Examination of Witnesses (Questions 740-757)
MR JOHN
TINER, MR
CLIVE BRIAULT
AND MR
VERNON EVERITT
16 MAY 2006
Q740 Jim Cousins: Do you have any
early indication of what scale of government money here we are
talking about through the treasury is already being spent on these
various initiatives?
Mr Everitt: We do not have a full
account, no. What we do know, for example, is we have the 120
million Financial Inclusion Fund, for example, which is going
partly towards funding Citizens' Advice and advice through their
network. 20 million of that money is going towards increasing
awareness amongst excluded groups of the benefits of financial
products, like basic bank accounts and like access to insurance.
In that area in particular I think there is an absolute opportunity
for us to join up with the Financial Inclusion Task Force so that
we join it up with the financial capability programme that we
have, so we do not have a full map at the moment, no, but that
is what we are aiming for.
Q741 Jim Cousins: What concerns me
a little bit about this whole approach is that there is this sort
of language of gone off sociology speak about inclusion and exclusion
as if we were talking about some kind of aboriginal people that
we have suddenly discovered in the population, whereas the instances
I gave to you, should you or should you not opt out of the second
state pension, that is a perfectly normal thing, millions of people,
probably tens of thousands of people have already today made that
decision on the basis of no advice whatsoever, without hardly
knowing what the state second pension is or what opting out of
it means. I mean we are not talking about some exotic minority
group, we are talking about a normal everyday activity that millions
of people on average incomes or less are taking, that is what
concerns me.
Mr Tiner: I accept that and I
think that we are not in the position to build a network of generic
advice, I think you would accept that, I think that what we want
to see though is that vacuum addressed and I think myself that
between the government, the industry and the voluntary sector
and the FSA it has got to be addressed and I fully agree with
you it is everyday stuff and it is important stuff and these are
decisions that people are making as we speak and what we cannot
do is to force the firms who regulate to provide advice into that
sector because that is not part of our mandate as I mentioned
earlier, so therefore there is a gap in the market, it is a social
need in the market and I think that there needs to be, as I have
said, more meaningful and rapid initiatives to fill that gap and
we are committed to working with others but we cannot do that
on our own.
Q742 Peter Viggers: I am following
very carefully the questioning of my colleague, Jim Cousins. It
is actually worse than it has appeared in the last five minutes
or so, because almost all advice is geared to financial institutions
giving advice which takes time and time costs money and they can
charge a fee because they are going to sell a product at the end
of the advice session and it all hangs together, everyone is happy,
because the financial institution gets reimbursed for the advice
for the services provided. Most really basic advice, much really
basic advice to individuals, will be to rationalise their borrowing
by reducing their use of credit cards and by having a balanced
portfolio, none of which will result in the financial institution
getting a fee, so nobody is standing to gain from this apart from
the individual who has been relieved of the burden.
Mr Tiner: And it is for that reason
that identifying either the commercial case which, on the basis
of your assessment of that, will suggest there is not one because
there is no revenue going into the financial services industry,
or creating a social policy case for dealing with that at the
government level is what needs to be done and it needs to be looked
at, not on the basis that it is going to result in a sale, but
it is going to result in the consumer doing something more sensible
with their money or reducing their debt or making the right choice
about opting in or out of the second state pension, but I think
that is a public policy issue that is very urgent and one that
we would encourage and are encouraging others to look at very
seriously, but we do need to understand where we are at the moment.
There is a lot of stuff that does go on but, as you say, it is
not co-ordinated and it is a bit all over the place and I think
we need to pull that together and work out how we can quite rapidly,
not we the FSA, but those that are interested in this area, can
get together and deliver some value to those people, but the funding
question is the big issue, it has always been the big issue with
generic advice, it is who is going to pay, it is very difficult.
Clive may come up with a case for the industry doing it and it
might be a good business proposition, I hope he does, but I think
the Government are going to have a responsibility here as well.
Q743 Jim Cousins: Just continuing
with the example of insurance that was given by my colleague here,
a lot of people who do not have contents insurance are busily
signing up to payment protection insurance when they buy products.
