Select Committee on Treasury Minutes of Evidence


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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