Examination of Witnesses (Questions 666-679)
MR JOHN
TINER, MR
CLIVE BRIAULT
AND MR
VERNON EVERITT
16 MAY 2006
Q666 Chairman: Mr Tiner, welcome to you
and your colleagues in this evidence session on Financial Inclusion.
Can I thank you for rearranging your diary to come along this
morning? It has been very helpful to us. Would you introduce your
colleagues for the shorthand writer, please?
Mr Tiner: I am John Tiner, Chief
Executive of the Financial Services Authority.
Mr Briault: Clive Briault, Managing
Director, Retail Markets, Financial Services Authority.
Mr Everitt: I am Vernon Everitt,
Director of Retail Themes, Financial Services Authority.
Q667 Chairman: Your submission notes
that the FSA "have no explicit responsibility for financial
inclusion" and "nor is it included in the principles
of good regulation as an issue to which [the FSA] should formally
have regard". However, you have told us that you "take
the issue very seriously". What does that mean in practice?
Mr Tiner: I think that what it
means in practice, Chairman, is that we believe that, as the regulator
for the whole of the UK financial services industry, we have a
responsibility to think about all consumers of financial services;
and, indeed, in the context of financial exclusion, potential
consumers of financial services, but in the context that they
relate to our four statutory objectives of market confidence,
protecting consumers, fighting financial crime, and creating a
better public understanding of the financial system. That ranges
from people who currently are not engaged with financial services
who perhaps should be, all the way through to those who have a
lot of money who want to invest in hedge funds. Our remit therefore
covers the whole landscape of the population engaged with this
industry.
Q668 Chairman: In your 2005-06 business
plan there is no mention of promoting financial inclusion. What
aspects of your work promote financial inclusion and how do you
measure that success?
Mr Tiner: In a number of ways,
Chairman. As you may know, we have recently launched a seven-point
strategy for building financial capability in this country. I
set up a steering group to spearhead this work, shortly after
taking over as Chief Executive at the FSA two and a half years
ago. We have built in financial inclusion as a priority to every
one of those seven areas that we are now taking forward, for which
we have funding for and for which we have a delivery mechanism
to get out to reach the people that we are targeting. That covers
people ranging from teaching in schools in deprived areas to help
the youngsters leave school with a better understanding of money,
to those people who are not in employment, education or training,
all the way through to the workplace and people who are on lower
incomes. We have some specific targets and strategies to help
those. Beyond that, our involvement in trying to help the financially
excluded become included, where it makes sense for them, is with
a big public education campaign on basic bank accounts. We have
put 600,000 leaflets into Post Offices, local authorities, housing
associations. One of the items that the Citizens Advice Bureau
quite rightly identified as a problem with basic bank accounts
is that people were put off by the identification requirements
in opening those accounts and having to take along utility bills,
passports, and things that they actually did not have, before
they could open these accounts. We have therefore stimulated some
discussions with the Joint Money Laundering Steering Group of
the industry to lower those barriers. Just recently, they have
published new guidelines for their members, to make it very easy
for people who do not have that sort of documentation but who
might have a letter from their probation officer, from their care
home, or from the DWP, to go in and open an account very easily—and
we have facilitated all of that. In the last two years we have
taken responsibility for regulating mortgages and we have introduced
specific requirements in relation to testing affordability, which
was not there under the regulatory regime that preceded us; and
we have put in particular requirements concerning arrears and
repossessions, so that those people are treated fairly and repossession
is seen as an absolutely last resort when a customer gets into
difficulty. Beyond that, we have approved the first Islamic banking
licence in the western world. That has been quite tricky, because
it is quite difficult to shoehorn Sharia law into our own law,
but we have worked very flexibly to do that. People who want to
observe those principles now have a banking facility in the UK.
We have worked very hard to create a proportionate regime for
credit unions. So, across the board, we have worked hard to reflect
the needs of the poorer people of the country.
Q669 Chairman: Should the FSA see
itself as the key body to ensure that the financial services industry
can meet the needs of the financially excluded? If not, who should
that body be?
Mr Tiner: It currently does not
fall into our objectives. That is clear. It is not the responsibility
of a regulator—any regulator, indeed, of appointed people
like me rather than elected people—to be creating social
policy. I think that is a government responsibility. What we could
do is to monitor compliance with that sort of social policy, but
I think that it would be wrong for the FSA to determine what the
government policy should be in relation to the financially excluded.
Q670 Chairman: There is a feeling
from the evidence we have taken already that there is a lack of
coherence in that area. There are so many bodies responsible for
little parts of it that there is not a joined-up approach. Is
that a view you would share?
Mr Tiner: It is probably a statement
of fact. Yes, I think that is right. Clearly the Government have
an interest, and I am pleased to see the work that they are doing
with the financial inclusion task force and the financial inclusion
fund; but, beyond that, OFT obviously have an important role in
this; we have something of a role; and indeed people like Link
have an important role in terms of making ATMs available to people,
again in the more deprived areas. So there are a number of bodies
who participate in this. It is probably fair to say that they
are not as well joined up as they might be.
