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Financial Services Authority

My Lords, I am grateful to the noble Lord, Lord Howard of Rising, for the last sentence of his speech because, otherwise, I was fearful about how I could possible answer what must have been about 40 questions. However, I shall seek to answer the more important ones, but not in a way that detracts from the important message and issues raised by the noble Lord, Lord James. Before I proceed, I would like to explain briefly the different roles of Government and the FSA and remind noble Lords of the FSA’s independence, which prevents me discussing the specifics of the case raised by the noble Lord, Lord James. The Government are responsible for the legal and institutional framework, as well as for setting the boundaries of FSA regulation. We are also responsible for appointing FSA board members in accordance with public appointment processes, those appointment processes applying to the appointment of the chairman and vice-chairman of the FSA. The Financial Services and Markets Act 2000 gives the FSA four objectives, one of which is to reduce financial crime. In meeting its objectives, the independence of the FSA is vital to its role as supervisor of financial services firms and as an investigating and enforcing authority. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making processes. It is for that reason that I cannot comment in detail on the case under discussion or direct the FSA to reconsider the case. The noble Lord, Lord James, asked about the FSA’s decision-making process around taking action on the basis of information that it receives. Like other bodies with investigation and enforcement powers, the FSA needs to have both independence and discretion in deciding which cases to pursue and which of its tools to use. Noble Lords will appreciate that the FSA receives many potential cases for consideration. It takes a risk-based approach in selecting which cases to pursue, considering factors such as consumer detriment; evidence of financial crime; indications of a more widespread problem; and the risk of undermining public confidence. If members of the public feel that their concerns have not been adequately addressed, they have access to the FSA complaints scheme. It may be worth mentioning that the Financial Services and Markets Act restricts the FSA’s ability to disclose information that it has received from firms, and its freedom to criticise firms, unless it has followed due process. It may be frustrating to complainants, but in the interest of fairness and to reduce the risk of jeopardising any further action, the FSA does not normally disclose the fact that an investigation is ongoing. I hope that the background that I have set out is helpful in explaining how the FSA, as an independent regulator, operates in considering cases brought to its attention. If I may, I shall make two general observations on the issues raised by the noble Lord, Lord James. The first is that all authorities investigating cases face choice in deciding which cases to pursue. For example, does the evidence presented suggest that there is a potential case of rule-breaking or even criminal activity? In making that judgment, any investigating authority will do its best to make a proper assessment based on the information that it has been given. That assessment may change if additional information becomes available. Hence the importance of the FSA keeping a record of the cases that it has assessed. The second observation is more wide-ranging and concerns whether the FSA’s powers are appropriate and whether, for example, the scope of market abuse is widely enough defined. As part of an ongoing review of the regulatory framework, the latter point is one that my officials will be considering, along with the FSA, in the upcoming European Commission review of the market abuse directive from which the UK regime mainly derives. The noble Lord, Lord James, may want to offer his experience in that wider debate during the Commission consultation that is expected to start later this month. I would be happy to alert him to the consultation once it has been published, if he would find that helpful. I turn to points made by other contributors. The noble Lord, Lord Smith of Clifton, made a cogent and coherent series of observations about financial regulation and behaviour in financial markets, which are consistent with his many comments on those issues to this House. I thoroughly agree with him that there must be a moral basis for people’s behaviour in industries and activities that depend on trust. The noble Lord, Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, will produce his report on 18 March on his conclusions on the FSA and the changes that need to be made. That will address a number of points also made by the noble Lord, Lord Howard of Rising. From my perspective, I think that there needs to be a zeal and determination in the pursuit of those who have done wrong. There also needs to be a strong set of requirements about behaviour and conduct that are deserving of trust. The issues of remuneration that have been referred to will be at the heart of some of the recommendations made by the noble Lord, Lord Turner. Supervision and the behaviour of individuals must always be the first port of call in stopping poor judgment and bad behaviour. There are limitations to what regulation can achieve, as we have seen in other jurisdictions, which do not operate under our FSMA but under their own particular regulatory processes, which have also been found to have shortcomings in the recent global crisis. The noble Lords, Lord Smith and Lord Howard, raised questions about Sir Fred Goodwin. I am happy to have the opportunity of saying something on the matter. Noble Lords will remember that I was involved over the weekend of 10, 11 and 12 October in decisions relating to the capitalisation, funding and liquidity of Britain’s banks; discussions which, if they had not been successfully completed, would have made it difficult for us to have seen markets open on the Monday morning with the confidence that emerged as a result of the decisions made. I understand that the board of the Royal Bank of Scotland agreed with "regret", in its words, that Sir Fred Goodwin should leave on Friday 10 October. I did not meet with Sir Tom McKillop and the senior independent director, Mr Bob Scott, until the evening of Saturday 11 October. In my meetings with the senior independent director and the chairman of both the Royal Bank of Scotland and HBOS, I was accompanied by a partner at Slaughter and May acting on behalf of the Treasury. In those meetings, I used a standard script. I said that in exchange for support, we would expect there to be no rewards for failure. We would expect the boards to minimise the cost of any severance that would arise and we would expect those departing from the banks to mitigate to the maximum possible amount the cost of their departure. I also added that I respected legal commitments and the rule of law—here I addressed the point made by the noble Lord, Lord Howard of Rising—and that I would not expect any company to break a legal and contractual agreement to which it was committed. I was assured that the pension arrangement for Sir Fred Goodwin reflected 30 years of service and no mention was made to me of discretion in that respect. No sum was mentioned, although Mr Bob Scott told me that Sir Fred’s pension would be a large sum. However, that would come as no surprise to Members of this House, who have studied the large pension rights that self-appointed chief executives and leaders of our financial institutions have negotiated for themselves with their boards of directors. I believe that I was only advised of the sum of the pension a few days later. I did not seek approval from the Prime Minister or the Chancellor of the Exchequer because I was not being asked to give approval. To pick up the term used by the noble Lord, Lord Smith, I did not endorse the pension of Sir Fred Goodwin; indeed, I have taken action to persuade Sir Fred Goodwin, as a matter of honour and decency, taking into account the huge losses that that bank has now reported and the substantial dependence it has placed on public funds, to make a significant gesture in terms of forgoing his pension or a major part of it. However, that must be a matter for Sir Fred Goodwin. I repeat that I do not believe that it would be incumbent on a Minister to encourage directors of the board of any company, bank or any other industrial enterprise, to seek to break a legal agreement. That said, UK Financial Investments, the body that holds the investment in Lloyds and RBS, has written to Sir Philip Hampton, the new chairman of the Royal Bank of Scotland, seeking a full explanation of the decision-making process and, in particular, ensuring that all directors of the Royal Bank of Scotland were fully informed. But for the avoidance of doubt, I did not approve Sir Fred’s pension, I was shown no papers, I was given no advice because no decision was sought from me in respect of his pension. I am grateful to the noble Lords, Lord Smith and Lord Howard, for providing me with an opportunity to set the record straight that I did not expect to receive this evening, but at which I have leapt with relish and alacrity.