Examination of Witnesses (Questions 1-19)|
8 NOVEMBER 2005
Q1 Chairman: Sir Callum and Mr Tiner,
may I welcome you to the first evidence session of the Treasury
Committee in the new Parliament, and in particular may I welcome
you, Mr Tiner, back to the FSA and to public life. Sir Callum,
we want to look initially at the remit of the FSA and the
additional responsibilities you have. In the past year in particular
there have been some big changes to the remit of the FSA with
the administrative task of authorising over 14,000 new businesses,
many of them small. What challenges has this posed to the FSA
and are you happy with the way the organisation has responded?
What is your view in terms of the future, the debate in the public
forum at the moment about further responsibilities for the FSA?
Sir Callum McCarthy: There are
two questions. One is how have we responded to the particular
responsibility for general insurance and mortgage broking; and
the second wider question of our future scope. On the way in which
we have responded to the new challenges and new responsibilities,
it was a very significant change. It brought in, as you said,
14,000 new firms. That has the effect that over 90% of the firms
that we regulate are now, in our terms, small firms; that is,
firms that in the normal course of business on a risk-based approach
we do not plan to visit or have a particular relationship with.
We have therefore had to devise ways of dealing with those so
that we are able to do thematic work, analytic work and statistical
work to identify where problems are arising, identify the other
firms that have a comparable emphasis on a particular type of
business, and deal with them. That has required very significant
changes to the processes within the FSA.
Mr Tiner: We recognised, when
we were asked by the Government to take on these new responsibilities
in December 2001, that we would need to reorganise ourselves and
refocus the operation around this very large volume of small businesses.
I think that the authorisation process, which is a real major
exercise, of putting 14,000 firms through authorisation has been
well accomplished. My feedback from the market is that the transition
to statutory regulation on the whole has not adversely affected
market structures and is beginning to show some significant benefits.
Sir Callum McCarthy: We have also
been very mindful that in approaching this very large population
who are being regulated for the first time by statutory regulation
it is necessary to take a deliberate approach, and that is why
we have done work, first of all to police what we call the perimeter
to make sure that the people who should be authorised are actually
authorised, and then to do thematic work to identify what are
the issues, then to give people warning, and then to take action.
Q2 Chairman: I am interested in getting
this on the record. A debate will ensue from the Hampton Report
suggesting that the Government should give responsibility to the
FSA for consumer credit regulation. Give us a very clear and precise
answer on how you view that.
Sir Callum McCarthy: In answer
to your second question, my concern about that is that it is very
important that we sort out an approach which achieves the public
policy aim that is desired. It is far from clear that giving to
the FSA the responsibility for consumer credit, which would mean
that we would have to take on another 100,000 licensees, is an
appropriate way of delivering the public policy objective. It
would mean, for example, a detailed interaction with Trading Standards
officers on the ground and it is far from clear we are the right
body to do this. I hope that those issues will be looked at very
carefully and that there will not be an assumption that this should
simply be transferred to the FSA.
Q3 Chairman: I feel that is a big
issue, Sir Callum. The need for us to become involved in the public
debate on this is important, otherwise it could swamp the FSA.
Sir Callum McCarthy: I would be
very grateful, Chairman, if you did.
Chairman: You may be aware that today
there is a memorial service for the late Sir Edward Heath. A number
of our committee members are attending that and that is why our
numbers are fewer than usual, and Peter Viggers is about to leave
Q4 Peter Viggers: I want to ask some
very simple questions about the basic advice regime. You will
have seen statistics produced by Mercer Human Resource Consulting
in 2003. They were working on the comparison between the basic
pension, on the one hand, and the guaranteed minimum pension,
added to which one gets housing benefit and council tax benefit
on the other hand. It is the person who has saved for his retirement
versus the person who has not saved his retirement. The difference
between those two is really quite significant because of the means-tested
advantage for the person who has not saved. Mercer calculated
in 2003 that it would be necessary for a person to save £180,000
before they would be better off saving. If they cannot save £180,000
and can only save less, they would be better off not saving at
all, partly because they have not even had the enjoyment of spending
the money. Later a Minister said that the figure was more likely
to be £250,000 nowadays. Means testing is making it advantageous
for many people not to save. Based on that, how do you justify
your response to the Pensions Commission when you said that for
most people most of the time it will pay to save? The Mercer Human
Resource figure seemed to indicate that for very many people it
is not worth saving at all.
