Consumer access to a wider range
of investment funds;
FOS and FSCS payment limits;
4. The rest of this paper picks out a few
of these issues to highlight why the Consumer Panel has awarded
a particular rating and focussing on areas of concern that have
arisen since the Panel published its annual report.
5. RU64. The Panel challenged the
FSA on its proposal to remove the rule (known as RU64) which requires
advisers to explain why any recommended personal pension is at
least as suitable as a stakeholder pension. The Panel believes
removal of this rule will not be in the best interests of consumers
as this could lead to mis-selling on a significant scale. The
Panel was therefore pleased the FSA delayed its decision on the
removal of RU64 until transitional arrangements for the NPSS are
announced later this year. The Panel rated the FSA performance
on this issue as acceptable, but will be monitoring the situation
closely in the coming months.
6. Home reversion plans. The announcement
by the government to regulate the home reversion and Islamic home
finance markets was welcomed by the Panel. The equity release
market is generally one which the Panel has a keen interest in,
and it has therefore monitored the development of the FSA policy
with great interest.
7. The Panel rating of the FSA as acceptable
in this area was given before it had considered the FSA draft
rules outlined in CP06/8. These proposals gave rise to several
areas of concern. The Panel remains alarmed that consumers will
be able to purchase a home reversion plan in the new regulated
environment, without advice. The industry currently largely operates
under a voluntary code which requires that product providers may
only sell these products where advice has been given. The FSA
does not intend to replicate this requirement which the Panel
sees as a retrograde step and one which could give rise to serious
8. The Panel recently undertook some research
in the equity release market, obtaining an analysis of the value
for money the products provide. Initial findings from this research
highlight the need to ensure these consumers are properly advised
before deciding to purchase any equity release productsnot
simply home reversion plans.
9. In addition, the Panel's concerns over
the extent to which a valuation can be guaranteed to be independent
have still to be allayed. This is again a subject which the Panel
will be closely monitoring over the next few months.
10. Financial promotions. The FSA's
approach to the regulation of financial promotions continues to
be the subject of much debate between the Panel and the FSA. Whilst
the Panel is pleased there has been an increase in resources made
available for this aspect of regulation, the Panel remains concerned
the industry will constantly push at the boundaries unless the
debate on what is acceptable practice takes place more in the
public domain. Research we undertook recently showed 57% of financial
advertisements published in national newspapers on one day did
not meet FSA requirements.
11. The Panel therefore continues to press
the FSA to consider naming firmsfollowing the example of
the Advertising Standards Authoritywhere action has been
necessary to remove unacceptable financial promotions, but where
such action falls short of formal enforcement procedures.
12. Compliance levels across investment,
mortgage and general insurance markets remain low, and the Panel
will shortly be repeating its research project, to take a snapshot
view of the number of financial promotions appearing in the national
press which comply with the rules, and the extent to which non-compliant
promotions present a medium or high risk to consumers.
13. Self-certification mortgages. The
Panel was very concerned at the results of thematic work the FSA
carried out in the self-certification mortgage sector. The Panel
gave the FSA a weak rating for this largely because it believes
the FSA did not appreciate the potential risks for consumers
which were apparent from the results of this work. The Panel challenged
the conclusions drawn; the FSA stated there was no evidence of
widespread abuse or systemic problem in this market. What was
apparent was that very poor record keeping continues to be an
issue, and the Panel believes that this could mask a much bigger
problem in this sector of the market than is immediately apparent.
The Panel believes further, higher priority work is necessary.
14. Interest Only Mortgages. The
Panel was also worried by statistics produced by the FSA for the
number of interest only mortgages for which there was no evidence
of the consumer having a repayment vehicle in place. This was
raised with the FSA and it is now undertaking research into why
this is and whether consumers understand the risks they are taking.
15. Closed funds and orphan assets.
The Panel has continued to monitor the management of closed
with-profits funds and orphan assets, as it believes these continue
to be a major risk for consumers. The Panel attached a weak rating
to this area of the FSA's work. Whilst the FSA has introduced
new rules on orphan assets, it remains to be seen if these will
have enough impact. There has been a recent rise in the number
of closed funds being sold by their original owner to consolidation
companies who specialise in this area. The Panel believes the
actions of these companies must be closely watched and that the
implications of the changes and options available should be communicated
to affected policyholders. However, the Panel remains worried
about the quality of information available to consumers and consumers'
ability to influence the behaviour of these companies.
16. Financial capability. The Panel
believes the FSA's work on financial capability has been very
strong recently. The FSA has successfully brought together government,
industry, educational and not-for-profit groups in an effective
partnership. The FSA's financial capability baseline survey gave
a comprehensive picture of people's attitude and behaviour in
relation to their personal finances. The Panel is pleased this
work was coupled with the publication of a new plan of action
to improve financial capability. The Panel welcomed the targeting
of specific groups including schools, young adults and the workplace,
although it was disappointed that older consumers were not seen
as an early priority. That said, the Panel is pleased that the
FSA is exploring the possibility of using intermediary organisations
to reach particularly vulnerable groups, including the elderly,
single parents and those in social housing. The Panel has also
been pleased at other initiatives including the Innovation Fund
which supported 12 projects where activities covered, for example,
a money awareness pack for cancer carers and a financial awareness
and support service for prisoners and ex-offenders.
