House of Commons - Treasury

Select Committee on Treasury Eighth Report

8 The role of the FSA

74. The evidence we have heard about the lack of consumer confidence in the financial services industry raises questions about the FSA's fulfilment of the statutory objectives laid down for it in the Financial Services and Markets Act 2000 (FSMA), under which it was established. The Treasury noted that there were four such objectives:

i. Maintain market confidence in the UK financial system;

ii. Promote public understanding of the financial system;

iii. Secure the right degree of protection for consumers; and

iv. Contribute to reducing financial crime.[217]

75. While there is no clear definition of the "right degree" of consumer protection, a regulatory framework that leaves consumers distrustful of the industry might well be considered to be failing to meet its core objectives. Some witnesses were indeed critical of the FSA. Only one, however, the President of the Institute of Actuaries, suggested that the FSA was doing a worse job than the regulatory arrangements it replaced. Mr Goford contended that the Personal Investment Authority, the FSA's predecessor organisation, had been successful in putting "supervisors on the ground to ensure that the benefits of a recommended product met identified, prioritised needs."[218] Mr Goford continued: "This activity does not seem to be followed up with as much vigour as in the early 1990s. That activity increased confidence in sales that were made and helped reduce inappropriate sales. Subsequent activities of the FSA have concentrated on structural issues that have had little immediate effect on confidence."[219] The Actuarial Profession's submission also suggested that part of the problem now was a "culture of mistrust of financial institutions … partly exaggerated by the activities of the FSA and the media."[220] Others within the financial services industry clearly share this view with, for example, one independent financial adviser observing to us that "FSA's mission seems to be to maximise bad press" for the industry.[221]

76. These views were not shared by any of the witnesses from outside the industry who gave us evidence. The Treasury's assessment is that "doubts had been raised about the effectiveness of the previous system of self-regulation, principally as a consequence of the high levels of mis-selling of personal pensions during the existence of the SROs [Self Regulatory Organisations]."[222] The view of most witnesses was that the FSA had inherited a regulatory approach that was outmoded and that it was now delivering a steady programme of improvements. The ABI told us that "the regulation of the industry needed to be fundamentally reviewed to ensure it remained fit for purpose" and that the industry therefore "welcomed the fundamental review of all aspects of regulation begun by the Financial Services Authority in November 2001 (the Tiner Review)."[223]

77. Consumer groups also agreed that the regulatory environment had improved in recent years. Ms Foster of the Financial Services Consumer Panel told us that the "regulator cannot, unfortunately, stop mis-selling, but they can take steps to do something about it. I do think the FSA has improved greatly in the area of enforcement action."[224] The Treasury noted that "the Government believes the regulatory framework established by FSMA has been a success, so the two-year review [established to review the workings of the Act] is not intended to bring about radical alterations." The Treasury went on to suggest, however, that "nonetheless, it is appropriate to consider the regulatory framework and how it can be improved".[225] While generally confident that the FSA had already delivered a significant improvement in the regulatory framework supporting consumer confidence in the financial services industry, many of those giving evidence in our inquiry similarly went on to suggest specific areas where the current regulatory approach could be improved. The Committee agrees with the view of the overwhelming majority of witnesses that the current low level of confidence in the financial services industry is in large part a reflection of the weak regulatory framework and inappropriate industry practices that existed before the arrival of the FSA.

Appropriate regulatory burden

78. The Association of Independent Financial Advisers (AIFA) wrote to us "that small firms in particular have been confronted by a never-ending succession of changes driven by regulation. Not only does this deflect businesses from their main function of giving advice to consumers; it also adds to the impression that this is a sector in which confidence is lacking."[226] We therefore asked their representatives which regulations they found most burdensome. Mr Sanders, Deputy Chairman of the AIFA, told us "If one looked at a checklist of things you would want to modify, as opposed to scrap, certainly you would start with money-laundering… That has become now one of the most time-consuming and onerous aspects of day-to-day relationships with clients and new clients, in a way that possibly was unforeseen when the regime came in."[227] Mr Sanders also told us "I think it is fair to say that the present handbook from the FSA is in need of being shortened, and indeed the work has started to do just that."[228] But he added that there were no regulations that were so burdensome or of such trivial effect that he would recommend scrapping them.[229] Similarly, when we took evidence from the chief executives of the major companies we asked if there were any rules that they felt that could be scrapped without weakening consumer protection and no suggestions were forthcoming.[230]

79. The burdens imposed by money laundering regulations were also mentioned by the Building and Civil Engineering Benefits Schemes. They wrote "individuals typically saving between £5 and £10 a week in a Stakeholder Pension are not using them as a tax shelter or to launder ill-gotten gains. 'Know your customer' identity checks act as a disincentive to many potential members who often struggle to provide the relevant documentation and are an additional administrative cost to providers."[231] In addition, their submission suggested that the amount of documentation and forms that need to be filled in for stakeholder pensions is "hardly practical when our members frequently move from employer to employer, including periods of unemployment and self-employment. Our members are put off by the size of the pack and are not the kind to find filling in forms an enjoyable or productive activity."[232] The Treasury also told us that firms have "raised compliance issues regarding the complexity of the FSA's Handbook of Rules and Guidance and the difficulty of obtaining individual guidance from the FSA"[233] as part of its N+2 Review of the FSMA.