Sir Callum McCarthy: I do not
claim to have the Mercer figures in any way in the front of my
mind when I am answering this. It is clear from, for example,
the initial report of the Turner Commission that one of the most
significant problems that we have in the United Kingdom is the
failure of people to provide properly for their retirement. Steps
to make people recognise the need to do that and to think about
the realities, which include the means-tested point that you have
identified, I think form an important issue.
Q5 Peter Viggers: The Turner report
may well recommend that people should think more about their retirement.
The figures I have just put before you, which I think are irrefutable,
indicate that people would be very unwise to put aside money for
their retirement unless they can be absolutely confident that
they can get over this threshold, which has been created by means
testing by this Government.
Sir Callum McCarthy: I think it
is important for people to recognise the range of influences which
are going to affect their retirement, including the points that
you have made.
Q6 Peter Viggers: The point I made
is clear and extremely disturbing. The first priority should be
for people to pay off their borrowings. The Government ought to
be creating a system which makes it advantageous to save for their
retirement and it has failed to do so. That is the point I am
Sir Callum McCarthy: I am not
disputing that. I am just trying to explain our role within a
much more complex and broad context.
Q7 Chairman: Sir Callum, on that
issue, the Pension Commission has identified a number of barriers
to greater voluntary contributions to pensions, including the
need for more financial capability, good advice and appropriate
management charges. On those specific issues, what contribution
can you make as an organisation to tackling these barriers?
Sir Callum McCarthy: There are
different contributions. If I take financial capability, it is
an area where we are much concerned about the mismatch between
the demands put on individuals to make individual decisions to
do with retirement, health and education and the capability of
the individuals to understand the financial products that they
are being offered. A great deal of what we are doing is aimed
to deal with that: the long-term problem of financial capability.
John has been chairing a committee for the last two years on that
and he can describe it. Second we are working, in terms of clarifying
and making more simple and understandable the actual descriptions
of financial products from firms. We very much take those as important
Mr Tiner: It was clearly our analysis
that the asymmetry that exists within the retail financial services
sector, where the power of information is really with the provider
and adviser rather than with the customer, means that the market
itself in comparison, for example, to the wholesale market in
the City of London does not work effectively. I think the public
policy responsibility, quite frankly, is to provide more power
to the elbow of the customer in this relationship. Improving the
financial literacy of people from the moment that they are in
school all the way through to the moment they are making provision
for retirement and for their families and then deciding how to
de-accumulate once they have retired is an absolutely critical
priority. We do not have an explicit objective to cover that but
we do have an objective to promote public understanding of the
financial system. As Sir Callum has said, in the last two years,
we have felt that we needed to take much more of a leadership
role in the area of financial capability. I can go on now or later
to describe some of the things we are doing. The other point is
to make the financial jargon at the point of sale much more consumer
friendly. The financial industry to a large extent has tied the
customer up in knots with jargon and technical terms. Through
some new initiatives to produce what we call "key facts"
and "key facts quick" documents, quick reviews, there
already is in some markets, and there is going to be much more,
concise, plain English literature for consumers. That will help
them build confidence about their own knowledge. There is a whole
range of things going on.
Q8 Chairman: There are two issues
on financial capability: one, you need more money; two, you need
a buy-in from the Department for Education in terms of the curriculum.
Is that correct?
Mr Tiner: Yes. Quite frankly,
there are two or three things which are critically necessary.
The first is for financial literacy to become either part of the
core curriculum or something which is frequently seen in many
schools around the country. I think myself that the Department
for Education has a public responsibility to provide that and
to fund it.
