Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100-112)




  100. Would you be concerned about how these are sold to retail investors?
  (Sir Howard Davies) Indeed, that is our concern. We issued a specific warning on this point in March of this year[4] to alert people to the fact that there were risks in this, but at this point we have not had drawn to our attention—I will not say "any" because no doubt somewhere there is one—many cases where retail investors have been inappropriately put into these trusts. They have been primarily marketed to high net worth individuals or indeed to other investment firms of one kind or another seeking to increase their leverage.

Mr Cousins

  101. Polarisation is a very important issue in terms of the future of the independent financial adviser networks, yet there has been delay in concluding the results of your polarisation review. You withdrew the issue of CAT standard ISAs earlier in the year. When can we now expect the final decision on your attitude to polarisation and the threat of the introduction of multi-tied advisers which would be a major new financial advice market product.
  (Sir Howard Davies) I recognise that this is a matter of considerable interest in the IFA community. May I go back in history? I am conscious that you have criticised me strongly for not going far enough back on another issue so I am going slightly back on this one. There was a review by the Director General of Fair Trading, who concluded that in some respects the polarisation rules we inherited from the SIB and PIA were anti-competitive. That report goes to the Treasury. The Treasury then ask us to take up the issue. We had some work commissioned for us from London Economics which agreed that the polarisation rules as they are currently couched were anti-competitive, not in all respects but they did have the effect of restraining competition and therefore needed to be reviewed. We are operating with that background from the DGFT who has the responsibility for policing our rule book. We then decided to do two things. First of all, because it was put to us that there was a specific issue in relation to stakeholder pensions that that market place might not get off the ground if we did not consider a relaxation of the polarisation rules, we did decide that it was appropriate to consult on that issue specifically. At the same time, since CAT standard ISAs have been brought into the market, we also did consult on whether there was a case for excluding CAT standard ISAs from the polarisation rules. We also looked at the issue of fund supermarkets. Of those three issues, the response we got on the first two, stakeholder pension and fund supermarkets, there is broadly speaking broad consensus that we should de-polarise those two areas and we did. However, on CAT standard ISAs a lot of arguments were put to us, particularly by consumer representatives that there was no particular reason to think that just because an ISA met a CAT standard it was really a less risky product because it could meet the CAT standard of low charges but still really essentially be the same as another ISA and there was no real case for excluding them from the polarisation rules. When we looked at those arguments we were persuaded by them, so we did not. We then said that we would be consulting on a slightly longer timescale on the options for reforming the system more fundamentally. This is something which one has to do more carefully because the whole industry is structured around the rules that we have. We felt we needed to proceed carefully. We did a lot of analysis of people's attitudes to advice, how consumers understood the regime and how they might understand a different regime which is very important. That process is now well under way. We held an open meeting the week before last at which we displayed our consumer research and we will be putting out a consultation paper on proposals for change, but specific proposals for change, that is things which we think look to us to be the most appropriate in December. I expect to take that paper to my board in November and assuming they are roughly happy with it I would imagine that would be out in December.

  102. Will you accept that the shadow of a hybrid between tied and fully independent financial advice has been very detrimental to the future of the independent financial adviser network?
  (Sir Howard Davies) I would not accept that at all. In fact the IFAs continue to increase their market share in most areas of the market. What is actually happening out there in the market, the most noticeable thing which is happening, is that large firms are deciding to trim down or in some cases even to remove entirely their direct sales forces on the basis that they have found it difficult to manage those in a cost effective way, but also in some cases because they believe that those direct sales forces have become a kind of obstacle between them and the consumer, that they have tended to have a mind set which said that what they wanted to do was to produce products to feed the sales force rather than to respond to consumer needs. So some companies have taken that view. What we have seen is continued growth in the IFA sector. We see that in the form of the numbers of authorised advisers coming in. Carol may have numbers on that but they continue to grow at a rapid rate and the overall market share of IFAs continues to rise. I do not think that this process of reform can be said to have had a damaging effect on the IFA sector.

