Changes needed in the regulatory
environment
27. The track record of the industry raises questions
about a business model used in much of the financial services
industry that seems to have the effect, however unintended, of
encouraging mis-selling. The FSA has itself expressed its frustration
at the level and persistence of mis-selling. As he left the FSA,
Sir Howard Davis told the FSA annual meeting that "The biggest
disappointment of my time at the FSA has been the failure of firms,
and particularly their senior managements, to learn the lessons
of past mis-selling."[49]
Some expert witnesses have suggested therefore that it might be
useful to extend the current regulatory approach, which focuses
on punishing firms for breaking the rules, so as to also punish
the managements of firms breaking the rules. Mr Watts of the Financial
Services Consumer Panel, argued that while the FSA has imposed
fines on firms for endowment mis-selling "what about the
individuals who were responsible for that? What has happened to
them? Should not individuals be targeted as well as firms."[50]
Mr Myners, author of a major report on institutional investment
for HM Treasury, [51]
expressed similar sentiments and drew an analogy with health and
safety legislation, telling us there "must be merit"[52]
in moving to a system that holds corporate officers responsible
for ensuring that firms conduct their affairs in accordance with
the regulations.
28. While it may be possible to reinforce the regulatory
environment surrounding the financial services industry, the Committee
has heard evidence that the repeated regulatory interventions
needed over policies such as endowment mortgages are adding considerably
to the industry's costs and that ultimately this has consequences
for the consumer. Mr Sandler, for example, told us "the more
the system is tightened up—which is in many respects a desirable
thing—the more cost is added to the process and the more
saving is made uneconomic for the smaller saver."[53]
The need to place increasingly tight regulatory constraints
on the financial services industry to ensure satisfactory behaviour
on the part of companies is imposing significant costs that risk
pricing the less affluent out of the long term savings market.
Tackling the underlying issues
that encourage mis-selling
29. Many witnesses suggested to the Committee that
the fundamental problem exposed by the history of endowment mortgage
mis-selling is a sales-led culture within the industry. Mr Watts,
of the Financial Services Consumer Panel, told us that the "industry
is sales-based, and that is what it makes its money from, and
that is a huge, fundamental problem. The FSA, I think, needs to
address the problem of how to achieve cultural change within the
industry to stop mis-selling."[54]
Several witnesses went on to suggest that the only effective way
to deliver the needed cultural change is to wean the industry
off its current commission-driven approach to business. Mr Sandler,
for example, told us that "a commission-based system where
the front-line is effectively rewarded on the basis of how much
product it delivers to the market—and that is true irrespective
of whether we are talking about a tied sales force or an independent
financial adviser—such a system is always going to be prone
to the more enthusiastic or perhaps the less ethical choosing
to circumvent the process and deliver a product which may, with
the fullness of time, not be suitable for the recipient."[55]
Mr Myners noted that while the current sales process is entirely
rational "for the people who are paying for it, who are the
product providers… it may not be in the best interests of
the product purchaser, who is not paying for it."[56]
30. Professor Davis of Brunel University told us
that "a question for the industry and financial services
generally is, why does the commission have to come up-front and
therefore make it so attractive to sell certain products and not
others? Could not the commission somehow go over the life of the
product and be related to its performance? Then there would be
in a sense sharing of the pain and much more care in terms of
the sales."[57]
Mr Sandler endorsed Professor Davis's views, telling us "I
think that anything that reduces the up-front cost is to be welcomed
and anything that has a performance-related dimension is further
to be welcomed because it aligns the adviser more closely to the
consumer, which is the state of affairs that we are seeking to
create" although he went on to warn that "it is classically
the area where the FSA is not going to take any steps, and the
industry left to its own devices has no incentive to take steps."[58]
Action is needed to better align consumer and product provider
interests in the area of financial services. The current commission
structure within the industry rewards potentially inappropriate
and short-term sales practices. Sometimes this is at the expense
of the saver's long term interests. It is unacceptable that the
industry's current commission structures rewards the industry
irrespective of the investment performance of the products it
sells.
30 Clarifying 'mis-selling': a note by the FSA,
17 July 2003 Back
31
Ev 114 paragraph 19 (HC 275) Back
32
PIA Regulatory Update Number 72, December 1999 Back
33
Progress Report on Mortgage Endowments FSA, October 2000,
page 4 Back
34
ibid page 5 Back
35
ibid Back
36
Ev 97 paragraph 15 (HC 275) Back
37
ibid paragraph 17 (HC 275) Back
38
Ev 95 paragraph 5 (HC 275) Back
39
Ev 114 paragraph 17 (HC 275) Back
40
Ev 78 paragraph 2 (HC 275) Back
41
Speech to SOFA Update Conference 27 November 2003, paragraph 7 Back
42
Q 208 Back
43
Mortgage Endowment Communication Research-Summary of BMRB omnibus
findings for the Financial Services Authority, June 2001 Back
44
Ev 110 paragraph 22 (HC 275) Back
45
Ev 115 paragraph 23 (HC 275) Back
46
Q 131 Back
47
Q 128 Back
48
Ev 192 (HC 275) Back
49
FSA annual meeting, 17 July 2003 Back
50
Q 181 Back
51
Institutional Investment in the UK, HM Treasury, March
2001 Back
52
Q 281 Back
53
Q 281 Back
54
Q 181 Back
55
Q 278 Back
56
Q 276 Back
57
Q 104 Back
58
Q 326 Back
