Examination of Witnesses (Questions 700-719)
MR JOHN
TINER, MR
CLIVE BRIAULT
AND MR
VERNON EVERITT
16 MAY 2006
Q700 Mr Love: I have yet to get my
head round that!
Mr Tiner: Anyway, we are talking
about the same thing—is that if there is an organisation
which has FSA authorisation, then that would meet their criteria
automatically. So I think that it is consistent between the two
of us.
Q701 Mr Love: There have been quite
a lot of concerns expressed about some of the problems that people
who have undertaken the right to buy have experienced. Different,
I suspect, because of a lack of knowledge on their part, and perhaps
a lack of experience as well. Has this been something that you
have been concerned about? Do you think that—recognising
your original statement that if there had to be regulation perhaps
it should be more regulation for vulnerable consumers—there
is a need here perhaps for extra vigilance on the part of the
FSA, because of the difficulties that many of them may get into?
Mr Tiner: Do we have any data
on that, Clive? I am not sure.
Mr Briault: The point I would
make here is, as John was saying, when we took out mortgage regulation
at the outset, when we began regulating mortgages, we set ourselves
some priority areas to look at in the first year. It included
the equity release market, in part because there we saw some potentially
vulnerable consumers. It included issues like looking at whether
or not there were any unauthorised mortgage brokers operating
outside our regulation. It included taking a very close look at
the mortgage documentation—whether that was meeting our
requirements. It included looking at various elements of the sub-prime
market in mortgage lending, and the self-certification market.
That is a way of saying that the right to buy mortgages were potentially
one of the things that we could have looked at, in terms of doing
some thematic work in the first year of mortgage regulation. Having
looked at that alongside other themes, we decided that it was
a lower priority compared to the areas that we chose to look at.
I very much hear what you say, in particular your point about
the vulnerability of consumers. What I would definitely say is
that we will take another look at that within our thematic work
on mortgages and see whether or not it should be something to
prioritise in future years. For the first year of the mortgage
regulation, however, it did not make that list.
Q702 Mr Love: Can I take us on to
equity release? There has been a lot of concern about the standard
of some of the owner-occupied property in this country. Because
government no longer provides grant funding for people to improve
their properties, taking out loans is the only alternative. For
people on low incomes or the elderly, that is quite difficult.
So equity release is a real opportunity, if we can bite the bullet.
However, there have been particular problems—reputational
problems as much as anything else—in relation to these products.
What can the FSA do to improve the confidence of the public in
equity release and ensure that this makes more of a contribution
towards improving our housing stock?
Mr Tiner: I completely agree that
there is a need for products to help release equity in people's
houses. Equity release and home reversion schemes, which we will
begin to regulate shortly, achieve that. I think that you are
right, however, that there needs to be a greater level of trust
by the public in the people who sell it. That follows some problems
of the past. Our "mystery shopping" has revealed problems
with that sector. We have seriously challenged the sector to raise
its standards, so that customers get properly treated. We do not
think that people should be being encouraged to over-borrow, so
that they borrow more than they need and then, hey-ho, the adviser
says, "You'd better place the balance of money you don't
need back with us, less the commission". We just need to
make sure that people are not being encouraged to take out more
than they actually need to look after themselves. In a way, I
think of equity release a little bit like paying protection insurance.
Both of them have very important roles to play in helping people
protect themselves or to provide for themselves, but both have
been subject to less than satisfactory sales practices and we
need to see significant improvements in the industry.
Q703 Mr Love: Could there be a role
here, do you think, and does the FSA have an opportunity to work
with not-for-profit organisations and, in particular, housing
associations, who do have a better reputation—if I can put
it that way, certainly amongst the client group concerned—in
being able to develop these products? Perhaps a combination of
lending institutions and housing associations working with the
FSA may be a way of improving the situation.
Mr Tiner: I will ask my colleagues
to comment, but I think so. We find that we are doing far more
with housing associations on the financial capability front. People
who are social tenants have been clearly identified in our baseline
work as being a group who need help, and we are targeting them
very specifically. We have given some of our Innovation Fund to
housing associations, to help them with their tenants as well.
So I think that there is probably a general need for us to be
working more closely with the housing associations—for all
sorts of reasons, and I think that you have also identified a
good one.
