| Previous Section | Index | Home Page |
Mr. Forman: Is my hon. Friend sure that all the excessive questionnaires, which I have also seen, are attributable to regulatory obligations? I have a feeling that many of the questionnaires, which no ordinary person is under a legal obligation to answer, exist to create market
opportunities for conglomerate financial institutions which wish to pass information from one part of their activity to another in order to open up other avenues of business.
Mr. French: My hon. Friend is absolutely right, but there is also a third explanation. More questions may be asked than are strictly necessary, but only in order to ensure that the approach is very cautious, and that nothing that a compliance officer or regulator might subsequently say should have been noticed was not noticed. That is what I describe as overkill.
Too many questions are asked and too many answers are received, so that the financial institutions are not caught out. If they are caught out, the penalties are severe. I accept, however, my hon. Friend's point that additional information may be thought highly desirable for marketing purposes by other parts of the same institution.
Let me give the House another example of where I think that the regulatory regime is too burdensome. Friendly societies are in the business of selling comparatively small policies, what they call small ticket business involving premiums of, say, £10 or £20 a month. Even though the salesman is selling such a small policy, the full panoply of the regulatory regime falls on him, and the enormous cost of regulation is reflected in the value, or otherwise, of the policies that he sells.
That is acceptable if the policies involve a large premium, or if the sellers are institutions offering a broad range of policies. In the latter case, the regulatory cost of the £10-a-month policies can be shared with that of the
£500-a-month policies, so that the cost is evened out. Friendly societies, however, do not have large-premium business. That means that there is a conflict between the cost of regulation within the premiums that they are charging and the Government's present policy, which is to give a tax concession to people paying premiums to friendly societies on qualifying policies. I have evidence that the value of the tax concession in respect of such a policy can be outweighed by the cost of the regulatory regime. That is a ridiculous situation that requires attention.
One of the consequences of the difficulty that the industry has had in following the requisite sales procedures correctly has been the generation of new forms of what are known as direct products. Very often, they are execution-only products, and no advice is offered. Of course, they are attractive, because it is the giving of advice and the responsibility involved in giving it that are expensive. If products can be sold separately from the giving of advice, they are likely to be easier to sell and, if correctly sold, might represent better value for the purchaser.
With such products, however, there is absolutely nothing to prevent the client from buying something wholly unsuitable. That means that they escape the regulatory regime completely, and ever more products are being sold in that way to avoid the heavy regulatory regime that would otherwise apply.
It has become easier to sell such products thanks to the recent improvements in technology. Much has become possible because the telephone and computer can work swiftly together to clinch sales. I believe that the problem will become greater as financial services come to be offered on the Internet--indeed, this is already happening--and become available on a cross-border
basis. There is likely to be a proliferation of direct, no-advice, execution-only products, which escape the regulatory regime altogether even though they may be wholly unsuitable for the person buying them.
I have a high regard for the people currently responsible for the Personal Investment Authority and the Securities and Investments Board. They are undoubtedly trying to act in the best possible interests of the consumer and the industry. Ultimately, there must be common ground between those two interests. However, an independent financial adviser, who is a member of the PIA, came to my surgery last week. He brought with him the PIA rule book, the PIA fact-find--or his version based on what the PIA requires--and copies of 16 consultative documents issued by the PIA or the SIB in the past 18 months or so. He felt that he should have a passing interest in all of them, or that he should at least have read them. He said that, if he were an employee of Allied Dunbar, for example, he would have a department to read the documents for him and advise him when he needed to take notice of them in the daily conduct of his business.
However, as he is an IFA heading a company of only eight people, the responsibility fell on him. He said that there were hundreds or even thousands of IFAs across the country in exactly the same position. One day in every fortnight--or 10 per cent. of his business time--had to be devoted to reading the latest material from the self-regulatory organisation. He suggested that the situation was out of control.
That might be the right way to deal with people proposing deliberately to be dishonest or negligent in their selling of products, but it should not be necessary for that person, as an honest and competent intermediary, to devote 10 per cent. of his time to reading the rule book instead of going out and getting the business on which his living depends. I have considerable sympathy with him. The current rule books are too complex, burdensome and detailed. They work on the assumption--a wrong assumption--that people in the industry will always do a bad job.
In general, all this is doing great damage to the insurance and personal investment industry. It does not help customers, except in a small number of extreme cases. Meanwhile, it is increasing costs and reducing the value of the products on offer. It also renders those products less sophisticated and less tailor-made to the client--the exact opposite of the original intention behind the Financial Services Act.
Moreover, insurance and investment institutions are being prevented from enjoying the sound, thriving domestic market which is so essential if they are to play their proper part in European and world markets. We have a wonderful basis on which to build; this country's institutions are highly sophisticated. They have a marvellous opportunity to do well in overseas markets, but the current domestic market is proving so difficult that what could be golden opportunities are being lost.
I agree with a number, although not all, of the proposals in the Select Committee report. I agree with my hon. Friend the Member for Hazel Grove about placing all responsibility for the retail and wholesale markets with the Treasury.
I should like a greater recognition of the fact that we should not throw the doctrine of caveat emptor out of the window. It seems only right to invest some responsibility in the client for what he is doing. At present, all responsibility seems removed from him. That is why I was pleased to read the recent speech by Andrew Large on this very point. He said:
That is the direction towards which we should strive. I am certain that there should be less prescription. The benefits of a product, and its price, should be clearly presented; but there must not be so many prescriptive rules governing the exact procedures involved in selling the products.