80. The FSA has long recognised that many people find the money-laundering regulations burdensome. Last autumn Mr Tiner told us "We think that there should be a kind of proportionate and risk-based approach to identification checking, so that it does not completely close down access to those whom we are trying to encourage to come into the financial system. There is an important point of balance here. I am not sure that point of balance has been satisfactorily reached yet."[234] On the particular issue of the bureaucratic burden attached to stakeholder pensions, however, the FSA told us that this was a matter for the Occupational Pensions Regulator.[235]

81. The evidence we have heard in the course of this inquiry tends to confirm that FSMA is currently working well. Apart from in the limited area of money-laundering regulations, we received no specific complaints of excessively burdensome regulation from the major companies in the industry, while consumer groups generally acknowledged a significant improvement in the protection afforded to the consumer. We note, however, that both the industry and the regulator agree that the current money laundering regulations require simplification.

Speed of enforcement

82. The Treasury told us that "the ability of consumers to obtain speedy redress when things go wrong" was an essential requirement "for building trust and confidence in the UK financial services market."[236] As well as speedy redress, the public is entitled to expect rapid enforcement action against wrongdoers to ensure that, in the worst cases, unsuitable individuals are removed from the long-term savings industry as quickly as possible. It has become clear, however, that in contested cases, bringing enforcement actions to conclusion can take a very long time indeed. The FSA is currently investigating events in the split capital investment trust sector. The Chairman of the FSA told us he regarded this investigation as "very serious" because the regulator believes that what happened "represents collusion on a very substantial scale between a number of practitioners in the market, collusion which brings the market into disrepute and collusion which has had harmful effects for very large numbers of consumers of split products."[237] The FSA agreed with our suggestion that rapid settlement of this case was highly desirable. Mr McCarthy told us "I think there are overwhelming reasons for drawing a line under this affair… The three reasons are, firstly, there has clearly been collateral damage to the investment trust sector as a result of this. Just look at the levels of sales of investment trusts. Secondly, for what was quite a specialised corner of the market, the damage to the reputation of financial services generally has been quite great and quite disproportionate to the size of that particular corner of the business. As you are conducting your inquiry in trying to restore trust and confidence in the sector, I think drawing a line under this is a key part of that. The third and perhaps the most important issue of all is that we believe there are thousands of investors who have been harmed by these collusive activities. It is only right to see that investors are put right as soon as possible."[238] The FSA is thus pursuing "a twin track approach—enforcement action in case there is no prospect of a negotiated settlement and negotiations to see if we can obtain faster compensation for those who have suffered,"[239] although Mr Tiner told us so far only three firms of the 21 under investigation had agreed to mediation.[240] Investigations began two years ago and the Committee notes that the press has reported that contested cases could take another three to five years to resolve.[241]

83. While an enforcement action is proceeding, the FSA cannot inform the public of the identity of those under investigation. The position was laid out in an FSA press release. "The FSA has not made public the names of the 21 firms with which it has held discussions. In accordance with the requirements of the Financial Services and Markets Act 2000, it will continue to keep the details of its cases confidential until either the relevant mediation or enforcement processes are concluded."[242] Such confidentiality arrangements raise the obvious danger that the public could entrust their savings to an unscrupulous individual unaware that the FSA was engaged in a protracted enforcement action against that individual.

84. Those accused of wrongdoing by the FSA clearly have a right to defend themselves at fair hearings. However, the length of time contested cases are taking to bring to a conclusion denies the public the speedy redress they have the right to expect in cases of wrongdoing. The fact that those under investigation have a right to anonymity reinforces the need to speed up enforcement actions. How this should be achieved should be addressed in the current review by the Government of the Financial Services and Markets Act 2000.

The Financial Ombudsman Service

85. The Treasury explained to us that "the Financial Ombudsman Service (FOS) was set up in recognition that consumers want a speedy, fair and inexpensive method of resolving disputes. There can be little doubt that the FOS has and continues to meet this aim—over 61,000 complaints of all types were considered by the FOS last year."[243] Consumer groups we asked were generally very positive about the FOS.[244] The Treasury, however, wrote to us "some in the industry have raised concerns about the decision-making process of the FOS. On 4 November, the Government announced, as part of the two-year review of the Financial Services and Markets Act 2000, that the FOS and the FSA will jointly review when regulatory action by the FSA should replace decisions on individual cases by the FOS and on the possibility of appeals of FOS decisions."[245] Consumer groups we asked were all opposed to any general right of appeal against FOS decisions. The Financial Services Consumer Panel wrote to us that an appeal mechanism would "diminish the current advantage of the FOS as a speedy and simple adjudicator and would lead to firms further dragging their feet in paying compensation to consumers."[246] Mr McAteer of the Consumers' Association told us "this industry has powerful lawyers and deep pockets, it has powerful trade associations. If they get a right of appeal against the Ombudsman's decisions they will just tie the Ombudsman up in knots for years and it will cause a reduction in the Ombudsman's efficiency and that will have a knock-on effect on consumer confidence."[247] Mr Merricks, Chief Ombudsman at the Financial Ombudsman Service, told us that the appeal route "has substantial disadvantages"[248] and that so far the consensus view appeared to be that "the answer lies in clarifying the way that cases which have wider implications which reach us are dealt with rather than [going] through appeals."[249] We note that the leading insurance companies from whom we took evidence indicated that they were not seeking a general right of appeal to be introduced. Mr Bloomer, Chief Executive of Prudential stated: "I do not think the industry is lobbying for a major change in the way the Ombudsman Service works"[250] and the industry was not certainly lobbying for an appeal process.[251] Major companies would like to see "a relationship between the FOS and the FSA that will deal with [cases with wider implications] properly"[252] but this applied to "a very narrow group" of cases.[253]

