House of COMMONS









Monday 28 June 2004



Evidence heard in Public Questions 2078 - 2198





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Oral Evidence

Taken before the Treasury Committee

on Monday 28 June 2004

Members present

Rt Hon John McFall, in the Chair

Mr Nigel Beard

Mr Jim Cousins

Angela Eagle

Mr Michael Fallon

Rt Hon David Heathcoat-Amory

Norman Lamb

Mr George Mudie

Mr James Plaskitt


Witnesses: Ruth Kelly, a Member of the House, Financial Secretary to the Treasury, Mr James Sassoon, Managing Director, Finance, Regulation & Industry, Mr Paul Kirkman, Head, Savings & Investment Products Team, and Ms Caroline Barr, Head of Retail & Financial Products and Distribution, HM Treasury, examined.

Q2078 Chairman: Good afternoon to the Minister and her officials and welcome to the Committee. This is the last evidence session in our "Restoring Confidence in Long-Term Savings" inquiry. We note the Treasury submission to our inquiry describes confidence in the financial services industry as "key to the success of the Government's voluntarist approach to retirement saving". We have had quite a number of witnesses before our Committee stating, as for example Ron Sandler, that a far higher degree of trust is attached to the brands of large supermarkets than attaches to the largest life insurers. When we asked a number of organisations to rate the financial services industry in terms of handling consumer issues, the National Consumer Council (NCC) said "significantly below average". The Consumers' Association said "by far and away the single biggest source of consumer detriment we have ever come across is the life insurance sector". The CAB said they would work with the financial services industry if they got something out of it and said, "How can we work with you to ensure that we get a commercial advantage over our competitors?" Does the Government acknowledge that people are shying away from savings, partly because, rightly or wrongly, they do not wholly trust the long-term savings industry to give them a good deal?

Ruth Kelly: I think there are a number of reasons why there has been a perception out there of difficulties in the long-term savings industry?

Q2079 Chairman: What is your perception, Minister? A number of people have come to us and given us facts rather than just perception.

Ruth Kelly: If you will allow me, Mr Chairman, I will go through a few of those. If you will forgive me, I will give quite a long answer to your introductory question as to how I see this as having arisen and what measures the Government can take on it, what we can do about it.

Q2080 Chairman: Short answers are preferable.

Ruth Kelly: I will try my best. I think the first reason that there has been an issue is because of the closure of some very high profile, largely defined benefit, company pension schemes and the loss among some groups of people of almost their entire savings. If I can say this, we are clearly taking measures in the Pensions Bill to protect people for the fist time as well as provide a package for people who have lost out. Then there is a second group of people who are currently probably in their forties and fifties who have seen a shift away from defined benefit to defined contribution schemes and defined contribution schemes anecdotally in which perhaps companies have been reducing contributions and where take-up is lower. That has provoked various factors, perhaps most particularly the bear market in stocks and shares, which has had a very profound effect on the savings industry in general, and alongside that an enormous increase really over the past 15 years in housing wealth, which has made housing relatively seem more attractive than investing in the stock market. That is obviously not necessarily something that will continue into the future, but it has been a feature of the recent past. For those groups of people, the Government is taking again many actions on the informed choice strategy and so forth, some of which we may perhaps discuss. Then there is a general worry perhaps about a third group of people, the young in particular, and the perception that they are under-saving, partly perhaps because of a lack of trust in the financial services industry, but also accompanied by this general preference to some degree for housing over equities. I think it is important to bear in mind for those people that their net wealth position remains strong, although that has not been invested in the same way in recent years as it has been in the past. There have been figures quoted, such as from the ABI, about the serious degree of under-saving, about much of which I think we have some scepticism. That is partly because, for instance: the ABI's widely-quoted figure on the savings gap assumes a natural target income of two-thirds of final salary for people in retirement; partly because it refers to people under 25 who would not necessarily be expecting to save in long-term savings; partly because it refers to people who are earning less than 9,500, again a group of people you would not necessarily assume should be saving. We have carried out our own estimates of the scale of this issue. We think that there are probably around three million people seriously under-saving, and around five to 10 million people who may not reach their level of target income in retirement. Again, we have taken a series of measures to try and stimulate the savings behaviour of that category of people. I think there is a series of issues which have come together over recent years, which has given rise to this general unease, but which I think will be addressed - and I do not want to detain the Committee too long at the beginning - by some of the measures that the Government is putting forward.

Q2081 Chairman: We have seen the issue of pension mis-selling, endowment mortgages, split capital investment trusts and precipice bonds which have damaged confidence of the saver. The FSA in their submission has told us that the financial services industry needs to do more to stop exploiting consumer lack of knowledge of financial matters. They call it "severe asymmetries of information". The financial services industry has been accused by the FSA of exploiting this for short-term gain at the expense of long-term brand value. You will be aware of the speech of Sir Howard Davies in July 2003, before he left the FSA, when he said that the way the industry had failed to learn the lessons of past miss-selling was the biggest disappointment of his time at the FSA. How do we ensure in the future that the industry gives sufficient weight to the interests of its customers?

Ruth Kelly: I believe you heard evidence from Ron Sandler on some of these issues as well, that there is clearly an asymmetry of information between the consumer and the provider. That is partly a result of how the market has functioned in the past, partly because of our consumer protection mechanisms and party because of our tax system. The overall market is one that is characterised by complexity and opacity, and it is very difficult for consumers in that sort of market to exercise the sort of consumer power you would expect to operate in a well-functioning market. It is also quite difficult for providers to have a direct link with their customers. For instance, it is a market which is highly intermediated with independent financial advice, so there is not necessarily a direct relationship between the provider and the consumer. For those reasons, I think we have seen a situation in which the interests of the consumer and the provider have diverged. On a positive note, I think I would say that the industry has reacted really quite constructively and positively to the sorts of suggestions that your Committee has been putting forward. I believe the industry has, for example, recently commissioned a very serious piece of research on the effect of commission bias and whether there is a bias in the industry. It is also looking very strongly at how it can improve its consumer relations. It has responded very positively to the recent announcement which the Government has made on stakeholder products. When we made an announcement, I think it was last week, which raised the price cap on Sandler stakeholder products, many players in the industry, including the ABI came forward and welcomed the proposals and said that they would engage positively with them as well. I think we have passed a turning point and the industry is now engaging very well with what the Government is putting forward, and indeed what their own committee has been proposing.

Q2082 Chairman: We have gained the impression, in the course of this inquiry, that much of the financial services industry abdicates many of its responsibilities to the Financial Services Authority. For example, the main trade association for independent financial advisers does not have a code of ethics and the major companies do not monitor the IFAs, as you indicated earlier, because they assume that the FSA will do that for them. They run the risk that their reputation, their brand name, can be traduced because of the actions of someone elsewhere. What advice do you have for the industry in that and other areas about taking more responsibility for their own actions?

Ruth Kelly: I think the industry is taking responsibility for its actions much more now than it has in the past. Even before we commissioned the Sandler Report in fact the industry had introduced the Raising Standards Initiative, which has provided guidance to the industry on disclosure, cooling off periods for example, and many other issues. It is promoting that quite actively as a form of best practice. There are still issues of the past that clearly the industry has to deal with, but I think, going forward, it has shown its willingness to engage constructively. We have proposals from the Financial Services Authority, for example on realistic accounting, which will make sure that the industry is on a sound capital base looking to the future, and proposals from the FSA again about transparency and its principles of practical financial management, PPFM, and disclosure on with-profits funds and so forth, on which again the industry is engaging quite constructively. Personally, I am optimistic about the future.

Q2083 Chairman: The Chairman of the FSA, Callum McCarthy, when he appeared before us in October last year, stated that he was not sure how many financial services' consumers know about the FSA. Given that situation and the fact that we have a world-class regulatory system for the long-term savings industry and the reality is that very few consumers know about the FSA, would it help restore confidence and persuade people that things were changing if the FSA raised its consumer profile, for example with an advertising campaign to tell savers that its role was to protect them and ensure fair play?

Ruth Kelly: I think there is an awful lot that the Financial Services Authority could do. Indeed, when you look back at the analysis that Ron Sandler carried out for the Treasury, one of the key issues that he raised was the potential role of the FSA in consumer information and education. I think that is something to which the FSA has responded extremely positively. Ron Sandler suggested that there should be a step change in the provision of that sort of information and education for consumers from the FSA. The FSA has now set up the Financial Capability Steering Group on which I sit. It is engaged in a very serous piece of work, looking not just at how it raises its profile but, more importantly, looking at how consumer awareness and all sorts of issues can be raised and, since the formal decision was made, at the point of sale of particular products. This work is at a stage at which very intensive studies are being carried out in particular areas. I look forward very much to the proof of that work in due course. I think it is doing the sort of things that you are suggesting.

Q2084 Chairman: You have described the abilities of consumers to get speedy redress when things go wrong as essential to building confidence. Take the case of the split capital investment trust: the FSA are in a battle at the moment to get compensation for savers. We could be talking about four or five years down the line before anything happens. This Committee visited the United States the week before last and met Eliot Spitzer, amongst others, and also the Securities and Exchange Commission. The latter told us that from the time of opening their complaint to the final element, we could be talking about two years. We seem to be behind the curve in this country on that. I note this week's Economist when it talks about that very issue is saying that the FSA is not allowed to name names, unlike Spitzer. They ask why not. The law requires the FSA to assume that those it investigates are innocent until proven otherwise, an admirable sentiment, says the Economist, but, given the record of the financial services industry over the years, many must wonder whether the best way of restoring trust in the industry might be to assume the opposite. How much sympathy do you have for this leader in the Economist?

