Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20-39)



  Q20  Mr Love: This is a two-way street. I understand why at this early juncture you would not want to move too decisively. You are obviously looking for a response from the mortgage industry. I know you can only do that anecdotally, but are you seeing those changes taking place? Do you have confidence that they are recognising the signals that you are sending out and that they are sorting out their own house?

  Mr Tiner: I think at the moment we are hearing the right noises and we are picking up the right signals, but our review of the regime when we do it comprehensively will test whether that has been put into practice. We are not leaving this issue alone. We are very interested to see whether the actions which the industry says it is going to take are reflected on the ground. That will emerge over the next few months.

  Q21  Mr Love: Looking at the whole issue of the key facts documents from the other side, there have been some complaints that they are now overly long and complicated. Indeed, Ann Foster, the Chair of your Consumer Panel, said that they are "unnecessarily lengthy, complicated and sometimes misleading". Does that concern you and how are you going to sort out that particular problem?

  Mr Tiner: That does concern us. In fact, we think that a number of firms have taken the key facts document and thrown the kitchen sink into it when that is not required by our rules. If one was cynical about it, one could say that is about trying to put everything down on paper so it transfers the risk, if you like, to the customer. What we want to see is firms thinking much more carefully about what they put into the key fact documents so that they can meet this test that I mentioned earlier of being clear and brief but containing the right information the customer needs to make a decision. We have seen some very good examples of that, by the way. Some companies have taken the key facts principles very seriously and produced very clear documentation. We want to see more of that.

  Q22  Mr Love: You obviously do not want to be too prescriptive in this area. You do not want to design the document for them. How can you ensure that these are, as you have suggested, concise, brief but contain all the essential information?

  Mr Tiner: There are a couple of things we can do. We are increasingly trying to point the industry to what is good practice in the industry. One, we have done this recently in the life insurance industry. I think that can help spread that best practice without getting in the way of competition. Two, we can just continue to work with the industry and their industry associations to improve standards. If we do not see the standards improving, then we would have to consider whether we need to become more prescriptive, but we would rather rely on the principle of clear, fair and not misleading disclosures.

  Sir Callum McCarthy: We have set out a two-page approach which we believe gives the essential information in terms of the product offering, the risk and the conditions, as a template, an example, of how key facts can be produced in a way which is readily understandable.

  Q23  Mr Love: Finally, and I suppose I am loading other responsibilities in advance, but of course the subject of home reversion plans is currently on its way to you. Have you done any initial work and how do you perceive that you will handle that when it finally arrives on your doorstep?

  Mr Tiner: We have not done any detailed work yet because we do not quite know the exact wording of the Regulatory Activities Order which is the secondary legislation that will send it down to us. We are very pleased that home reversions are coming into regulation. It is clearly a product which competes in the elderly market with equity release. Although it is technically a land transaction, it has all the substance of a financing transaction for elderly people. We are very pleased to see that coming. Over the next 18 months we will be putting a regime in place and consulting as usual on that. I think you should expect that as we were, I think, quick off the mark on equity release, we will be on home reversions as well.

  Q24  Mr Todd: Turning to one of the sexy areas of new financial products, the opportunity to build self-invested personal pensions, how concerned are you that, bearing in mind the huge amount of media publicity there has been about the opportunities that these offer, there will be a gap in the regulatory system which will allow people to be sold products of this kind with very limited information on the risks involved?

  Sir Callum McCarthy: We are concerned about two questions. One is a question of timing. We do not yet know what the regime is going to be for SIPPS because the Treasury is at the moment consulting upon it. When they have consulted, there is a requirement in law on the FSA to define what we think is an appropriate policy, consult on it, consider the consultations. and then implement it. There is the strong probability, if not the certainty, of a time gap between the present timing for the introduction of SIPPS and the point at which, whatever our responsibilities are and we as yet do not know them, we are able to introduce them. The second thing is that it is very important to define what it is that the FSA will be responsible for. Basically I hope the FSA will be responsible for, as it were, the overall structure, but I would regard it as deeply unattractive if we were deemed to be in a position to regulate investment in a whole range of physical objects on which we do not claim to have any expertise.

  Q25  Mr Todd: You have highlighted the area of concern that I had, which is that there is likely to be a period in which these products will be available but in which there will be no proper advice on how these products should be sold. Would you accept that that indicates a significant risk of mis-selling?