17. Consumer communications. Also
given a very strong rating was the FSA's work on its strategy
for communication with consumers. The Panel was very pleased to
see the development of the "mortgages laid bare" and
"money laid bare" campaigns. The FSA has put in place
a sustained and co-ordinated programme of consumer campaigns aimed
at highlighting regulatory/policy issues and improving financial
capability. The Panel hopes the FSA will set realistic and achievable
evaluation measures for future communication activity in the next
18. Mortgage disclosure. The FSA
did some good research on the information firms were required
to give to consumers looking for a mortgage. Whilst the results
of this work were disappointing, the FSA warned the industry that
improvements were needed. Of particular concern were the results
on the quality of advice in the lifetime mortgage sector. The
Panel was particularly disappointed that the FSA did not act to
require firms to remove advisers from the sales force who were
found to be weak. However, it is reassured that further work is
being planned in this area. The Panel awarded the FSA a strong
rating for this work.
19. Generic advice. More disappointing
was the painfully slow development of work on the provision of
generic advice and as a result the Panel judged the FSA work in
this area as weak. The Panel sees this as one of the most important
aspects of the FSA's work on financial capability and would like
to have seen the FSA "champion" generic advice more.
New avenues are being explored by the Resolution Foundation to
look into the business case for providing generic financial advice,
although it is disappointing that as a result the FSA has appeared
to relinquish its leadership role. The Panel would like to see
the FSA step more into the forefront on this subject. The main
hurdle appears to be funding and the Panel is hopeful that the
proposed Social Investment Bank, which might use unclaimed assets,
could provide the resources needed.
20. Mystery shopping. The Panel
believes the FSA's performance in relation to the use of mystery
shopping has been strong. For some time the Panel has been urging
the FSA to make greater use of a range of regulatory toolsto
rely less on information provided by the industryand to
check with the consumer or receiver end by using mystery shopping.
The FSA has undertaken several projects during the year where
mystery shopping has been an integral part of the project.
21. The use of this means of checking industry
performance has sadly uncovered problems in several areasfor
example, equity release, the sale of payment protection insurance,
mortgage disclosure, self-certification mortgages and with the
new depolarisation rules. The Panel hopes the FSA will continue
to use mystery shopping as an important means of checking whether
regulation is working correctly at the level of the individual
22. General insurance regulation. The
Panel judged the FSA's performance in relation to general insurance
regulation as acceptable. There has been some early thematic work,
the results of which have been disappointing. The Panel expects
to be briefed on the results of the FSA's general insurance effectiveness
review towards the end of 2006, which will judge the effectiveness
of the regime itself, and whether it is delivering policy objectives
23. Also disappointing were the results
from the Panel's small research project covering financial promotions.
In the general insurance sector, the research found that a staggering
79% of promotions failed to comply with the relevant rules, and
of these 17% were judged not to comply with the requirement to
be clear, fair and not misleading. These results are very worrying.
Whilst general insurance promotions were judged to pose a low
risk to consumers, these results demonstrate that more must be
done in this field to ensure that rules are adhered to.
24. As mentioned previously the Panel is
critical of the FSA's risk based approach to the regulation of
financial promotions rules. It feels that firms will simply copy
other examples of non-compliant promotions which are seen to provide
a competitive advantage and where no action appears to have been
taken by the regulator. The Panel has written to the FSA calling
for the FSA to review its policy on the regulation of financial
25. Principles-based regulation.
The FSA has stated its intention to radically change its regime
by scrapping many detailed rules and relying instead on high level
principles such as Treating Customers Fairly. The Panel stated
in its annual report that it supported the FSA's review of current
regulatory requirements but countered this with a comment that
better regulation does not necessarily mean deregulation. The
Panel is concerned that the driver for the move to a more principles-based
regime is one of deregulation, and feels strongly that this should
not be the case, but that rather, it should be driven by a desire
for better customer outcomes as a result of a closer match between
firms' working culture and the requirements of the regulatory
26. The Panel has been briefed by the FSA
on its proposals to simplify the Conduct of Business regime for
investment business, although as yet it has not seen the detailed
proposals this entailsthis could be an early indicator
of what is to come. The Panel supports a more principles-based
regime in the wholesale market where there is likely to be a fair
balance of knowledge and expertise between parties. The Panel
is happy to support such a move in the retail market, provided
the resulting regulatory structure delivers what is needed for
consumers and is robustly enforced.