Ruth Kelly: I would say that the FSA is being quite proactive in trying to obtain speedier redress for consumers. I know again that you have heard evidence from John Tiner recently and Callum McCarthy on this subject. I am afraid I have not had a chance to see the transcript because I do not think it has yet been produced, but, as I understand it, they are pursuing a twin‑track process of working with those parts of the industry that are prepared to co-operate to produce a speedier and fair settlement for consumers alongside the more regulatory enforcement process that is carried out for those not co-operating. I think actually they have been very much on the side of consumers during this whole process. If you asked me for one message I would give the industry, it is: co-operate with the FSA when you have the chance and really do think about giving consumers a fair deal. If the industry does want to move forward, it has got to be seen to be constructive and to engage properly with the FSA on these sorts of matters.

Q2085 Chairman: Minister, based on the evidence available on endowment mortgages, it looks like there were around 800,000 policies sold by IFIs prior to 1988 that are likely to be in shortfall but are outside the scope of the Financial Ombudsman's service compensation arrangements and 700,000 cases that are time-barred by the three-year rule. Whilst there is some overlap between those numbers, it seems likely that somewhere between 1 million and 1.5 million policyholders now find themselves with no effective right to compensation for mis-selling because of rules they probably never knew existed. Surely that is not a satisfactory situation? Can we be assured that when things go wrong in the future, large numbers of consumers will not similarly find themselves unable to claim redress because of obscure rules?

Ruth Kelly: First of all, it is not exactly clear what the potential size is of people affected in this case; 700,000 is one estimate but I know the FSA is conducting much more detailed work to try and establish the size of the group of people likely to be affected. Clearly, they have been working very closely with the industry. Sometimes, some key players in the industry have come forward and have said that they will never time-bar people; they will continue to look at complaints on a voluntary basis and try to resolve those they think have some basis. Again, I think the FSA is taking quite a sensible approach here in trying to make it as easy as possible for people to make a complaint and for that to be considered and trying to encourage voluntary action on the part of the industry. The question for us, I suppose, is whether we should say somehow that the legislation applied before the period in which it was introduced, before 1988 I think it was, and whether complaints could be upheld validly, even if there was not voluntary compliance. I suppose the general principle to be applied here is that I do not believe in retrospective legislation. I think it is quite an important point of principle. We want to do everything we can to make sure that those people have their complaints satisfied, but if we can pursue that on a voluntary basis, that would be infinitely preferable.

Q2086 Mr Fallon: Just going back to the issue of split capitals, this has already dragged on for two years now. We have had this forecast by some directors of the firms involved that it could take five years to resolve. How, in those circumstances, can you describe the FSA as "quite proactive"?

Ruth Kelly: I am not saying that the process is a speedy one when people refuse to play ball. What I am saying is that the FSA is going out there and asking people to come up with very significant sums of money to pay redress. Those negotiations are proving quite difficult, I think the FSA has said to you, but it is taking the action that it thinks appropriate.

Q2087 Mr Fallon: When do you think it will be resolved?

Ruth Kelly: Clearly that is an issue for the FSA. It is not for the Treasury now, as it were, to get involved in detailed discussions between the FSA and the industry. That is why we set up an independent regulator in the first place. We have confidence in the ability of the FSA to carry out that sort of negotiation.

Q2088 Mr Fallon: So you do not mind if it does take five years?

Ruth Kelly: Of course I want to see these things resolved as speedily as possible.

Q2089 Mr Fallon: The Penrose Report on Equitable Life and the Parliamentary Ombudsman's report both highlighted the need to ensure that consumers' expectations of the circumstances in which compensation was due should be realistic. When you appeared before this Committee on 16 March, you accepted that. I think you said that there is "a duty to educate and inform the consumer" on that precise point about realistic compensation. Have you yet published your evidence to the Ombudsman on Equitable?

Ruth Kelly: We have sent our response to the Ombudsman, who requested evidence from us, in the full knowledge or expectation that she may indeed choose to publish it.

Q2090 Mr Fallon: Why are you not publishing it? Would it not help to educate people about compensation?

Ruth Kelly: Clearly, we are responding in the way that we normally respond to requests for information, which is to provide it.

Q2091 Mr Fallon: But all members were invited to submit evidence. A number of us have done so. We are quite happy to publish ours. Why will you not publish yours?

Ruth Kelly: We fully expect the Ombudsman to put that in the public domain.

Q2092 Mr Fallon: That could be a year or so away?

Ruth Kelly: I very much doubt it as she has suggested that she is likely to make her conclusion in fairly short order.

Q2093 Mr Fallon: So we have to wait until then. The current FSA publication entitled Guide to Making a Complaint lists some 16 different organisations to which the customer might need to complain: the Finance and Leasing Association, Mortgage Code Arbitration Scheme, Mortgage Code Compliance Board, and all the rest of it. I will not read out all 16, but the FSA's own complaints commissioner has labelled these complaint arrangements as a patchwork. What have you done to encourage the FSA to simplify this mess?

Ruth Kelly: Actually, if you look back before 1997, it was vastly more complicated. What we have done is bring together seven different regulators into one streamlined body with a single ombudsman service and a single financial consultation scheme, and made it far easier for people to see their complaints resolved. Of those that you have mentioned, for instance the Mortgage Code Compliance Board, when we introduce the regulation of mortgage advice and mortgages from October this year, then again people will be able to use the FSA as a single port of call, and so it has become much simpler under this Government.

Q2094 Mr Fallon: Since 1997, seven long years have passed and all this streamlining: why do we still have 16 different organisations to which to complain?

Ruth Kelly: The Financial Services Authority has a remit to cover financial services and if something is not a financial service, then it is probably right that it is dealt with by a different body. We have introduced a vast streamlining of arrangements. I have mentioned the Mortgage Code Compliance Board, which is being integrated, or rather the function is being taken by the FSA as of October this year. Also, the issues of the General Insurance Standards Council in the future will be dealt with by the FSA. We are constantly reviewing arrangements, seeing what is appropriate for the FSA to regulate, seeing what is not appropriate for the FSA to regulate. Sometimes it will still be the case that self-regulation is preferable. For example, we held a review into the Banking Code under DeAnne Julius at the Treasury. She found that it was working very well in protecting consumer interests and promoting consumer interests. She suggested that certain things be done about the Banking Code, which we have continued to do. What works well clearly we will leave to work well, but where there is a case for something to be streamlined, as there was in the case of mortgages and general insurance, we have taken action, and are continuing to take action.

Q2095 Mr Fallon: The FSA's own Complaints Commissioner is labelling all this as patchwork. He says there are numerous complaints misdirected and considerable consumer confusion. Are you not encouraging the FSA to simplify all this?

Ruth Kelly: We are, and I have just outlined the action that we are taking.

Q2096 Chairman: Minister, as part of the Financial Services and Markets Act review process, some in the industry are lobbying for a right of appeal over Ombudsman decisions. Consumer groups have told us that this will defeat the whole point of what is supposed to be a quick and easy way for consumers to gain redress. One concern is that a right of appeal inevitably will leave big companies and their legal teams in a position where they could tie up the compensation process for years. We do not want that. When Jonathan Bloomer was here before our Committee, I asked him about this very point. He said that they do not want an appeal process but just to ensure that there is a look at cases with wider application. He went on to say that all they are looking for is a relationship between the FOS and the FSA that will deal with these sorts of cases properly; it is not an appeal mechanism. Would you sympathise with that, that we do not want a general right of appeal?

Ruth Kelly: I think that is right. I think you have highlighted the reasons why initially we took the decision that there should not be a right of appeal. Consumer groups are very clear on this point. They see the Financial Ombudsman's Service as providing speedy, effective resolution of complaints which is binding on the provider but not the consumer. Having said that, and that is something that they very clearly want to preserve, there has been a feeling amongst some providers that there should be a right of appeal. The feeling was sufficiently strong enough for us under the two-year review of the Financial Services and Markets Act (FSMA) to think it worth consulting to tease out the issues. We have pledged to do this. We are currently asking stakeholders what they think, but with absolutely no presumption that we will necessarily change the way it operates at the moment. We think it is right to have a full hearing and outing of the arguments so that we can assist them, agree with them if the case is strong enough, but reject them if the case is not strong enough. You also mentioned the point of issues that have wider application than clearly just the particular consumer in question. A number of issues have been raised about that as well. The FSA and the Ombudsman have been working closely together to see how they can resolve issues that have wider application, potentially systemic implications, and how those might be resolved. Again, they have consulted on a neutral basis, a joint basis in fact, to see if that can be taken forward.

Mr Kirkman: They have been conducting a series of informal consultations with industry and consumer people on both of those issues and they are due shortly to issue a formal consultation paper, which will cover both the issue of appeals and also the issue of wider implications.

Q2097 Mr Plaskitt: Generally speaking when we have had representatives of the industry in front of us, they have accepted that there is a problem with long-term savings confidence. When we have asked them to identify causes of that, they have tended to put in their list items such as: changes in consumer behaviour and a long bear market. On the other hand, when we have had representatives of consumer groups in front of us, they have also said that yes, there is a problem with long-term savings confidence. When we have asked them about the causes, they have tended to cite industry behaviour, mis-selling and scandals. I was quite interested to note that when you gave your list of causes in your answer to the Chairman's opening question, your list was almost the same as the industry's list but it did not have much in common with the consumers' list. Was there a reason for that?

Ruth Kelly: In fact, I could well have added that I think, for instance, the issues with Equitable Life, with pensions mis-selling, split caps and precipice bonds have all added to a general unease among consumers about the nature of the industry. However, I would say, and I have said clearly, that I think the industry could engage very constructively on these points looking forward, working closely with the Government and indeed with the FSA, including, for example, financial education where some of these issues, looking even further to the future, need to be resolved.

Q2098 Mr Plaskitt: I think you have also accepted already this afternoon and acknowledged that there is information inequity between the supplier and the consumer of these products. What do you think needs to be done to redress that imbalance?