That is clearly a substantial waste of money and could result
in all sorts of abuse. Of course that is execution only, it is
not a regulated sale if you sign up to payment protection insurance
when you buy a very expensive telly. Are you attempting to address
that in any way?
Mr Tiner: It is a regulated sale
actually, since the beginning of last year it is a regulated sale,
but it is a regulated sale without advice and I do not think everybody
has understood that actually, so if you have bought a bad product
then you still have recourse through the regulatory system to
have that put right, so you have recourse to the ombudsman, you
have recourse to the company to make a formal complaint under
our rules. So the sale itself is regulated but, as you say, it
is very often then sold without advice and we have been concerned
about sales practices for a number of reasons, one, the exclusions
are not always very clear and not always very clearly spelt out,
particularly these things that are sold on the telephone, which
they quite often are, together with the accompanying credit that
goes with buying a white good or whatever. We have come across
instances of people who are either over 65 or unemployed who have
taken out payment protection insurance which they will never be
able to claim on, it is just a waste of money, and we are also
concerned that very often the pricing of the premium is bundled
with the price of the credit, so it is not transparent to you
how much you are paying for that insurance premium and whether
it is worth what you are paying, the risk protection is worth
what you are paying, and so we have been doing a lot of work which
Clive might talk about in terms of raising the standards here.
Again, this was our first priority when we took on the regulation
of the insurance sales at the beginning of last year, was to look
at payment protection insurance and see the standards being raised
and we are also working with the OFT on whether there should be
an unbundling of the insurance premium from the cost of the underlying
credit. I think that the final point which is troubling us is
that a lot of the premiums are paid in one lump sum at the outset
and if the loan is then repaid early there is no refund of the
premium and so the effective cost is just huge and unreasonable.
There are a number of areas here, again it is a product which
is very suitable for many people who want to protect themselves
against losing their job and having all their assets seized because
they cannot get their credit, it is a perfectly legitimate and
justifiable and good market, but we are concerned about the standards
of sales.
Q744 Jim Cousins: When are you and
the OFT going to bring forward proposals in this area, for example,
to unbundle the costs?
Mr Briault: There are three things
going on there. One is that the OFT is undertaking a market study
at the moment which I think is due to complete towards the end
of this year after which they will decide whether there are remedies
which they, the OFT, wish to suggest or whether there are things
which they want to refer on to the competition commission. I cannot
speak for the OFT as to what their market study is likely to result
in, that is obviously up to them. We are looking at whether or
not we should be changing any of our rules and requirements as
a result of what we have learnt through the first stage of our
payment protection insurance work and we are currently embarking
on the second stage of that work which is to do another random
visit to see whether or not standards have improved since our
last set of visits last summer which we then publicised very widely
last November. And the third thing is that we are chairing, in
effect, a group of trade associations representing the various
people involved in this, the insurance companies, the brokers,
the lenders, to encourage them to focus on the way in which really,
through the industry, they could improve practices, whether or
not there are things they could do by way of codes of practice
to improve standards as well, so there are those three things
going on simultaneously. I think that is already beginning to
have an impact from the publicity we gave to our earlier work
in terms of people saying to themselves, "Look, FSA is really
serious about this, we need to improve standards here, let's get
on with it", but we will only know that once we have done
the second phase of work to look at those standards in more detail.
Q745 Jim Cousins: In terms of transparency,
again going back to a question that was asked earlier about contents
insurance, of course there is a post code premium system, you
pay more if you are in an allegedly high risk area, so that all
my constituents who have an NE3 post code are all paying less,
knock for knock, pound for pound, than all my constituents who
have an NE4 post code. Do you not think that that should be made
much more transparent and the justification of this should be
tested and scrutinised and brought up to date, because the effect
of course is that the areas which generically have lower income
are all paying higher costs than the areas of higher income which
is perverse in terms of the issues we have been discussing here
this morning?
Mr Tiner: In terms of those issues
it is perverse. I think where it is not perverse is that we are
always encouraging the insurance industry to price their products
on the basis of the risks that they are taking on, so from a prudential
point of view we want to see the pricing of their products matched
against the risk that they think they are taking on their books,
matched against the capital they hold to cover that risk and the
insurance industry, by and large, has decided to use post codes
for contents insurance, for car insurance, I think, as well and
to use that as a method of discriminating different types of risk
and the whole of the insurance industry is made up of discrimination.
