Memorandum submitted by the Financial
Services Authority
A. INTRODUCTION
1. This memorandum is submitted by the Financial
Services Authority in the context of the Committee's Inquiry into
Financial Inclusion. We look forward to elaborating on it in oral
evidence.
2. The memorandum:
— Provides brief background on the
FSA, including its scope and overall approach to regulation;
— Describes how the FSA's work takes
account of financial inclusion; and
— Considers whether it might be appropriate
for the FSA to be given either a new statutory objective to promote
financial inclusion or a new "have regard to" principle
of good regulation.
B. BACKGROUND
INFORMATION ON
THE FSA
3. The Financial Services and Markets Act
2000 (FSMA) gives us four statutory objectives: to maintain market
confidence; to provide the appropriate degree of consumer protection;
to promote public understanding of the financial system; and to
reduce financial crime. In carrying out our general responsibilities
we must also have regard to seven principles, including using
our resources efficiently and economically, proportionality, and
facilitating innovation and competition.
4. We have translated these four statutory
objectives into three strategic aims, which guide our day-to-day
work:
— helping retail consumers achieve
a fair deal;
— promoting efficient, orderly and
fair markets, both retail and wholesale; and
— improving our business capability
and effectiveness.
5. As at the end of 2005, we regulate 29,193
firms, ranging from major global financial groups to small financial
advisers. Our scope is decided by government. FSMA gives Treasury
Ministers power to amend our scope through secondary legislation.
There have been several increases in our scope since we gained
our powers under FSMA on 1 December 2001. In particular, during
the last year or so we have taken on responsibility for regulation
of mortgage business and general insurance intermediation. Given
the scope of the Committee's inquiry, we note that we do not have
responsibility for regulating consumer credit. Any change to our
objectives or principles would require primary legislation.
6. Our retail work is designed to make a
real difference to firms and retail consumers. We focus our activities
on four main aims: capable and confident consumers; clear, simple
and understandable information available for, and used by, consumers;
soundly-managed and well-capitalised firms which treat their customers
fairly; and risk-based regulation which enables us to focus our
resources and activities on the most significant risks, through
firm-specific and thematic supervision.
C. HOW THE
FSA IS TAKING
ACCOUNT OF
FINANCIAL INCLUSION
ISSUES
7. Under FSMA, we have no explicit statutory
responsibility for financial inclusion. Nor is it included in
the principles of good regulation as an issue to which we should
formally have regard. However, we take the issue very seriously
and have consistently tried to be thoughtful about and sensitive
to the special requirements of those who find it difficult to
gain access to financial services. We have outlined this role
publicly on a number of occasions. In the following sections we
set out how we have done this, under the main headings in the
Terms of Reference for this inquiry.
1. Access to banking services
8. We have helped the financially excluded
gain access to banking services by:
— providing information on, and support
for, basic bank accounts;
— facilitating a more proportionate
approach to customer identification requirements; and
— facilitating the provision of Islamic
banking and Sharia-compliant products.
Basic bank accounts
9. Sixteen banks now offer basic bank accounts
and at end-September 2005 a total of 1.5 million basic bank accounts
were open. Whether banks offer these accounts is in our view a
matter for them. We do not think it is consistent with our objectives,
and in particular with our concern for the prudential soundness
of firms, to require them to offer products or services against
their commercial judgement (for this reason also we do not require
banks to provide facilities for cash withdrawals in particular
areas or to limit their charges for providing these facilities).
10. But we have actively supported the promotion
of basic bank accounts by publishing our own consumer guide to
the accounts, which explains the potential benefits of a basic
bank account, how to choose one, and how to open one. Since it
was first published in 2001 we have distributed over 467,000 copies.
We are sending 18,000 copies of the most recently revised guide
to individual Citizen Advice Bureaux, housing associations, local
authority housing departments and to the members of the Financial
Inclusion Forum of Services Against Financial Exclusion (SAFE).
We are commissioning research to assess the guide's effectiveness.
Initial informal feedback on the latest revision comments very
positively on the relevance and clarity of the information and
key messages in the guide.
11. We have worked with the Association
of British Credit Unions (ABCUL) on their proposal to provide
basic bank accounts in partnership with the Co-operative Bank.
