Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 106-119)


14 DECEMBER 2005

  Q106 Chairman: Would you introduce yourselves for the shorthand writer?

  Mr Howard: I am John Howard, Chairman of the Financial Services Consumer Panel. Hopefully, there are enough issues that you want to discuss today that I can provide some valuable evidence on.

  Mr McAteer: Good afternoon; my name is Mick McAteer, Principal Policy Advisor at Which? the UK consumers' association. I was one of the consumer reps on the expert banking groups, and I am also the consumer rep on the CEIOPS consultative panel.

  Q107  Chairman: Welcome back, Mr McAteer. You are well known to us. In your humble, wise, shy and retiring way, you can tell us exactly what the situation is about the consumer in Europe and being able to shop across borders.

  Mr McAteer: The biggest criticism we have I suppose on the Commission's overall approach is that everything is driven towards this belief that if we do not move we will not see integrated markets at the retail level. The Commission's objective seems to be the integration of markets per se; it does not seem to be making sure that consumer needs are met. One of our big criticisms is that the Commission has this assumption that the interests of the market and producers are aligned with the interests of consumers. If you break down these barriers to integration, you will see more choice for consumers, more innovation, which will lead to improved consumer welfare. We are quite sceptical about it because we see very little evidence of any consumer-led demand for a single market. A recent survey—the Euro-barometer survey—found that something like 95% of EU consumers have never bought a financial product across border. A similar amount had no intention to do so. To conclude this opening statement, we do see considerable benefits for the UK consumer and for European consumers if the Commission focuses on allowing integration to happen at the wholesale level and at the institutional levels. There are considerable benefits to be had there from economies of scale and so on, but we think you should leave well alone at the retail consumer protection end of the market because we see more unintended consequences and risks than benefits to the end user.

  Mr Howard: There is a risk, is there not, that Mick and I will wind ourselves up to be more and more extreme, but I would certainly go along with what he says there. A lot of what you have been hearing this afternoon about MiFID and CESR and all these phrases seem to be an awful long way from the high street and what matters to consumers. I am concerned that the whole of this initiative has been taken once again from the direction of the industry and what is best for commerce, rather than looking at what the consumer really needs; so I would go along with Mick as far as that is concerned. The same thing happened to some extent in this country; that the industry starts off with all these initiatives, provides the language and the framework for the way these things are sold; the regulator then comes in and tries to impose some sort of control over it; and the consumer has to put up with or suffer what is produced at the end of the day. I think the same is happening in Europe. It is a shame that there was not greater consumer input at the Commission level. I suspect there might have been a different perspective then over the directive that came out, but we are where we are and we must proceed from there.

  Q108  Peter Viggers: What are the biggest obstacles to a European single market in financial services? What problems do you see?

  Mr Howard: I think the biggest obstacle is the outlook of the consumer. It would need to change dramatically if they are going to take what many would perceive to be a risk in dealing cross-border. They may not necessarily realise in some situations that they are dealing cross-border but I think they would want to know. There is a cultural division; there is a division on legal grounds, which are all big obstacles to a single market in financial services coming about. In the UK consumers will see it as very difficult to judge where any benefit might come at the moment. I know when you went to Europe you heard that the FSA was doing a pretty good job. There was some envy on the part of regulators and supervisors in Europe as to the way the FSA operates. I think that consumers in this country feel that there is a regulator here and they are doing a reasonable job. There are many ways in which they could have that improved, but I do not think they see much benefit in cross-border deals of any sort. That is where the consumer is coming from. It is the outlook of the consumer that is one of the biggest obstacles.

  Mr McAteer: I could summarise it in three things. It is awareness, culture and then confidence and trust. We see no evidence that consumers are aware of the benefits of cross-border shopping. The cultural differences are vastly underestimated at Commission level, and I think that that is a hugely important point. There is then the general confidence and trust issue. We have got problems of confidence and trust amongst UK consumers buying financial products in the UK and it is very difficult to imagine the consumers would be confident enough and trusting enough to buy products on a demand-led basis from other Member States.

  Q109  Peter Viggers: We have had a tepid and moderate response to the 26th regime, which would not be one of the 25 nations. Do you share that view?