  Sir Callum McCarthy: I think there is a problem because of the gap that is likely to exist at the present time.

  Q26  Mr Todd: What advice have you given on this?

  Mr Tiner: I think there is a gap but we are trying, within our current powers, to mitigate the risk of that gap as much as possible. There are three things that we can do to try to reduce the severity of that gap. The first is that a lot of people offering SIPPS are already regulated by the FSA. We have a broad principle of treating customers fairly. We will be expecting those firms to treat their customers who are setting up SIPPS fairly. That is something we should look to the current regulated community to do. Secondly, we have, again for those firms, broad responsibilities in relation to financial promotions, and will be looking very carefully at the advertising and marketing of SIPPS, not just for current regulated firms, but for other firms as well. Although we do not then have any powers in relation to those other firms, if we see financial promotions which we think would not meet our test under normal circumstances, we would refer them to the Advertising Standards Board for them to look at. The third thing is that I think we can send some pretty strong signals to the unregulated community that if they want to become regulated a year later, they will have to go through an FSA authorisation process. We would expect to look at their behaviour during the months running up to that from the time at which SIPPS take effect on the new basis on 6 April next year to the time we authorise them.

  Q27  Mr Todd: Do you think that there is some tension here? One of the principles of SIPPS is that the consumer is allowed a very considerable amount of freedom and therefore is presumably free to exercise his judgment in sometimes perhaps foolhardy ways and that this is going to be an area where a light touch of regulation would anyway be expected, because otherwise the principles of that freedom of action will be aborted. Is there going to be a tension anyway when you get to the point where you are able to issue regulatory frameworks between the idea behind this, which is to give largely wealthy people the opportunities to invest more freely than they have up until now, and your normal function of protecting the consumer?

  Sir Callum McCarthy: As John indicated, our determination is that people should be put in a position so that they can understand both the potential rewards and the potential risks. That is why we concentrate on the information being available in a readily understandable way and the financial promotions aspects. There is a range of investments that people can make, which are different for various varieties of risk. We do not try to control the risk; we do try to ensure that the risks are properly defined.

  Q28  Mr Todd: Bearing in mind the diversity of the products that one could have as the foundation of the SIPPS, on which you have already said you would not seek to build expertise and nor would we as parliamentarians expect you to do that, what basis of advice could you give to control that risk, other than that the consumer should be beware if he is investing in items which he does not deeply understand?

  Sir Callum McCarthy: Different asset classes have different volatilities associated with them. It is important that those are described, whether they are at a very high level in terms of bonds, equity, cash, property or commodities, or whether you go down to a specific level of fine wines versus property on the Algarve.

  Q29  Susan Kramer: To follow up on those questions, the issue of property, particularly overseas property, is one that troubles many people. What do you think would be your capacity to oversee and regulate those kinds of transactions coming into SIPPS? It can presumably be property that is just about anywhere in the world. How dependent are you on the integrity of a local regulator to make that effective, to make sure that disclosure is appropriate, that kind of thing?

  Mr Tiner: Once again, it is possible that investments from all over the world could be put into SIPPS, whether it is an equity investment in a company in Japan or the US, or whether it is a property in the Algarve or anywhere else. Our concern is to ensure that there is very clear disclosure to the customer about the mix of assets, the balance between UK assets and foreign assets, and the location of foreign assets before the customer makes any investment. We do not see a role for ourselves in regulating the asset itself and our responsibility is in relation to disclosure and making sure that if a customer receives advice about the asset mix in the SIPP, the advice is suitable to that customer's circumstances. I do not think that we will expect, as we do not at the moment in the equity markets or in the bond markets or any other markets, to regulate the actual source investment.

  Q30  Susan Kramer: I was just wondering how you can ensure that the quality of advice is decent when it is so far-flung and so specific and diverse. Would this have been easier if essentially property were in structures like RITS where you were less dependent on the individual property and working with portfolios?

  Mr Tiner: We have always said on our web-site that diversifying risk is for most people a sensible thing to do and putting your eggs all in one property, if I can mix metaphors for a moment, would not meet that test. Property is an important asset class. If you are able to invest in a collection of properties through the equivalent of a RITS market here, then that helps that diversification of risk, but we would hope that the financial adviser community when they are looking at suitability will be looking at the balance of risk, at the balance of the portfolio, for somebody's particular needs.

