Only Those Submissions Written Specifically for the Committee Have Been Included

House of Commons

Treasury Committee

Banking Crisis

Written Evidence – Part 1

This is a volume of submissions, relevant to the inquiry Banking Crisis, which have not yet been approved for publication in final form. Any public use of, or reference to, the contents should make clear that it is not yet an approved final record of the written evidence received by the Committee.

Only those submissions written specifically for the Committee have been included.

List of written evidence

Page

1Chartered Institute of Personal Development3

2FT9

3NUJ12

4Odey Asset Management14

5Shelter23

6David H Smith28

7Campaign for Community Banking Services (CCBS)34

8Landsbanki Guernsey Depositors Action Group38

9Incentive Media47

10International Securities Lending Association (ISLA)50

11Equifax55

12States of Guernsey58

13Association of Independent Financial Advisers (AIFA)63

14Association of British Insurers (ABI)69

15BDO Stoy Hayward LLP79

16The Association of Mortgage Intermediaries (AMI)82

17Financial Reporting Council88

18Paragon Group127

19News International134

20Periodical Publishers Association142

21Centre for Research on Socio Cultural Change149

22The Institute of Chartered Accountants of Scotland164

23Ken Cooney169

24Resources Compliance174

25KPMG184

26James Robertson187

27Save our Savings (SOS) [Charities Group]197

28Christian Aid203

29Hedge Fund Standards Board216

30Scottish Daily Newspaper Society227

31The Newspaper Society228

32Investment Management Association233

33Which?258

34PIRC Ltd284

Memorandum from CIPD

CIPD overview

1. The CIPD’s primary purpose is to improve the standard of people management and development across the economy and help our individual members do a better job for themselves and their organisations.

1. As the UK’s leading professional body for those involved in the management and development of people, we are ideally placed to contribute to the development of public policy across the spectrum of workplace and employment issues.

1. We are able to draw on the experience and knowledge of our 133,000 members and our wide range of research to provide a pragmatic stance on public policy that is based on solid evidence and the real world.

1. Our membership base is wide, with 59 per cent of our members working in private sector services and manufacturing, 34 per cent working in the public sector and 7 per cent in the not-for-profit sector. In addition 82 per cent of the FTSE 100 companies have CIPD members at director level.

Background to the FSA review

In the UK, the media and politicians have raised concerns that inappropriate remuneration schemes in the City may, in some way, have contributed to the current financial difficulties. These concerns have also been raised internationally, through reports from the Institute of International Finance and the CRMPG. As a consequence, the FSA is now examining remuneration polices across the banking sector as a whole. Given the implications of this review for the wider financially regulated sector and, potentially, for other areas of the economy it is seen as important that the CIPD has a view on the FSA’s review.

This paper has been put together following a meeting of the CIPD Vice President’s senior reward panel held 3 November 2008.

Is remuneration the problem?

While recognising the scope of the FSA’s letter and the legitimate need to explore this aspect of the banking crisis, members of the panel were concerned that the focus of the FSA’s letter is solely on remuneration design (levels and structures) looking at the weak points in reward and how they can be strengthened. It does not acknowledge the associated contextual issues which frame any remuneration system such as employee engagement, the culture of performance and hiring practice.

In this paper we examine the FSA’s review in more detail, but focus initially on these ‘contextual’ issues:

Given the tight labour market in investment banking at the time we witnessed:

• high recruitment, training and development costs
• confusion over whether annual incentive deferrals were primarily a retention or a performance tool
• annual incentives deferrals being bought out when people left organisation and so lessening their performance role
• the role of the HR/reward professionals being minimised in terms of assessment of reward design standards with a heavy emphasis on maintaining ‘market rates’ on salary and bonuses, rather than operating a strong link to performance
• a focus on short-term measurable profit/revenue, with less emphasis on management and reward of rounded performance (including administrative and risk compliance)
• despite the City regarding talent management as being crucial to success, a number of best practices were not universally followed in relation to recruitment, performance management and work force planning.
• a failure, at all levels, to appreciate and manage risk of new products, particularly in the originate to distribute model
• a perception of first mover disadvantage in applying closer controls on aspects of good HR practice and reward

The FSA review

1. Remuneration levels

The FSA does not intend to investigate this area, which would be fraught. It believes that levels are a matter for the board within the context of prudent management of returns to employees and returns to other stakeholders, taking into account performance and risk. The CIPD agrees with this view. The CIPD recognises that the focus of concern at this time should be what the individual is incentivised to do to receive the payment and the management and governance of the process.

1. Remuneration structures

The FSA wants to ensure that firms follow remuneration polices that are aligned with sound risk management systems and controls. However, we believe that is something that goes beyond just incentive design. What is needed is for these organisations to build their reward and people management capabilities.