Q671 Chairman: We will try it from
another angle. Ofgem has a statutory duty to take account of vulnerable
consumers and one of its strategic themes is to combat fuel poverty.
Ofcom has to have regard to vulnerable consumers or other groups
who may be disadvantaged. The question people are asking us, therefore,
is why should the FSA not have a similar requirement, a statutory
requirement, to take financial inclusion into account as part
of its activities? You have gone round the answers here but, for
the sake of the record, I would like you to answer that.
Mr Tiner: To my understanding,
before I arrived at the FSA this specific issue was discussed
in the bill going through Parliament, and the bill committee felt
that there was an inherent conflict between having an objective
for financial inclusion and an objective for prudential soundness
and market confidence, in that we may therefore direct companies,
direct banks for example, to make decisions which were not in
their commercial interests—and questions therefore about
the stability of the banking system. That was the debate at the
time. That is why I understand that financial inclusion was not
included. I guess those same arguments are still there today.
Q672 Peter Viggers: Would you say
a word about your initiative called Treating Customers Fairly?
How specifically does this fit into the pattern that you have
just been asked about?
Mr Tiner: I will say a few words
and then I will ask Clive, who heads this up for us at the FSA.
What we want to see on Treating Customers Fairly is the product
providers, together with the distributors, thinking about the
whole chain of product creation: through to target marketing;
through to the quality of sales and the quality of advice; through
to the complaints that follow; across the financial services sector.
It does not explicitly cover financial exclusion because it is
about customers who are coming in to be serviced by the financial
industry, rather than going out and seeking people who are not
currently engaged. Clive, do you want to add what we are doing
in that area?
Mr Briault: As John has said,
it deliberately focuses on what we call the product life cycle,
and therefore looks in particular at the way in which firms design
products; the way in which firms then pass information about their
products on to those who distribute them—be they in-house,
in the sense for example of bank branches, or through a third-party
intermediary such as a financial adviser. It looks at issues such
as the potential incentive problems arising from the way in which
staff and advisers are remunerated. It looks at the clarity of
financial promotions put out by product providers. It looks at
the clarity of other information put out at the point of sale.
It looks at the quality of advice and, beyond the point of sale,
looks at issues such as complaints handling, to make sure that
complaints are handled fairly and promptly. It is essentially
about the way in which firms treat their existing customers primarily,
and also about the way in which potential customers can receive
clear information and advice. It does not, as John has said, seek
to reach out to the financially excluded. There are other aspects
of fairness that you and the Committee have already discussed
at previous sessions, which the Treating Customers Fairly initiative
does not cover.
Q673 Peter Viggers: In response to
a question from the Chairman, you pointed out that it is not the
regulator's job to force financial institutions to create products,
but you do talk about monitoring compliance. Do you regard it
as your job to encourage the industry to develop products or services
that cater for the needs of different groups who would otherwise
be excluded?
Mr Tiner: Not to encourage them
per se. If our rules somehow prevent the creation of products
that might be in demand in the community, then we should seek
to look at those rules very carefully, as we have done recently,
for example, in widening the assets that can be held within investment
trusts. Generally speaking, however, we are not a product regulator.
We do not create or approve pre-approved products, as they do
in some countries. Our view is that it is up to the market to
determine what products they should create, and then to stimulate
the demand for those products.
Q674 Peter Viggers: You gave an interesting
example of investment trusts, widening their investment range.
Can you think of other examples where the FSA has been operative
in this field?
Mr Tiner: Yes. Two years ago we
consulted on the reform of the collective investment schemes,
which were quite old-fashioned and could only hold very traditional
securities. We have liberated that market quite a bit, to allow
property trusts to emerge, property funds to emerge, and so on.
So there are a number of things that I would say have been brought
forward from our predecessor regulators, which we have looked
to liberalise to create a more diverse financial market; but we
do not go out and try to stimulate product creation where our
rules already allow that creation to take place, because we would
regard that as the job of the market.
Q675 Peter Viggers: We have had evidence
that, whereas financial exclusion from banking and affordable
credit is mainly associated with consumers in the lowest range
of income, the exclusion from access to financial advice and long-term
planning goes much further up the financial tree. In fact, I was
just rereading your publication Establishing a Baseline,
where you talk about financial knowledge and say, "In short,
unless steps are taken to improve levels of financial capability
we are storing up trouble for the future".
Mr Tiner: Yes.
Q676 Peter Viggers: Can you say what
initiatives you are taking to promote financial awareness?
Mr Tiner: Yes, certainly. As the
document you have just referred to spells out, there was a worryingly
low level of financial capability, we found, right across the
population. This was not just among poorer people. In fact, we
found that poorer people were rather better at keeping track of
their money than people in the so-called middle classes, because
there was a real imperative: they had to make sure they did not
run out of money each week, and people were very careful. We also
found that there was much less capability in terms of planning
ahead for their retirement; planning ahead for a rainy day; just
planning ahead to not get into trouble, should the economy turn
against them; and also a worryingly high trend of people choosing
the wrong products for their own particular circumstances. What
we have set out, therefore, is this seven-point plan that I referred
to earlier, to try to address the education needs in schools.
