Examination of Witnesses (Questions 60-79)|
8 NOVEMBER 2005
Q60 Ms Keeble: In quite a few of
your comments this morning you have talked about IFAs and people's
relationships with their IFAs. Have you done any study of how
people get their financial advice? Particularly now with the strip-down
regimes a lot of people will not be perhaps building up a longer-term
relationship with an IFA, people will talk about their changing
needs and their changing financial circumstances. I wondered if
you had done any work on that at all?
Sir Callum McCarthy: One of the
things that we are deeply interested in, I would describe it,
rather than concerned about, is the change in patterns of distribution
and change in patterns of advice, which are going to accompany
the polarisation, because there is going to be a whole serious
of new models of how products should be distributed, the relationship
between the end customer, the distributor, the producer of the
products, and the way in which the distributors are rewarded.*
All those are subject to a very considerable change and flux at
the moment, and that is one of the issues that we absolutely have
to keep on top of because I think there are opportunities for
both the development of good practice and the danger that some
of the bad practices that have occurred in the past will not be
eradicated quickly enough, and we are looking at that very carefully.
*Correction from witness: which are going to accompany depolarisation, because there is going to be a whole series of new models of how products should be distributed
Q61 Ms Keeble: One of the big issues,
presumably, is that the people who have the tightest finances
have perhaps some of the greater difficulty in accessing the most
Sir Callum McCarthy: There is
a great concern in terms of how do you get basic advice on things
like, pay off debt before you make an investment; how much money
should you try and keep so that you have some money for an emergency?
The basic things that people should get. How to get that basic
advice available to the parts of society where it is most needed
is a very real problem.
Mr Tiner: A key part of our financial
capability work, one of the seven strands we are now moving forward
with, is what is called "generic" advice. You have full
advice, basic advice, generic advice, but generic advice is really
facilitating the provision of advice to people, particularly,
I suppose, people who are not easily able to access and pay for
full advice, to have the sort of discussion that Callum has just
referred to. There has been a concern about that in the past,
that people who were perhaps in a position to give that sort of
advice were worried about stepping into the regulatory net and
therefore were not providing that advice at all, and what we are
trying to do there is to provide much more of a safe harbour for
those people so that they can have real conversations with people
about their financial circumstances without providing a recommendation
and without actually providing regulated advice. And there are
some discussions about whether there can be a quality mark to
back that up. Then the question is one of funding: how are these
generic advice services going to be funded? There is a range of
possibilities there, ranging from a public policy type of approach
through to: are there commercial interests for organisations to
provide that generic advice either free or very cheaply? We are
looking at all those sorts of options. There are also other types
of solutions, for example like the Resolution Foundation that
has started to set up their own charitable organisation to look
at a generic advice service for the most poorly paid members of
Q62 Ms Keeble: But those would be
different from the current model of IFA?
Mr Tiner: Yes.
Q63 Ms Keeble: It would be perhaps more
like the community legal service where you have different grades
of advice for different levels of expertise, that sort of thing?
Mr Tiner: Yes, but it might also
enable IFAs to have a conversation with customers which is not
regulated advice, but which is just generic advice in relation
to their particular circumstances, which may or may not then lead
into regulated advice if there is a product that is being offered.
Q64 Ms Keeble: Then you can look
at the pension credit advice.
Mr Tiner: Yes, it comes back to
the point that was raised earlier.
Q65 Susan Kramer: I just want to
say that I am getting very concerned about the fragmentation of
all of this and whether or not people will actually know what
piece of advice they have and what they can rely on around that
advice, and that is both from the perspective of the consumer
and from the perspective of the person who is providing the advice.
If I can just ask you, the money market has its "No advice,
no protection" campaign going, basically asking the FSA,
amongst others, whether or not it really is clear to consumers
that when they buy direct, for example, that they do not have
the protection of the Financial Services Ombudsman, or that there
might be other products that might be better for them but they
will not find that out on the website that they are using because
they are making a direct purchase. I think there are real issues
of concern about that. I have talked to IFAs who feel that they
have paid compensation for the what was then termed pension mis-selling,
advising people to get out of occupational pensions and to go
into a personal pension, where the occupational pension scheme
is now in default, or indeed has collapsed altogether, and are
saying, "Evidently we gave very good advice but we have been
forced to pay compensation and we cannot go back now and get you
to look at this situation and acknowledge that maybe the judgment
was wrong." We have a whole series of questions now coming
up all around this entire chain, a great deal of fragmentation.