  103. Does that affect your view about whether polarisation is uncompetitive then?
  (Sir Howard Davies) The way in which the market is developing is interesting. What it tells me more is that there is a strong market out there for independent advice, that the way in which people think about independent advice is not necessarily the way our rules tell them they ought to think about it, in that they tend to see something of a spectrum between the completely independent adviser who is claiming to trawl the whole market, from those people who say they have a panel of products and these are our panels which we have pre-chosen, to those who are independent advisers but perhaps co-located inside a bank branch. Actually people do have quite a sophisticated understanding of what "independent" really means. The notion that there is just "independent" and "not independent", which is the structure of polarisation, is one which is perhaps not essential as a pillar of the regime going forward and does not perhaps reflect the way in which the markets develop.

Dr Palmer

  104. Have you started to undertake visits to selected product providers and independent intermediary firms to assess the selling of stakeholder pensions? Is this an area on which you are focusing at all?
  (Sir Howard Davies) We have done some of that in the course of our normal work. At this point we have not done a kind of focused programme of visits on stakeholder pensions yet.
  (Mr Tiner) It has formed part of our routine visits to firms in recent months but I would think that it was the sort of thing we would in our terminology develop a theme around, probably over the next several months. It would seem sensible to have a look across all the firm community about their practices in selling stakeholder pensions.

  105. In a recent survey by Marks and Spencer's financial services they showed fairly widespread ignorance among employees of the fact that their employers were required to offer schemes at this stage. It was commented there that the prospect for that changing is not necessarily all that good because in order for the £50,000 fine to become a realistic prospect, one of the employees actually has to complain. If they do not know about it, that is not going to happen. Do you have any ideas on how familiarity with the situation can be broadened?
  (Sir Howard Davies) We have put out consumer information about the availability of stakeholder pensions, but the reality is that most employees will get information about that directly from their employer and therefore what is important is that the employers understand and accept their obligation to provide such a scheme. The role of ensuring that happens lies with the Occupational Pensions Regulatory Authority because they are the regulator of occupational schemes which are outside our regulatory patch.

  106. Are you satisfied with the take up of stakeholder pensions by companies or do you feel that you are unable to comment on that?
  (Sir Howard Davies) That is not a matter for me and indeed I would not have any reliable data on that since it is OPRA who are responsible for that.


  107. The Council of Mortgage Lenders has described your proposals on the regulation of mortgage lending as a bureaucrat's dream. Are they isolated or do they have many friends with that view?
  (Sir Howard Davies) They have written an exotic range of letters. They have written quite polite letters to me but quite different letters to you, which is odd. There are two issues in the mortgage lending regime and one is that the mortgage lenders continue to take the view that the regime should cover advice and should cover intermediaries. Therefore what they have said to us is that in large part the bits of the regime which we have proposed, which they do not like, are there because there is no regime applying to intermediaries. As you know, they have said very clearly to you and to me, and on this point their letters agree, that they would prefer a regime in which advice was directly regulated, which would then get them off the hook, if you like, for the policing as they would see it, or monitoring of what intermediaries do in relation to individual consumers. They have however made some important and in some cases certainly valid points about the way in which the regime we set out in our original consultation, CP98, was articulated. They argue that there are certain things in that regime which will be expensive for them to meet and difficult for them to meet and in fact in their detailed responses to us they have made some constructive proposals for how we might achieve broadly what we should like to achieve, which is some kind of assurance that an intermediary has supplied the individual investor with proper disclosure and the ways that might be done in a less costly and less burdensome way. We are looking at those very carefully, indeed we have had an internal meeting already to discuss it and I think we are pretty comfortable that there are some changes we can make to the detailed rules which will certainly go some way towards meeting their particular concerns. It is important to emphasise that the regime is important because there is plenty of evidence that consumers do not necessarily take out mortgages which are most suitable to them and are not given very much choice and do not understand the different characteristics of different mortgage offers. The purpose of the regime is to improve that disclosure and to improve the decision-making ability of consumers. This regime is meant to make the market work better; that is what it is for. It will not do that if there is no monitoring at all of what the intermediaries do. Over half of mortgages go through intermediaries and therefore we must have some way and it is not unreasonable to require that lenders take some responsibility for ensuring that the right kind of product information about their mortgage has in fact been given to the mortgagee. I am unrepentant about that aspect of our regime, but we could probably do it in a smarter and more cost effective way and I hope we shall be able to meet the Council of Mortgage Lenders on that point.

