Examination of Witnesses (Questions 680-699)
MR JOHN
TINER, MR
CLIVE BRIAULT
AND MR
VERNON EVERITT
16 MAY 2006
Q680 Angela Eagle: You have used
very interesting analogies for a market that is meant to be free,
where demand gets stimulated. The supplies are meant to be there
if there is a demand, rather than to be created and then you have
to stimulate the demand to justify them. Is this not one of the
things that is wrong with the financial services industry: that
it creates massive numbers of very complex, innovative products,
which are complex but pretty similar? To such an extent that it
has put off its entire customer base, so that they then have to
create a huge range of another way of making money in the financial
services sector—which is to give advice in this highly complex
market? They then exclude half the population who are not profitable
anyway, and then we spend time at committees like this saying
that we ought to have lessons in school to teach people to conform
to the particular—and I think very bad—model that
the financial services industry has created in this country. Should
we not be looking much more at the Sandler approach and simplifying
things? Thank goodness bank accounts and current accounts were
created before this model arose, because we would be trying to
argue that the Government should subsidise somebody to make a
living telling people which current account they should have.
The whole thing is nonsense, is it not?
Mr Tiner: It is true to say that
many financial products are sold and not bought, as you say.
Q681 Angela Eagle: Yes—putting
it mildly!
Mr Tiner: Unlike other consumer
markets, like in electronic goods and things like that, where
you go shopping around on a Saturday morning, or whatever, and
you figure out the one that you want. That has been the case for
a long time. The product proliferation and complexity is a tricky
one. I think that basic bank accounts are a very good thing. Interestingly,
the stakeholder products that were launched a year ago, which
are straightforward, pretty simple financial products and relatively
easy to understand, have not really taken off—
Q682 Angela Eagle: The industry does
not want them, does it?
Mr Tiner: . . . and not really
been promoted, as they did not promote heavily—
Q683 Angela Eagle: It is not a surprise
to you, Mr Tiner, is it?
Mr Tiner: . . . stakeholder pensions,
because they have got a price cap. So I think that there are questions
about that. On the other hand, the FSA has a principle of good
regulation, set by Parliament, not to get in the way of product
innovation. That suggests that we should not stop further complexity
and so on. I understand your point. In some areas, the UK financial
service industry is the envy of other countries. In the mortgage
area, a large part of continental Europe would like to have a
mortgage market like ours because it offers so many particular
fit-for-purpose deals for consumers, and consumers are quite good
at shopping around in the mortgage market. It does not seem to
have happened in the investment market.
Q684 Angela Eagle: It is not a surprise
therefore that nobody wants the simplified advice that you have
been trying to trial, because they are trying to kill simplified
products before they get to be too popular and ruin the market
everybody is comfortable with and is making money in. Is that
not what is happening?
Mr Tiner: I do not know. I do
not know whether it is the lack of firms coming into the marketplace;
that they are already making too much money out of other things
and they do not want to slow that down; or whether it is that
they feel that, at the price caps that have been set, they can
create the product and the distribution system and still make
a return for their shareholders. I think there is a question about
that. On the other hand, it is probably true to say that the UK
financial services industry could be a bit more productive and
lower their costs.
Q685 Angela Eagle: I think that is
putting it mildly. We have had specific issues—and I know
that you have been concerned about this—when we visited
Toynbee Hall and spoke to people who had been refused access to
basic bank accounts and been run around terribly by the ID requirements.
Could you say a bit more about how you think the new circumstances
will avoid this? There is scepticism amongst the people who help
and give advice to the financially excluded that the changes in
structure will actually make much of a difference on the frontline.
Mr Tiner: I think that scepticism
needs to be overcome by the reality of it being much easier, and
I think that there will remain sceptics until that happens. These
new requirements, or these new standards, came in only a month
or two ago. It is true that the industry needs to retrain tens
of thousands of people to go through a different process with
their customer at the point of account-opening, and so there is
a six-month transition to the new approach. However, the wording
in the joint money laundering paper is quite interesting. The
paper addresses the financially excluded in terms. It basically
says that the banks should have a predisposition to help those
people open their account, even if they cannot prove where they
live—and that is no longer a requirement, which is a very
big change from the old system. They do not have to prove their
address any more. So the days of utility bills and things like
that for those people are gone. All they have to do is take a
letter from someone that suggests that they are a bona fide
person. What the banks do not want are people who are undischarged
bankrupts, or who have recently committed fraud. We have encouraged
them very hard to take a very broad view of financial exclusion
and to facilitate those people getting bank accounts; because,
as the Committee know, from 2010 onwards those who do not have
one will really struggle to have their benefits paid. So it is
really critical.
