Memorandum submitted by Which?
1.1 We welcomed the creation of the FSA
that brought together the activities of the 10 previous regulatory
organisations under one umbrella. However, we want to see some
changes to the governance, operation and structure to ensure that
the regulator better ensures that consumer interest is at the
heart of its work. We are not calling for more regulation. Our
goal is to promote more effective, proportionate regulation. We
want a system of deterrents and incentives which can be applied
to the retail financial system so that the interests of consumers,
providers and shareholders are better aligned.
1.2 We believe that if the FSA is to be
a more effective regulator, it needs to become better at identifying
detrimental practices in the first placeand then become
a more aggressive enforcer.
1.3 We welcome the FSA's recent announcement
that it is to start looking more carefully at root causes of consumer
detriment, and we share its analysis about the problems caused
by the prevailing remuneration model. It is now vital that the
FSA follow through on this analysis and take tough action to address
these problems. The forthcoming FSA Retail Distribution Review,
will be an important opportunity.
1.4 We do not object to the move to principles
based regulation/Treating Customers Fairly. However, we have concerns
that the FSA is in effect devolving more responsibility to directors
of firms without first ensuring that robust discipline and enforcement
measures are in place to provide a deterrent against firms exploiting
less intrusive regulation. In addition, Which? believes that any
change to principles-based regulation should be accompanied by
a cost-benefit analysis of potential detriment.
1.5 A key current issue is regulatory costs
and benefits. No one supports unnecessary regulation that adds
no value. However, it is our view that allegations of overregulation
and unnecessary costs are overstated. The industry lobbies have
been able to portray standard business costs as new or additional
costs of regulation. When cost sources are examined objectively,
firms that were following good business practice would still incur
most of those costs.
1.6 In many respects, the FSA's General
Insurance Conduct of Business regime has led to benefits for consumers.
However, we have concerns that the protection that this regime
offers is insufficient for some of the higher-risk products, notably
the pure protection products.
1.7 The Chief Executive of Which?, Peter
Vicary-Smith, will be giving oral evidence on the work of the
Retail Financial Services Group in conjunction with other colleagues
from the group, including the previous chairman, Richard Lambert.
We are aware that written evidence by the committee is being provided
to the committee directly by the group.
2.1 We saw the creation of a single retail
regulator in the form of the FSA as being a significant success
and milestone in our efforts to make retail financial services
markets work in the interests of consumers and wider society.
However, we are of the view that the structure and culture of
the FSA is in need of reform if it is to meet the future needs
2.2 At present, we are concerned that the
FSA puts its relationships with firms and issues of market confidence
ahead of the interests of consumers. We would like to see the
consumer interest be given equivalence to other more powerful
interests within the financial system. We are not calling for
more intrusive or expensive regulation. Indeed, we recognise that
the cost of regulation will ultimately be borne by the consumer.
Instead, our goal is to promote more effective, proportionate
regulation. We want to see a system of deterrents and incentives
which can be applied to the retail financial system so that the
interests of consumers, providers and shareholders are better
2.3 This response focuses on the three questions
set out in the call for evidence. However, we would also like
to bring particular attention to a number of key issues that the
FSA highlight in their annual report.
2.4 The problems with financial advice that
the FSA depolarisation post-implementation research has identified
are of particular concern. Which? is concerned that depolarisation
has meant that consumers are increasingly confused about the advice
that they are being given. In September 2006, we published the
results of an in-depth study of 57 financial advisors and found
that less than a third reached our benchmarks for good advice3
(This study is provided as a separate attachment). Tied advisers,
who mainly work for high street banks and building societies,
were the worstjust 16% passed all the standards. Almost
half of the tied advisers Which? visited led researchers to believe
they offer more choice than they do. While independent financial
advisers (IFAs) came out better, they still fell short of the
mark; less than half those visited passed all the benchmarks for
good advice. These findings are of great concern and will require
2.5 Which? has long highlighted the problems
in the Payment Protection Insurance market. 4
Problems relating to poor selling practices and a lack of compliance
in this market have been highlighted this year by the FSA in their
thematic work in this area. The emerging thinking document published
by the OFT in August, as part of their study of the effectiveness
of competition in this market, has also been very critical of
this market. Some tough action is needed to correct the clear
problems that exist in this market. The problems that the FSA
highlight with the sale of Critical Illness insurance are also
of notable concern.
2.6 A number of outstanding problems in
the mortgage markets also need addressing. The serious problems
that the FSA has identified in the equity release market will
need to be tackled as will the widespread deficiencies that the
FSA have identified with mortgage disclosure documentation.
