Select Committee on Treasury Written Evidence

Memorandum submitted by the Children's Mutual


  1.1  The Children's Mutual is a specialist provider and distributor of savings and investment plans designed to allow families to build up funds for their children's futures. We are the only financial services organisation dedicated solely to this area of customer need, and have over 50 years of relevant experience on which to draw.

1.2  We have become a major player in the Child Trust Fund (CTF) market, offering both stakeholder and non-stakeholder plans, based on underlying investment in funds of selected UCITS collective investment schemes. We also offer and promote both wrapped and unwrapped investment in such funds for adult consumers, designed primarily for use by parents and grandparents as a way of building additional funds for a child's future.

1.3  We have responded separately to the HMT Consultation Paper on the UK implementation of MiFID. A copy of that response is attached for reference. We would particularly draw your attention to the concerns expressed therein over the potential threat to the continued distribution of non-complex products—and most specifically stakeholder CTF accounts—via the "direct offer" route, as currently undertaken in the UK. We see this eventuality having the possible outcome of totally undermining Government efforts to improve the financial wellbeing of future generations, and to start addressing the "savings gap".


2.1  We wish to make the following submissions in response to the specific issues raised by the Inquiry.

2.2  Whether the proposals adequately reflected prior input into the legislative process and the extent to which there were any significant "surprises" in the proposals, or whether any new requirements were included without sufficient prior consultation?

2.2.1  We are not aware that any public consultation, either at EU or UK level, had taken place prior to the adoption of the MiFID framework directive (EC/2004/39) in April 2004. We now believe that the scope of the directive has increased immeasurably beyond that which was originally envisaged—for example by the inclusion of investment advice as a separate regulated activity (we accept that the giving of advice is already regulated in the UK), and by extending the list of financial instruments covered to include units in collective investment undertakings—even though the undertakings themselves are not covered.

2.2.2  We are concerned that this widening of scope will, in the UK, lead to FSA significantly changing the nature of its conduct of business (COB) rules for other types of investment product (eg life insurance) so as, effectively, to bring within the scope of MiFID-type regulation, products and services which were never intended to be covered by the architects of the original directive. The costs of implementing such a wide-ranging change will be very significant, and yet it is impossible to identify any quantifiable benefits accruing to UK consumers, in terms of enhanced protection or otherwise.

2.2.3  The lack of clarity regarding many elements of the directive, and the draft implementing directive—the prime example being the issue we have raised regarding direct offer promotions—is making it extremely difficult for firms to undertake a meaningful analysis of what the ultimate effects, and hence costs, on their business is likely to be. The lengthy delays which are continuing to occur, whilst the implementation date of November 2007 remains "set in stone", serve only to exacerbate this difficulty.

2.3  The extent to which the proposals now provide sufficient information for a full cost benefit analysis to be undertaken at this stage and the desirability of undertaking such analysis?

2.3.1  Whilst we believe a full cost-benefit analysis is essential—both at EU and UK level—at this time we have not been able to identify any benefit for either UK consumers or the UK industry, beyond (from our perspective) the very limited relaxation of requirements for firms wishing to transact business in other Member States. Following on from our comments above, we do not see how such an analysis could be undertaken at the present time, given the continuing uncertainties and lack of clarity.

2.3.2  The partial regulatory impact assessment undertaken by the UK Government at present does not go far enough in considering either the initial or on-going industry costs which will impact on UK firms, and the consequent effect on consumers.

2.4  The identification of any elements of the proposals which are most likely to be interpreted differently across Europe and the problems that this may generate

2.4.1  Experience shows that few Member States are able to devote the necessary energy and resources to effect the successful and timely transposition and implementation of EC financial service directives required by Community bodies. We firmly believe that the length and complexity of MiFID will mean that it is extremely unlikely to buck the trend set by earlier measures. Differential implementation by Member States, and at varying speeds, should be anticipated. In particular, specific aspects such as customer advice, financial promotions, complaints handling and systems and controls are likely to be implemented in a variety of ways, and may lack the comprehensive approach normally adopted in the UK.

2.5  The identification of any elements of the proposals which conflict with existing UK regulation and an indication of the costs and benefits of changing these elements to reflect the rules under MiFID

2.5.1  The most significant element of the proposals that appears as if it may conflict with current FSA regulations is the issue of distributing non-complex financial products (falling within MiFID) by "direct offer", where the promotional material is sent (usually by post but also, increasingly, by email) to individual consumers, about which providers and distributors typically know very little, or nothing, other than their name and address.

2.5.2  Although this method of distribution is not disallowed by MiFID per se, its total absence from the directive as a distinct distribution channel—given that the way direct offer currently works excludes it fom the definition of "execution only"—means that the potential position post-MiFID is unclear, leading firms to have to consider the "worst case scenario" that this distribution channel may either be closed completely, or become too expensive to operate. This eventuality could leave the only routes via which a huge proportion of consumers could access basic, low-cost, investment products (such as the CTF) being the display of leaflets in high street outlets, and generic sections of providers,/distributors, websites. Both channels would require pro-active engagement by the consumer in the first instance, which experience shows to be lacking in the community at large, and especillay amongst the less financially sophisticated. We cover this issue, and the significant level of consumer detriment that we believe would ensue, in much greater depth in the attached response to the HMT consultation paper.

2.5.3  The costs to the industry (and hence, indirectly, to consumers) would be negligible if HMT and FSA were to implement the directive in such a way as to remove direct offer business from the scope of the directive; a high level of consumer protection is already in place under current FSA COB rules for buisness transacted in this way. A list of possible options for achieving this desired outcome is included in the attachment. The benefit to consumers—and especially those for whom the cost of obtaining advice is prohibitive—of taking such action would be the continued freely available access to straightforward affordable financial products.

2.6  The identification of areas in which the UK could benefit from rules additional to those included in the Commission's draft proposals and areas in which such "super-equivalence" should be avoided.

2.6.1  We have not identified any area which would be of relevance to our business in which the adoption of additional measures would be advantageous or beneficial. We are unable to comment on other areas, such as trading platforms and asset management issues. In general, we are opposed to super-equivalence unless significant tangible benefits for both UK consumers and firms can be demonstrated.

2.7  Whether the UK financial services sector is prepared for the domestic implementation of MiFID and the extent to which the proposed MiFID implementation timetable is realistic for UK firms

2.7.1  We do not believe that the present timetable is attainable for the vast majority of firms in the UK financial services sector. Given that final agreement of the level 2 proposals is not anticipated until June 2006, the period that will remain for FSA to finalise, publish and consult on its implementation proposals, to be able to have the necessary regulations in place by the end of January 2007, will be far too short. We have already seen the results of trying to implement measures in such a rushed manner in respect of the Simplified Prospectus Directive—and MiFID is in our view far more complex and far-reaching in scope. We do not believe that achieving full implementation by 1 November 2007 is a realistic prospect.

April 2006

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