These discussions have helped minimise additional regulation in
order to facilitate the take-up of basic bank accounts, which
will be provided through credit unions from autumn 2006.
Customer identification requirements (ID)
12. Over the last 18 months we have been
leading a multi-agency initiative to deliver a more proportionate
customer identification regime which commands industry and consumer
support, and meets law enforcement needs. A significant aspect
of this initiative has been to improve how the industry verifies
the identity of those without the types of document typically
used as proof of ID—for example, driving licences, utility
bills, and passports. In this context, we have worked with financial
exclusion experts such as the Treasury's Financial Exclusion Team
and not-for-profit organisations such as Business Action for the
Homeless, SAFE and other key stakeholders.
13. In October 2004 we published a report,
ID—defusing the issue, and the proposals for streamlining
the ID regime have largely been taken up by the Joint Money Laundering
Steering Group (JMLSG) in their revision of their Guidance Notes.
The JMLSG is an industry group made up of the leading UK trade
associations in the financial services industry and the Guidance
Notes are the key resource for industry in designing defences
against money laundering. This new Guidance is expected to be
published in the first quarter of 2006 and a new approach by the
industry over ID checks will follow in the second half of the
year.
14. The JMLSG's new Guidance is expected
to include a wider range of options for consumers to prove their
ID (for example, benefit claimants will be able to use an entitlement
letter or an ID confirmation letter issued by the DWP; those in
care homes or sheltered accommodation will be able to use a letter
from the care home manager/sheltered accommodation warden). With
some products (notably basic bank accounts), customers will typically
not have to prove their address. We will monitor the industry's
changes to its ID processes to check that it delivers a more proportionate
outcome.
Islamic banking and Sharia-compliant products
15. Last year we authorised the first purely
Islamic bank in Europe, the Islamic Bank of Britain (IBB). It
gives those who had previously felt unable to transact with a
conventional bank the opportunity to do so with a bank whose products
and operations have been endorsed by their Sharia board.
16. We worked with IBB on issues such as
the treatment of Islamic deposits, the role of the Sharia Board,
promotional materials and corporate governance to ensure that
depositors had the same protection as with other banks. We are
aware that other banks may follow.
17. Similarly, we are working with the providers
and consumers of Ijara house purchase products, which provide
a Sharia-compliant alternative to mortgages, so that we can put
in place an appropriate regulatory regime which is consistent
with Sharia principles and affords appropriate consumer protection.
We will consult on this during 2006.
2. Access to affordable credit
18. We have taken initiatives in the following
areas to improve access to affordable credit:
— developing and implementing a proportionate
regime for credit unions; and
— facilitating the development of Community
Development Finance Institutions and Community Banking Partnerships.
Credit Unions
19. Our regulatory regime for Credit Unions
is proportionate, requiring suitable standards while recognising
their role in reducing financial exclusion. While there has been
some consolidation in the industry, total membership and total
assets have continued to rise. Leaders of the credit union trade
bodies agree that the drive for higher standards together with
the safety net of compensation coverage has been beneficial.
20. We provide significant regulatory assistance
for those involved in running credit unions, for example through
a dedicated section of our website and through a regular newsletter
keeping credit unions up to date on matters that affect them.
We have also started to run "surgeries" for credit unions,
inviting all those in a specific geographic area to discuss any
regulatory issues or concerns with our supervisors. To date we
have met with 17 credit unions in Birmingham, 27 in Liverpool
and 33 (including one development agency) in Scotland. Overall
we have to date invited almost 50% of all credit unions in the
UK to these surgeries.
Community Development Finance Institutions/Community
Banking Partnerships
21. We have been closely involved in the
development of Community Development Finance Institution (CDFIs).
CDFIs provide personal and small business loans at competitive
rates in disadvantaged communities, and those which invite retail
investment are registered (but not regulated) by us under the
Industrial and Provident Societies Act, subject to meeting certain
protection requirements. We fully acknowledge the important role
that CDFIs have to play in combating financial exclusion. We have
been concerned that regulation of those inviting retail investment
would add unreasonable costs to the sector while it is still in
an early stage of development. We have been closely involved in
recent discussions on proposals for the development of a Code
of Practice for CDFIs as an alternative to regulation (and we
have been mentoring the Community Development Finance Association
on its development). We have been aware of uncertainties caused
by the lack of assured funding after March 2006, which may have
proved an obstacle to effective self-regulation, but these have
now been resolved, at least for the next two years.