  Q31  Susan Kramer: There seems to have been some confusion over property investment clubs and whether or not the FSA would now start looking at this issue. Do you think you could make some comments on that and how you see that particular class of activity?

  Mr Tiner: We do believe, as we have said, in some guidance that we are currently consulting on, that property investment clubs which meet the characteristics of a collective investment scheme within our rules would be regulated by us as a collective investment scheme. Those sorts of criteria are where the management of the property is handed over to a third party, where there are services provided like asset selection, education and servicing of the investments. We try to give some quite specific criteria so that firms are able to understand the substance of what is a collective investment scheme rather than simply what is the legal form. We have seen some quite clever legal wording to try to get it out of the regulatory net. I think we have made it clear that we want to look at the substance of arrangements and not just the legal form. We have given some guidance on that. What we are very anxious not to do, I would say, is to define the regulations in a way which brings in all property transactions. That is not something that we feel is our responsibility, or indeed to bring in property transactions which are under the sole control of an individual. Where there is a collective responsibility, then we have regulatory responsibility. That is what we are trying to define for the market.

  Q32  Susan Kramer: As you say, people have been very clever with the language in terms of structuring these property investment clubs. It is very hard to distinguish when you look at the brochure, whether you are looking at one that falls under regulation or one that does not, or when you converse with people who are part of one, whether it falls under the regulation or whether it does not. Do you think you should be extending, as it were, your definition to err very much on the side of a generous interpretation so that many more of these clubs are captured within that arena or else we basically risk turning this into the area that the cowboys flee to as regulation starts to impact on other areas.

  Mr Tiner: I think there is a danger of overdoing it as well, going too far to deter people who simply want to buy a property in their own name from that being regulated subject to our rules, which would seem disproportionate. What we need to do is to see how our new guidance settles down and, quite frankly, for us ourselves to look at what we call a perimeter very carefully and to see, given that our guidance is all about the substance and not about the form of arrangements, whether the spirit of that is being met by firms, and, if not, to act to bring them inside the perimeter rather than out. For the time being, I think we would like to see how our guidance operates in practice.

  Q33  Susan Kramer: I will deal with some of the issues in regard to past problems. Could we turn first to endowment mortgages? The FSA has warned mortgage endowment providers not to use the Financial Services Ombudsman as a substitute for a proper complaints procedure. I wondered about your comments, now that you have written to the companies, on raising those kinds of concerns. Have practices now improved in your view?

  Mr Tiner: Yes, I think they have. As you may have seen, we have on occasion taken enforcement action against firms because they did not have adequate complaints processes and far too many complaints were bouncing straight to the Ombudsman. I think we have seen, and I think the Ombudsman confirms, an improvement in complaints handling by firms, but we are very keen to keep the pressure on because they clearly have a regulatory responsibility to handle complaints properly on a timely basis and to look at them seriously. We are looking at the uphold rates, uphold rates of firms' complaints processes versus the Ombudsman, and seeing where we can see signals of firms not really behaving properly. Since we have started to take a stronger position on this, we have certainly seen improvements.

  Q34  Susan Kramer: You will be aware that there is some concern, particularly amongst the IFA community, that the strategy of the FSA in this arena has been, for reasons of financial stability, as it were, to provide some protection to the providers of these products and, in a sense, to let the IFAs become the scapegoats for the mis-selling that I think most people generally feel took place and that we are in a situation where the IFAs were a key part of the whole advisory chain. Many of the smaller ones particularly are under threat as a consequence. You will obviously be aware of Seymour v. Oakwell and the outcome of that case, which seemed to imply that as the IFAs were as much the victim of mis-selling as the end user, then the product provider should be picking up a significant part of the compensation but that does not necessarily seem to be flowing through in practice. We have had some individual companies—Clerical Medical is often held up as the example—that basically said that because of the use of LAUTRO charges, there was effectively mis-selling and that they were willing to step up and make individuals whole, but that other companies, and Standard Life is the one that is nearly always named, refused to take that step and that you have not intervened adequately in those situations. This is about the mis-selling issue and particularly mis-selling around the use of LAUTRO charges in order to provide a future forecast.