I also believe that regulation requires some cost benefit content. It is all too easy for self-regulatory organisations to make regulations without regard to their cost to the industry. Whenever new regulations are made, some assessment of the likely accompanying costs should be a requirement. I also agree with the proposal to rationalise the SROs. The proposal most often made--one SRO for the retail and another for the wholesale side--commands a great deal of support.
Lastly, we need a vigorous enforcement mechanism and effective redress for people when things go seriously wrong. At present, a huge amount of effort is devoted to ensuring that nothing goes wrong in any sale of any retail product. If something small goes wrong, someone may suffer a small amount of damage. The greater effort should therefore be directed to vigorous enforcement when there have been serious departures from what should happen.
Mr. Malcolm Bruce (Gordon):
I was waiting with bated breath to see what conclusion the hon. Member for Gloucester (Mr. French) would arrive at. When it came, it was not quite what I had been expecting. Most of his speech seemed to be against regulation, so his ending surprised us.
I defer in these matters to other members of the Select Committee, because I joined it only when most of the work had been done and most of the evidence had been taken. I am therefore not as apprised of the issues as is the hon. Member for North Durham (Mr. Radice). Nevertheless, we all have an interest in them.
Whatever our differences of view, no one is looking for heavier regulation. What we want is more effective regulation, to engender confidence at home and abroad. The reputation of the City of London and of our financial services and banking regulations is an important factor in the confidence of the home market and of our European and international markets.
The crises and scandals can have an international impact--the banking scandals are a case in point; the impact of the Lloyd's crisis might be termed intermediate;
then there are the domestic scandals which also affect the reputation of the City. That is why we must all be concerned to find a regulatory framework which is effective, confidence-inspiring and good for the City's reputation, at home and abroad.
The hon. Member for Gloucester rightly said that there is a balance to be struck: regulation must not stifle the flexibility and innovation which are characteristic of British financial service institutions and which render them world class. There is a huge cultural difference between our system and the conservative and cautious approach in Germany to the financial instruments of saving and investment. The approach in the United Kingdom is far more creative and flexible; in general, that means that every pound invested through the City of London will produce a better return. Of course, more risks are involved too.
All this points to the conclusion that we need to get the balance right. We cannot afford another catastrophe at home or abroad, because the City's reputation is already tarnished. If we fail to ensure that the system can anticipate scandals, we will face a problem that could have long-term repercussions for the City's earnings.
It is widely argued now that the self-regulatory organisations are wrongly described. They have become much more formalised; there has been some blurring at the edges, resulting in confusion. There is a clear need to tidy up that confusion. Indeed, some of the problems to which the hon. Member for Gloucester referred may have arisen precisely because of confusion over where the boundaries lie. That could be reduced if the lines of communication were made clearer.
Here, too, a fine balance needs to be struck between practitioners and consumers. Perhaps there should be an over-arching umbrella under which a bilateral division is set up. Even if boards are set up with a slight majority of practitioners, to ensure that regulations are based on knowledge of the internal workings of the market, the effective chair should perhaps be drawn from the consumer side so as to provide balance and confidence.
I certainly do not intend to launch a broadside against the Minister's response to the report, which I have managed to read through quickly. I would say, however, that there was a wait-and-see flavour to her response, suggesting that she is not quite as apprised as we are of the need for definitive action in all these areas. The hon. Member for North Durham pointed out that, after three major banking scandals, it is becoming difficult to believe that the Bank of England is the right institution to regulate banking.
The hon. Gentleman's point about the Bundesbank and the benefit that the Bank of England would have from that separation is powerful. That must be worthy of consideration as we move towards a more independent central bank. The Minister knows perfectly well that I and my party favour an operationally independent central bank and believe in any case that, if we move towards monetary union, we will have to take that step. That being the case, it seems better that the Bank concentrates on its role as monetary regulator, and divests itself of the role of banking regulator.
Having given that as my personal opinion, I say to the Minister that I am not sure about her waiting for the Bank's report--which is presumably the Arthur Andersen report--and the Select Committee report. Although all of
us on that Committee are grateful for the role and status that she gives the Committee, and in spite of the very important points made by the hon. Member for North Durham about the power of Committees to take evidence, the Government should commission their own clearly independent inquiry, at the very least--if they do not accept the argument--to determine whether the separation would be beneficial.
This is no pejorative criticism of Arthur Andersen or any consultant at all, but when the Bank of England commissions a firm of consultants to look into something independently, the consultants tend to work out who the purchaser is and what kind of reply they might be looking for; it is only human nature. The report therefore inevitably falls into the category of being commissioned by the Bank of England.
It is not entirely clear what the Bank of England's view is. Eddie George says that he is relaxed, and is not fighting hard either way. That being the case, the Government therefore would not cause any particular difficulties at the Bank if they were to commission an independent report.
The members of the Committee who worked on the report throughout produced a great deal of detail, a great deal of information and a clear indication that specific steps need to be taken to move the matter forward. It may be that the Minister wishes to leave the decision on action to the next Government. That might be the right thing to do.
But there are one or two useful things that the Minister could do to show that the Government were in control and recognised that we were moving in the right direction. The industry itself has been moving in the right direction, but pretty well everyone one talks to acknowledges that we need a reformed legislative framework. Indeed, there is potential cross-party agreement on the desirability of that.
"Over time we may see a shift away from the bulk of the customers placing trust and reliance in financial advisers towards a situation where more of them take full responsibility for their own investment decisions."
| Next Section
| Index | Home Page |