Ruth Kelly: One of the most important things we can do is, as Ron Sandler suggested, introduce a new suite of simplified products that: consumers can trust; have consumer protection built into the product; are transparent; have for example no exit penalty; get rid of up-front charges; and can be provided with fairly simple advice. I think a lot of consumers are put off the whole process of saving at the moment partly because of a deep‑seated distrust of the financial services industry and perhaps, particularly in some lower income groups - and I am talking particularly about the financially excluded and so forth - partly because of the way the industry has developed but also the way that government regulation has developed in the past. It has just not been profitable for the financial services industry to target consumers in lower income groups. It has been prohibitively expensive for them to do so, and they have effectively been disenfranchised from the market. As we introduce new products and strip away some of the regulation which has surrounded the selling process and been embedded in the product as well, as we have just for example introduced a new tax relief of 150 per person for financial advice to be provided in the workplace, as we introduce our informed choice strategy, as we have introduced a pension simplification which makes the whole tax scene in relation to pensions a huge amount simpler and alongside that flexible retirement so that people can make different choices about the combination of work and saving, I think it will become a lot more attractive to people to think about their savings choices and to act on them in the future.

Q2099 Mr Plaskitt: Certainly new and simpler products will address an issue in one segment of the market. Do you think something should be done about the complexity of the very large suite of existing products to help the consumer make progress in rebalancing this information inequity? Sandler products are not going to solve all the problems in this industry.

Ruth Kelly: Sandler products are certainly not going to solve all of the problems in the industry, although they are an important component of any strategy to increase the overall level of savings. If you look at the impact, for example of stakeholder pensions on the market when they had 1 per cent charges, the effect was quite dramatic in driving down charges right across the industry. Even in products which are not stakeholder products, the effect can clearly be seen. The other aspect of that is perhaps some of the proposals coming out of the FSA alongside some of the proposals coming out of the industry on raising standards to increase transparency and to try and explain much more to consumers about how particular products operate and how they serve their basic financial needs. In the past, it has strongly been my view that the structure of the industry was such that it was quite difficult to ascertain what people's basic financial needs were. In the future, with the new Sandler products, with potentially a new generic advice product, with incorporation from the industry and others in this sector, it will be possible to sit down with people, either one-to-one or for them to use a computer tool or something, and have a real discussion about whether people should be saving or not saving, whether it should be in a pension or a medium-term product, or whether they should be paying off their debts. It is that sort of basic financial discussion which has largely been absent in the past and which will become increasingly possible in the future.

Q2100 Mr Plaskitt: You yourself acknowledged earlier on that the products here are often, to quote your phrase, complex and opaque. Do you not think the industry has contributed itself quite substantially to the decline in confidence in long-term savings by the very fact of producing products that are so difficult for the consumer to understand?

Ruth Kelly: I think it has probably been a completely rational response on the part of the industry to the set of regulations and the tax treatment of products under consideration. Ron Sandler pointed out, for example, that there were 1,600 unit trusts and OEICS, and 1,600 different private pension funds. What has happened in the industry is absolutely phenomenal. If you strip away some of the differences over the tax treatment and some of the regulatory differences, it becomes much less rational of the industry to act in that way and consumers become much more empowered to make informed choices between different products and their providers.

Q2101 Mr Plaskitt: Do you think the industry has been doing everything it can to help the consumer through this maze? We have taken a look at the key features documents that have accompanied many of these products. We found them pretty seriously wanting in terms of enlightening the consumer as to what they are buying. Most of the witnesses we have spoken to, both in the industry and from the regulatory side, have accepted that, and hence the document is now, somewhat belatedly, under review. Do you not think the industry should be trying to do an awful lot more than just revising the key features documents?

Ruth Kelly: Partly, yes, as you rightly say, the FSA is reviewing this, but also the industry has been reviewing this as well through its Raising Standards initiative, and so I think there is an understanding now in the industry that it has to raise its game and really provide decent levels of transparency so that people can make informed choices. As I said, in the future it will become much more rational for them to do so. Clearly, this is something where we would like to see the maximum degree of transparency possible, although clearly it is for the FSA to consult on individual proposals and not the Government.

Q2102 Mr Plaskitt: That is interesting, because when Mr Tiner was in front of us last week he said, and I now quote from his evidence, that he wanted to see whether there is a way of converting complexity into something which is straightforward for the consumer. Do you think that can be done?

Ruth Kelly: I think it will become much more possible in the future than it ever has been in the past for the variety of reasons that I have already set out. These things will probably always be quite difficult for consumers, but we have had in the past, I think, a situation where it has been almost impossible for the consumer to compare products because of different tax treatments. If you look at unit trusts or a unit linked policy, they are virtually the same thing but they have entirely different tax treatments. It is virtually impossible for a consumer to compare the two. We are committed, as part of the Sandler review, to trying to simplify the legislation and the regulatory boundaries to make it much easier for those sorts of comparisons to be made, but we clearly expect the industry as well to disclose the essential nature of their products as clearly as they possibly can to their consumers.

Q2103 Mr Plaskitt: In order to do that, do you think the industry can achieve one, easily recognisable, standardised set of indicators for the riskiness of their products?

Ruth Kelly: I think it is difficult. The reason I think it is difficult is partly because the risk profile of a particular product may change over time. In fact, you may want the risk profile of a product to change over time. If you look at a stakeholder pension, for example, we are requiring providers of stakeholder pensions to lifestyle their products, as we call it, so that you start off in riskier equities and you move perhaps into bonds as someone approaches retirement, which is a much safer asset. It is quite difficult to know how you would risk‑profile that or whether that would change over the life of the product. It is an interesting idea. I would be fascinated if people come forward with constructive suggestions. It is really something, however, that the FSA should look at. It is an interesting idea but not without its difficulties.

Q2104 Mr Plaskitt: You say it is difficult but earlier in the course of this inquiry you sent a note to us in which you said, and I quote: "It is of fundamental importance that all users of financial markets understand and accept the risks involved." If that is going to be achieved, there has got to be some means of doing it.

Ruth Kelly: I think it is important to realise that risk means entirely different things depending on who you are talking to. Indeed, sometimes I am asked about the Child Trust Fund, not least by this Committee. One of the things that I have always borne in mind when thinking about these issues is that some people advocate putting money on deposit or in cash for someone who is likely to hold an account for 18 years saying that that would be risk-free or much less risky than putting the money in equities but, because the return is likely to end up so much lower, it is not necessarily the case that that is a risk-free option. In fact, you could describe it as a pretty risky option.

Q2105 Mr Plaskitt: It has been described to us as reckless caution.

Ruth Kelly: Exactly, and that is a wonderful way of putting it. I will use that in future. Risk does mean different things to different people. It is quite difficult to capture. What I think we should aspire to is an informed discussion taking place considering the essentials between the provider or the distributor and the consumer, so that the consumer can make reasonable choices on the basis of the information.

Q2106 Mr Beard: We have been told that under the current sales regulation regime it can take several hours to go through all the regulatory hurdles to make a sale. Do you accept that this convoluted sales process, and the costs involved, have been a major factor deterring people from saving, particularly people in the lower income groups? Is there a risk that the current regulatory framework is trying to prevent mis-selling but encouraging no selling?

Ruth Kelly: I very much agree with the thrust of your question, that in the past the sales process had become so complicated that long-term savings has been taking place among higher and moderate earners rather than among moderate and lower earners, where perhaps you might wish to see more saving. I think Ron Sandler in his report, looking at the figures for the length of time taken to sell a product, if I remember rightly, said it took about six hours to sell a pension under the old regime. With the simplified sales process under which companies sell the products, we hope that that time will reduce to something like 30 or 40 minutes in a face‑to‑face meeting with a customer and perhaps the same again behind the scenes, but much less. I completely agree that people have been put off by the complexity of the process, the time taken and also because it is unprofitable for sales to target their efforts on people I think Ron Sandler said who had less than 8,500 as a lump sum, or 70 per month. Yes, I do, which is why we are introducing the new Sandler stakeholder products and why the FSA has now decided to consult on its simplified sales process.

Q2107 Mr Beard: Does that simplified sales process cover the products that are above the Sandler level, so that the sales process is simplified and shortened for them? The Sandler process is there in the main but what about the ones further up the income scale?

Ruth Kelly: I think Sandler products will be attractive to many individuals, not just those on lower and moderate incomes but perhaps those on hither incomes as well. They are inherently attractive products. They have no exit penalty; their charges are capped; their risk profiles are monitored and controlled; and so they are inherently attractive products to a large number of people. So, yes, the simplified sales process would apply to higher income individuals as well as those moderate earners.

Q2108 Mr Beard: You have spoken of people being able to buy stakeholder products in their lunch hour. Do you hope that people will be able to make such purchases at their place of work? The current rules preventing employers from actively promoting stakeholder or other defined contribution pension schemes have been described to us as indefensible. Would you like to defend them?

Ruth Kelly: If I look five or ten years ahead, I think the workplace will be a major distribution channel. I would like to see it as a distribution channel not just for pensions but for all sorts of financial products. One of the issues in our consultation on the Pensions Green Paper and then on the Pensions Bill that has been brought to our attention by employers and by providers of pensions is that they sometimes show very risk-averse behaviour; they do not want to take risks and potentially be trapped by people saying in the future that they have been mis-sold a pension. They are not quite sure where the boundary lies as to what they can say and what they cannot say. We pledged, in response to that, to consult on how we can make it much clearer for people where that boundary lies, and indeed move it to make it easier for people to offer pensions in the workplace in the future. I cannot justify the old regime. I think it needed to be changed. We are in the process of doing that. I hope very much that the workplace will really take off in the future as a delivery channel.

Q2109 Mr Beard: How long will that review take? Is this part of the N2+ 2 review?

Ruth Kelly: It is, and we are not looking just at the workplace; we are also looking at Citizens' Advice Bureaux and so forth, and what they can say to people and how the regulatory boundary can be clarified. Also, for example this week I think, Andrew Smith and myself are launching the employers' pack of information to employees about what is available for them potentially through the workplace. We are really trying to make this as easy as possible for employers.

Q2110 Mr Beard: The workplace has been a major stopping point in promoting stakeholder pensions. Why has the issue not been addressed previous to this?