FSA TO THE
3.1 Which? has a number of strategic aims
for the retail financial services industry:
Introducing strong market forces
which lead to effective competition from the consumer perspective
and "normalising" good behaviour and responsible practices.
Putting power in the hands of consumers
and ensuring firms are held accountable by aligning the interests
of shareholders/producers with those of consumers and society.
A high degree of consumer protection,
reducing the risk of mis-selling and other reckless behaviour
Restoring confidence in the financial
services industry, which at a time when the UK faces a pensions
crisis, must be in the national economic interest.
3.2 Our strategy for making retail financial
markets work is based on a three-pronged approach.
Better regulation: that is more robust,
targeted regulation which addresses causes rather than symptoms
of market failure;
Better governance, accountability
and consumer representation: to balance the explicit duties directors
have to shareholders under UK company law (including self-regulation);
Making market forces work better
so that competition has a chance to work effectively.
3.3 Reform is needed in each of these three
areas. Our major initiative "Time for A Change"
a set of standards designed to promote better governance and leverage
market forces to complement effective regulation.
3.4 The FSA has a major role to play in
achieving these strategic aims. Rather than solely chase after
detriment, we believe that if the FSA is to be a more effective
regulator, it needs to become better at identifying detrimental
practices in the first placeand then also become a more
3.5 We welcome the FSA's recent announcement
that it is to start looking more carefully at root causes of consumer
detriment. The FSA has recently said that the current distribution
system for financial services to retail customers "serves
neither the producer of the services nor the consumer of the services".
In their opinion, the prevailing remuneration model is leading
to product bias, provider bias and churn, with the consequence
of significant potential consumer detriment. Training deficiencies
have also been highlighted as another important problem. Which?
has long argued that problems of remuneration and training are
key sources of detriment in the financial sector and this development
is therefore timely.
3.6 It is now vital that the FSA follow
through on this analysis and take tough action to address these
problems. The forthcoming FSA Retail Distribution Review, will
be a very important opportunity to do this.
3.7 The FSA is changing the way it regulates
the industry trying to move from a rules based approach to one
based on high level principles. Which? does not object to high
level principles/TCF per se. It is a worthy aim that we share
with the FSA. However, we have concerns about this approach:
The FSA is in effect devolving more
responsibility to senior management/directors of firms without
first ensuring that robust discipline and enforcement measures
are in place to provide a deterrent against firms exploiting less
The FSA is not publishing data on
individual firms' compliance with TCF. This means that consumers
will not be in a position to assess the risks and benefits involved
in entering a commercial relationship with a firm. This undermines
the consumer protection and competition aims of the FSA.
The necessary market forces to provide
incentives to good corporate behaviour are not in place.
Which? believes that any change towards
principles-based regulation should be accompanied by a cost-benefit
analysis of potential detriment. We are not aware that the FSA
has conducted an impact assessment on the potential consumer detriment
by replacing rules with high level principles. We believe an impact
assessment is vitally important. In light of the better regulation
environment, we would have expected the FSA to justify any changes
to legislation with a cost/benefit analysis, including looking
at potential impact on consumers. It is surprising that this has
not been done.
3.8 If the FSA is to ensure that firms do
treat customers fairly, then a system of deterrents and incentives
need to be created along with intelligent application of regulatory
tools to the root causes of detriment.
3.9 Senior management have to be clear that
failing to treat customers fairly will result in serious consequences
for the individuals responsible, the financial position of the
firm and therefore its shareholders. Firms need to fear the FSA.
They need to be certain that behaviour which is detrimental to
the consumer and public interest is likely to attract the attention
of the FSA and result in penalties which hit their bottom line.
Only then do we think that shareholders will be incentivised to
put pressure on directors of firms to put consumers at the heart
3.10 To provide this necessary regulatory,
corporate and individual director level accountability we advocate
a number of reforms connected to the enforcement process. These
A more transparent enforcement process.
We argue for a reform of the disclosure regime so that firms are
required to publish information which would affect consumers'
decisions to engage in a relationship with a firm (similar to
the rights of access afforded shareholders under the Listings
Regime). This could include complaints information or regulatory
A clear, tough fines tariff.
4. PROGRESS IN
4.1 One of the key issues exercising the
business community, regulators and government is regulatory costs
and benefits. Which? believes in a common sense approach to regulation.
No one supports unnecessary regulation that adds no value. However,
it is our view that these allegations of overregulation and unnecessary
costs are overstated. Industry lobbies have been able to portray
standard business costs as new or additional costs of regulation.