The CIPD broadly supports many of the FSA’s criteria for good remuneration policies and welcomes the approach which avoids detailed guidelines that could be counter-productive in individual instances over diverse business situations.

For example, it is one thing to call for reward to be linked to performance, it is another thing to be able to define, measure, manage, appraise and ascribe it. Unfortunately, there is no one solution and employers have to work out what is best for them within the appropriate regulatory framework

In CIPD’s experience, for incentives to work, they should not exist as isolation but as part of a wider, integrated reward and people management approach to meet the needs of the business. That to be effective incentive schemes need to have:

• appropriate and measureable performance targets
• effective communications
• management of all key elements of individual performance
• responsible management
• operate in an environment where scheme participants know what values, performances, skills and behaviours that will be rewarded and recognised.

Governance

It is clear that the remuneration practices which may have contributed to the present crisis operated in an environment where aspects of risk were not systematically understood and managed. This applied right the way from the Boards of banks to regulators, rating agencies and the employees themselves. Given this context, even the best practices of remuneration governance were unlikely to have fully avoided short term potential overpayment for the performance achieved

The CIPD believes that Remuneration Committees of Boards, accompanied by greater transparency and the advisory vote on executive remuneration policy at AGM’s has improved governance of remuneration for executive directors. This requires Non Executive Directors sitting on the Remuneration Committee to bring their understanding of the business strategy, risk and operational plans to the design of executive reward within the context of best practice in reward design and people management. Whether it is appropriate or feasible for the Remuneration Committee to have detailed involvement in reward, including incentives, at lower organisation levels is open to doubt given the role of non executives in the UK corporate governance model. However it is clear that there needs to be sound design and management of incentives at lower level, involving individuals are qualified and experienced in reward management, accountable for business performance and not themselves beneficiaries of the arrangements.

The CIPD suggests that the board as a whole needs to regularly review its people management practices to ensure that they encourage the behaviours, attitudes, skills and performances that support the long-term interests of the organisation and the shareholders.

Summary

The CIPD believes that:

• there is no one size fits all solution. There are tensions and risks in any reward system and these need to be recognised and managed, for instance between the needs of the organisation to reward and recognise individual performance, but in such a way that it does impact adversely on cohesion of the organisation and the achievement of longer term goals.
• while incentives may have contributed to the credit crunch on their own they did not create it, so their role should not be exaggerated, not what can be achieved by their reform. Performance and talent management are just as important components of successful reform of the cultures in these companies.
• managing risk more effectively is not just about more sophisticated risk-adjusted measures of performance and it is not just more complex compensation plans, it is also about the wider performance management environment and culture of the organisation.
• many employers will already be using the FSA’s good practice criteria at board level. The implementation of good practice criteria below board level, for highly paid talent needs to meet high standards of governance and design. Boards should ensure that this is happening
• employers need to look beyond reward and examine their people management strategy and practices to ensure it is creating or sustaining a culture supportive of long-term shareholder and business needs
• the involvement of reward professionals in the design and management of incentives is an important element in ensuring that they are designed to meet their aims, effectively modelled to identify costs and set within the context of wider people management. The reward function should be involved with the risk management, governance and finance functions when creating their remuneration practices
• organisations need to review the capability and skills of the HR function in such areas as risk management and finance so that it can play a role in training the non-executive directors while the compensation function needs to be properly resourced so it can play an influential and strategic role in reward management
• organisations need to review whether the remuneration committees and others associated with design and management of incentives have the sufficient capability to review the reward-risk issue
• organisations need to recognise the importance of good people management to organisational success and to regular monitor HR practices at board level

January 2009

Memorandum from The Financial Times Limited

Introduction

1.The Financial Times, one of the world’s leading business news organisations, is recognised internationally for its authority, integrity and accuracy. Providing extensive news, comment and analysis, the newspaper is printed at 24 print sites across the globe and has a daily circulation of 448,523 (ABC figures, November 2008). The newspaper, consisting of separate UK, US, European, Asian and Middle East editions, was last year named “Newspaper of the Year” in three separate highly regarded awards ceremonies. The FT’s writers are recognized experts and commentators in their respective fields and the various publications are frequently cited as authoritative sources by leaders in the financial sector.

FT.com is one of the world’s leading business information websites providing an essential source of news, comment, data and analysis for the global business community. FT.com attracts 7.1 million unique users, generating 72 million page views per month (ABCe figures, March 2008).

The FT group of companies also includes fund management information provider Money-Media and Financial Times Business which produces specialist information on the retail, personal and institutional finance industries, including the UK's premier personal finance magazine Investors Chronicle, The Banker, Money Management and Financial Adviser for professional advisers.