Ruth Kelly: We have always thought that it has been possible for people to offer pensions principally through the workplace. I think the issue that has been brought to our attention is that people were not prepared to go as far as we are pretty sure they are allowed to go because they are risk averse; they do not want to take any risks at all about what they say to their employees. As they have come to us in discussion, we have said, "Let us clarify it. Let us make it absolutely clear to you what you can do in the work place and make it as easy as possible for you to offer pensions". Indeed, in the future I hope very much that that also will be a channel for the other Sandler products as well.

Q2111 Mr Beard: There is a widespread view by those outside the industry that the dominance of payment by commission encourages mis-selling. Is not the industry always going to be under suspicion from consumers on this score as long as commission is the dominant form of remuneration in the financial services industry?

Ruth Kelly: Historically we have had an industry based on commission, and it is pretty difficult to change history quickly. I think we have begun to see over recent years - and again Ron Sandler, a very wise person, mentioned it in his report - is that commission has increasingly moved from being charged purely up-front to being spread more and more over the life of a product. We have seen a change in behaviour as to how commission is indeed paid. The FSA have consulted on how the consumer might be empowered and how we can remove some of the perceived consumer commission bias towards particular products or firms. The FSA has come up with a menu approach whereby consumers are given the information about commission charges up-front and they can make an informed decision on that basis. We are going through a period of change.

Q2112 Mr Beard: The ABI sponsored consultants to look at this because it is obviously worried about it. Do you see payment by commission as fundamentally incompatible with dispassionate advice?

Ruth Kelly: As I said earlier, the ABI is undertaking a very comprehensive study on whether commission bias exists at the moment. The FSA's own work showed that this could largely be addressed through their proposed menu of charges, and so I think the move has been in the right direction, but I am delighted to see that the industry itself is thinking through some of these issues, largely in response, I would imagine, to what the Committee has been saying.

Q2113 Mr Beard: One issue both our inquiry and the recent report by Sir Richard Sykes has uncovered is that as well as the 3 per cent to 5 per cent commission on the initial sale, many long-term savings products pay trail commission over the life of the product, which can add up to many thousands of pounds on a relatively modest savings product. One witness told us that selling and commission costs on long-term savings products now cost the equivalent of 300 per year for every household in the country. Do you think they are getting value for money?

Ruth Kelly: One of the reasons we are introducing the stakeholder product range is to cap the charges to the consumer. Clearly, an important element of that is commission. Under the cap, there will be an incentive, under the structure that we have proposed, for commission to be more spread out than it has been in the past. I hope that the cap structure that we have proposed will again push this in a positive direction and make it harder for firms to charge up‑front commission or unreasonable levels of commission.

Q2114 Mr Beard: There is also the trail commission because although it looks modest at about 0.5 per cent a year, if that goes on for 20 years, it becomes far less than modest, and yet it is justified as being a retainer for the adviser to continue to give advice. The evidence is that many people break their connections with the adviser and so the money just keeps getting paid for nothing.

Ruth Kelly: One of the issues about transparency is that the consumer will be made aware of the level of commissions that he or she is paying. Ron Sandler argued in the past that the market for advice just was not working properly because people did not realise they were paying a fee for commission, either as an up-front charge or spread out over the life of the product, or indeed a combination of the two. I would expect that market for advice to develop and become more efficient in the future and for people to pay less as a result.

Q2115 Mr Beard: Senior figures in the insurance industry have told us also that they would like to move away from the commission-led business model. The problem the industry has is that it cannot do this while keeping up the standard of living independent financial advisers have come to expect. When people are given the information openly, they are not prepared to pay the equivalent sum in fees. The Financial Services Authority has, to quote one trade body, already done a U-turn in its proposals for depolarisation and the requirement for anyone using the title "independent financial adviser" to be fee based. In clinging to this commission system, are we in danger of perpetuating a business model that only serves affluent savers and effectively locks out low incomes groups from the market?

Ruth Kelly: I guess the motivation behind the question is to suggest to me that maybe we should have a view on the appropriate business model and say to firms that this is the precise sort of model that they should follow. I think, personally, that that would be going too far.

Q2116 Chairman: Minister, that was not the question. The issue raised is that this model is flawed and it asks how we get a fairer system. It is not for Government or anyone else. We are putting the onus back on the industry to look at it, and some people in the industry have accepted that as a business model it is flawed.

Ruth Kelly: That is very helpful. Some of the changes that we are proposing I think drive us in that direction. They do not force a big bang solution but, given the sorts of facts that you have put forward, the fact that IFAs have low capitalisations generally, it is difficult for the IFA market to adjust quickly to change. That does not mean to say that we should somehow be here to support IFAs. IFAs have a valuable role to play and they should be serving their consumer needs.

Q2117 Mr Beard: That is almost the implication of what we were told by some senior figures, that they are going to change but it would damage the living standards of the IFAs.

Ruth Kelly: I think it is a recognition of the fact actually that IFAs are very poorly capitalised on the whole. Historically they have depended on commission. I would expect this process to be rather more gradual.

Q2118 Angela Eagle: Why are you so optimistic that the industry actually wants to change when we have had lots of experience, from hearing the evidence, of the industry actually wanting to shoot the messenger? Mr Gyllenhammar, who is Chairman of Aviva which operates as Norwich Union, has complained about the Government and this Select Committee and the regulators bashing the industry, without really admitting that there was anything wrong. It is almost as though they are annoyed that people have noticed what they have been up to for years. Where do you get your optimism about the industry wanting to change? We have seen plenty of laggards before us in the sessions we have on this particular subject before this Committee?

Ruth Kelly: There are always those who are going to be the more positive and engaged and those who are going to be less constructive about engaging in any reform.

Q2119 Angela Eagle: But the laggards do seem to be quite important people?

Ruth Kelly: I am not going to comment on individuals, and please do not draw me there. Where do I get my optimism from? That is because I have seen the sorts of actions that they have proposed recently, the fact that they are taking commission seriously, the fact that they are looking at their care of customers more seriously, and the very positive reaction we had to the stakeholder announcement last week from major players in the industry, including at least one that had said it was on the point of withdrawing from the stakeholder market but is now coming back in. I think there is a willingness there to engage. I also think that other issues that have been around, such as the difficulties there have been about moving to realistic accounting, will be resolved over the next year and that the industry with the transparency proposals that are being put out by the FSA and so forth has shown again a willingness to engage, and a bear market does not continue for ever. We have been through a particularly difficult time recently. I am more optimistic about the industry.

Q2120 Angela Eagle: You will be watching the laggards, will you not?

Ruth Kelly: In some respects it is not my role to single people out and pursue them or not. It is really a question of the Regulator making sure that they are there and treating their customers fairly. It is an absolutely key objective of the FSA to ensure that that happens.

Q2121 Angela Eagle: They have been complaining about the FSA running the industry down as well. I can give you plenty of quotes about that which indicate that some people are being dragged kicking and screaming in to a more transparent era, let us put it that way. Do you think that commission, trail commission particularly, is at all justified? Is it not just money for old rope?

Ruth Kelly: Trail commission was set up effectively to pay for ongoing advice that somebody receives, and it should be paid in that situation. It potentially has a role to play.

Q2122 Angela Eagle: It is paid as a matter of course whether continuing advice is given or not, often without the knowledge or explicit acquiescence, except in the very tiny, small print, by people who signed up for it in the first place. There was an article in the Financial Times in February of this year which pointed out that when you pay 300 per month into an ISA over 20 years, the trail commission and up-front commission would reduce the amount that you would actually have in that ISA by over 13,000 and in total it came to 18.4 per cent of the entire total. That is for a very simple, very predictable savings vehicle on which this trail commission is paid every year, whether people receive advice or not. Is that not just money for old rope and should we not actually abolish trail commission unless advice is given?

Ruth Kelly: There are a few points to make about that. You could almost make the same argument about the charges that people pay in general administration charges on a fund. For instance, Ron Sandler said that if you looked at a unit trust tracker fund, and there is not that much difference between one unit trust tracker fund and another, some charge a 0.3 per cent management charge and others charge 2 per cent; 0.3 per cent to 2 per cent is a huge variation, particularly in the market, for commission. It has been clear that consumers have not been exercising power. A fundamental part of his analysis was to show that this market was not working properly; that consumers did not exercise great consumer power; they did not understand what charges they were paying; and they could not compare products. What are we going to do about it? We are going to introduce the new products which have capped charges.

Q2123 Angela Eagle: That is good and that is for a part of the market that is currently almost completely untapped, but what about this market where people are still paying trail commission and close to 20 per cent of their final amount in commission to advisers that they never see from one decade to the next?

Ruth Kelly: I am not going to justify that for a minute. I would say that when consumers realise for the first time what they are paying under the menu approach proposed by the FSA, I would be very surprised if consumers will tolerate that situation.

Q2124 Angela Eagle: Would it be a good idea to ban the paying of trail commission unless it could be proven that advice had actually been given?

Ruth Kelly: Really it is a question for the FSA as to whether their customers are being treated fairly, but I think generally an informed choice strategy where the information is provided is a good route to pursue.

Q2125 Angela Eagle: Since you have raised administration costs, is this not another example of a cosy little price mechanism in this industry whereby it has been paying itself for years without the consumer really knowing? What plans do you have to bear down on some of those costs and to ensure that these cosy little arrangements that have gone untouched for years, which make a few people a very nice living indeed at the customers' expense, are actually exposed to some form of competition?

Ruth Kelly: You are right that it has not been working efficiently as a market. I think one of the major effects of the introduction of stakeholder pensions that we have seen is that charges were driven down in non-stakeholder pensions and not just in stakeholder pensions because of the impact on the market but also because of a policy called RU64, which meant that when someone went to buy a pension, they had to be told of the existence of stakeholder pensions at the same time. That was made available to them. It had a massive impact on charges. Clearly, we would expect the introduction of other products to have an impact right across the industry as well.