Is this just getting away from it? Is this whole thing starting
to escape you, and is it breaking down as an oversight regulatory
service that is not likely to work for the consumer terribly well
and does not work for people who get into any level of this advisory
relationship, whether regulated or not regulated?
Sir Callum McCarthy: I will try
to give a quick answer, Chairman. First of all, I make the distinction
between advice and direct selling, which has always been there,
so if there is a direct sale that does not purport to be advice.
You can make claims against a direct sale which has been misleading,
but that is a different basis for advice. I do not think, as you
phrased it in the question, "Do you believe that this is
an escape from regulatory oversight?" I think it is a good
thing that the distribution network is now going to be challenged
in a variety of ways with a variety of new entrants and a variety
of new possibilities, and I think that that will produce a more
vibrant financial services sector and help deal with something
that is badly needed, which is the restoration of confidence on
the part of consumers in the financial services.
Q66 Susan Kramer: But you would accept
that there is some point where choice just tips over into confusion.
I know that people would say that it is difficult to work out
who should be their electricity provider, but that is a far less
significant issue than trying to purchase some of these financial
products which shape the quality of your life.
Sir Callum McCarthy: That is why
I go back, as John and I have kept trying to emphasise, to the
fundamental question of financial capability, the vital question
of the clarity and understandability of the information made available;
and, third, something we have not talked about very much, but
is an important component in this, the work on ensuring that firms
treat their customers fairly. If we manage to get those three
building bricks properly in place, of which the first one will
take a long time, we will deal with the problem. But those, I
think, are the real problems.
Q67 Jim Cousins: Could I ask you
about a different section of the market entirely, the one that
applies to the so-called non-private customers and your proposals
to do away with the training and competence required under the
Approved Persons Regime. Do you understand that the real concern
there is about this? What is your motive for doing away with these,
what seem to me to be very basic requirements?
Mr Tiner: They are basic requirements,
agreed, and because of that we would expect and indeed would anticipate
that in the professional market, where professionals are dealing
with professionals, as you say non-private customers, that firms
would themselves want to put in place those basic requirements
because it is in their own interests to have competent, well trained
people executing the business on their behalf, and that firms
quite frankly should not need the regulator to prescribe exactly
what that should be; they should be able to go about that freely,
within the context of a principle that says you have to have competent,
well trained people. Similarly, that you would not want your traders,
your people that are dealing with your counter parties to be anything
other than fit and proper people, and there should be a proper
internal mechanism to judge that. It is only a proposal at the
moment, we are simply consulting on this, and we have heard the
sort of response that you outlined from many in the industry who
are concerned about this, but others who have said, "We fully
support this because it is trying to in effect work with the forces
of a market that by and large works pretty well." So we are
not in a position to prejudge this yet but we do hear the concerns.
Q68 Jim Cousins: You would agree,
Mr Tiner, that there are now a bewildering and ever- growing range
of very exotic financial instruments in which people can engage,
as non-private customers, and indeed that concept of the non-private
customer itself, if you consider some of the things we have been
talking about this morning, like SIPPS, may not completely hold
water. Are you not concerned that at the present moment, when
you run the Approved Persons Regime, when you run the Training
and Competence Regime, you have access to criminal records, and
you have statutory immunity in your ability to place people and
allow people to go on the Approved Persons Regime, where some
of the companies in the market simply do not have that protection,
do not have that information.
Mr Tiner: They do not necessarily
have all the information in relation to the Approved Persons Regime,
but I think againand we have an open mind on this because
we are simply dealing with a proposal rather than a decision at
the momentthat big firms who are dealing with other professional
counter parties should be in a position, we think, to make those
kind of decisions themselves. It is very interesting that whenever
we bring forward a proposal which is to take away a rule the industry
puts their arms up and goes crazy because they want the safe harbour
of a rule; they do not like the idea of a principle. Yet at the
same time they will bleat about the cost of regulation, and to
some extent you cannot have it both ways. We set out quite a broad
agenda of areas where we think that the responsibilities for making
decisions about things that are currently set in rather a prescriptive
way in our rules could be safely transferred to the industry.
Our view was that those two areas that you mentioned fell into
that category. But, as I say, we are looking at the responses
as we speak and we will make a judgment over the next few months.