There was recently a proposed directive out of Europe that would
disallow discrimination on the basis of gender and that would
have been a real problem for the insurance industry because the
pricing of annuities which is lower for women than it is for men,
because women live longer, the pricing of car insurance where
women are safer drivers than men, would have to be adjusted and
so the insurance companies would have to price on the basis, not
of risk, but on the basis of some other arbitrary method in a
way. Our responsibility here is to make sure that the insurance
industry are matching risk and pricing and they have, by and large,
chosen to do it this way. There are some firms who are making
a market out of possible market imperfections from doing that,
so a number of firms have emerged who will target particular sectors
and can undercut the big insurance companies who are pricing into
those sectors whether they be old people, young drivers and so
on, because the big companies risk models may be taking too much
of a severe view of risk and therefore over pricing it and there
is competition that comes in to get underneath that. I think our
feeling is that competition needs to resolve any issue that may
emerge in unfair discrimination or unsupported discrimination
rather than in any regulatory intervention.
Q746 Jim Cousins: But how can competition
resolve these issues of post code discrimination when the loadings,
the extra charges, for the post code are not transparent and cannot
be known or challenged by the consumers? If they were transparent
then consumers of insurance products who lived in various parts
of NE4 would be able to organise together and approach their insurance
companies and say, "Look, this isn't right, it isn't fair,
you haven't assessed the risks properly", but while they
are completely unaware that they are being charged more because
they lived in NE4 you cannot get that kind of market reaction
because it is not transparent?
Mr Tiner: I agree it is not transparent
on a pure post code, but you do not know what the rate is for
your post code kind of thing, I accept that. I guess the transparency
of risk pricing by the insurance industry is by and large not
transparent actually across the board. You cannot price the components
of risk yourself to say, "Well that is a fair deal".
All you can do is actually shop around to see where you can get
a better deal and actually by shopping around in the insurance
industry you can very often get a much better deal, but it is
very difficult and particularly, going back to the financial capability
issues, the consumer is not always able to ask all these questions
because they do not understand what goes into the pricing of a
product and it is a problem. Competition to me is the answer rather
than trying to rely on the consumer to unpick the basis on which
the cover has been set.
Jim Cousins: The consumer, unless they
have the pricing information to test, may not even look for the
competition. You see I think a lot of my constituents that live
in NE4 that you might consider not to be very financially capable
at all, if they were sent a letter saying, "We are charging
you more for your insurance for your house and your contents and
your car and your motor bike because you live in NE42", my
goodness I think they would sharp learn, their financial capability
would advance by leaps and bounds, because once it was made known
to them how this risk pricing was working, they would look into
it, they would find out, they would challenge it?
Chairman: I think it is worth a letter
from you to all your residents in NE4, Jim. I think it is something
we will come back to because Jim's point about over-the-counter
sales being regulated but no advice, I do not think many people
will know about that. I went for a product just a couple of weeks
ago and I think the insurance on a three year protection was about
a third of the price of the product itself and I thought this
is not a good deal at all so I never took it, but it is an automatic
response from the sales assistant saying, "We will give you
insurance on it", I think it is something that is worthy
of further consideration.
Q747 Mr Love: That is where the retailers
make their profit.
Mr Tiner: It is the incentives
that are created.
Q748 Chairman: We will look at that
from a transparent point of view. And also the PPI, can you keep
us informed of what is happening?
Mr Tiner: Absolutely.
Q749 Chairman: You know our Committee
has been looking at that and I had a loan from my bank about five
or six months ago and I got 12 separate letters from them subsequently
saying it was really important for me to take out PPI, so they
are really chasing me on it. I thought there has got to be something
better in it for the bank than in it for me when I get 12 letters,
but there you are. However, we will come back to those issues.
