David probes the Managing Director, Conduct Business Unit, FSA in his appearance before the Treasury Committee.

Witness: Martin Wheatley, Managing Director, Conduct Business Unit, FSA, examined.

ne Q101 Mr Ruffley: A question for Mr Wheatley. The consumer protection objective specifies that the FCA must have regard to "the differing degrees of experience and expertise that different consumers may have". How on earth, in practice, do you envisage the FCA achieving regulation having regard to those distinctions? It is quite a tricky one, isn't it?

Martin Wheatley: It is quite a tricky one. That partly derives from the broad legal definition of consumer, which is different from the common man test of a consumer, so the broad legal definition has consumers including everything from retail consumers through to hedge funds, through to major parts of the infrastructure like stock exchanges or clearing houses. In that sense, what we are saying is it is not that within retail consumers we are going to try to judge the responsibility and the duties that we owe to different groups. It is more reflecting that institutional consumers, corporate large wholesale consumers, have the ability to take more responsibility and they have the legal powers to read the 200-page document and understand exactly what it means. That is the sense in which that was in the document.

Q102 Mr Ruffley: Do you think under the new arrangements there will be more protection for the consumer than under the old system?

Martin Wheatley: Yes, I do.

Mr Ruffley: More protection for the consumer?

Martin Wheatley: More protection and because it comes back to this philosophy as to whether you can trust a combination of disclosure and conduct to deliver good outcomes, and what has happened in history is it has not, and therefore we are moving along the value chain to an earlier part of product design to try to ensure that good outcomes are designed into the corporate governance process of the people creating products. It is designed into the features of the product. I think it will lead to more protection for consumers.

Q103 Mr Ruffley: Can you finally give an example of how the new regime with these enhanced protections for the consumer, which you have just described-which will relate to product design among other things-would have prevented one of the failures in the last 10 years from a consumer's point of view.

Martin Wheatley: A couple of examples and it is easy with the hindsight of history so-

Mr Ruffley: No, but I am inviting you to frame that judgment.

Martin Wheatley: PPI is, as you know, one of the big areas where we have had significant concerns and they have ultimately ended up with a major redress issue with all of the banks selling PPI. With that product we would have been looking at the product production governance within firms, we would have been asking firms to show us how they have demonstrated to themselves, to their risk committees, to their board, that the product met our reasonable standards of care and fairness and we would have analysed the product profitability for firms, and if we saw products that were generating a margin of 70% or 80%, we would have been very intrusive in asking those firms whether that product and those features were properly explained to their clients.

Q104 Mr Ruffley: You do not believe the old system gave the regulator the power to ask those very pertinent questions? You are saying it is only under the new arrangements that those questions could be asked; is that right?

Martin Wheatley: PPI was a particular case in point because the FSA only took responsibility for insurance after some time.

Q105 Mr Ruffley: You said PPI but it was one example. Give me another example.

Martin Wheatley: Another example would be mortgages, where we look at the business model of a firm and look at its profitability-and here it might be the converse of PPI. In PPI we found products that were 80% margin. If we looked at the business model of some of the mortgage products, they are unprofitable under normal circumstances and they only become profitable when people start defaulting on their payments and banks start to impose higher charges based on those defaults. That is another example where we would have gone in and said, "You can't possibly launch a product that only works if it fails or you only make profits if it fails."

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Read the full transcript here: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/uc1574-ii/uc157401.htm