Q69 Jim Cousins: Do you not think
that these proposals run against the grain of international financial
regulations? The SEC, the Securities Exchange Commission in America
have very comparable requirements, and in terms of being able
to operate cross-border, cross-Atlantic, it could be a grave disadvantage
not to have similar requirements in the British system. Similarly,
we have just been talking about proposals in the Markets and Financial
Instruments Directive, which again has precisely the same sort
of requirements as we now have in the Approved Persons Regime.
Do you not think that you are weakening the British position for
a strong position in global financial markets?
Mr Tiner: No, I think as the report
in the Financial Times says today, that the City, the UK
financial markets has benefited greatly from the sensitivity of
regulatory touch here and has continued to move ahead of its competitors
globally. There is a completely philosophical difference between
how regulation is done in the US and how it is done here, where
it is a much more prescriptive and legalistic system in the US,
and we try to base our system here much more based on principles.
So I do not think that the read across is necessarily all that
significant; there are much deeper-rooted issues to do with appropriate
regulation than simply training and competence and approved persons.
We are not saying here that people who are dealing with professional
counter parties should not be competent, should not be well trained
and should not be fit and proper. The question is whether it is
management's job to judge that or whether it is our job, and we
have so far said we think that it is something that management
Sir Callum McCarthy: If I could
just follow that up? I absolutely agree that the professional
market is becoming increasingly complicated with detailed instruments
being used, but the real test of the UK and its standing and the
standing of the people within it is not actually the test that
we have to authorise people, which because the power to say, "You
cannot carry out your training" is such a draconian power
and such a fearful power we exercise very carefully.* The real
test of people's professionalism is the test of training and management
within the firms of the sort that John has described.
*Correction from witness: Because the power to say, "You cannot carry out your trade" is such a draconian power and such a fearful power, we exercise it very carefully.
Q70 Jim Cousins: When you look at
some things like aspects on derivative markets and secondary markets,
they are hardly now secondary, they are tertiary markets that
are exploding, do you not see that there is a need to be very
rigorous indeed about the people who are allowed to practise in
Sir Callum McCarthy: We believe
that it is extremely important in terms of the systems and controls
within firms that they are properly controlled, and we have taken
a variety of initiatives to deal with that. But, truthfully, the
way of dealing with that is not via the authorisation of individuals,
in our view.
Q71 Jim Cousins: So despite what
Mr Tiner has said earlier, you are providing me, Sir Callum, with
a very clear idea that you have already reached your conclusions.
Sir Callum McCarthy: No, John
was absolutely correct in saying that as with other things we
put up a proposal and we listen very carefully to the strength
of the argument, but we would not have brought this proposal forward
unless we believed that there were strong reasons for it. It was
not something that we simply did, as it were, in a light-hearted
way, it is a serious proposal; but, equally, we will seriously
consider the representations that we have received, which have
been many and serious.
Q72 Jim Cousins: Do not think that
if you were to withdraw these requirements that you might need
to seek other kinds of tests of the individuals that might threaten
the resilience of the British financial system?
Sir Callum McCarthy: I think the
things that we believe are the method of actually dealing with
the very real questions of the resilience of the financial system.
The way in which that resilience is affected by the development
of new instruments of the sort that you have described is more
likely to be effectively dealt with via work on systems and controls
generally, of a systematic nature within each firm, rather than
trying to deal with it individual by individual.
Q73 Chairman: Sir Callum, you came
out with a paper on payment protection insurance on Friday and
I want to ask you a few questions about that. Around 20% of the
firms visited by the FSA provided for no refund on early cancellation
of a payment protection insurance policy. This means that the
consumer can pay several thousand pounds for a single PPI policy
and receive no refund if they settle the loan early. What plans
do you have to stop that practice?
Sir Callum McCarthy: First of
all, I think that the results of both the thematic work and of
our mystery shopping in relation to PPI showed that this is a
worrying and real problem. The concern that we have is that in
particular a number of providers of this product, which is not
a bad product, inherentlyit deals with the real requirement
to give people the insurance they need, dealing with loansnot
particularly in relation to mortgages where the position is quite
good, but in other respects, were not giving the information that
the customer needed. If it is made clear that by making a single
payment you risk losing it or wasting it if you repay the loan
early or change the loan, as long as that is explained properly
that is a decision for people. The worrying thing was that people
were not having that explained.