Q686 Angela Eagle: In the past, retail
banks have put a degree of responsibility on the people on the
frontline, with respect to money laundering requirements, which
has made them much more risk-averse than perhaps they needed to
be. There is also a suspicion that some retail banks do not actually
want to attract very low-paid customers, because they do not think
they can make any money out of their business; and this combines
to make it pretty difficult in some contexts for people to open
bank accounts, regardless of the ID requirements. How do you think
that the new arrangements impact on that?
Mr Briault: As John was saying,
the important thing is that each bank sorts out for itself what
its procedures are going to be, and then educates and trains its
branch staff in line with that. The requirements in the guidelines
are, as John says, much more permissive. They are much easier
for customers to meet. However, at the end of the day, it is still
a decision for each bank to decide what level of requirements
to impose. Similarly, as I think you have already discussed in
previous sessions, it is undoubtedly the case that some banks
promote basic bank accounts more heavily and more effectively
than others. Again, the obligation to offer a basic bank account
is one thing; the extent to which you promote it actively in a
particular branch is another. So almost inevitably, when you are
talking about banks' commercial judgments and the way in which
individual bank staff behave in branches, there will always be
a degree of variation of treatment and of approach.
Q687 Angela Eagle: In terms of them
having to take personal responsibility for the decisions they
make with respect to money laundering regulations, though, this
was particularly identified when we visited Toynbee Hall as one
of the problems that causes barriers at the frontline. How do
the new arrangements tackle that particular issue? Also, you fined
three banks for breaching money-laundering regulations. Do you
think that at a corporate level—and I am not against you
fining banks for breaching regulations—that has also added
to the risk-averse approach to all of this?
Mr Briault: At the branch level,
first of all, what we would very much hope is that the new guidelines
set out very clearly the minimum standards of identification required
for various types of potential customer. So it covers all sorts
of people: people who are newly arrived immigrants in the country;
people who are in or indeed just leaving prison. Each of those
is now covered explicitly in the guidelines, as John said. If
institutions look at that and say, "We will now change the
basic requirements in our branches, but we will make absolutely
clear to our staff what the new requirements are", then I
see no reasons for those staff—once they know and have been
trained in what those requirements are—to feel that they
need to be particularly risk-averse, because they have the protection
that what they are doing is following procedures set out in the
new guidelines. You mentioned previous disciplinary cases around
money laundering. That was essentially around systems and controls
in terms of monitoring quite large-scale flows of funds going
through the institution, rather than particular issues in terms
of opening personal bank accounts.
Q688 Angela Eagle: Do you think that
is just an excuse than banks are using then? Whingeing about your
putting the regulations into effect?
Mr Briault: We would certainly
hope that banks would take seriously the requirements which they
are required to meet; but the point we are making is that there
is now a revised set of requirements which should make it much
easier for people to open bank accounts—set out in the new
guidelines—and we would hope that banks would change the
way in which they operate to reflect those new, more permissive
guidelines.
Mr Tiner: It is worth saying that
those guidelines are their own industry's guidelines; they are
not ours. They wrote them and they wrote these four documents
that have been presented on account opening. As I told the Committee
on a previous occasion, I struggled enormously trying to open
an account for my 16-year-old daughter and was bounced out because
I took a community charge bill rather than an electricity bill,
or something. So there is a sea change that is needed in the banks,
I think, to help their customers with banking.
Chairman: We have been told that improvements
have been made as a result of that. We will have the banks in
front of us on Thursday, so we will be asking that question.
Q689 Angela Eagle: Finally, there
is still scepticism, particularly by groups such as Services Against
Financial Exclusion, that even the new regulations still rely
on primary sources of identification like passports, which people
do not have. Are they just completely wrong about that and have
got the wrong end of the stick?
Mr Tiner: I think that they are
wrong about that. A straightforward letter from somebody who is
in a position to vouch for an individual will do.
Q690 Chairman: Angela mentioned stakeholder
products. I think that there is a lesson to be learnt here, particularly
with the NPSS scheme that has been proposed by Lord Turner. However,
with stakeholders, a combination of the sales approaches, the
commission incentives—a model which, by the way, Trevor
Matthews of Standard Life said was completely flawed—the
decisions about the charge caps, which are always on the way up,
and the consequent regulations that have been put out by yourselves
as a result of that—we thought that all of those combine
to make the product uneconomic to both providers and potential
customers in this middle-income market. Is that not correct?
Mr Tiner: I am not sure I would
say that is entirely correct. If those stakeholder products had
to be subject to the full rigours of regulated advice, then yes.
That is why we went for this significantly cut-down, decision-tree
approach, which does not take very long. It significantly reduces
the cost.
Q691 Chairman: Okay, so why did it
not work then? That is what we are trying to get to.
Mr Tiner: I think that you will
have to ask the banks that, Chairman. It is interesting that—
Q692 Chairman: But you have a bird's
eye view.
