uses competition to deliver against all three of its operational objectives.

Q213 Mr Ruffley: Basically this duty to discharge its general functions in a way that promotes competition, you are arguing, covers everything-the word "competition" is there and, therefore, it all right-but I think this Committee takes the view that the word "competition" is not included in the strategic objective, nor is it included in any of the three operational objectives, and I rather wondered why.

Mr Hoban: But Mr Ruffley, I have been quite clear in my evidence this morning that we will listen to the comments that this Committee has made.

Q214 Mr Ruffley: So you will look at using the word "competition" in one of the strategic or operational objectives?

Mr Hoban: What I do not want to do, in the same way as you would not wish me to prejudge the outcome of your inquiry, is to prejudge the outcome of the PLS process or, indeed, pre-emptively respond to the ICB.

Mr Ruffley: I will make one final comment, just so that it is on the record. We have four objectives in the legislation, three of which are operational, one of which is strategic, and in not one of those objectives is the word "competition" mentioned, and I think this Committee, or certainly myself and others, would like to see it there.

Q215 Chair : We are all very grateful for the flexibility that we are hearing in the remarks that are coming back across the room.

Mr Hoban: It should be clear.

Chair : We are listening, and I expect the wider world is too.

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