Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)



  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 to attend.

  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 making.

  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 issues.

  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 information—going back to John's point about clear and understandable information—so 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 ones.

  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 identified.

  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 you taking?

  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 social need.

  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 process?

  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 claim, complacency.

  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 12 December 2005