Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80-99)



  Q80  Chairman: You visited 45 places.

  Sir Callum McCarthy: Yes.

  Q81  Chairman: In the light of that, in terms of OFT, if the market is not working, then a letter from this Committee to OFT asking them to look at that would not be a bad thing?

  Sir Callum McCarthy: There is already a super-complaint in front of OFT and the support of this Committee would be very important.

  Mr Tiner: I was going to add on this point about commission, that commission levels can be very high in the way that you have described. That is related to the kind of incentives that we have seen and referred to in our paper, to staff who are selling PPI, which would potentially create the purse incentives in terms of the suitability question, and that within our Treating Customers Fairly the broader issue of sales people being incentivised in the right way to do the right thing, is a key component of this work as well.

  Q82  Chairman: There have been suggestions made that there should be comparative tables for PPI produced. Would you, after your next round of investigations, consider that?

  Sir Callum McCarthy: Yes. I would hope that just with annuities and life policies and travel insurance, once you get the separation you actually get the market working effectively, and that is what we would very much like to see. We also, as John said, really want to stop elements of mis-selling.

  Q83  Chairman: Given that there is a joint regulatory aspect to the FSA and the OFT, are you satisfied with the arrangements at the moment with OFT, or can it be taken further?

  Sir Callum McCarthy: We need to look and see how the OFT would respond to the super-complaint that has been made to it, and we also need to consider the timing of that because if it were to take an extended period for investigation we would want to look and see whether the abuse that we believe is a problem was going to be controlled, and whether we would be satisfied to wait until the end of the OFT and Competition Commission deliberations, and I cannot yet give you the answer to that, other than to say we are thinking carefully and want to look at it once we understand what the OFT is doing.

  Chairman: Would you keep us informed of that?

  Q84  Jim Cousins: Sir Callum, you have described very clearly the issue of unbundling, that is to say separating the primary product that is being sold from the issue of protection of payments in the future and the insurance on that. You have described that unbundling process as an issue for the Office of Fair Trading, but surely where we are talking about primary products that are products regulated by the FSA regime, surely you could unbundle them right now? That is not an issue for the OFT, that is an issue for you.

  Sir Callum McCarthy: You are quite right that we could take a regulatory initiative to unbundle these, and we may choose to do that. The question that we have to think about is, first of all, what is going to be the response of the industry to the problems that we have flagged up over the last months and particularly published our findings on last Friday. Second, if there is an investigation by the competition authorities in relation to those practices, should we wait until they have finished? Because they will do some work which one would hope would be of value. Those are the questions that we have to weigh up. I am making clear that we have not yet come to any decision, but I completely accept you are right, that we could actually take action ourselves.

  Mr Tiner: Could I add a point, Mr Cousins? As we have said, much of our work so far has shown that the problem here is much more related to credit cards and unsecured lending than to mortgages, and of course we do not currently regulate credit cards, we do not regulate unsecured debt, so we do not quite have the same access of power, if you like.

  Q85  Jim Cousins: Mr Tiner, let us not muddy the waters here. My question was very specifically on four primary products, which are part of the Financial Services Authority regulated product regime, which you could unbundle right now, and Sir Callum has clearly said that the answer to that question is, "Yes, we could unbundle right now."

  Mr Tiner: In relation to just those products, yes.

  Q86  Chairman: You can understand the urgency of that. I would like to go on to the issue of claims handlers. I know you say that you are not responsible for regulating third parties and to pursue complaints on behalf of consumers, but there have been concerns about claim handlers. In fact the FOS state that claim handlers who provided the forms make the determination, and the ABI in a survey of the second quarter of 2005 looked at this issue. The total complaints were over 137,000 with just over 66,000 upheld, and the success rates for customers complaining direct was 48% and the success rate for claims handlers was 46%. Given that the FOS and insurance companies ask for no more information than complaint handlers companies, then it would seem as if this is a situation in an unregulated market where quite a number of companies are making a few bob for themselves, and then at the end of the day the person losing in it—because the same procedures are followed whether they go to a claim handler or direct—is the individual who states that they have a shortfall on their mortgage. That seems a pretty scandalous situation.