Q2126 Angela Eagle: Do you think that on the so-called traffic light categorisation of risk, which is an idea put before us by several people, there is any chance of being able perhaps every year to have products categorised in risk in order that, if they change over time, you can actually change their categorisation? Are not those products which change their risk profile without telling the people who bought them in the first place the most dangerous? Both split-capital investment trust and precipice bonds were an example of people being lured, often through the post without advice, into investing substantial sums of money into what they were told were not risky products only to find out when it was too late that they were about the riskiest you could invest in.

Ruth Kelly: I think the issue of execution-only sales is an interesting one because people decide to buy a product without advice, and disclosure at that point of sale clearly is very important. It is an interesting issue that you raise - of course, it is one for the FSA - as to whether that should be updated on a regular basis. When advice is offered, the same sorts of issues apply as to whether it has been properly explained to the person that the nature of the product they are buying may change over time and what the best strategy for ensuring that someone remains well informed about the risk profile of their investments is.

Q2127 Angela Eagle: If those envelopes arriving through the post had had a little traffic light on with red, perhaps some of the people who invested 7.3 billion over the years in those trusts might have thought a little more about it.

Ruth Kelly: Possibly.

Q2128 Chairman: The industry undertook to look at that issue when they came before us.

Ruth Kelly: As I said, it is quite an interesting issue. Potentially, there is something there but it is not an easy answer to the solution.

Q2129 Angela Eagle: We have been told by consumer groups that this is one of the few industries that does not seem to think it has a duty of care to its customers, more like how much money they can make out of their customers in trail commission, admin, this, that and the other, and it is almost as if the FSA has been set the task of trying to catch them at it but the Association of Independent Financial Advisers told us that they were not worried that they did not have a code of ethics, though we are worried about that. Do you not think that perhaps there is something we could do to introduce an explicit duty of care that would actually begin to change this idea that the industry will get away with what it can until they are discovered and then put it right afterwards into a more explicit upfront prevention of these problems and would introducing a duty of care impact positively on that?

Ruth Kelly: I certainly would not agree with the proposition that everyone out there in the industry does not sign up to the idea of a duty of care. There are some very good players in the industry. There are some, for example, who still sell door to door and regularly go back to their customers.

Q2130 Angela Eagle: But it is the bad players who affect confidence, is it not?

Ruth Kelly: I will come back to them. There are clearly some good guys out there who do a very professional job and make sure that consumer needs are met. The challenge for us to make sure that occurs on as wide a basis as possible. One factor which I think is worth bearing in mind about the stakeholder products - and I do think stakeholder products have the potential for a very significant impact on the market - is that the fact that we have chosen a charging regime which does not have upfront charges and which is spread over the life of a product - 1.5 per cent for the first ten years falling to one per cent thereafter - gives a very significant incentive for providers to retain their customers. When you combine that with a zero exit penalty so that people can leave at whim without paying anything extra, I would imagine this should promote behavioural change in the direction which we envisage but it is something you would expect the industry to be looking at very carefully as again - and I come back to this point - it is quite difficult in a market which is highly intermediated to have that direct relationship between provider and consumer but it is something with which the industry should be grappling.

Q2131 Mr Heathcoat-Amory: You have mentioned your concern about management charges but you recently announced an increase in the price cap for these charges for certain stakeholder products to 1.5 per cent from the familiar one per cent. Is this an admission that one per cent was wrong?

Ruth Kelly: I thought long and hard about this decision as you might imagine and went back to the original decision as to why we chose one per cent in the first place. When I started discussions with the industry, the one question I asked that I never really got an entirely satisfactory answer to but in which I was very interested was, when we introduced one per cent, why was it that they did not charge for advice on top of that one per cent because in fact they were allowed to; there was nothing prohibiting firms charging for advice in addition to that one per cent. The answer, I guess, was that consumers were not willing to pay very clearly for advice in that situation and, for whatever reason, the market did not develop in a way in which providers charged extra for advice which they were clearly allowed to do under the regulations, and they made a case that they needed that extra flexibility if they were going to be able to operate and promote their products to lower and moderate income groups. So, what we have done in the proposals is say they can charge explicitly for advice but only for the first ten years and up to a maximum of 1.5 per cent, so an extra 0.50 per cent, and that then it should revert to the one per cent. This has the advantage for the consumer that the returns, over a period of 25 years say, are virtually identical to if you charged one per cent the whole way through. It is quite striking. If you look at the reduction in yield for the consumer at 25 years, the reduction in yield at one per cent is 1.06 and the reduction in yield at 1.5 per cent dropping to one per cent is 1.17, very, very close, but it has the advantage that firms are able to charge explicitly for advice rather than implicitly as before. It should enable efficient providers to enter the market and low to moderate income earners to benefit from that and we have also said that we will review that after three years to make sure that if firms are not charging for advice, that they have not taken advantage of that flexibility, so that competition really does emerge with execution-only sales and sales which have no advice attached been charged at under the old cap but if advice is being provided as an add-on, that firms are able to charge explicitly for that. So, I think this is actually an adaptation of the old one which explicitly recognises the challenge we have to encourage firms into the market, it should encourage great efficiency and competition under those levels and 1.5 per cent is the very maximum we would expect to see. We still expect to see some providers charging very significantly under one per cent.

Q2132 Mr Heathcoat-Amory: You have really just described the hazards of price fixing. That process is somewhat arbitrary and you run into all sorts of definitional problems, so why do you think you have it right now and perhaps I can ask you something specific abut the process as outlined by your consultants? They were very influenced by the concept that saving products are sold and not bought. In other words, the big influence on saving levels is not an assessment of return by the consumer but rather the importance of marketing, salesmanship and the distribution channel. Are you not here feeding that distribution channel slightly more generously and not giving equal attention to the ultimate return which is inevitably going to be squeezed by a higher fee?

Ruth Kelly: No and, for the reasons I have outlined, I do not think there is a higher fee as such. I think it is a recognition of the fact that advice was not being charged for which had been allowed for under the previous regime but is now being allowed for in the price cap. If advice is not provided, we would not anticipate that firms charge over one per cent. In fact, in many cases, they could charge significantly less than one per cent and we will review competition to make sure that that is the case. I do not agree that it somehow mitigates against good investment performance, in fact I think it encourages good investment performance and, for all the reasons that Ron Sandler set out in his report to the Treasury, I think it is an essential component of consumer protection.

Q2133 Mr Heathcoat-Amory: Let me be clear. You believe that the amount of charge will actually not alter, that this has been a hidden 1.5 per cent, and you are simply making it explicit and you are confident that that will be the case when you review this in three years' time.

Ruth Kelly: That is not exactly what I said. I said that firms were not taking advantage of the possibility of charging for advice under the old regime. In some respects, that hindered the potential or disenfranchised low-income providers from the process. They argued very strongly that they needed to be able to advise people in low to moderate income groups if they were to buy particularly pension but other stakeholder products as well. So, we have recognised that fact but because we are only charging it for the first ten years, the reduction in yield at year 25 is actually very similar as for a one per cent cap.

Q2134 Mr Heathcoat-Amory: So, they will be charged more and are you sure that this advice they are charging for is not actually a kind of salesmanship?

Ruth Kelly: What we want them to do is open their doors to low to moderate income consumers - that is the ultimate goal of this - and to encourage people to save who have previously not saved. If that is the ultimate result, then I think this policy will have been successful.

Q2135 Mr Heathcoat-Amory: You rather endorse my view therefore that it is to pump up the distribution cost, what I would call selling cost, as much as advice. Perhaps you could comment on the other part of my question which was the squeezing of the return because the return on equities is estimated to be not more than 2.5/perhaps three per cent above bond yield, so we are beginning to eat into that extra return from equities by going up to 1.5 per cent. It does seem to be a switch in philosophy away from a concern about yield to the consumer.

Ruth Kelly: No, that is absolutely not the case and I have very clearly outlined the figures on reduction and yield. The consumer at 25 years - they are virtually identical, very slightly higher, under the 1.5 per cent dropping to one per cent after ten years. This is an excellent deal for consumers and the combination of the new structured price cap plus the simplified sales process really does open up the possibility that large sections of the market which had previously not had the opportunity to buy a savings product will, for the first time, have that opportunity.

Q2136 Mr Heathcoat-Amory: So, consumers will get a lower yield but this is better for them.

Ruth Kelly: I am very clear that there is almost no difference in the reduction in yield figures.

Q2137 Mr Heathcoat-Amory: What about people who have taken out these products under existing schemes? There is no hazard that they will be charged the 1.5 per cent, is there?

Ruth Kelly: We very much expect that the industry will retain their current charging structures. We will be negotiating this closely. On the stakeholder pension front, clearly it will the Department of Work and Pensions in the first place to take those negotiations forward. That is what we would expect the industry to do.

Q2138 Mr Heathcoat-Amory: That is an expectation but that is all, it is as soft as that.

Ruth Kelly: No, it is not soft.

Q2139 Mr Heathcoat-Amory: It is not a requirement.

Ruth Kelly: It is not legislated for.

Mr Heathcoat-Amory: So, it is just a hope.

Q2140 Norman Lamb: We understand that about 161 billion of savings are currently tied in closed with-profits funds and that appeared to be about 30 per cent of the with-profits sector. They have heavy exit penalties locking investors into the fund with very different investment objectives to what they went into when they first bought their product and spiralling costs per policy as the number of policyholders dwindles. What is to stop investors in the smoothed investment product available as part of the new stakeholder suite ending up in exactly the same position as those who are currently in closed funds now?

Ruth Kelly: Clearly, there are always reasons why it might be appropriate for the regulator, for instance, to close a fund to new business in the best interests of all the remaining policyholders. It is not necessarily the case that people in closed funds will always be disadvantaged in respect to those in more open funds, so I do not think you can draw very simple comparisons.

Q2141 Norman Lamb: But they end up with something completely different to what they purchased, do they not?

Ruth Kelly: Are you saying that the risk profile of the product that they purchased is different?

Q2142 Norman Lamb: And the return.

Ruth Kelly: Not necessarily.

