Select Committee on Treasury Minutes of Evidence

Further memorandum submitted by the Financial Services Authority


  1.  When the FSA gave evidence to the Committee on 13 November, we undertook to provide an update on the concept of treating customers fairly (which replaces policy holders' reasonable expectations). We also said we would provide further information about the extent to which the sale of new Guaranteed Annuity Rate (GAR) policies taken out as part of group pension schemes between 1988 and 1993 were subject to conduct of business rules.


  2.  As Howard Davies said in evidence on 13 November, to support the FSA's new approach to regulation we have set out a number of high level Principles for Business which all regulated firms must follow. One of these states that a firm must pay due regard to the interests of its customers and treat them fairly. Others require:

    —  that firms pay due regard to the information needs of their clients and to communicate information to them in a way which is clear, fair, and not misleading;

    —  that they must manage conflicts of interests fairly; and

    —  that they must take reasonable care to organise and control their affairs responsibly.

  3.  These Principles replace various requirements of the previous regulators, including that of "policyholder' reasonable expectations" and provide us with a basis for articulating in more detail how we expect firms to treat their customers at various stages in the relationship.

  4.  In preparation for N2, we carried out a review entitled "Treating customers fairly after the point of sale". This focused on "after the point of sale" because the Financial Services Act regime for retail consumers had focused principally on the marketing and selling of investment products. By contrast, the consumer protection objective under FSMA does not distinguish between "before" and "after" the point of sale. In line with the Principles referred to above, our review therefore covered the whole life of a firm's relationship with its customers.

  5.  We published a discussion paper in June 2001 on the outcome of the review; a copy is attached. Our conclusions were that unfairness to retail customers occurred in five particular areas:

    —  some products and information are difficult for consumers to understand;

    —  customers are not always kept appropriately informed after the point of sale;

    —  products and firms do not always deliver what consumers are led to expect;

    —  customers are discouraged from "switching" suppliers or products;

    —  customer complaints are not always dealt with fairly.

  6.  On the issue of consumers' expectations, we pointed out in our paper that financial promotion and the sales process can create expectations among consumers which are unlikely to be met, often with unpleasant surprises further down the track. The FSA has several projects already under way which will address this issue, including:

    —  development of a new disclosure regime at the point of sale which will aim to reduce the opportunity for "unpleasant surprises" to arise later;

    —  investigation by a task force of the use of past performance material in advertising and elsewhere;

    —  the new rules on financial promotion;

    —  the Comparative Tables of financial products, the first three of which have now been launched;

    —  other FSA consumer information and education materials designed to help consumers understand what they should expect of different products and situations, and to encourage them to plan and review their finances and to encourage them to shop around for the product or service that best meets their needs; and to understand their rights including their right to complain;

    —  our use of the Unfair Contract Terms Regulations (under which the FSA now has powers).

  7.  We received 30 responses to the "Treating Customers Fairly" discussion paper. Most expressed strong support for the general principles outlined in the paper and in particular for our conceptual approach in defining fairness (other than a rigid "check-list" based criterion). Where concerns were raised, they related principally to specific issues of detail in interpretation or possible implementation, including, for example, practical issues arising from the proposal to publish comparative data on complaints made against firms.

  8.  We shall publish a full response statement early in the New Year, and in due course provide progress reports on the work programmes designed to rectify the unfairness in the areas identified in the discussion paper.

  9.  As part of the review of with-profits products we shall also shortly publish a paper on discretion and fairness in with-profits contracts. This will bear directly on some of the expectations issues which particularly affect policyholders and will outline how we approach the Principles for Business and the Unfair Contract Terms Regulations in this context.

  10.  Later this year we will publish a further Discussion Paper on the subject of governance of with profits funds. A key issue which this paper will consider, which is relevant to treating customers fairly, is the current lack of accountability to policyholders on how the discretion afforded to companies' management over the operation of with-profits funds has been and will be exercised.

  11.  We will keep the Committee informed of progress on all of the above.


  12.  In his evidence before the Committee on 13 November, Howard Davies explained that the conduct of business rules which the FSA inherited were focused on the rules at the point of sale. He noted, however, that guaranteed annuity policyholders did not have the benefit of the protection of the 1986 Financial Services Act at the point of sale, as these policies were all sold before this legislation came into force (in 1988). He further indicated that he did not think that new members who joined a group scheme between 1988-93 were covered by the PIA[4] rules, but undertook to write to the Committee to clarify this point.