2.The Treasury Committee is undertaking an inquiry into the Banking Crisis and has called for evidence from interested parties on a range of issues. At paragraph 1.11 of its request for evidence, the Committee has invited submissions on “The role of the media in financial stability and whether financial journalists should operate under any form of reporting restriction during banking crises”.

3.The Financial Times Limited (“FT”) is making this submission in response to that specific request at paragraph 1.11.

Executive Summary

4.This submission raises the following issues:

(a)The media plays a crucial role in disseminating information regarding issues of public importance to the rest of society. The current global financial crisis and the bank failures that have contributed to it are issues of immense public interest and significant complexity. It is therefore the responsibility of the press to explain what has happened and what measures are being taken by government and financial institutions to address the current state of affairs so that members of the public may evaluate the actions taken by key decision makers and make informed decisions regarding their own circumstances.

(b)By making information available to all members of the public simultaneously, i.e. greater transparency, the financial media actually act against the creation of false markets and contribute to the proper functioning of the financial system.

(c)Reporting restrictions constitute a prior restraint on the right to freedom of expression and as such must respect the requirements of Article 10 of the European Convention on Human Rights. Given the indisputable public interest in the ongoing economic turmoil the FT is of the view that reporting restrictions in such circumstances could not be justified.

(d)If there is concern regarding the quality or content of financial journalism in the UK, the government should more properly be assessing the degree of public disclosure required by financial institutions – including banks, private equity firms and hedge funds. We submit that focusing merely on the role of the media as opposed to addressing the overall sufficiency of disclosure obligations and public access to financial information misses the larger issue altogether.

Each of the above issues is elaborated in the main body of the submission.

The role of the media in financial stability

5.This submission addresses only one of the key areas identified for consideration by the Committee as part of its inquiry, specifically paragraph 1.11, under the heading “Securing financial stability”, regarding “The role of the media in financial stability and whether financial journalists should operate under any form of reporting restrictions during banking crises.”

6.It will come as no surprise that the FT – along with other media organisations – is extremely concerned to learn that the government is even considering the possibility of imposing reporting restrictions on the financial media.

7.The UK authorities have repeatedly recognized the crucial role played by the media as “watchdog” protecting the public interest and also as the primary means of disseminating information regarding public life to the rest of society.[1]That the financial system is an integral part of public life and therefore a worthy subject matter for extensive media coverage should be totally uncontroversial.

8.The increasing complexity of global financial systems and the speed at which developments occur make it imperative that the media be able to report freely to the public regarding what is happening in their economy and ultimately, with their money. For instance, the decision made by governments around the world to commit unprecedented levels of tax payer money to rescue failing institutions requires a media that is capable of explaining the bail out packages in order to ensure that these receive the required degree of scrutiny. One cannot seriously maintain that the public interest – or financial stability – would be better served by keeping the public in the dark regarding a £50 billion bail out of UK banks, or not reporting why a stock price is moving up and down.

9.It is arguably naïve, in this era of email, blogging and instant messaging (much of it anonymous), to attribute the spread of false rumours to the media, or to accuse the media of aggravating the banking crisis – however defined. In fact, the media and financial regulators frequently have similar objectives, including dispelling unfounded rumours that distort the market, and regulators frequently benefit from the media’s efforts to hold the market’s participants to account.

10.An example is provided by the FT stories that revealed how mathematical models used by Moody’s to evaluate an important financial product contained a computer error that resulted in the product receiving a higher rating than it deserved (see The stories were published after the FSA declined to investigate due to a lack of jurisdiction. As a direct result of the revelations, Moody’s initiated an external review of its practices and took steps to improve the integrity of its ratings processes. The Securities and Exchange Commission in the US announced an investigation into the affair and Standard & Poor’s – another of the dominant ratings agencies – publicly disclosed that an error had been found in one of its models. Each of these occurrences will or should improve how the ratings agencies function, to the benefit of the public, and were triggered by an investigation undertaken and reported by the media.

11.A further example of the important role played by the media throughout the current economic crisis is provided by the coverage given to the collapse of Lehman Brothers and the fall out from the uncovering of Bernard Madoff’s suspected billion dollar “Ponzi scheme”. Although two very different sets of circumstances, each involved countless numbers of small investors seeking and needing to obtain reliable, timely and accurate information in order to protect their interests as best as they could. If these investors had been obligated to rely only on the flow of information from the press office of Lehman’s administrators or Madoff’s prosecutors then they would effectively have been left entirely in the dark, if not misinformed.

Arguments against reporting restrictions during banking crises – Article 10 issues

12.For the reasons set out above, namely the important role played by the media in informing the public regarding the financial sector, it is the FT’s submission that there is no case for the imposition of reporting restrictions during banking crises. It is also the FT’s submission that such restrictions would be difficult if not impossible to justify under Article 10 of the European Convention on Human Rights.