  Sir Callum McCarthy: We have made clear, and make clear in our publicity and advice that there is actually no need for anybody to get advice in making a complaint and that they can do so by themselves without any problem. What we are not prepared to do is to say that people should be prevented from doing that because there are some people who will find it helpful to get advice on how to formulate a complaint, and the difficulty is between drawing people's attention to the fact that they can do it themselves, that there is no disadvantage in doing it themselves, but not actually saying that the Financial Ombudsman Scheme will refuse to take issues when they come via complaints handling firms. I understand that the government generally is looking at the question of complaints handling and people who advise on claims, but that is a general issue. The specific position that we are taking is to try to make it very clear that people can do it for themselves, but equally to make it clear that if they choose to get advice they are not going to be debarred from making a compliant either to the firm or for themselves.

  Q87  Chairman: There is provocative literature out in the market on this for people. Let me give you an example here, Endowment Justice say, "Can everybody do it? It is intended that everybody is able to present their own complaint. But, to do so, you either have to have blind trust in the system or in-depth legal knowledge and understanding of the financial services regulation." Absolutely, utterly not true, you would agree. "The difficulty with handling your own complaint is that: you have to rely and trust that the financial services company dealing with your complaint will do it properly, fairly and in accordance with the law." So a question mark there against the integrity of the financial services company. Also, "You have to rely on the FSA to enforce the regulations quickly when providers breach the rules." Second question mark against the integrity of yourselves in this instance." Thirdly, "You have to rely on the FOS (the Financial Ombudsman Service) to make fair, reasonable and consistent decisions in accordance with the regulations and believe that they will not make mistakes or interpret the regulations in a way that is unfair and disadvantages the consumer. It is a disappointing fact that consumers cannot rely on any of the above." If I were a consumer I would be confused, and if I do not know what is happening I would say, "Jeez, the FSA—useless; the FOS, more useless." And what am I going to do, go through them? It is the same process going through with a better claim if you do it direct, as a result of that. Yet this provocative literature is going through, and if the figures are to be believed £250 million was made by claim handlers' companies in the past year, and if we look at some of them, "Complain to us," they say, and they limit the deduction to 54% including VAT. If you have a constituent who has a £5,000 shortfall, that means that £1,700 is taken off straight away, and other companies, like Endowment Solutions, say they limit it to 15%—do not say if it is VAT. The same as Sole Investors do. Endowment Justice say it is 17.5% plus VAT, which is 20% with VAT, and Bonnington Partners say it is 20% plus VAT, which is 23.5% off an individual's claim. Given that there is no added value whatsoever in claim handlers doing that, the ordinary consumer just seems to be losing out enormously, and surely to goodness whilst it is not regulated there has to be a view here, Sir Callum, and there has to be something done.

  Sir Callum McCarthy: Chairman, I think I am in violent agreement with you.

  Q88  Chairman: That nothing can be done?

  Sir Callum McCarthy: I do not have legal powers to deal with these people. That is why I welcome the government tackling this—and I do not think it is confined to financial services—and until there is a new initiative giving statutory powers to either the FSA or to somebody else I cannot do anything about it other than the things that we are doing.

  Q89  Chairman: Would you, as a result of this Committee meeting this morning, go back and discuss it with your Chief Executive, senior management and maybe send a letter to the government or put some policy issue up to encourage this situation to stop?

  Sir Callum McCarthy: Absolutely, I undertake to do that. I do not think that the government is in any doubt about our position.

  Chairman: I think we need pressure on this. People are losing out as a result of this. I looked at the Daily Mail yesterday, and this is on the back page with the sports, "Endowment shortfall. Big Ben." So a real authority there. It says, "The clock is ticking, have you been mis-sold? If you do not claim they win, you will lose." Pretty powerful stuff, so we need action.

  Q90  Mr Todd: You have raised a number of times during your answers the importance of the FSA communicating with consumers on a variety of issues. Do you measure how effective your communications actually are? For example, when you produce comparative tables which John urged, on payment protection, for example, have you measured how well used those are?

  Sir Callum McCarthy: We measure hits on our website. We have just embarked on a Naked Facts about Mortgages programme to try and improve the number of hits on our website, but it is also quite important to recognise that, for example, the comparative tables are extensively used by the personal finance press as a basis for making recommendations. So it not only affects immediate consumers but some of those important intermediaries.