22. We have also been closely involved in
the Community Banking Partnership pilot in Birmingham, which is
aimed at bringing together on one site credit unions, the community
finance sector, banks and building societies and money advice
agencies to provide a co-ordinated approach offering services
to the financially excluded. We have offered advice to the participants
in the pilot, particularly on its potential regulatory implications
(failure to address these properly could lead to consumers losing
protection, for example compensation in the event of a failure)
and we have made clear to the pilot that we stand ready to do
more on request to facilitate its future development.
23. By intention, any regulatory system
acts to some degree as a barrier to entry in order to protect
consumers. We believe that the examples of credit unions and the
Islamic Bank of Britain shows that authorisation and compliance
costs are not significant obstacles for smaller or different business
models. We note the conclusion of the OFT's Competition Review
of the Financial Services and Markets Act 2000 (November 2004)
that our actions are unlikely to have any overall negative impact
on the structure of markets.
3. Financial education and access to financial
advice
National Strategy for Financial Capability
24. Since November 2003, we have been leading
and co-ordinating the National Strategy for Financial Capability.
Each of the original seven workstreams established under the Strategy's
Steering Group was required "specifically to take account
of the needs of the financially excluded". The Steering Group
decided in October 2005 to take forward into implementation a
set of priority projects: schools; higher education; the workplace;
maternity/paternity leaver resources; FSA information campaigns;
development and roll-out of the Debt Test; and further work on
whether there is a commercial case for the wider delivery of generic
advice. These priority workstreams should make a positive contribution
to financial inclusion. Brief details on each are set out below.
(i) Schools
The Schools project involves the development
of a planned programme of personal finance education. The Chancellor,
in his pre-Budget Report on 5 December, made clear the Government's
commitment to enhancing the role of personal finance education
in the education system. This includes addressing financial education
through the functional mathematics parts of GCSE maths. This provides
an important opportunity to embed personal finance education in
schools. The Schools project will also build on the good work
done over recent years by the Personal Finance Education Group.
(ii) Higher education and other young
adults
The FSA Young Adults Working Group has undertaken
a Higher Education pilot at Roehampton University to deliver financial
capability education aimed at young adults who are becoming financially
independent and actively participating in financial services market
(to varying degrees) for the first time.
In addition, the Steering Group has agreed to
consider the wider roll-out of initiatives to provide support
for young adults not in education, employment or training. This
is subject to the findings of two pilots (a Citizens Advice pilot
training frontline youth workers and Fairbridge West, a national
charity that works with young severely disadvantaged people) and
an examination of the associated business case. The young people
covered by these pilots all have a range of financial capability
and awareness challenges and many will lack access to bank accounts
or formal credit facilities.
(iii) Workplace
In 2005 the Workplace Group tested the delivery
of workplace financial education through eight organisations across
the country ranging from multi-nationals to family-run firms.
The aim for 2006-07 and beyond is to reach a greater number of
people, including those working part-time or on the minimum wage.
(iv) Maternity/paternity leaver resources
We are funding a pilot in 2006 which is initially
looking at distributing financial information and resources to
maternity/paternity leavers through employers. This will be done
through a range of health-care workers, government departments
and other agencies.
(v) The Debt Test
The Borrowing Group has developed a tool to
help prevent people becoming over-indebted. In developing the
tool (currently known as the "Debt Test") the group
liaised with HM Treasury and the Financial Inclusion Taskforce
to produce a set of questions which specifically cater for the
financially excluded. The Debt Test has been piloted on the financially
excluded to ensure that it meets their needs. The Debt Test will
initially be launched on both the BBC and FSA websites in January
2006 and further promotion and distribution will follow later
in the year.
(vi) Generic Advice
As part of our work on generic financial advice,
we are working with the Resolution Foundation, a policy and research
organisation which is examining how generic financial advice could
be offered to people who do not depend wholly on State benefits,
but who have below-average incomes and are unlikely to be targeted
by conventional providers of financial products and advice. The
Foundation plans to develop fully-costed proposals for a national
generic advice resource aimed at this group. The income range
the Foundation has initially assumed for this group is approximately
£10,000 to £22,000 pa. We welcome this initiative.
