Examination of Witnesses (Questions 20-39)
SIR CALLUM
MCCARTHY
AND MR
JOHN TINER
8 NOVEMBER 2005
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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