Q2143 Norman Lamb: And, if they choose to try and leave it, they are locked in effectively by the penalties ---

Mr Kirkman: The issue is not necessarily one of being opened or being closed, it is a matter of the amount of spare capital that is available in the fund. If you have an open fund that in effect does not have a significant amount of spare capital, that inevitably is going to end up taking a lower risk investment strategy. It is the case that many funds have closed at a time when life insurance with-profits funds do not have an awful lot of spare capital and, as a result of that, a number of them will have ended up having to think very carefully about what kind of investment strategy is in the best interests of the totality of the people in that fund and come to the conclusion that one that is relatively low risk and therefore inevitably low return is what the best thing is for the totality of the policyholders. In practice, the new regulations from the FSA around PPFMs, principles and practices of financial management, are there to deal with both open and closed funds and to try and work out the most orderly way out of a situation for a closed fund taking the interests of all the policyholders together.

Q2144 Norman Lamb: But it is the case that people could end up in a closed fund with investment policy within the stakeholder suite of products just as they can now. There would be nothing to stop that happening.

Mr Kirkman: I guess eventually that could be possible but given the way that people are going into those with very explicit consideration of investment strategy and capitalisation up front, I guess there is less of a risk of that than there were with with-profits funds which historically have not been running in quite such an explicit risk-controlled way.

Q2145 Norman Lamb: There is a growing debate about the possibility of closed funds being sold on to so called vulture funds that are set up to buy assets through the run-off period. That is obviously a great concern for investors. Can you provide any reassurance to investors that their position will be protected should this possibility develop?

Mr Kirkman: It comes back again to the changes the FSA have made with CP207 with principles and practices of financial management. I am obviously not actively involved in any of these negotiations that firms may be having and discussions they might be having with the FSA but I have seen the newspaper reports that there have been.

Q2146 Norman Lamb: Do you see that potentially it could be a good thing?

Mr Kirkman: I think that potentially it could be a good thing. In effect, investment returns are going to have to come out of the costs of running the fund, if people can get economies of scale and run funds more efficiently as a result of that, it could be a good thing for investors. What is important is that the FSA are going to have to take any decisions about changes of control in the light of the existing principles and practices of financial management and ensuring that the change of control of those life funds, if they are taken over, will protect ---

Q2147 Norman Lamb: So, the FSA will play a critical central role in protecting consumers if this does happen?

Mr Kirkman: Indeed.

Chairman: When the FSA were before us last week, John Tiner stated that they would be looking at this particular issue particularly with regard to Royal Sun Alliance and that was in the news last week.

Q2148 Norman Lamb: On the with-profits principle, the industry generally seems to believe that, to use Lord Penrose's phrase, "with-profits cannot survive without mystery" but he also went on to say, "but that cannot continue to provide an excuse for delay in the open provision of financial information." Do you agree with Lord Penrose in that view and what conclusions therefore do you reach about the future of with-profits?

Ruth Kelly: Again, if you go back to Ron Sandler's proposals, he actually suggested a model with-profits fund which is very similar to the smoothed product which we put forward as part of our Sandler proposals which introduces an enormous degree of transparency.

Q2149 Norman Lamb: So, without the mystery?

Ruth Kelly: Without the mystery, basically.

Mr Kirkman: It is certainly the case that a with-profits fund because of the way it smoothes investment returns over the time and because investment returns are uncertain, there needs to be a certain amount of discretion in the way that the fund is managed. I think what Ron Sandler tried to suggest and what the FSA have done through the CP207 work is to try and suggest a way through whereby that discretion is bettered but fulfilling the interests of transparency and understanding by policyholders and for the protection of policyholders but there is still enough discretion in there for them to be able to operate a smoothed investment product.

Q2150 Norman Lamb: In other words, reform of the concept of with-profits rather than abolition of it?

Mr Kirkman: Yes.

Ruth Kelly: A smoothed investment product is what we have put forward because, when we considered this issue, we looked at the features of the product and decided that inherently there are certain quite attractive features for consumers in smoothing and we wanted to offer them the opportunity to buy a smoothed product but with the maximum degree of transparency.

Q2151 Norman Lamb: And those two concepts are compatible?

Ruth Kelly: As Mr Kirkman said, clearly when you operate a smoothed investment fund and when investment returns are inherently unknowable, there is always going to be an element of complexity and it is a difficult concept to communicate.

Q2152 Norman Lamb: Which you keep from the public. Which you keep back from the consumer.

Ruth Kelly: No. If you look very closely at the proposals which we put forward for our smoothed product, you will see that the principles underlying the operation of the fund are very clearly exposed to the public.

Q2153 Norman Lamb: If I could move on to the actuarial profession. They have received a fair amount of criticism from Lord Penrose in the report on Equitable Life, indeed including the Government's own actuaries within the Government's Actuaries Department. The profession has also been criticised by this Committee in the report on endowment mortgages and by the FSA when they appeared before us as witnesses. You have commissioned the Morris report on the future of the profession. Do you think that savers have been well served by the profession over recent years?

Ruth Kelly: I think Lord Penrose was pretty forthright in his comments.

Q2154 Norman Lamb: Yes, he was.

Ruth Kelly: But we took his comments extremely seriously. Clearly, there has been a huge element of discretion which has operated. Actuaries have exercised their professional judgment on particular issues ---

Q2155 Norman Lamb: With too cosy a relationship?

Ruth Kelly: One actuary can easily come to a very different conclusion about a complex issue to another actuary. I think it is clearly the case that Lord Penrose pointed out that, while reforms are in train, the self-regulation was perhaps not as powerful as in other professions and these are the sorts of issues that we bore in mind when we asked Sir Derek Morris to undertake his review.

Q2156 Norman Lamb: The criticism, as I indicated earlier, covers the conduct of the Government's own Actuaries Department. If you are asked by the Parliamentary Ombudsman to change the rules to allow her to examine the work of the Actuaries Department in order that we can test out whether there has been maladministration there, would you agree to such a request?

Ruth Kelly: Just before I answer that point - and I will answer that explicitly in a moment - it is important to bear in mind that the life insurance function has been transferred out of the Government Actuaries Department and is now in the FSA, so the same considerations do not apply now as potentially were there in the past.

Q2157 Norman Lamb: But, in the crucial period, they did.

Ruth Kelly: Absolutely. The actuarial functions were there during the timeframe that Lord Penrose was looking at. I have spoken in person to the Ombudsman; I have asked her whether she wanted the Government's Actuaries Department to be included. She said and we agreed that she would ask me if she thought that was necessary. She has not made that approach to me but of course I have said that I would consider it if she does.

Q2158 Norman Lamb: What is likely to be your answer?

Ruth Kelly: It would be ridiculous to speculate on whether she thinks it might be a good idea or not.

Q2159 Norman Lamb: But if she asks you the question. You must have reached a view about whether it would be appropriate to agree to it.

Ruth Kelly: We would look at the evidence that she presented and see whether it was a reasonable request or not and consider it in that light, but we have said very clearly that we will consider a request.

Q2160 Norman Lamb: But you have seen the evidence that is in the Penrose report, so you must be able to reach a view as to whether you would agree to such a request given that there are a considerable number of people who feel that should be tested to see whether it amounts of maladministration.

Ruth Kelly: We were absolutely clear, there was no evidence of negligence or maladministration found by Lord Penrose in respect of any of the functions carried out by Government or regulators. Clearly, the Ombudsman may consider this in the light of her own opinions and make a request or not. If she makes a request, we will consider it.

Q2161 Mr Cousins: Minister, did you attend the Chelsea Flower Show this year?

Ruth Kelly: I did not.

Q2162 Mr Cousins: There seems to have been entertainment to be found in the mobile phones in the roses! This Committee has been working its way round the design, manufacture and selling of retail financial products. Meanwhile, back in the wholesale financial markets, we now find that we have soft commissions, improper connections between analysts in some of their other activities, we have late trading, share ramping, insider dealing, short selling ... We have a market that makes kickboxing look like the bells on Sunday! What is being done about this because if people are to have confidence in savings, they can hardly avoid being aware of these sorts of activities and the allegations of these activities in the wholesale financial markets? What is being done about it?

Ruth Kelly: Many of the issues which you describe I would not myself associate with the terminology that you have used. Many of the issues are being examined by the FSA. They have already been looked at in other international jurisdictions but the FSA are also examining them here. What are we doing about them? We have set up an independent regulator to examine these sorts of issues if and as they arise.

Q2163 Mr Cousins: Yes, we have partnerships and strategies and stakeholders and working groups and important meetings here, there and everywhere. Where do we have a successful prosecution of these things? That is what counts. That is what is going to change behaviour. That is what is going to give people confidence.

Ruth Kelly: I can certainly provide you with a list ... I do not know if the information is in the public domain, so I would have to be careful about promising information from the FSA that I do not have, but the FSA does have a very clear enforcement strand. In its recent structural review, it emphasised the importance of enforcement. I know it is something that the Chairman of the FSA is personally committed to. I do agree with you that it is a key element in confidence.

Q2164 Mr Cousins: Our systems simply do not produce the rattle of the tumbrels that is necessary to change behaviour. They do not produce it. I had hoped that, through the Financial Services and Markets Act, we would produce effective enforcement that would change behaviour but, so far, we simply do not have that kind of effective enforcement. Do you agree with that?

Ruth Kelly: As I say, I think the profile of the apportionment has risen massively under the new leadership at the FSA. There has been very clear enforcement action that we have already been discussing during this Committee on split caps, for instance. I know that the Chairman and Chief Executive are taking these issues seriously.

Q2165 Mr Cousins: So far without any result.

Ruth Kelly: They have had an offer from the industry and they want to get more. So, those negotiations are very clearly taking place.

Q2166 Mr Cousins: Where are the sanctions in place that change behaviour?

Ruth Kelly: The FSA is currently taking through procedures in its Enforcement Committee. There are very clear penalties that can be imposed. In the case, for example, of money laundering, the controls which need to be in place, the FSA has imposed clear fines which has changed behaviour and I would not under-emphasise the importance of the sort of discussions that this Committee has been playing in raising the profile of issues and seeing that they have been addressed.