86. The Financial Secretary told us that while a review was in hand, there was "absolutely no presumption that we will necessarily change the way [the FOS] operates at the moment."[254] The Financial Ombudsman Service currently commands wide support among the industry and consumers as an inexpensive and speedy way of resolving disputes and achieving redress where redress is due. Introducing a general right of appeal into the Ombudsman process risks undermining confidence in a system which is currently working well. The Committee notes that the Chief Ombudsman sees substantial disadvantages in introducing any general right of appeal and that the major insurers are not pressing for such a right. While there may be scope to improve co-ordination between the FSA and FOS in certain cases with wide implications, the Committee believes that calls for a general appeals process should be resisted.

Establishing an identity with the consumer

87. The Complaints Commissioner, Ms Radcliffe, who is responsible for investigating complaints against the FSA, told us last summer that there was a need to address "the extent to which the FSA focuses adequately on consumer as well as industry issues."[255] She went on to argue that, while there had been some improvements, "the way in which they have organised themselves to relate to consumers is something which they still need to do a lot of work on."[256] The representative of the Financial Services Consumer Panel similarly felt that "the FSA could do better to be aware of the consumer interest right across the organisation. There are some parts which are very much alive to the consumer interest and build it into their thinking and policy making. However, there are still some gaps,"[257] with those areas of the FSA dealing with wholesale markets doing little to consider if their actions may also have an impact on retail consumers.

88. Both consumer groups and industry representatives felt that it would also be useful for the FSA to improve its communication with, and raise its profile among, consumers. Help the Aged wrote to us suggesting that currently regulatory bodies in financial services "communicate poorly with the general public about what they are doing and why they are doing it".[258] The fact that Mr McCarthy, Chairman of the FSA, told the Committee last autumn that he was "not sure how many financial services consumers know about the FSA"[259] seems to confirm that communicating with the public has been a relatively low priority at the FSA. Ms Foster of the Financial Services Consumer Panel suggested "the FSA actually has to question more whether its profile amongst consumers should be much higher."[260] Similar views were expressed by leading figures within the industry. We asked Mr Bloomer, Chief Executive of Prudential, if greater public awareness of the FSA and its role in consumer protection would bolster consumer confidence. He replied that "it may well do… there is a role because I think the FSA does take a strong line and we do have in the FSA one of the best regulatory systems, as I look at different countries, around the world. We could make more of it and if that helped bolster confidence it would be a good thing."[261] The Financial Secretary also told us that she felt that "there is an awful lot that the Financial Services Authority could do"[262] in this area.

89. The Committee notes that towards the end of our Inquiry the FSA announced that it was setting up "a Hotline for the public and firms to report misleading advertisements for financial products."[263] The FSA's press release stated that "the Hotline is part of the FSA's commitment to put significantly more resources into the regulation of financial advertising, including setting up a new department which will lead the efforts to stamp out misleading advertising… To help us put an end to misleading ads we need the eyes and ears of the public." [264]

90. Greater public knowledge of the FSA's role and activities in protecting their interests can only do good in terms of restoring consumers' confidence in the financial services industry after a chequered history of weak regulation and successive mis-selling scandals. We recommend that the FSA should now engage in a publicity campaign. The aim should be to ensure that potential savers are fully aware that underpinning the financial services industry there is an effective regulatory body ensuring that the industry treats its customers fairly. We welcome the recent launch by the FSA of a hotline for firms and the public to report misleading advertisements, but would observe that this is only likely to be effective if the public are regularly reminded by advertising of the hotline number and the FSA's role in regulating the financial sector.

217 HC 275, Ev 129 para 18 Back

218 HC 71-II, Ev 372 para 12.1 Back

219 ibid. Back

220 HC 71-II, Ev 369 para 4.4. Back

221 See List of Memoranda placed in the Library of the House and in the parliamentary Record Office
p. 78 (Memorandum by Paul B Bennett & Co) Back

222 HC 275, Ev 128 para 14 Back

223 HC 275, Ev 35 para 5.16 Back

224 Q 1448 Back

225 HC 275, Ev 30 para 29 Back

226 HC 275, Ev 52 Back

227 Q 1307 Back

228 Q 1310 Back