  Q91  Mr Todd: So you measure your website hits, what does that tell you?

  Sir Callum McCarthy: It tells us which ones are most used—

  Q92  Mr Todd: I thought you were going to tell me something quantitive there. I know what hit measuring does.

  Sir Callum McCarthy: I think there are something like 1,700 a week.[3] But the point I am making is it is not clear whether—

  Q93 Mr Todd: Mr Tiner is looking doubtful about that.

  Mr Tiner: I am looking it up.

  Sir Callum McCarthy: My point is that it depends whether those 1,700 people are one individual looking it up for his or her own mortgage or whether it is, as it were, 1,600 IFAs who were then going to give their advice on mortgages, or mortgage brokers using the information in a much bigger way. So it is quite a difficult thing to answer.

  Q94  Mr Todd: Bearing in mind what has been said repeatedly through this morning, which is that the level of financial knowledge and education of many consumers is limited, is it not sensible to regularly audit your communications achieved so that you actually know who you are reaching, who you are not, what the level of education is you are hitting regularly, and those you are missing? Is that not really a part of your duty? And do you do it?

  Mr Tiner: I would say we have done it sporadically, not systematically, which I think is what you are saying is what we should be doing, and I think you have a good point there. Particularly as in the last two year we have doubled again the amount of money we spend on consumer information, financial capability and so on, it is the sensible thing for us to do.

  Q95  Mr Todd: I am sure you can understand the risk, which is that you may be producing excellent information for a group of people who are already relatively well informed, and it is usually supplementary information which makes them better informed, but it does not really chisel into the mountain of mis-information, and the kind of thing that John talks about, where you are pitching at people who really do not understand very much anything about these issues.

  Mr Tiner: We do understand that simply putting something on our website does not then inform the whole of the British public. Where we do have information going up on to the website which we think is particularly important to a group of people, we try and work very hard with the media to point them to it, so that they can refer to it, write about it, and point their own readership to it so that we get much wider distribution. For example, on things like precipice bonds and high income bonds in the past, we have had a very active campaign in effect through the media to try to get people to come and look at the issues on our website in terms of what to do if they felt that they had been mis-sold a precipice bond.

  Q96  Mr Todd: You did quite a lot of work on that and yet a tremendous amount of selling took place long after you started shouting.

  Mr Tiner: Yes, we cannot stop it all, clearly.

  Q97  Mr Todd: The peak sale period fell after the point when you started shouting warnings.

  Mr Tiner: Yes. We had started shouting warnings quite early, but we could have been louder at the time.

  Q98  Mr Todd: So you will be looking harder at this because, to be honest, the same could be about to happen with venture capital trusts where you have been indicating that these are products which really should be bought in a very highly informed environment, and yet I would hazard a guess that there will be a lot of people who will be thinking that it seems to be a very attractive tax free product and let us sweep it up.

  Mr Tiner: We have issued our own warnings on venture capital trusts both to the providers of the products and to customers again working through the medium of the relevant information on our website which the media refer to quite frequently. Again, we cannot stop them buying these trusts if, having acknowledged all of that, that is what they want to do. The general point is that we need to be perhaps a little smarter on how we convert the data we put on our website into the information that goes into the hands of the population.

  Sir Callum McCarthy: I think it is, if I may say so, a good point to put to us. It is very difficult to work out what we would have to test.

  Q99  Susan Kramer: Following up on that, I am really concerned with this strategy, as to how are people going to know both the scope of the advice that they are getting, how partial it is or how complete it is and also what protections are in place when they follow that advice. Would you take a look at that issue in trying to make sure that there is absolute clarity all along the line, and also that there is some sense of where the liability goes back to as you look at these various products because none of this is very clear to anybody. It is so ambiguous.

  Sir Callum McCarthy: I absolutely undertake that we will continue to worry away at these issues because I think that they are important issues, and they are important both ways, so that the consumer should know what protection is associated with particular forms of advice, and also so that we do not erect unnecessary obligations on people giving advice which deters the provision, the sort of basic advice which is so desperately needed. So it cuts both ways, but, yes, it is an issue that is we are very conscious of.

3   Note from Witness: The consumer information section of the FSA's website received, on average, 21,000 visits per week in October 2005. Back

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