  Mr McAteer: I think it depends very much on the product area. People have previously alluded to the idea of 26th regime mortgages. It is difficult to see how that could even happen, given the different Land Registry requirements, the different repossession protection measures and so on. Property and everything associated with it has different levels of legal protection. I would be quite surprised to see a 26th regime even get off the ground. I would imagine that if the opportunity for provision of cross-border mortgages was really there, I think the market would have already developed that regime. I would be very sceptical about whether a 26th regime could be possible in the mortgage market. I have heard people talk about the possibility of a 26th regime for the insurance business, and I have to say that we would look on that as a backdoor way of introducing a lower level of regulatory protection. The big fear that consumer groups have at European level is the issue of regulatory arbitrage where the industry tries to manoeuvre its way into the lowest common denominator of regulation. Maybe we are being overly sceptical here, but we would imagine that is the main reason behind some of the insurance groups proposing a 26th regime.

  Q110  Peter Viggers: The European Commission has promised a better regulation agenda, and the theory is that legislation will not be introduced in a situation where there is a better alternative available. Do you see signs of this happening? Do you think it is likely?

  Mr McAteer: Again, I must confess to sharing some of the frustration and concerns of the industry about the way that the European Commission policy-making process works. We all share the concern that there is a real lack of evidence base as to the best way forward for regulation, particularly when directives are being imposed or introduced. Again, the Commission is making worrying noises about doing ex ante evaluations of directives and regulatory initiatives and so on. It talks about better cost-benefit analysis and regulatory impact assessments, but it remains to be seen whether or not that happens in practice. Crucially, it remains to be seen how they will undertake those cost-benefit analyses because we would have criticism of the UK financial regulatory system in that we think, in our view, that the cost-benefit analyses are too industry-centric. It starts from the premise that regulation costs industry. Let us look at the best way of protecting consumers or meeting consumers' needs! It remains to be seen whether or not an improved regulatory process will be delivered by the Commission.

  Q111  Peter Viggers: The similar point is that the Financial Services Consumer Panel refers to the Commission's agenda and the fact that it stresses the importance of implementation, enforcement and evaluation of existing legislation. What are the likely key benefits to consumers from post implementation evaluation of recent financial services legislation?

  Mr Howard: I think you learn by your mistakes—that's possibly the best way of looking at it. You could then make an assessment of how effective something has been. The Consumer Panel is very interested and concerned to see how some of the latest regulations have been introduced into the UK is panning out, especially in regard to insurance and mortgages, to see what the overall cost and impact of those things has been, and our future work will be looking at those areas in particular because we want to see whether the regimes that have been put in place really do what they were supposed to do and whether the costs to that have been worthwhile. That is essentially what we would want to do with these European directives, to make sure that there really was value in doing them after the event. I notice that you heard from the industry that they were unsure about whether it was shareholders or consumers that were paying. I would say that nearly always it is the consumers who pay for regulation, and they have got a real incentive in having value for money in regulation, and that is why we would support that approach of the Commission.

  Q112  Mr Todd: You have listened to the kind of blood-fest we have had over the role of the FSA and to some extent the Treasury in the first session. They have offered to assist you in getting the consumer messages across and they say they have been doing their best to do that. is that your perception of their performance?

  Mr Howard: In the EU?

  Q113  Mr Todd: Yes.

  Mr Howard: Yes, but what they can do is rather limited because of the complexity of the EU, the places where decisions are made, and the task they have got. So far we have expressed our views on Commission proposals to the FSA and they have taken that forward, and we have also made representations, where we can, directly to the EU to try and influence the way things have happened; but it is very difficult for the FSA to be able to take messages directly into the heart of the EU and make a difference as a result. There have got to be significant structural changes in the way that consumer representation is introduced in the EU.

  Q114  Mr Todd: Does the White Paper encourage you to think that might happen?