27. However, the Panel does have a number
of concerns with this developing policy. With a reliance on high
level principles comes a greater emphasis on senior management
responsibilities within a firm and on the ability of FSA supervisors
to make judgements about adherence to principles rather than detailed
28. Of particular concern to the Panel is
the temptation for the industry, seeking certainty under a principles
based regime, to write its own guidance and codes and then seek
FSA endorsement for these. Currently FSA rule changes are subject
to public consultation and scrutiny. If the industry writes and
controls its own guidance and codes, dictating policy on much
of the interaction between consumer and firm, the worry is that
any consultation process will not be as open as it is now. Open
and effective consultation with consumers at large must be seen
to operate effectively to ensure consumer concerns are adequately
29. Also of concern is the importance of
ensuring consumers are aware of the limitations of such codes
and that apparent compliance with an industry written code does
not preclude a complaint being made to the Ombudsman who may well
see things differently.
30. The Panel also believes that the extent
to which the Ombudsman and possibly the FSA's Regulatory Decisions
Committee will take industry codes into account needs much greater
claritythe independent standing of both will be of particular
importance under the new regime. The Panel will be keeping a close
eye on this significant development in FSA policy.
31. Costs and benefits of regulation.
The Panel was very interested to read the report of the costs
of regulation work jointly commissioned by the FSA and the Financial
Services Practitioner Panel. The incremental costs of regulation
appear to be lower in each sector than some had feared. Whilst
senior management in firms seem to understand the importance of
regulation, there is still a problem on the high street where
consumers continue to face poor advice and information which the
regulator must do more to improve. The figures in this report
seem to counter the argument that strong regulation will undermine
32. The Panel is not yet convinced that
proper account is being taken of the benefits of regulation. It
appears that the necessary assessment of benefits is falling behind
work on the costs of regulation. The Panel is also of the view
that the work on the benefits undertaken by Oxera has focussed
on the methodology alone and in any event may have only limited
application. The FSA needs to take a broader approach to this
issue. An immensely important benefit of regulation is the fact
that consumers who have confidence in a strong regulatory system
will be more willing to invest, and an effective and efficient
regulator appears to be an international asset, drawing more firms
to the UK and also increasing the country's lead in financial
33. Commission. The Panel has taken
a keen interest in the continuing debate on how financial advice
should be paid for, and like the Treasury Committee, remains concerned
about the potential for commission payments to cause adviser bias
towards certain products or providers.
34. The Industry has been reluctant to accept
that commission is causing biased advice. But whether it does
or not, consumers clearly believe it does and this perception
has a significant effect on consumer confidence in financial services
35. The Panel welcomes the comments in a
recent speech by Sir Callum McCarthy in which he recognised that
the current distribution model focuses on business volume as opposed
to quality, and that this system serves neither the consumer nor
producer of financial services, nor arguably the financial intermediary.
36. The Panel has recently discussed what
alternatives there are to a commission-based sales regime that
would serve industry and consumers better and has pledged to encourage
wider debate on this point. It will be closely following the FSA's
project which will be examining the current distribution model
in the retail investment market.
The main purpose of the Panel is to provide
advice to the FSA. Consequently the emphasis of the Panel's work
is on activities that are regulated by the FSA. The Panel is also
responsible for assessing and commenting on the FSA's effectiveness.
The Panel also looks at the impact on consumers of activities
outside but related to the FSA's remit. Examples include European
issues and policy proposals by HM Treasury and others. The Panel
has regard to the interests of all groups of consumers, including
those who are particularly disadvantaged in the context of financial
services. The Panel can also advise the Government on the scope
of financial services regulation; and consider other matters that
assist it in carrying out its primary functions.
How the Panel operates
The full Panel meets about 10 times per year.
In addition, smaller "working groups" meet monthly to
deal with specific issues in more detail and to consider the Panel's
formal responses to FSA and other consultations. FSA staff and
other third parties are invited to these meetings and participate
in discussions. The Panel also holds meetings outside the FSA's
offices (most recently in Glasgow) with members of the financial
services industry, as well as with consumer representatives. The
Panel also commissions research to obtain a better understanding
of consumers' views and to identify areas of concern. A monthly
report of the Panel's work and concerns is provided for the FSA
The Panel publishes an annual report on its activities.
Annual Reports, responses to consultations, research reports and
other information is available on the Panel's website at www.fs-cp.org.uk.
The website contains the Panel's e-mail address, but makes it
clear that the Panel is not in a position to pursue individual
or specific complaints from the public about financial services.
The Panel does however consider carefully the wider implications
of any complaints or other information provided by consumers and
others who contact the Panel.
Panel members are appointed by the FSA Board
following an open recruitment process based on the Nolan principles;
the appointment of the Chairman must have the formal approval
of the Treasury. John Howard became Chairman of the Consumer Panel
with effect from 1 October 2005, having been a Panel member since
October 2000. Adam Phillips, who joined the Panel in March 2004,
was appointed Vice Chair with effect from 1 November 2005.
Members of the Panel have a wide range of relevant
experience such as consumer advice and advocacy, front-line advice,
legal expertise, market research, consumer policy and the media.