Q2167 Mr Cousins: It is perfectly true now, we have a menu of draconian penalties but not a single act of effective enforcement of them.

Ruth Kelly: I can think of many in the field of money laundering. Certain action has been taken, fines have been enforced. It depends whether you are talking about control systems or whether you are talking about disciplinary behaviour on the part of individuals. There are some issues currently in front of the tribunal which looks at these issues.

Q2168 Mr Cousins: It would not be right to draw you onto details but no one who read the Sunday newspapers could hardly avoid the saga of the so-called plumber. These are not impressive examples of enforcement action being taken, are they? Whatever view you take of the substance of the issues involved, they are not examples of effective enforcement.

Ruth Kelly: I think it is actually quite important for the Government to preserve a degree of arm's length distance with the Regulator on issues of enforcement. Even within the FSA, the enforcement procedure is very clearly separated through Chinese walls with other parts of the FSA and how it operates. So, I am not going to speculate or get drawn into debates on particular enforcement actions other than to say that I know that these issues have been given a very high degree of attention in recent months.

Q2169 Mr Cousins: Do you think that whatever comes out of the financial capabilities steering group, the 90,000 for the CAB, there is any chance, against the background that we have now, that low to moderate income potential savers can look at in the financial markets of overcoming this great suspicion and distrust that now exists where we have soap operas?

Ruth Kelly: Yes. I am personally quite confident, optimistic I suppose, about the future because I think that we have a unique combination of factors that are coming together over the next few years. We have a very well capitalised or we are going to have a very well capitalised life insurance industry - one of the soundest in the world - once realistic accounting has been introduced. We have, through pension simplification, the most simple tax regime in the world applying to pensions. We have a new suite of stakeholder products. We have clear incentives for financial advice to be provided in the workplace for the first time through the tax break. We have an informed choice agenda which is rolling out combined forecasts right across the population starting with the self-employed where we are providing state forecasts but soon moving on to all other groups on an annual basis with more and more millions being covered where people, for the very first time, will receive an estimate of what their combined retirement income is likely to be from the state and from their employer. These are very significant developments that are coming together at the same time. If you include the potential for generic advice to be provided on a needs basis rather than on a product basis which it has had to be in the past and the workplace as a delivery channel, I think you will see a radically different industrial structure potentially in the future but far more people being reached.

Q2170 Mr Cousins: To pick up the point that you have just now raised, why do we have tax shelters that operate in a fashion that if you put your money at 25 into a stakeholder pension, you cannot get the money out until you are 50 at the earliest? We have flexible labour markets with all the uncertainties that young people have to face but we do not have flexible savings markets to match that.

Ruth Kelly: I think you are talking about the minimum retirement age. What we have done through our proposals on the pension tax simplification is introduce flexible retirement, for the first time, from next spring. People will be able to choose between the ages of 55 and 75 when they want to retire and whether they want to take part of their pension and continue to work with the same employer. That has never been possible in the past. We will have flexible retirement for the first time in the future and that is one of the other ingredients that I think will be important in changing opportunities. The other factor to take into account under our new pension simplification proposals is that it will be possible, again for the first time, to save money in a liquid form before moving it over and transferring to a pension without loss of tax relief because there will be no annual limits on pension contribute under 215,000 in any year compared with the current very restrictive limits. It will be just subject to one lifetime limit starting at 1.5 million. This will make pension saving far more flexible and easy for 15 million people.

Q2171 Mr Cousins: Minister, that makes pension saving very easy on the way in but it does not make it any easier on the way out and it does not answer the point that has been made to this Committee that people have suggested tax shelters with internal flexibility, so that you do not have to commit the money like that, that correspond to the facts of life in today's labour markets. Why do we have labour markets that are so very flexible and savings markets that are so very inflexible?

Ruth Kelly: I think I have partly answered that question by saying that we are introducing massive flexibility after the age of 55 for the first time into the pensions market plus the combination of saving in liquid vehicles before transferring your savings later in life.

Q2172 Mr Cousins: You cannot tell a young potential saver at the age of 25 that there is a bit of flexibility when they get to 55.

Ruth Kelly: No, they can save in an ISA, for example, for the first ten years and transfer it after that if that suits them better without the loss of tax relief at all, for the first time ever. On top of that, I think if you are asking why one should not be able to draw down liquid savings from a retirement product when one buys it, which I guess you are getting at, despite the other great flexibility in the system, it is fundamentally - and we return to this point time and time again - why do we provide 30 out of ever 100 in the form of tax relief in a pension fund? Of every 100 of it that is in there, 30 of it is Government money. We provide it in order that people have a decent income in retirement. The evidence suggests that, when you allow free draw down from a pension product, as happens up to a point in the United States, then people spend that money before they reach retirement and eventually they fall back onto means-tested benefits. The fundamental purpose of tax relief is to enable people to build up a pot of money which is then available to provide a secure income in retirement.

Q2173 Mr Cousins: I am a little taken aback because, my goodness, has this Government not learned so much from the United States? Has it not learned that, in the American system that you have just described, you can draw down if you are trying to train after you have been made redundant; you can draw down, provided you pay it back, to get the money to start out in the housing market? Are these not features that many young people in this country would find attractive?

Ruth Kelly: Yes and they can now save in liquid forms of saving and have the flexibility, for the first time, under our pension simplification proposals and transfer the money later in life when they are sure that they need it, to provide an income in retirement. The disadvantage of allowing people to use the pension vehicle as a draw down facility is that actually it tends to be the fact that, with the Government tax relief already attached, people use it and they do not pay it back and they then have less retirement income. So, we are pretty clear about the principles which inform our pension policy. The pension tax relief is provided in order to enable people to have a secure income in retirement.

Q2174 Mr Cousins: Why, if somebody does hit hard times in their life and has to fall back on the means-tested benefits system and consider that, should they then be confronted with savings limits that punish their savings or that attribute precipice bond-like rates of return to the savings they have, or attribute income from those savings that does not exist and could not possibly exist and, if they do try to draw down their savings, gets them potentially up on a fraud charge?

Ruth Kelly: I presume you are referring to the capital limits in the benefit system?

Q2175 Mr Cousins: Exactly.

Ruth Kelly: As I am sure you are aware, we have recently announced that we are going to double the capital limit from 3,000 to 6,000 as ---

Q2176 Mr Cousins: Three thousand pounds to 6,000?

Ruth Kelly: As a first step but we are keeping it under review to make sure that it is sufficient.

Q2177 Mr Cousins: So, we are allowing the not very well off when they hit hard times the equivalent of less than one year's ISA contribution at present that we will give to the well off?

Ruth Kelly: As I was outlining, we have recently doubled the capital threshold and we are keeping that under review. We have also - and this is of course a policy lead of the Department of Work and Pensions - announced that the withdrawal taper over 1,500 is 1 for every 500 which is twice as generous ---

Q2178 Mr Cousins: There is a certain amount of Treasury leadership over the Department of Work and Pensions.

Ruth Kelly: ... which is twice as generous as the previous system and actually is a far better deal than people have had in the past.

Q2179 Mr Cousins: What about joined-up Government? Never mind the Department of Work and Pensions, what about joined-up Government? If we are going to encourage people to save, we have to provide the benefit system that fits the take up of saving.

Ruth Kelly: That is why I am answering questions on it because I think it is relevant that we are making the system far, far more generous than it has been in the past. We are prepared constantly to keep this under review and, if we feel there is a need to act further, then of course we would.

Q2180 Mr Plaskitt: In the course of this inquiry, we have established, I think, that the financial services industry spends about 1.4 billion a year promoting its products, advertising in other words, but we are finding it much harder to find out how much they spend on supporting consumer education about how to understand those products but we think it is less than the bonus paid to any one particular chief executive in the industry. Is this not another of the asymmetries here that the Government should help rebalance in the interest of the consumer?

Ruth Kelly: Yes, it is and it was recognised by Ron Sandler.

Q2181 Mr Plaskitt: And how.

Ruth Kelly: ... as a very, very important part of a strategy to promote savings. The FSA work in its steering group is going to make a very important contribution to raising the levels of consumer education. I am very pleased to say that the industry is engaging very constructively in that work. The work streams - and I think there are seven current work stream in place looking at issues as varied as the opportunities available through the Chart Trust fund and borrowing and advice, generic financial advice and so forth, many of these are being led or contributed to by people in the industry. Part of their remit is to identify sources of funding. I live in a very strong expectation that the industry will come back and volunteer lots of money for this work to be taken forward.

Mr Heathcoat-Amory: Do you really?

Q2182 Mr Plaskitt: Do you have a strong basis for that expectation?

Ruth Kelly: All I can say is that they are very positive about this agenda and that many of them are actively involved in taking the work forward. It is core to restoring trust in the industry and providing access to low to moderate-income earners and that has to be in their financial interest.

Q2183 Mr Plaskitt: Would you look sympathetically upon proposals that proposed a very small percentage levy on that promotions budget in order to fund a proper education service for consumers?

Ruth Kelly: We have asked the FSA to look at all the funding options and the work streams, as I said, are coming forward with specific proposals on each area as to how it might be funded and then the steering group will take a view as to the overall way in which the money will be raised. Clearly, you could go for an individual levy on something, on the product, on the promotional material and on any other issue or you can look for funding in different ways. That is not yet something on which we have taken a view because the options have not been presented but a great deal of work is going on in identifying the funding streams.

Q2184 Chairman: We give the industry a platform on this but they are rather coy. We are delighted to know that they have opened up to you and we look forward to good news!

Ruth Kelly: I am a natural optimistic!

Q2185 Mr Heathcoat-Amory: It is common ground between us that we need to save more but it is getting very difficult to answer the "why save?" question for low income groups because of the spread of means-tested benefits and the pension credit. We have received a great deal of advice that low income savers face a very steep effective tax rate because of the withdrawal of means-tested benefits and indeed we have actually been told that companies are now closing their pension schemes to low income workers because of this problem. In fact, it would be a form of mis-selling to persuade low-income groups to save when they could receive just the same amount of money if not more from the means-tested pension and benefit system. What work has the Treasury done on this problem and how are we going to tackle it?

