Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  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 detailed advice.

  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 the community.

  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 again—and we have an open mind on this because we are simply dealing with a proposal rather than a decision at the moment—that 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 could do.

  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 these markets?

  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, inherently—it deals with the real requirement to give people the insurance they need, dealing with loans—not 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 circumstances—and single payments is a very good example of that—were 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, Chairman.[2]

  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 early—and that was indicated in a DTI Press release in December 2003—and 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 suitability rules?

  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 PPI—eight 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 practice—and I think it is the correct practice—is not to name firms until we have amassed the evidence and taken it through due process.

  Q78  Chairman: But if you work at that urgently.

  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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