  Mr Howard: Absolutely, and I am delighted to see that the White Paper included a proposal for what in effect looks like a financial services consumer panel. It was one of the recommendations that we came up with. I think they need to go further than that. You have had mentioned to you already the euro conference that we organised. We had 14 states represented at the conference. It was very difficult to find consumer representatives from some countries. When you talk to some of the representatives there you managed to get an idea of why that was. I remember speaking to one delegate—I will not say where they were from, but essentially they were a national consumer agency. They had 40 people who dealt with every consumer issue, which they were representing to government; but not only that they were handling queries from consumers who came through the door, so they were trying to do everything. Expecting them to have the capacity and resources to deal with something as complex as financial services really was not on.

  Q115  Mr Todd: It is interesting you say that. Have you gathered the impression, which I think I probably have, that in terms of consumer representation and the ability to make the consumer voice heard, this country is quite substantially ahead of—you are frowning, Mr McAteer!

  Mr McAteer: I do not want to get involved in semantics here, but from our point of view there is a huge difference, a world of difference between consumer representation and representing the consumer interest. Representing the consumer interest properly is not just about bodies on committees or panels; it goes much deeper than that. It goes to how the regulatory process works. It goes to what form of economic model you use to evaluate the benefits of regulation and so on. I mention that because I totally agree with you that the FSA and the Treasury are very, very good at facilitating consumer representation at UK level. They are very consultative and talk to us all the time; but I would disagree that they are representing consumer interests in Brussels.

  Q116  Mr Todd: Nor was I suggesting that. My question was about capacity of consumer organisations in Europe and the relative strength of the UK experience. I take all you say about whether the representative function actually works, but in terms of capacity it sounds from what Mr Howard has said that there are some places where they are struggling at a very primitive level of getting any means of getting consumer opinions heard at all.

  Mr McAteer: There is simply no way that consumer groups at the European level have the resources of the people to lobby to the same degree as industry.

  Q117  Mr Todd: That is presumably an obstruction to carrying out what the White Paper aspires to, which is simply gathering representations.

  Mr McAteer: There are two possible models that we are evaluating at the moment. As John says, it is encouraging that some form of consumer panel is being considered at European level, which could be very effective if it is resourced and staffed properly, and if it has the authority to call the Commission to account. I do not think it will have much impact if it is just another forum for discussion. It needs executive power to require the Commission to answer its recommendations and so on. An equally interesting potential way of representing the consumer interest—we are looking at how we can translate the Treasury Select Committee model to the European arena, because clearly this body of people has had a powerful influence in the UK financial world.

  Q118  Mr Todd: A financial blood-fest!

  Mr McAteer: There is a potential model there. The European Parliament set up IMCO, one of these committees that is meant to be the internal market in consumer protection. That has interesting potential as well. I would like to see that committee play the role that the Treasury Committee plays in this country for holding both the regulator and the industry to account at that European level. That is the only way we can ensure that the structures are in place and ensure that the public interest is represented in a public forum, and effectively.

  Q119  Mr Todd: In the first part of the discussion when we had the representatives of industry here there was a discussion about the various processes which eventually lead to instruments, which make UK law. How do consumers fit into that chain of decision-making influence? How do they, and how should they?

  Mr Howard: In the EU at the moment there are a couple of organisations that do input. One is BEUC, the consumer body that represents the whole spectrum of consumer issues, so again it is very resource-stretched when it comes to dealing with specific financial issues. Another body has been set up called FIN-USE, which is a group of experts in financial areas. One of my colleagues on the Consumer Panel actually sits on FIN-USE and would have been here today if it had not been for the fact that FIN-USE is sitting today. Those two bodies do input consumer representation, but at quite a low level. They have no greater opportunity to influence things than to send recommendations to the Commission or the various Lamfalussy bodies and suggest what they feel is the most appropriate way forward. There has got to be a much stronger structure than that, although I would not necessarily go as far as Mick is suggesting where they would have some sort of power to veto, or something like that. The sort of structure that I would like to see would start at a national level first of all. Our recommendations suggest that the Commission ought to be putting pressure on national governments to provide resources for some sort of consumer representation nationally and to arm those people with resources to be able to make proper decisions in the financial services area and then from those one would have a selection of people you could pick to put on a financial services consumer panel at Commission or EU level, and you would need to build that into the structure to be able to advise directly.

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