4.2 Costs "attributed" to FSMA
regulation arise from a number of sources and the existence of
FSMA and FSA does involve real additional regulatory costs for
firms. However, when cost sources are examined objectively, firms
that were following good business practice, which would naturally
include things like information disclosure, would still incur
most of those costs regardless.
4.3 The most objective way to measure regulatory
impact is to identify costs over and above those costs which firms
would incur anyway as part of operating in the market and providing
a decent service to consumers.
Deloitte "Cost of Regulation" Report
4.4 We believe that the Deloitte report
into the cost of regulation reinforces much of our assessment.
One of the main conclusions from the report was that "much
of what regulation requires is, in fact, regarded by firms as
good business practice".
4.5 The study concluded that incremental
costs in the wholesale sectors covered were relatively low. In
contrast, the incremental costs in the retail sector covered were
higher. Deloitte explain this contrast by arguing that a more
detailed regulatory regime was established in the retail market
because of the clear evidence of significant market failure.
4.6 Which? would dispute whether Deloitte's
study supports the idea that there are significantly greater incremental
costs in the retail sector. There is no question that there has
been significant market failure in the retail pensions and investment
sector. However, it does not necessarily follow that incremental
costs are directly correlated with the level of detriment. Firms
who were behaving fairly and transparently towards retail consumers
should already be undertaking the same steps and performing the
same checks and balances required by regulation.
4.7 Regulation serves to codify what should
be good business practice and acts as a proxy for effective market
forces. In other words, consumer focused firms ought to be "self-regulating"
their behaviour throughout the retail supply chain
so as not to exploit the advantage they have over retail consumers.
If incremental costs are defined as costs over and above those
associated with the normal course of business or good business
practice, then a functioning consumer focused retail market would
not be burdened with significant additional costs. It is possible
that firms reporting higher incremental costs may have a more
"reckless" attitude to conflicts of interest and risks
throughout the retail supply chain.
Real Assurance Risk Management Study"Estimation
of FSA Admisistrative Burdens"
4.8 The Real Assurance Risk Management study,
conducted for the FSA, estimates that total costs of reporting
to the FSA for the financial services sector are around £600
million a year (approximately 0.5% of industry costs). The study
identified the top 20 rules which individually account for 1%
or more of total administrative costs. Looking
at the top 20 rules, it is interesting that rules relating to
money laundering are the single biggest componentover 40%
of total estimated costs. It can be inferred from this that the
so called burden associated with conduct of business rules is
5. THE INITIAL
FSA REGULATION OF
5.1 In many respects, the FSA's General
Insurance Conduct of Business (ICOB) regime has led to benefits
for consumers, especially in terms of product disclosure and redress.
However, we still have some concerns about the regime.
5.2 Our key concern is that we don't believe
that the same regulatory regime is appropriate for all general
insurance products. The ICOB regime means consumers can be sold
insurance products on a non-advised route, without the consumer
knowing whether or not they have been advised until the end of
a sale. This may be appropriate for lower-risk products such as
home and contents cover, or car insurance, but higher risk products,
especially the pure protection products such as Income Protection
or Critical Illness, should have been given a higher standard
of protection with stricter advice requirements unless the consumer
specifically asks for a non-advised sale.
5.3 In a Which? report, published in June
2004, we highlighted the problems that consumers faced when trying
to purchase insurance to protect themselves in the eventuality
that they could not work. This research explained that because
of the complex and high-risk nature of these products regulation
should not treat them in the same way as other general insurance
products. The situation research into financial advice that Which?
published in September 2006 clearly highlights that, even with
the protections given under the new ICOB regime, the scope for
consumer detriment that is being caused by inappropriate sales
of protection products still exists. In our study, 76% of advisers
visited for protection advice failed to advise researchers of
the risks associated with income protection should their income
these articles are provided as separate attachments.)
5.4 As a result of the considerable scope
for detriment surrounding protection products, we continue to
argue that the FSA should treat protection products with a higher
importance than other general insurance products.
3 http://www.which.co.uk/press/press_topics/product_news/which_magazine/financial_advisers_571_94442.jsp Back
Which? "Protecting your income", March 2005. Back
Which?, "Time for a Change: Discussion Paper",
Which? 2005. Back
Speech by Callum McCarthy, Chairman, FSA, Gleneagles Savings &
Pensions Industry Leaders' Summit. Back
Deloitte, "The Cost of Regulation Study", p 1. Back
Much of the detriment which occurs in retail financial services
we attribute to the conflicts of interest which can be identified
along the supply/distribution chain. Back
See Table 1: Top Twenty Administrative Burdens, FSA Briefing note
BN022/ 06, 28 June 2006. Back