Q704 Mr Love: Finally, can I ask
Clive this, in relation to the response you gave earlier about
the particular sectors of the market that you looked at carefully
when you first took over regulation? Was financial inclusion a
criterion for deciding on those sectors? What role will issues
of financial inclusion play in the way that you try to focus on
different sectors of the market in the future?
Mr Briault: Not financial inclusion
explicitly but, as John has said, there are a number of those
markets—equity release is one of them, sub-prime mortgage
borrowing is another—where it definitely touches on some
of the more vulnerable and potentially excluded members of society.
So, yes, in the sense that we do take into account the vulnerability
of the particular group of consumers involved as being one of
the criteria for asking if there is a particular issue here about
whether or not people are making clear the nature of the product,
and whether or not people are selling in a way which takes into
account the particular circumstances of the consumer. Equity release,
for example—one of the things we looked at specifically
in the mystery shopping was to see whether or not advisers were
looking at issues such as what other assets that person might
have available; whether in fact it might be better for that person
to trade down rather than to borrow further against their existing
property. We encourage lenders and advisers to encourage people
to speak to their families, to speak to solicitors, about whether
this is a sensible thing for them to do. So, yes, to some extent,
but not really explicitly under the label of financial inclusion
of itself; but inevitably it arises, because we are talking about
a part of the population, some of whom will be either financially
excluded or potentially financially excluded, who will be within
the consumer group.
Q705 Peter Viggers: You have been
co-ordinating and leading the National Strategy for Financial
Capability since November 2003, at a time when financial products
have been becoming more sophisticated. Are you able to establish
whether you think things are improving or getting worse?
Mr Tiner: I am not, during that
period, able to answer that. They are probably, I would guess,
remaining the same. Change is a long-term thing. We have recently
completed a baseline study to establish the level of financial
capability across the country. It is the largest study of this
kind every completed, not just in this country but, we understand,
anywhere else in the world. It is statistically reliable data,
which shows some quite strange outcomes: not in the context of
complexity but in straightforward products. We found that 40%
of people who own an equity ISA did not think that they had stock
market exposure, and 15% of people who have a cash ISA think that
they did. Forget the complexity; that is the level of knowledge
you are dealing with in quite straightforward products. A very
large percentage of people have not made any provision for their
future. Few, 50%, had any retirement savings, and so on[2]31.
We will repeat this baseline survey in four or five years' time,
probably at four or five-year intervals, because it will take
that sort of period to see any discernible movement. To some extent,
I think this is a generational thing, I am afraid to say. We need
to see the children leaving schools today, being in their forties,
knowing what to do and knowing what they should have done over
the last 20 years to help make provision for the families and
for retirement, where the state and the employer are not going
to bail them out. So it is a generational thing, to my mind. I
think that there are some things we can do, and I think that we
will see things improving steadily. Also, the public are beginning
to believe that it is important to them; whereas, in the past,
I am not sure that it was a very interesting subject for people
to talk about. I think of taking care of your money now as being
on par in society with taking care of the environment and taking
care of your health. There is that sort of importance in terms
of having a decent quality of life. I think that is beginning
to become accepted, and people are engaging more because of that.
Q706 Peter Viggers: The core function
of your body is regulation.
Mr Tiner: Yes.
Q707 Peter Viggers: How many staff
do you devote to Financial Capability?
Mr Tiner: Vernon heads the team,
but you have to remember that one of our four statutory obligations
is to promote public understanding of the financial system, which
has a broad definition because it covers not only financial capability
but also consumer warnings about products that we consider to
be worrying for consumers. However, it is Vernon's team.
Mr Everitt: In terms of the team
that is leading on the programme, we have over 40 staff. That
is a combination of FSA staff and also staff that we have seconded
in from the industry.
Q708 Peter Viggers: That is quite
a small number for a very big task.
Mr Everitt: It reflects the fact
that much of the work is leveraged through bodies outside the
FSA. What we have certainly found—particularly when you
are talking about the more excluded in society—is that they
respond to people they already know and trust; so working through
people like housing associations and other trusted intermediaries.
We have certainly found that, in the work we have done with those
young adults who are excluded from employment, education or training,
that leverage is great. What you need at the centre, therefore,
is not a huge team; what you need is an intelligent team with
good relationships with those people who work at the coalface
and who really understand the constituents.