Q74 Chairman: This is your own document,
and you say you consider no refunds are made under unfair terms
in Unfair Terms in Consumer Contract Regulations, 1999.
Sir Callum McCarthy: If I try
to deal with the main questions that we were concerned with, one
was that exclusions were not properly described and particularly
in people in terms of age exclusions and self-employment, so there
were a number of instances where products were sold and the person
could not subsequently make a payment against that product, and
that is inexcusable. There were a number of instances in which
the question of the risk associated and what would happen in particular
circumstancesand single payments is a very good example
of thatwere not explained, and we need to get better explanation.
And there is then a legal question which we have to do more work
on, and I will have to come back to you with a note on the legal
question because I would not give you the proper legally correct
answer if I tried to give it now, but I will do so, if I may,
Q75 Chairman: Yes. You indicate under
your Treating Customers Fairly principles that product providers
should consider how the products meet their personal needs and
expectations and the new Conduct for Business Rules require the
firm making a personal recommendation to ensure that the product
is suitable for the customer. Given that over 70% of unsecured
loans are settled earlyand that was indicated in a DTI
Press release in December 2003and you recognise that many
customers are likely to need flexibility, does this mean that
many single PPI policies are failing to meet the current customers'
needs under the Principles of Treating Customers Fairly and your
Sir Callum McCarthy: I think it
is clear that many of them have sold inappropriately, yes.
Q76 Chairman: There is a need for
urgent action, and I am a bit disappointed in terms of your recommendations
because the Treasury Committee recommended that the OFT conducted
investigations into the PPI as early as December 2003 and indeed
we went on, in January 2005, following the transferral of responsibilities
for the general insurance regulations, to ask the FSA to conduct
an investigation. Your press release states, "Having put
the industry on notice to improve its sales practice, the FSA
plans to undertake a second round of thematic work early next
financial year to check that compliance levels have improved."
It seems as though this problem is going on and on and there is
not much done about it. Let me give you a personal example. I
went into my bank to get a small loan added and I was asked if
I wanted payment protection insurance, to which I said no. The
next week I get eight separate letters from the bank asking me
to sign up for PPIeight letters as a result of that. I
did nothing about it, but there was a heavy sell here.
Sir Callum McCarthy: Chairman,
I absolutely agree with you that this is a major problem. On Friday
we indicated that it was, we have said that we are going to do
further work on it. I am glad to say that both the BBA and the
ABI acknowledge that this was something that they had to deal
with, and the other thing that we have made clear is that we are
initiating enforcement action against a number of firms where,
from the initial work that we have done, we believe that there
is a case for further investigation with a view to taking action
against them because of the way that they have behaved. Given
that we have been responsible for this for less than a year I
think that we have tackled it firmly and been determined to get
the evidence to make sure that we understood it, and as soon as
we had that evidence have taken action.
Q77 Chairman: But if some firms were
named, so that customers could have a chance. After all, if it
is conflicting with your Treating Customers Fairly regulations
and the legal implications here, then something needs to be done.
It is to try to get an urgent response from you this morning that
I am asking these questions.
Sir Callum McCarthy: Chairman,
you know that our practiceand I think it is the correct
practiceis not to name firms until we have amassed the
evidence and taken it through due process.
Q78 Chairman: But if you work at
Sir Callum McCarthy: We are attacking
this as a problem that we regard as a major and important problem
that we are determined to deal with. Could I just add one other
thing? The other element of it, as well as the mis-selling, is
that it is a question which I would hope the OFT will deal with
with equal determination, but that these products should be bundled
up with the original loan because they are both questions of bundling
which are important.
Q79 Chairman: Also your document
indicates that you have found examples of commission rates as
high as 80% payment protection insurance premiums. Does this indicate
that there could be a lack of competition in the market that OFT
could investigate along with what you are suggesting there?
Sir Callum McCarthy: It is clear
that the cost of the PPI can vary by a factor of three, ie people
can pay either £300 or £1,000 for the same degree of
protection. So it is clear that there is not proper competition
in the market, you have that degree of discrepancy. The thing
that worries us about the very high level of commissions, if you
are paying those very high level of commissions you have to be
particularly careful to make sure that you have internal systems
and controls to prevent the product being mis-sold, and the evidence
that we have from limited thematic work and mystery shopping does
not give us confidence at all that there are those systems and
controls in place.
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