Q9 Chairman: In a recent conversation
with Ruth Kelly, she did indicate to me that she would be happy
to work along with yourselves, and she has a background in the
Treasury and was a member of your committee before she moved on.
Mr Tiner: The Secretary of State
was a member of my committee from the beginning. The current Economic
Secretary is now a member. That is very welcome news if Ruth Kelly
is saying that. I think we also need to see the public sector
as a workplace coming to the table. A lot of financial information
can be provided through the workplace, both in the private sector
and in the public sector. We hope very much that the Government
will come to the table there as well.
Q10 Ms Keeble: On the point of pension
credit, it is certainly the case that quite a lot of people when
they are considering retirement are going to be looking, amongst
other things, at pension credit. From what I have seen, most of
the advice on pension credit comes from people who are expert
in the benefits system and are benefits advisers. People who have
substantial savings are going to go more to financial advisers
who perhaps might not be expert in the benefits system. We all
know that pension credit is quite a complicated benefit. Do you
see there is any role for more integrated advice for people approaching
retirement so that they can again information on what their income
is likely to be based on them as individuals rather than having
to ferret around through quite a difficult system to look at what
the impact is going to be on their total income, and whether they
do or do not go for the pension credit?
Sir Callum McCarthy: One of the
questions that was raised at our annual public meeting in July
this year was from an independent financial adviser asking, "Am
I expected to understand about the benefits system as it impinges
upon my clients?", to which the answer was emphatically "yes".
If you are giving advice to somebody, which includes advice on
matters which are affected by tax or benefits or the interplay
between the two, we would expect the IFA to have command of that.
Q11 Ms Keeble: Do you seriously expect
independent financial advisers to understand all the ins and outs
of the pension credit system?
Sir Callum McCarthy: Not all the
ins and outs but enough to give advice, yes.
Q12 Mr Love: Can I turn to focus
on mortgage regulation? The Committee has been told by the Council
of Mortgage Lenders that the cost of introducing mortgage regulation
rather than the £83 million that you originally estimated
has turned out to be closer to £180 million, which is about
twice that cost. As a result, there has been some concern expressed
about rising arrangement fees since the introduction of regulation.
Do you have any plans to have a post-implementation review of
mortgage regulation? What would you be looking at?
Sir Callum McCarthy: Yes, we undertook
that we would do that. It is important to enable the regime to
bed down for a bit before we do it, and we thought that we would
do it after a year. To put the cost of mortgages into context
it is around 12 to 15 basis points on the cost of a mortgage,
something around £4 per month per mortgage. The thrust of
what we are trying to do, as well as to make sure that advice
is given well, is to ensure that people get the informationgoing
back to John's point about clear and understandable informationso
that they recognise the ability that they have to save money by
going to a new mortgage. Substantial savings are available, up
to a whole percentage point. We are doing that. When we actually
do the mortgage review, we will want to look at the whole range
of issues associated with how it is working.
Q13 Mr Love: You are carrying out
a wider review on the cost of regulation. Will that be one of
the factors you will be looking at? Will you be trying, as a result
of that review, to reduce the cost of regulation to mortgage providers?
Sir Callum McCarthy: As for the
way in which we are going about the cost of regulation review,
first of all, we are doing it alongside the industry. The actual
group is chaired by John and the Chairman of the Practitioner
Panel, and we are trying to look at two elements of cost: one
is what is the direct cost of being regulated by the FSA; and
the second, what is the net cost? The idea that, absent the FSA,
firms for example would hold no capital, firms would not have
a compliance department, is clearly a false idea. We are trying
to get an idea of the gross and the net cost. We are doing it
in three sectors. None of those is the mortgage sector. The general
lessons from the study I think will be applicable, but not specific
Q14 Mr Love: Can I turn to mortgage
exit fees? It used to be the case that they were something under
£100 yet more recently we have had examples of various mortgage
banks charging anywhere between £220 and £300. You have
indicated that it is not likely to be unfair as long as those
mortgage banks can provide a rationale for that charging. What
justification do you think they can give you for charging a figure
of £250 or £300?