Q709 Peter Viggers: You have referred
to the fact that you established a baseline study. What were the
key messages from this?
Mr Everitt: Some of the key messages
are that there are two particular areas of major concern. People
simply are not planning ahead for their financial future. That
is both in the long term—so pension provision—and
also in the short term, just setting aside a little money to take
into account the ups and downs that you have in life, and changes
in personal circumstances. It also clearly demonstrated, as we
have just touched upon, the great difficulty that people have
in engaging with the industry in terms of product choice. We particularly
found deficiencies in the capability of the younger age groups,
which we define as 18 to 40, which again, as John mentioned, are
the sort of people who are bearing more and more individual responsibility
for their financial affairs. We also found that, in terms of debt,
over half a million people in this country are in severe debt
difficulty; another million and a half or so flip in and out of
arrears, depending on whether they have been able to get work
in the previous week. There are another two million-odd households
who, because of the planning ahead point that I mentioned before,
are vulnerable to changes in their own personal circumstances.
That all adds up to major challenges for us.
Q710 Peter Viggers: These are valuable
general conclusions, but what are you doing to focus on the most
financially excluded consumers?
Mr Everitt: In schools, for example,
that is an ideal place to reach people from all backgrounds. As
John mentioned earlier on, we have been really encouraged by the
work that we have been able to do with DfES and the Curriculum
Authority to look at what we can actually do in schools—through
examinations, but also to give confidence to teachers who are
already providing personal finance education to give people confidence
about how to base judgments more effectively. So laying the long-term
foundations in schools is really important. We then extend that
into higher education establishments. We ran a pilot scheme last
year called "Money Doctors" at Roehampton University,
which is now being taken up by a large number of other universities,
which use fellow pupils to help educate their peers in handling
their money. In particular, we hope that will help retention rates
in universities, because financial problems are one of the key
things that lead people to drop out of university. So we hope
that it will help people from less advantaged backgrounds, and
help to retain retention rates right the way through. Finally,
on those not in education, employment or training, we are working
with a large number of bodies that work at the coalface with those
individuals, to try to give them the confidence to manage their
money well.
Q711 Peter Viggers: This is fine.
I was at a financial education class in St Vincent College in
my own constituency 10 days ago. This is splendid. What are you
doing to help the one in five schoolchildren who cannot read and
most that cannot count?
Mr Tiner: I think that one is
a bit above our pay grade. It is a problem, and numeracy as well
as literacy is a problem. There are all sorts of surveys about
the percentage of people who leave school not being able to calculate
a percentage. We clearly cannot address that. We have to hope
that the education system will take care of that problem.
Q712 Peter Viggers: This refers to
a baseline. What are your targets for improving on the baseline?
Mr Tiner: It is a baseline that
is judged against those five criteria. We have not set targets
for each of those. We want to see steady improvement. It would
be quite difficult to set what would be a sensible target actually.
We just want to see steady improvement from one period to the
next. It may be that in four or five years we do not see significant
improvement, because it may be that it takes longer to come through
the process than four or five years. I would be rather disappointed
if that were the case, but it is possible. I think that we need
to see a significant shift. We have not set numeric targets. In
a way, the survey does not play to numeric targets; it is trying
to give a picture of financial capability rather than a single
performance measure.
Q713 Peter Viggers: Your document
does not mention the role of the Government in promoting financial
education through programmes like the New Deal and the Basic Skills
Assessment. Is the Government doing enough to integrate financial
education into the New Deal?
Mr Everitt: I think that, more
generally, we have been talking to government about ways in which
we can start to try to get some of the big messages revealed by
the baseline survey more fully integrated into the various delivery
channels that there are to help people with their finances. We
touched on it a little earlier. I think that there is more joining-up
that can be done to leverage the network that is already available,
to help people manage their money well. We are working very closely
with the Treasury and with the Financial Inclusion Task Force,
to think about ways in which we can bring more coherence to that.
Indeed, we have been talking to the DWP, as they work up the response
to Lord Turner's proposals, to see how we can get all of that
factored in. I think that there is therefore more work that can
be done to become better joined up.
Q714 Peter Viggers: One commentator
referred to your programme as "pushing around cold food",
because you do not have the resources to be effective. Have you
thought of approaching government and demanding more resources,
or have you thought of suggesting a levy on the industry?