Ruth Kelly: The pension credit, when it was introduced, did two things: it tackled pensioner poverty but it also, for the very first time, said to people, "If you have small private savings, you will be rewarded for that small private saving or occupational pension." It is the first time that we can unambiguously say to people that savings count.

Q2186 Mr Heathcoat-Amory: You say that but they face a pretty vicious effective rate of tax equivalent to the top rate of income tax of 40 per cent as a withdrawal rate, so we are told, and we are also told that you would need a pension fund of between 60,000 to 90,000 to get clear of the pension credit system. That is beyond the reach of very large numbers of people, so it is in danger of simply not being a rational decision to save because we understand the reason for means testing, it is cheap for the Treasury and it targets the help where it is needed, this is a short-term benefit, but we are in danger of doing very great long-term damage to the saving habit, the saving culture. Indeed, worse than that, we could have another mis-selling scandal on our hands if people end up no better off having saved as against their neighbour who is entitled to all sorts of means-tested benefits and pension credits having not saved. What empirical evidence do you have and what research has the Treasury done on the scale of this problem?

Ruth Kelly: I do not agree with the premise of your question partly because, for the first time, the pension credit makes it absolutely clear to people that, if they do save, they will be rewarded for that but also for the reasons that I have been discussing with Mr Cousins about the very generous withdrawal rate on benefits compared to the previous regime. In fact, it used to be the case that small private savings were withdrawn one for one. Now people are rewarded clearly, for the first time, for any small private savings. In fact, if you are looking for a simple message to tell people, it is that savings count.

Q2187 Mr Heathcoat-Amory: Do you dispute the figures that I gave you? You are rewarded even if there is a 98 per cent withdrawal rate. I find this frighteningly complacent. We are dealing here with people's attitudes, people's expectations, and just to say that you benefit, you can benefit by a very small amount and still be within what you have just said. I do not think that measures up to the scale of the problem or the advice we have received from witnesses. Do you not find it scary that workers are being denied access to stakeholder pension schemes because of this problem? That completely contradicts everything you have been saying up to now about the importance of saving. Do you not perceive that this is a problem?

Ruth Kelly: Interestingly enough, I make quite a lot of comments about advice in the workplace and why employers under certain circumstances have not been offering pensions. They came to us to say that they were not clear about the regulatory boundary which is why we are taking action and consulting on the regulatory boundary to make it absolutely clear that employers can offer pensions to their employees. That is what they have asked for, that is what we are consulting on and that is what we are providing. So, I certainly do not accept that we live in the status quo as the question seems to indicate.

Q2188 Mr Heathcoat-Amory: I am just repeating advice that we have been given that this is happening in the marketplace and for a rather rational reason that, if you sell a pension to someone, persuade them to save, and actually they are no better off for doing so, you could be in the cart with the FSA on the way to the tumbrels watched by Jim Cousins over there! It would be a form of mis-selling. Does that not worry you?

Ruth Kelly: First of all, I do not accept the figures that you have put forward; there are all sorts of assumptions on which they are based which I do not agree with. The second point is the one about pension credit, it is far more generous than the old minimum income guarantee system and makes it clear that there is a reward for saving. Thirdly, the real question that should be asked in the sales advice process is, should you be saving or should you be paying off debts? Under some situations, it may be the case that people on low incomes are actually better doing something else such as paying off their debts.

Q2189 Norman Lamb: Are you not at all concerned about the volume of evidence we have had from the academics, consumer groups, the actuary profession, pension funds, and the providers of this stakeholder pension who are all saying that this acts as a positive disincentive to save? Do you not have any concerns for all of that evidence?

Ruth Kelly: I think there has been some lack of clarity as to what employers are able and are not able to do and we are taking action to remedy that. The point I was just about to develop is that it is through the sales process, the simplified sales process relating to the stakeholder product, that people will be asked whether they are wealthy enough, whether they have enough money to save or not, so that sensible decisions can be taken. Of course we are aware of these issues but I am making the point that it is in people's interests or they will get a reward for saving for the first time under the pension credit proposals.

Mr Heathcoat-Amory: I have not had an answer to my point about whether you have done any research on this. Is there any evidence to back up your remarks which you could let our Committee have because I think this is a matter not just simply of opinion but of fact? Can you send us something, if you cannot give it to us now, about work that you have done on measuring the scale of this because after all, when you bring in the pension credit as you have done, you must presumably have anticipated this problem and have some figures which perhaps you could show us.

Q2190 Chairman: Some of the evidence we have had is imprecise. We have had a submission from the National Association of Pension Funds which states that a number of members have reported that they longer offer membership of their pension scheme to those with low incomes because they, the employers, judge that such employees would be better off relying on means-tested pension credit. So, I think there is an area here maybe for more understanding and more education of employers and employees.

Ruth Kelly: I absolutely agree and, in the end, what matters is that people take an informed choice based on the reality not just of their current income but also of their future income prospects and so forth. The FSA is looking at this very closely when designing and consulting on its sales process to make sure that people make reasonable decisions.

Q2191 Mr Heathcoat-Amory: Can you answer and I am sorry to pose it for a third time. Do you have any work that you have done on this before you brought in the pension credit and indeed other benefits at budget time to tackle this problem? It is an issue and you have denied its importance but I am really asking whether you have any papers and facts which you could let us have to back up your claim that it is really either a trivial problem or one that you have overcome?

Ruth Kelly: I think it is absolutely clear that the pension credit is the first time the penal impact on savings has been removed, so we do not need evidence to say that ---

Q2192 Norman Lamb: It is the current system that these witnesses are commenting on.

Ruth Kelly: Witnesses often make assumptions about Government policy that are not necessarily the case. There was a clear lack of understanding about the regulatory boundaries which we are addressing. There has been concern, I recognise that, but we are taking action to clarify issues.

Q2193 Chairman: Minister, could you write to us on these points in conjunction with the DWP. That would help us in the evidence. Paul Myners, in his evidence to us, stated that the industry pays relatively little attention to delivering good investment returns with key areas like asset allocation under-resourced. In our report on endowment mortgages, we asked the development of fee structures that reinforced the link between good investment returns and fees companies could charge. Did the Treasury every consider such links in setting the stakeholder charges of perhaps a one per cent basis fee and an extra 0.5 per cent for those fund managers that deliver above-average returns?

Ruth Kelly: As I was trying to make clear, I think the structure that we have set for the cap does in many respects encourage good investment performance because it encourages retention. If we had opted for a model of charge cap which had an upfront charge for example, there would be much less incentive for the industry to deliver good investment performance because they would be much less worried about losing somebody after five or ten years. There is an incentive in the current system for retention of people who take out a stakeholder pension or indeed any of the other products. So, it is something we explicitly considered and informed our decision on the structure of the price cap which we adopted.

Q2194 Chairman: You seem to have quite a fancy for Ron Sandler in terms of what he has been saying; is that correct?

Ruth Kelly: I think he has provided a compelling analysis of some of the problems that have existed in the market.

Q2195 Chairman: In his memorandum, he states, "Over a considerable period, the cost base of the industry has risen at a surprisingly rapid rate. Whilst this is partly attributable to the application of more stringent regulation, it is also a reflection of the muted pressures on the industry to seek cost efficiencies. Rather, the competitive dynamic in the savings industry operates so as to encourage product proliferation and even greater levels of product complexity" and then he goes on to talk about consumer weakness which "would be less of an issue if ... (IFAs) were able to act effectively on behalf of consumers to ensure that value-for-money was delivered by product providers" and he sums up by saying, "Improving the efficiency of the industry presents a considerable challenge." Would you agree with that?

Ruth Kelly: I certainly would and that is why we have responded so positively to his report. It is why we have introduce the stakeholder range of products including some of the features which he said were desirable. It is why we have asked the FSA to develop a simplified sales regime which they have gone on to do and have successfully market tested and are now putting out for consultation - it is currently out for consultation. We agree with his fundamental analysis that there has been a very clear incentive for providers to target higher earners and that low income and moderate income consumers have been cut out of the savings process and have very weak consumer power in the market.

Q2196 Chairman: In their evidence again on 22 January, at the end of the meeting, I summed up and asked them a question and I made the point to them that the evidence we had indicated that we have an industry which "is still dominated by a sales-focused culture, with little or no sense of duty of care to the customer, after the sale has been made" and I asked them if that were a fair conclusion and Mr Sandler said, "Yes, I think it is. The industry - and I am thinking of the life companies in particular - have clearly defined obligations to their shareholders. Their obligations in terms of duties of care to policyholders are much less well defined, and I think, historically, the industry has operated much more on the basis of how do I secure distribution rather than how do I ensure that my customers are being best served." Would you agree with that?

Ruth Kelly: I think we have actually seen ---

Q2197 Chairman: Historically, would you agree with that?

Ruth Kelly: ... a distribution-driven industry. I hope now that we are in the process of seeing that more consumer orientated and indeed the FSA proposals on treating customers fairly are a clear example of that approach being adopted.

Q2198 Chairman: The reason I put those points to you, Minister, is that, when John Tiner was here last week, the same points were put to him and he said that it is a national problem which is very important to resolve and that there needs to be a collaborative approach on this, and we have challenged the industry in a very positive way to come back with submissions to us that would look at the business model and change it because we do realise that it is an interested industry to make a profit and to be successful, the consumer in order that they get good returns and also the Government for people to save. John Tiner said to us that maybe some form for taking this forward on the basis which we outlined would be helpful, a collaborative approach; would you agree with that?

Ruth Kelly: Absolutely. I would look to the industry to come forward with positive suggestions. As I say, I think they have produced some very positive papers recently, commissioned research studies and so forth. The more that we can improve customer care and increase efficiency in the industry overall, the better.

Chairman: In response to David's points, we look forward to your written submission to us. Thank you very much for your time, Minister, and that of your officials. It has been very helpful.