Select Committee on Treasury Written Evidence

Memorandum submitted by Alan Lakey, Highclere Financial Services


  1(a)  The FSA is charged with a number of duties. Protecting the consumer and maintaining market confidence are two of these. Clearly this is a difficult task especially when these two Statutory Objectives often cancel each other out.

  1(b)  It is apparent that the FSA believes that the publicity resulting from its public shaming and fining of firms serves to show that it is on the ball and batting on behalf of the consumer. However a trawl through the financial newspapers will highlight the fact that whilst dubious compliance practices and ineffective management controls are eagerly stamped on the far more worrying financial criminals preying on UK consumers appear to operate without constraint.

  1(c)  I attach a copy of a recent Tony Hetherington column in the Financial Mail On Sunday. [1]This is an example of continuing FSA ineffectiveness, something regularly highlighted within its pages.

  1(d)  I would also argue that highlighting rule breaches or principle breaches, as they will shortly become, engenders a negative effect, even an antipathy towards the financial services sector.

  1(e)  The UK population is woefully under-insured and under-pensioned. It also has the highest level of personal debt in the world. These matters are not unrelated as they indicate a failure of another Statutory Objective, the need to promote public understanding of the financial services system. It is partly a matter of education and partly one of persuasion.

  An example is the distrust of pensions. Partly due to the Maxwell and Equitable Life scandals, partly due to the Governments dismissal of the Parliamentary Ombudsman's ruling in respect of wound up pension funds and partly due to the stockmarket crash of 2000-03.

  1(f)  There is another reason and this is the Governments decision to introduce Stakeholder pensions which ticked every conceivable box yet purposely failed to accommodate a profit margin for the providers and, more importantly, the distributors. In my own practice pension planning has fallen from around 60% of my business in 1999 to around 10% over the past few years.

  1(g)  Advisers no longer seek out clients to assist in retirement planning because it is simply not economic. It is far better to concentrate on other more profitable areas because, like insurers, we are businesses and not charities. As an example, Legal & General no longer pays introductory commission on Stakeholder pensions where the monthly contribution is less than £200.  Stakeholder pensions were designed for the £10,000 pa—£25,000 pa earnings group—a group typically unable and unwilling to contribute 10%-25% of their gross incomes.

  1(h)  The Government and the FSA seem keen on the view that fee-based advice is the way of the future. The theory is that consumers will pay either an hourly or an agreed fee to take advice from pension specialists (normally independent financial advisers). The theory is sound for high net worth individuals but it does not work for the Stakeholder target income bracket. The result is that this large sector of the public has effectively been disenfranchised.

  1(j)  A further point is that high net worth individuals are usually self-aware of the need to plan for their retirement. They rarely require chiding or persuading. The disenfranchised majority do need persuading. They hold other more short-term obsessions and therefore need persuading and educating. The ultimate irony is that at retirement they will likely receive means-tested benefits which are funded by the rest of us.

  1(k)  In summation, the FSA is the organ of the Treasury and whilst it has Statutory Objectives these are often in conflict with the short-term needs of the Government. This divergence serves to work against the consumer. Where the effect of regulations impedes the ability of the consumer to save, insure or prepare for retirement the regulation must be revised.


  2(a)  There is great concern within the industry regarding the move from rule-based to principle-based regulation. The fear is that such a concept allows great leeway for the FSA to determine a breach. In other words, it can choose which firms to punish. This is a realistic fear as a small firm is unlikely to have the capital backing to pursue the FSA through the appropriate channels and courts.

  2(b)  The balance of costs v benefits is one close to the heart of every firm. Annual fees have risen massively as has the annual levy for the Financial Services Compensation Scheme (FSCS). In assessing costs the Committee should be aware that the FSA has chosen to spend over £300,000 on works of art to adorn its Canary Wharf offices, over £1,700,000 on foreign travel and £1,000s on taxi fares for its staff. The industry has right to expect its regulator to apportion expenditure in a disciplined and prudent manner. I attach a comment from September 23rd edition of The Scotsman. [2]

  2(c)  The FSA's December 2005 Better Regulation Action Plan confirmed that in dealings the regulated firms "information we require from firms will be kept to a minimum". This is not borne out by the introduction of the Retail Mediation Activities Return (RMAR). Twice yearly firms are required to submit data online. The nature of this data ranges from the obviously essential such as complaints and professional indemnity insurance details to the less meaningful such as The area of most concern is the requirement to provide precise half-yearly financial information relating to capital adequacy, profitability and breakdowns of types of business. Such information can only be arrived at by using the firms accountants to trawl through part-year figures and arrive at an "estimate" of gross and net profits and capital account details. Such information may well be essential for large corporate bodies and indeed it is these bodies that have the infrastructure to provide such information. The matter effectively returns us to the cost/benefits argument.

  2(d)  The FSA has stepped up it "thematic work". Typically this involves a third-party company in mystery-shopping firms. The resulting data is used in press releases and used to shape policy, This would be acceptable if the base information was robust however in recent months we have seen mystery-shopping exercises involving less than 60 firms. Additionally, the firms were divided between "independent", "multi-tied" and "tied". No competent scientific laboratory would use such scant information as the basis for a paper let alone a system of regulation. The FSA needs to consider the basis under which it obtains and receives such information. In addition there is a substantial question mark regarding the artifice of pretending to be a potential client when actually obtaining data for the regulator.

  2(e)  By way of summation, the FSA is seen as an unfriendly organisation waving a big stick in the form of fines and naming and shaming. It maps out a course of action, often based on inaccurate or potentially misleading data. Whilst advocating financial prudence to the consumer it has a far more reckless view when spending funds received by way of fees and fines from its stakeholder firms. Like many quango's it appears beholden to nobody, accountable to the Treasury yet left to its own devices. Regulating by fear is not an option in the 21st century.

September 2006

1   Not printed. Back

2   Not printed. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 22 January 2007