Mr Laws

  108. Do you think that the timetable for the introduction of the new regulation regime will slip back again?
  (Sir Howard Davies) It will depend on what kind of changes we make in response to the consultation. If we conclude—and I shall need to put this point to our Board in the next month or so—that we should make some changes as recommended by the Council of Mortgage Lenders then it may be that it would be appropriate to give a little more time for that to happen because there will be systems changes. This is essentially an issue about making sure we produce some rules which can properly be implemented and where the systems changes which they need to have in their IT systems can be made in a timely way. I should not like to commit myself to changes in the timetable now, but I will commit myself to saying that we will not impose a regime which the industry does not think it can meet in that timetable. That would be the worst of all worlds: to pretend we had a disclosure regime but which in practice could not be achieved.

  109. At the moment you are still thinking of August 2002, are you? But that could go backwards if you feel it is necessary.
  (Sir Howard Davies) Yes, that is where we currently are but it could go backwards.

  110. Would you think it sensible if the FSA had had greater regulatory powers in relation to mortgage advice as opposed to some of the other areas you presently cover? Does that create any difficulties for you in doing your job effectively?
  (Sir Howard Davies) It has created some difficulty for us with the Council of Mortgage Lenders because they do not like this regime. They have made that absolutely clear and they believe that they would prefer the responsibility to be on advisers. Our view on that is based on looking at the consumer detriment in mortgages, which we believe can be corrected in good part by a better regime of disclosure, but the disclosure regime is a reasonable place to start, I have always said, however, as I said to the predecessor Committee last time I appeared, that I do believe there is a case for reviewing this regime fairly soon to ensure that it really is delivering. We are relying on the lenders to monitor what the intermediaries do and they have reasonable doubts about whether they can really achieve that properly. What we would need to do is to look quite soon at whether this regime was delivering the kind of appropriate disclosure that we really need and improving people's ability to make good decisions for themselves. If not, then regulating advice would need to come back on the agenda. At the moment we can kick off in this direction.

  111. Is that something you feel you as the FSA would be able to make a judgement on and recommend to the Treasury or would you look to some other department to lead on that?
  (Sir Howard Davies) I think we could do that. I believe we will be asked. I am going to do it anyway actually. We will take a view on whether this is delivering effectively. It will be difficult to take a view on whether people are making the right decisions because that might not be evident for 15 years, but we will certainly want to assess whether, by mystery shopping, etcetera, people are being given a proper disclosure and whether they are understanding what they are given. We would be able to measure the effectiveness of the regime in that sense quite soon and that we shall certainly do and we shall certainly send that information to the Treasury.

Dr Palmer

  112. Are you satisfied that the concepts for describing mortgages are sufficiently standardised across the industry? I was very struck recently when I looked into it for myself that something simple like APR is actually interpreted quite differently by different mortgage lenders.
  (Sir Howard Davies) Yes. That has been one of the issues which has been most tricky in devising the regime. What we have produced is something called a PAI—a pre-application illustration. The PAI is in a standardised format and tries to put the different terms of mortgages into one framework which allows people to compare and contrast. That has actually been the trickiest bit of the whole exercise.

  Chairman: We have gone into four minutes of extra time but you being a good sporting man will not mind that. A golden goal has come after four minutes. May I thank you for your constructive and detailed exchange with the Committee this morning. It has set an appropriate tone for our future witness sessions. I thank you for your comprehensive answers and I look forward to welcoming you and your colleagues again on 30 October when we discuss Equitable.

4   Note by Witness: Also in March the FSA issued specific guidance to financial advisers, reminding them of their responsibility to ensure that investors are aware of the risks involved in purchasing split capital investment trusts. Back

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