Sir Callum McCarthy: I would draw
a distinction between trying to justify a figure in terms of a
cost plus basis and trying to make sure that when people are offering
a mortgage, the total cost associated with that mortgage, including
cancellation costs, are properly identified. The mortgage market
is becoming a very competitive market, and typically the length
of a mortgage is now down to three or four years. People are shopping
around. It is important that when they shop around they understand
the total costs, including the cancellation costs.
Q15 Mr Love: Are you going to insist
that that cost is made openly and is available to people when
they take out a mortgage?
Sir Callum McCarthy: We want all
the costs associated with taking out a mortgage to be properly
Q16 Mr Love: Can I move on to the
vexed question of equity release? You carried out a mystery shopping
exercise. Indeed, you have carried a number, and I will come on
to some of the others in a second. That showed that 70% of advisers
had not gathered enough information to give proper advice. Indeed,
you quoted yourself a situation where someone had been offered
a lifetime mortgage and the interest rate was 7% and had then
been told to invest that in a bond that would provide 3.5% interest
rate. Your own consumer panel has suggested that there should
be decisive and immediate action in this area. What action are
Sir Callum McCarthy: First of
all, we have done the thematic work. We have brought that to the
attention of the industry. Between May and October, we distributed
something like 30,000 fact sheets about equity release. I think
it is important to recognise that as well as the potential for
abuse with equity release, it is also a product which meets a
real need, what John referred to as the de-cumulation in a period
of people's lives when they have very big assets that they are
trying to use intelligently for their retirement. One of the balances
that we have to strike is between stopping abuse but not preventing
development of a product which, if it is properly explained and
sold, meets a real need.
Q17 Mr Love: One of the criticisms
you are facing is that by saying that you are working with the
industry in this area, many people feel you are sitting back while
mis-selling is going on. What they are looking for is action.
How do you respond to that criticism?
Sir Callum McCarthy: I think we
do that by trying to explain the balance that we are trying to
strike. We are trying to take decisive action against mis-selling
while not impeding the development of a product that meets a real
Q18 Mr Love: Another mystery shopping
exercise you conducted was in relation to mortgage lenders and
brokers. That focused around the key facts documents and the provision
of information. What action are you taking to ensure that key
facts documents are provided at the appropriate point in the sales
Sir Callum McCarthy: We identified
in the immediate check on how the mortgage regime was working
that in a large number of instances the mortgage key facts were
not being used in the right way. This goes back to my very first
answer to the question of the Chairman. We are trying, in a proportionate
way, to draw this as a problem to the attention of people to give
them warning that they have a limited period to get this right,
that we are going to do a review of the mortgage regime, and if
we find that this remains a mis-use, we will then take action
against the individual firms.
Q19 Mr Love: The results of your
mystery shopping exercise were very clear. I can quote them for
you but I am sure you are only too well aware of them. Again,
can you be criticised as having some complacency in relation to
taking action in this area?
Sir Callum McCarthy: I am sure
there will be people who will criticise us for that, yes. The
balance that we are trying to strike, in terms of a large group
of people who have not, up to now, had the sort of discipline
that we are bringing to bear, is that we have identified a problem,
we have given people warning, and we have given an idea of the
timetable. I do not think that is being complacent. I think that
is proportionate. It is a judgment and it would have been possible
to make that judgment in different ways, but it is not, I would
Mr Tiner: We are a year into statutory
regulation of mortgages. We feel that to jump very early on into
the most penal of treatments would really discourage the market
from making their services and products available to customers.
On the other hand, we have to temper that by coming down relatively
hard on cases where we think there has been severe wrongdoing.
For example, where we have come across cases of levels of income
being stated and reported which were not the real levels of income
so that a customer could get a mortgage and that has been facilitated,
if you like, by the adviser, then we have taken the toughest action
of enforcement, and that is what is going on. We are trying to
get the market to improve standards by taking the appropriate
action where there is the most egregious of problems.