  13.  We can confirm that this is broadly the position. The precise details are set out below.

  14.  "Group schemes" are rights given under-occupational pension schemes-underwritten by policies which could have been issued to the Trustees of the occupational pension schemes in one of two ways:

    —  through a master policy with provision for additional members (or increments) to be introduced to the schemes subsequently; or

    —  through a series of individual policies issued to the trustees as and when new members joined the scheme.

  or, possibly, a combination of the two.

  15.  We are advised that the Equitable did not issue new master policies for the establishment of group schemes which conferred GAR rights on individual members after June 1988. Nor, where individual policies were issued as part of a group scheme (as described in the second bullet of paragraph 14), did any policy issued after 1988 carry GAR rights. But, of course, it would have been possible for group schemes with master policies issued before this date to continue to add new members who would have had the benefit of the GAR. From July 1988, the facility to add new members with GAR rights was progressively removed by the Equitable.

  16.  Group scheme members with GAR rights have throughout the period from 1988 to the present continued to pay additional premiums which have attracted GAR rights. (The payment of those premiums by scheme members has not, however, involved the sale of new policies.)

  17.  The main provisions of the Financial Services Act 1986 came into force on 29 April 1988. Prior to this date, no conduct of business regulation existed in this area.

  18.  After 29 April 1988, LAUTRO[5] was responsible for regulating the sale and marketing of policies[6]. Its rules were therefore directed at the marketing practices of insurance companies, not at the administration of policies and how companies dealt with claims. Accordingly, LAUTRO was not responsible for regulating the manner in which the Equitable met claims on GAR policies.

  19.  LAUTRO's rules governing the provision of information at the point of sale ("disclosure rules") came into force on 1 July 1988. These rules applied to the Equitable in respect of the sale of new policies after that date.

  20.  The LAUTRO disclosure rules applied:

    —  where the initial sale of a master policy to the occupational pension trustees occurred after 1 July 1988 (but, as noted in paragraph 15 above, these would not have been policies to which GAR rights attached); or

    —  where the occupational pension trustees took out individual policies after 1 July 1988 for the purpose of admitting additional members into the scheme.

  21.  In these circumstances, there was a requirement on the Equitable to provide "product particulars" to the trustees in accordance with LAUTRO Rule 5.12. (The relevant provisions are LAUTRO rule 5.12 (1)-(4), which are attached to this note).

  22.  The obligation to provide the trustees with scheme information only applied at the point of the initial sale of a master policy (or individual policies) to the trustees. The requirement (in 5.12(4) of the rules) to update that information applied only where changes occurred to information previously given in accordance with the rules (ie in respect of master policies or individual policies sold after 1988). It did not apply to policies sold before 1988.

  23.  The LAUTRO product disclosure rules for occupational pensions apply at two levels:

    —  disclosure to the trustees when they first buy a master policy or at any time when they buy an individual policy; and

    —  disclosure of information to the trustees for transmission to employees joining the occupational scheme.

  24.  The former is covered by 5.12(1)(a) and provides for product disclosure on an example basis to the trustees. Employee disclosure is covered by 5.12(3) and provides for product information to be given to the trustees for every joiner—those joining at the outset and those joining in subsequent years.


  25.  When the PIA was set up in 1994, the PIA Ombudsman was given a voluntary jurisdiction, as well as a mandatory jurisdiction, in order to enable him to deal with complaints about former FIMBRA[7] and LAUTRO firms and to effect a clean split between his responsibilities and those of the Insurance Ombudsman.

  26.  Where a PIA member submits to the voluntary jurisdiction of the PIA Ombudsman, the Ombudsman is also able to deal with complaints:

    —  in respect of business which occurred before the firm became a member of PIA or before the Financial Services Act 1986 came into force;

    —  in respect of the administration of life policies and pensions and other long-term insurance contracts (as distinct from the marketing and selling of those products); and

    —  in respect of certain unregulated business (term insurance; permanent health insurance; and long-term care contracts).

  27.  Most life companies chose to submit to the PIA Ombudsman's voluntary jurisdiction. The Equitable did so from 1 April 1995.

18 December 2001

4   Personal Investment Authority (a Self-Regulating Organisation under the Financial Services Act 1986). Back

5   Life Assurance and Unit Trust Regulatory Association (a Self-Regulating Organisation under the Financial Services Act 1986). Back

6   (Insurance companies were authorised under the Insurance Companies Act 1982 and automatically authorised under the Financial Services Act 1986.) Back

7   Financial Intermediaries, Managers and Brokers Regulatory Association (a Self-Regulating Organisation under the Financial Services Act 1986). Back

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