Select Committee on Treasury Written Evidence

Memorandum submitted by the Financial Services Consumer Panel


FSA Responsiveness

  For the first time, in this year's annual report, the Consumer Panel assessed how effective it felt the FSA had been on behalf of consumers. The Panel looked at a number of aspects of FSA operation and awarded scores ranging from very strong to weak. Overall it was felt the FSA had responded reasonably well to the needs of consumers but there are a number of areas where the Panel is looking for improvement.

Better Regulation

  Progress in relation to the FSA's Better Regulation Action Plan, including recent studies of the costs and benefits of regulation has included a number of initiatives, not least of which is a move to a more principles-based regulatory regime. The Panel supports the FSA's plan to scrap many of its detailed rules and rely instead on high level principles. However the Panel is concerned that this may result in industry developing its own guidance and codes. There seems little benefit in doing away with many rules only to replace them with even more guidance and codes controlled largely by industry bodies with little or no real consumer input. The effect could be to replace publicly scrutinised rules with codes and guidance which have not been scrutinised in public.

  The Panel welcomed the joint FSA/Practitioner Panel initiative to ascertain the costs of regulation and noted that these costs proved to be lower than many commentators expected. The Panel is however, not yet convinced that proper account is being taken of the benefits of regulation. The Panel feels the work undertaken by Oxera concentrated on a methodology which may have only limited application.

General Insurance

  The initial experience of FSA regulation of the general insurance industry has been mixed. The Panel was pleased the FSA undertook early thematic work in the general insurance sector, the results of which were disappointing. Also disappointing were the results from the Panel's own research into compliance levels for financial promotions appearing in the national press on one particular day in February. The results for general insurance promotions were the worst of the three regulated sectors with only one in five of promotions reviewed found to be compliant. The Panel remains concerned that the FSA ignores what the regulator sees as technical breaches of the rules.


  1.  In its 2005-06 Annual Report, the Consumer Panel focussed its attention on the outcome for consumers of FSA performance in particular areas. The Panel gave the FSA performance a rating, ranging from very strong to weak. These ratings were based on the opinion of the Panel, which is comprised of a more informed group of consumers. In arriving at these ratings, the Panel did not make a judgement about the resources available to the FSA. It discussed overall priorities in the FSA work programme with FSA staff, but recognises that a range of factors, some of them outside the Panel's remit, need to be considered by the regulator when allocating resources.

  2.  The Panel addressed 23 key areas of the FSA's work covering the period April 2005 to March 2006. The Panel rated FSA performance as very strong; strong; acceptable; and weak, with no very weak rating being awarded. These ratings are outlined below:

  3.  Very strong:

    —  Bundled brokerage and soft commissions for retail investment funds;

    —  Financial capability;

    —  Communications with consumers;

    —  European issues.

    —  Strong:

      —  Treating customers fairly (TCF);

      —  Mortgage endowments;

      —  Disclosure of information;

      —  Mystery shopping.

      —  Acceptable:

        —  RU64—advising on the most suitable pension;

        —  Payment protection insurance;

        —  Financial promotions;

        —  Home reversion schemes;

        —  Islamic home finance schemes;

        —  Unfair contract terms;

        —  Enforcement action;

        —  Regulation of small firms;

        —  Mortgages;

        —  General insurance.

        —  Weak:

          —  Self-certification mortgages;

          —  Consumer access to a wider range of investment funds;

          —  With-profits funds;

          —  FOS and FSCS payment limits;

          —  Generic advice.

          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 consumer detriment.

          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 products—not 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 firms—following the example of the Advertising Standards Authority—where 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 few months.

          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 tools—to rely less on information provided by the industry—and 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 areas—for 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 consumer experience.

          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 to consumers.

          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 promotions.

          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 environment.

          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 entails—this 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 rules.

          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 dealt with.

          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 clarity—the 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 business.

          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 services.

          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 generally.

          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 Board.


        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 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.

        October 2006

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