Mr Tiner: Again, we do not feel
that our role is to deliver all of this. That is not the best
use of public funds or the best use of our levy funds, in fact.
Our job is to lead this, corral people into participating, so
that, as Vernon says, you have people that different communities
trust who are delivering this. We have found that there is a great
open door there. People are coming to us saying, "We want
to participate in this. We want to help the communities that we
serve become more financially educated". There is a great
demand for the sort of literature we are producing, both on the
internet as well as the hard copy literature. So we are helping
with content; we are helping with organisation, leading all of
this; but the real resources are just out there, in the communities.
That is a much better way than trying to build some kind of central
system, which I was very, very resistant to. I do not want to
build a new delivery channel for Financial Capability, when there
are numerous delivery channels that already exist which people
trust. I think that we have to push it through that. We are having
some success with that, I think. I do not look at just the £10
million we are spending or the 40 people that Vernon has in his
team; I am looking at the much bigger picture, which I think is
beginning to make an impact.
Q715 Chairman: So a good message
to get out is that you are not solely responsible for financial
capability in this country. You have the Government; you have
the Department of Education, for example, which could be more
involved in that area.
Mr Tiner: Yes, I agree. On my
steering group that I chair I have ministers from the Treasury,
the Economic Secretary, the ministers from the DfES and from the
DWP, together with people from industry and the voluntary sector.
I think that there is serious commitment to this and that the
Government are stepping up to the plate, by and large, where they
need to participate.
Q716 Chairman: Back to that question
where you discovered that 40% of people who own an equity ISA
are not aware that its value fluctuates with stock market performance.
Does that not suggest that there are major problems with the product
disclosure regime? We have been on about this before—about
risk rating, traffic lights for the industry. We were told by
this sophisticated industry that this is too hard and they cannot
do anything about it. There really needs to be further work on
that product disclosure regime, does there not?
Mr Tiner: I think that there does.
I do not dispute that at all. The product disclosure regime has
actually become too complex itself. The documents are too long;
there is too much jargon. To some extent, for some companies,
they have become a tool to pass on the legal risk to the consumer.
At the moment we are looking very carefully at the disclosure
regime. We have been held up a little bit because of a European
directive called the MiFID, the Markets in Financial Instruments
Directive, which is introducing a whole load of rules which are
maximum harmonising rules; so they are mandatory for the UK. We
need to make sure that whatever we want to do can fit in with
that, which will be quite difficult. However, there is a need
to re-look at disclosure, because that sort of finding suggests
there is a problem.
Q717 Ms Keeble: One of the things
that has been stressed by several witnesses is the fact that the
effort to build up financial capability seems to target the mainstream
groups of people and it does not necessarily target the financially
excluded. How do you intend to deal with that?
Mr Tiner: I said earlier, possibly
before you came, that, in all of the seven priorities which we
have established and now have clear plans to deliver, we have
asked the teams to think about how they can include the financially
excluded. There are specific proposals therefore within each of
these to help reach those people. Vernon has mentioned some of
them; for example, in the work with further and higher education.
We have specific plans to reach those not in education, employment
or training, for which the distribution system, as we see it,
is not the one you would use to reach those who are going off
to university or to a college of further education. There is therefore
a lot of work going on in each of the teams to help reach poorer
people.
Q718 Ms Keeble: You had a lot to
say about the equity release schemes and people who are going
for that. Whilst, of course, there are some real difficulties
around equity release, I would completely agree with that, would
you call those people necessarily the seriously financially excluded?
Mr Tiner: No, I mean, by and large,
not. There is an interesting debate about what is the definition
of financially included/excluded. I mean most people who want
to release equity in their house probably have got a bank account,
I mean not necessarily, but they may well have, but nonetheless
they may be very vulnerable to aggressive tactics and they should
be entitled to be protected by the regulatory system. So I try
and think of, in a way, financial exclusion and vulnerability
in a bit of wider context.
Q719 Ms Keeble: If we look at the
seriously financially excluded, or those who are excluded for
one reason or another from the mainstream of financial services,
would not some black minority ethnic groups come right in the
middle of that?
Mr Tiner: Yes, quite likely I
think.
2 31 Note from Witness: The FSA subsequently
clarified this as follows: Few, only 42% of the pre-retired, have
a current personal or occupational pension, with 28% having a
pension they have paid into in the past. Back
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