Memorandum submitted by Alan Lakey, Highclere
1. THE RESPONSIVENESS
FSA TO THE
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. 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
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 groupa group
typically unable and unwilling to contribute 10%-25% of their
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
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. PROGRESS IN
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(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
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.
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