  Mr Tiner: The first point I would make is that the decision to proceed with the strategy that we have on mortgage endowments was quite explicitly not informed or made because of financial stability. It was thought, as we said at the time, to be the best approach in terms of the cost benefit, the costs of running a scheme, the cost of managing a process that is now being executed, and getting rapid compensation to those who were mistreated and mis-sold. It was not a financial stability issue. There are broader questions about responsibilities of providers and advisers. You mentioned a case which has some definitional importance in that respect. We currently have a project underway to look more clearly at the responsibilities of advisers and product providers, but we made it clear in our "treating customers fairly" work with the product providers that they need to think carefully about the documentation they give to the adviser and how the adviser might use that in relationships with the customers. I think it is unhelpful for the product providers to step back from that and say that is not their problem. In terms of mortgage endowments, we would not generally accept that the compensation has come from the wrong place. The Ombudsman has rules and criteria and those are being applied consistently. I do not think we see a particular problem on mortgage endowments in that respect.

  Sir Callum McCarthy: Since the relationship between any product provider and an independent distribution organisation can take a great variety of forms, it is not necessarily surprising that you should find different views on the responsibility of the product provider in any particular case. It is not one colour for all.

  Q35  Susan Kramer: Would you accept as fundamentally unhealthy a structure in which product providers are looking to shift liability further down the chain to fall on the back of the adviser, who is far less able typically to take that liability? It is a fairly convenient mechanism. What approach would you have to take a look at what you are doing to make sure that you are not becoming part of that liability transfer process?

  Sir Callum McCarthy: As John said a moment ago, we are looking at this as a general issue because we accept that it would be wrong for people simply to take a structural solution, which would slough off responsibilities that they should properly take. It depends on a large number of things, including the explicit relationship between the producer and the distributor, but we are looking at it.

  Q36  Susan Kramer: Sticking with mortgage endowments, what work are you undertaking to ensure that consumers who have not taken any action to deal with potential shortfalls understand that they may only have a short time before they are time-barred from making a complaint?

  Mr Tiner: A group has been established, which we are part of with the industry, to help what we think are still a few hundred thousand customers out there who have either not yet made alternative arrangements to repay their mortgage or who have not already complained and are seeking compensation where they thought they had been mis-sold to start thinking very rapidly about this. We continue to use our consumer information bulletins and so on to prompt this. I think it is very helpful now that the industry is very actively engaged in that, as they have been for some time.

  Q37  Susan Kramer: The Financial Services Consumer Panel asked you to consider an urgent solution to address the need for advice to consumers to evaluate their options in dealing with those shortfalls and you have not taken them up on those recommendations. Could you explain to us why you have taken that position?

  Sir Callum McCarthy: I do not think that is an altogether fair description. One of the things that has happened is that we have been working for a number of years very actively, and I think quite successfully, to address this huge market. Almost 70% of the people, more than 2.2 million, are now in a position where they say that they understand what their position is and have either taken action to find ways of meeting any shortfall or are reconciled to it or have complained about mis-selling either to the firm or to the Financial Ombudsman Service.[1] There has been a major set of activities, quite successful activities, in meeting 70% of the people and we know that they have already changed. Our concern is over the residual number which is a pretty difficult group to meet or to get information on, but we keep on working.

  Q38 Mr Todd: When someone has been provided with an endowment mortgage and has not resolved how to meet his liabilities in future, he has the need to obtain advice on what to do. Of course, because of the mistrust that there is in this sector, turning to those who are the providers is hard for them. I think it is fair to say that a significant proportion of the 30% you have been talking about are people who anyway are not comfortable dealing with these sorts of issues. I found that earlier answer really rather disquieting. Is it not necessary to focus much more effort on this group of people who are likely to be confronting these problems with some anxiety and genuine confusion as to the appropriate routes to follow?

  Sir Callum McCarthy: I think I share your concern. The fact that we have dealt with 70% is something—

  Q39  Mr Todd: These are likely to be the 70% who are the more capable customers.

  Sir Callum McCarthy: It is important that we keep on making sure that the residual 30% first of all keep on getting information from the firms, which we are absolutely compelling them to do, and that the need for action is brought to their attention. It goes back, I think, to the subject that we started discussing, which is the financial capability question, but which is the fundamental problem with which we are also trying to deal. I completely agree with you that this is a really important issue.

1   Note from Witness: Almost 70% of the 2.2 million households with an endowment-linked mortgage and facing a shortfall now say they understand what their position is and say they have either taken action to find ways of meeting any shortfall, are reconciled to it or have complained about mis-selling either to the firm or to the Financial Ombudsman Service. Back

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