We are very pleased that the Government have now put financial
education into the functional maths curriculum from 2009 onwards.
We are working with an organisation called PFEG, the Personal
Financial Education Group, between now and then, so that teachers
can be ready to teach that in the classroom as of 2009, and indeed
beforehand, before the curriculum becomes mandatory.[1]
30 Then we are doing work in higher education, for students who,
these days, will leave university with large top-up loans; probably
quite healthy balances on their credit cards, which are now accessible
to them; going to the workplace—if they can get a job, that
is—where they will probably not get a very good pension
and they will perhaps want to buy a house or rent a house at very
high cost. The need to think about money now is crucial. We are
therefore doing work with colleges of higher education and then
in the workplace. The other area that I think goes to the first
part of your question is the issue of generic advice. It is by
its nature a general term, thought to refer to financial advice
which is not regulated advice. In other words, regulated advice
is advice that will be provided to the consumer that would result
in a product recommendation and a product sale; but there is the
sense that there is a real need for people to have just a discussion
with somebody about their state of affairs—about their money,
their debt, and how to resolve their problems—which is not
leading to a financial recommendation. We have been working with
a lot of intermediaries to test that out; and, of course, we supported
Clive Cowdrey's Resolution Foundation by putting one of our senior
people on to his committee and following that very closely to
see whether there is a commercial proposition to offer generic
advice. However, I think that is a gap in the market that needs
to be resolved.
Q677 Peter Viggers: OFCOM says that,
when determining the course of regulatory action, it may be appropriate
to give greater weight to older people, disabled people, or those
on low incomes and vulnerable groups. To what extent do you regard
this as a principle of good regulation?
Mr Tiner: Where we feel that vulnerable
groups are potentially being targeted in a way that could take
advantage of that vulnerability, then we definitely consider that
a part of our consumer protection objective. When we started regulating
mortgages at the beginning of last year, our first priority was
equity release mortgages, where, if you stand back, you would
say there is an obvious market there for older people to release
equity in their house, to create some income for them in their
later years, but that sales practices were not good. So we have
targeted that very specifically. Generally, where we feel that
the financial services industry may be seeking to profit from
that vulnerability, then we are very interested—in terms
of having robust and proper sales practices. That is not to say
that we get involved in the pricing of those products, because
we are not a competition or price regulator. That would be more
a job for the OFT.
Q678 Peter Viggers: Does the law
of unintended consequences sometimes apply? The ABI, for instance,
has told us that there is a wider picture of well-intentioned
regulatory initiatives that nonetheless have the unintended consequence
of making it more difficult for consumers to gain access to financial
services. Do you think that sometimes consumers are being excluded
from getting financial advice because of the weight of regulation?
Mr Tiner: Yes, I think that the
cost to companies of the sales process is quite high. A fact-find
might take two to two and a half hours, which is expensive and
time-consuming. Last year, following the Sandler review of long-term
savings, we introduced a cut-down scheme of advice called Basic
Advice, which is on average a 22-minute discussion using a decision
tree, which could lead to a recommendation of a stakeholder product.
There has been little take-up of that, interestingly. A number
of companies have registered to provide Basic Advice: not many
large companies and mostly IFAs. However, the activity is rather
low. It is perhaps interesting to explore why that is. One year
on from the start of that regulatory regime, we are looking at
what has happened in the market and what can be learned, because
the full-advice market does cut out a number of people who need
access to advice.
Q679 Chairman: On the Clive Cowdrey
Resolution model—and he has briefed me on it—there
are three different models, from the basic right up to the luxury
end—from about £30 million to £100 million. What
aspect attracts you there? Do you think that there is a need for
industry and government to get together to provide generic advice?
That is where his model is going at the end of the day, is it
not?
Mr Tiner: I think so. He has not
yet come up with his business plan, which I think is what is crucial,
to see whether the economics can be made to work, and I wait with
great interest to see that. I do not know whether he will be able
to make a case for it to be an entirely commercially funded operation
and whether the Government in fact will have to come to the table.
I wait to see the answer to that. In terms of the type of model
that emerges, however, I know that he has good ideas about the
surgery model—copying the general practice model in all
the villages around the country. There is also a need to stimulate
demand for that. It is all very well creating the supply; I think
that there needs to be a lot of effort, in parallel with any initiative
that Clive or others are able to launch, to see that there is
stimulation of demand, so that people will go along to these surgeries
and ask the questions that are worrying them. I am not sure that
would happen automatically, without a lot of effort.
1 30 Note from Witness: The FSA subsequently
clarified this as follows: We are very pleased that the Government
have now put financial education into the functional maths curriculum
from 2008 onwards. We are working with an organisation called
PFEG, the Personal Financial Education Group, between now and
then, so that teachers can be ready to teach that in all classrooms
as of 2010, and indeed beforehand, before the curriculum becomes
mandatory. Back
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