Mr Tiner: . . . very, very few
financial institutions have signed up for that.
Q693 Chairman: Therefore, they are
not making enough money.
Mr Tiner: That may well be the
case. They feel that the margins in that business are not as high
as elsewhere.
Mr Briault: The point that I would
make is that it is not at all apparent to us that the reason they
are not signing up is because of the Basic Advice regime imposing
particularly heavy costs on them. Clearly that is an element of
cost. We would not deny that. As John says, however, we have tried
to introduce proportionate regulation there, given that these
are reasonably simple, straightforward products. That is why we
introduced the slimmed-down regime. I think that the institutions
who have decided not to enter the market would say that, taking
account of the complete package—and, as you say, the price
caps involved in those products—they have taken a commercial
decision, some of them, not to enter the market. Others have taken
a commercial decision to enter it.
Q694 Mr Love: Could I ask you a general
question to start? Some years ago, I think it was the OFT which
produced a report on vulnerable consumers, and one of your predecessors
interpreted this as suggesting that there ought to be two standards
of regulation: one for ordinary consumers and one for vulnerable
consumers. Can there ever be a case from the FSA's point of view
where you would lighten the burden of regulation, to recognise
the vulnerability of consumers?
Mr Tiner: I was not aware of that
OFT paper or my predecessor's views on that, but my take on it—
Q695 Mr Love: He was totally hostile.
He said there could only be one standard of regulation.
Mr Tiner: I think that what would
worry me is that, by lightening the regulatory touch for the more
vulnerable people, you are reducing the protections to the people
who most need it. That would worry me. If anything, there could
be a lighter touch at the other end, where people were more able
to take care of themselves. Unless you were able to carve out
members of the population into different buckets, it would be
quite difficult to apply a differentiated regime—just at
a practical level, I think. So I am probably with my predecessor
in principle, but I think that the application of what we do—like
we were just saying for the financially excluded—could be
much more reflecting common sense in terms of the need of those
people, and not a sort of blind application of a rule book.
Q696 Mr Love: Can I take us on to
access to affordable credit and your relationship with community
development finance institutions? You have decided at this stage
in their development to develop a code of practice, rather than
more formal regulation. Can you tell us why you have decided on
that?
Mr Tiner: I will say a word and
then ask Vernon to talk about this issue. It is a bit like the
previous question. We do not want to overburden that area with
statutory regulation. If they can achieve the right levels of
outcomes in terms of affordable credit to the people that the
CDFIs are there to serve, that would be a better position than
imposing significant costs. We would like to see whether that
can be made to work. Vernon, would you like to add to that?
Mr Everitt: There is not too much
to add, but we are working very closely with the CDFA to come
up with a code of practice which reflects a commonsense approach,
and which in some respects would reflect what you might have in
a very, very light-touch regulatory regime. Certainly as far as
the Treasury and others are concerned, we would really like to
give the code of practice a chance—given the characteristics
of that particular sector.
Q697 Mr Love: One of the disappointments
so far in relation to CDFIs is that they have not been able to
attract much finance from the banking and orthodox lending sector.
Do you think this has anything to do with lack of regulation,
trying to find a code of practice, or is it just that people are
naturally hesitant at this early stage of development?
Mr Tiner: I think it might be
that. I do not think that it is regulatory-related.
Mr Everitt: I think that it is
more the latter. There have of course been some uncertainties
about funding in that sector going forward as well, which I guess
has introduced some doubt in some people's minds. It tends to
be because of the relative originality and novelty of the sector.
Q698 Mr Love: Can I take you to the
right to buy? Do you see this as a priority for action for the
FSA? What regulatory framework are you setting up to protect people
who undertake the right to buy, many of whom are what we would
term vulnerable consumers?
Mr Tiner: I think that I am right
in saying that the right to buy effectively falls into our mortgage
regime, which covers first-charge mortgages: to the extent that
their right to buy and the loans have a first charge on the property,
and therefore they are subject to the full rigours of that. As
I mentioned earlier, it covers things like affordability tests;
particular provisions for arrears and repossessions in the event
that the customer gets into difficulty. Are there any other specifics,
Clive?
Mr Briault: I think that the other
specific is very clear information being provided to consumers
up front, before they take out any mortgage product, which, as
John says, includes the right to buy if it is a first charge on
a property.
Q699 Mr Love: What used to be called
the Office of the Deputy Prime Minister has certain criteria for
the lending institutions that provide finance to people who undertake
the right to buy, and often it is felt that that is sufficient;
that this will clear and ensure that those lending institutions
are above board—whereas you come in at the other end. Is
there any confusion between the role of the FSA and the role of
the department in relation to right to buy?
Mr Tiner: My understanding of
the Department of Community—whatever it is called now—
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