I just want to have a few questions to wind up. First of all,
the ABI told us that it was disappointed that the FSA's basic
advice regime is aimed specifically for the sale of stakeholder
products has retained many of the high cost features of the current
full advice regime and that in their opinion the original vision
of simple reliable products sold cheaply within a light touch
regulatory regime has been lost. Would you agree?
Mr Tiner: No, I think that—
Q750 Chairman: I did not think you
would, but tell us why?
Mr Tiner: I think that, as I said
earlier, the full advice, fact find and advice process that takes
two and a half hours is now down to 22 minutes, that is quite
a significant shift to me.
Q751 Chairman: What is your current
position on Rule RU64?
Mr Tiner: It is being discussed
by our board in the next couple of weeks, so if I may write to
you on that?[5]
Q752 Chairman: That is good. Lastly,
John Howard, who is the Chairman of the Financial Services Consumer
Panel, has said that if the industry cannot justify selling personal
pensions at a higher price and is allowed to avoid the obligation
of telling consumers about cheaper stakeholder products, this
will be tantamount to misselling on a significant scale, so the
industry and the regulator should brace themselves for widespread
claim for misselling in the future unless this rule is retained.
What is your response?
Mr Tiner: We feel that (a) the
rule was put in at a time when stakeholders were introduced to
stop a particular activity at that time. That has now moved on
and our view is that there is, and Clive can list them out for
you, a whole list of what we call risk mitigations that we will
do to prevent that kind of systemic misselling happening. We absolutely
do not want that to happen and we think that through all these
other risk mitigations it will not happen otherwise we would not
be inclined to remove RU64 which, as I say, we have not yet done
because the board needs to take a decision in the next couple
of weeks on that. If we do remove it there will be a whole load
of things we will do to prevent that kind of misselling that John
Howard is concerned about and we have spoken to John and the Consumer
Panel extensively about this. I do not know whether you want to
just mention what they are, Clive, in closing?
Mr Briault: I would just add that
they fall into two main categories. One is what is in place in
the regulatory regime even when you remove the specific rule which
is issues such as the suitability and requirements of treating
customers fairly in principle and all of those higher level requirements.
The other side of it which we think is very important is that
we will need to monitor really quite closely what is going on
in this market if the rule was removed and that will be a combination
of looking quite closely at what is being sold and we might also
undertake some mystery shopping, for example, around that to see
what practice generally is in the market place, so if we removed
the rule, and as John says that is not a decision that has been
taken yet, only our board can make or remove rules, then we would
look very closely at what happens in the market place thereafter.
Q753 Chairman: Good, we will look
forward to that correspondence. The last question: the Pension
Commission report found that the incentives to save in a pension
for people on slightly below the average income are in their opinion
hardly compelling, even with a 1.5% cap on annual management charges.
If this is true, how will allowing the industry to sell those
people higher cost products help to solve the problem of inadequate
pension provision?
Mr Briault: I think the main initiative
for helping those people receive an adequate pension provision
is going to be through a national pension scheme.
Q754 Chairman: But low cost?
Mr Briault: In terms of low cost,
in terms of auto enrolment, albeit with an opt out provision,
because that will remove the need to sell these products to individuals
in a way in which, as we were discussing earlier, these products
need to be sold rather than being willingly bought, so we think
that the solution for a low cost and generally suitable pension
regime will be through the national pension scheme which is intended
to reach, whatever it is, nearly 12 million employees who are
currently not members of an occupational pension scheme.
Q755 Chairman: And Turner's figure
of 0.3% charge, do you think that could be achievable?
Mr Tiner: I do not know. I think
that—
Q756 Chairman: It is in the interests
of people that that charge is as low as possible?
Mr Tiner: Yes, it is, it is important
that the market forces are able to drive it as low as possible.
Q757 Chairman: That we find, maybe
for the first time ever, is that market forces are working and
it is taking prices down rather than up because that is what has
been happening—
Mr Tiner: That would be a very
welcome change.
Chairman: Good, because we have a report
coming out from the NPSS in the next couple of weeks and it will
be very helpful. Can I thank my colleagues first of all for staying
the course this morning and, secondly, yourselves, for a very
interesting session and it has been very, very helpful to us in
our inquiry. Thank you very much.
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