25. Other initiatives which we are taking
as part of our financial capability work include:
(i) The Financial Capability Innovation
Fund
We have also established an Innovation Fund.
This supports new and innovative financial capability projects
run by voluntary and community organisations. We will provide
£200,000 to fund projects running until March 2007. Award
winners were announced in December 2005. Many of the projects
which have been chosen will reach people who are financially excluded,
for example the British Refugee Council, which provides financial
capability courses aimed at women with families and the unemployed.
A key part of the selection criteria is that
projects should be sustainable beyond the period of FSA funding
and that they should be easily replicated. Once the projects have
been concluded, it is our intention to publish the lessons learned
from them and share these with other financial capability projects
and partners.
(ii) The Baseline Survey
Supporting all these initiatives, the Baseline
Survey will describe and measure the state of financial capability
in the UK, including consumers' knowledge and understanding, skills
and confidence and attitudes. It also includes variables on the
quality of the neighbourhood that people live in. This will allow
us to compare differences between those who live in deprived and
non-deprived areas. We plan to publish the results of the Baseline
Survey in the first quarter of 2006.
The survey has been designed to take account
of the whole UK population, including those on low incomes. The
survey will include coverage of unbanked consumers—8% of
the sample of 5,300 do not have bank accounts.
26. We also offer a number of other factsheets
and other tools which are aimed at consumers. These include:
— Factsheets on mortgage affordability
and on managing arrears;
— Our website-based Financial Healthcheck
provides tips on basic financial planning; and
— The website also provides information
on credit and debt, and offers basic information on opening and
using a current account.
As part of improving our overall communication
and distribution strategy, we have a programme in place which
supports the distribution and promotion of these tools.
4. Incentives and barriers to saving for
people on below average incomes
27. We have responded to the evidence that
some firms were reluctant to give advice to consumers making low-value
transactions because firms could not be sure of recovering costs
(and also that fee-based advice can be an unattractive option
for low-income customers). We put in place in April 2005 a streamlined
and proportionate regime for the regulation of advice on the sale
of the Government suite of "stakeholder" savings and
investment products which is designed to support firms' ability
to sell stakeholder products to lower-income consumers more cost
effectively. To date 23 firms have registered with us to offer
this advisory process.[118]
Many others are exploring how they could develop Basic Advice
alongside existing distribution channels.
28. We are also aware of the importance
of consumers understanding the level of service, and type of advice,
that they can obtain. We therefore produce the "Consumer
Guide to Financial Advice" to help all consumers make
an informed decision. This document is widely distributed, as
well as being available on our website or via our Consumer Contact
Centre. Stakeholder products are clearly branded as low-cost so
that consumers are not discouraged from considering them because
of the perceived cost.
29. We have already begun to undertake a
post-implementation review of Basic Advice to better understand
how the market is developing, and will make an announcement in
April 2006 outlining our findings. Broadly, the feedback we have
had from the industry has indicated that we have created a regime
that is proportionate to the products being sold. We will continue
to monitor the situation as the market develops.
D. THE ROLE
OF FSA: A NEW
OBJECTIVE OR
PRINCIPLE?
30. As set out above, we aim to play a positive
role within the framework of our existing statutory objectives.
Given this, we have considered whether it might be appropriate
for us to be given an additional statutory objective or an additional
"have regard to" principle on financial inclusion.
31. Giving the FSA a statutory objective
on financial inclusion was suggested by the National Consumer
Council in 1999 during the passage of the Financial Services and
Markets Bill. This was rejected by the Joint Committee on Financial
Services and Markets chaired by Lord Burns and by the Government,
on the basis that an additional objective would make life unnecessarily
difficult for a regulator responsible for prudential supervision
and would damage lines of accountability. The Joint Committee
said that if the Government wished to impose social obligations
on financial services businesses it should do so directly, perhaps
asking us to monitor these.
32. We believe that the reasons for rejecting
a statutory objective on financial inclusion continue to hold
good. We also believe that a new "have regard to" principle
of financial inclusion would make little material difference to
how we operate, since we already take financial inclusion into
account in our work.
April 2006
118 Corrected figure as at 11 January 2006. As at 11
April 2006, 40 firms were registered with the FSA to offer Basic
Advice. Back
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