Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


10 OCTOBER 2006

  Q1 Chairman: Mr Lambert, welcome to the Committee's hearing in advance of the FSA appearing before us on 24 October. Can I, first of all, congratulate you on your new appointment at the CBI and thank you for the work you have undertaken with the Retail Financial Services Group in the past year. Given that this is a State of the Nation address from you, first of all, was it worthwhile establishing this group, because the retail services report the Treasury Committee came out with mentions that there was little dialogue between the industry representatives and the consumer groups; so has the establishment of the group been worthwhile in that respect and maybe in other respects?

  Mr Lambert: Thank you, Chairman. May I start by thanking the Committee for having us along. We were very keen to report back to you after a year and let you know how we have got on in our deliberations. I would answer your question in this way: at the end of our first year we asked all members whether they were keen and enthusiastic for the group to continue in existence. We said there was no point in going on if it was not serving some purpose. As you know, all members are senior people in companies or in the consumer groups which they represent—the Treasury and the FSA have important representation on it—and they all said they wanted it to go on; they thought it served a purpose and that it met a need. My sense of it, coming pretty much as a newcomer to this world—and I chaired five meetings and subsequently there has been another meeting which Ron Sandler chaired (and he sends his deep apologies for the fact he cannot make it today)—was that the early meetings were quite stilted, in a way, and conversation did not flow all that freely; but after we got to know each other I felt that we were making real progress; we have had good and lively discussions; and that we were being frank and open with each other in a way that perhaps it had not been easy to do when such a group did not exist. I think you said in your report it was a bit odd that here was a world where people had only spoken to each other through megaphones; I think we have found an alternative to the megaphone approach. Perhaps I might ask my colleagues for their comments on how they see the performance over the last year.

  Mr Satchell: I would very much echo what Richard says. I think it is a valuable forum. It is a unique forum; it is the only place where we do all come together—all the various constituent parts who have an interest in the industry—and we sit round the table and talk about things. Obviously, when you do get a bunch of people together who do not know each other very well then those early exchanges are quite stilted, as Richard said; but I certainly have noticed a growing confidence amongst the group. The other benefit I would point up is that, because you do get to know the guys, you do bump into them on the circuit and those private snatches of conversation which go on outside the group I think now go on to a greater extent then perhaps they did before. That is all very valuable in building the relationships. I think the work we have done has contributed to the mission that we set ourselves—which is to contribute towards policy initiatives; to act as an early warning system for any things that might be happening in the marketplace that we do not quite like; and also to promote best practice in the marketplace. I can see those features coming through within the group and wholeheartedly endorse what Richard has said. These are senior people who are at that group; if they did not feel it was of some value then they would not be there.

  Mr Vicary-Smith: I would say that for me the most useful aspect has been the chance to put views directly to CEOs of major players. We often have an opportunity to put things through trade bodies and so forth, but speaking directly to the CEOs is a very different business. This is the only forum I am aware of where we can do that to that degree on such a wide range of interests. The other thing that is interesting is, as we have gone through and have perhaps got to trust each other a bit more that things are going to stay discussed within the group, I think there is a surprising commonality of analysis of the problems and of where we are trying to get to; lots of difference at times about solutions, obviously; but what seems to emerge in a number of areas is much more of a common understanding of where issues are coming up, what problems might be arising in the future and, therefore, a good base for a discussion about how to approach it collectively.

  Q2  Chairman: I think it is important to emphasise that CEOs are there. I think that was one of the early recommendations we had, nothing less than that, so if any decisions were made they were made at the top. You have stuck to that over the year, have you not?

  Mr Lambert: That is right, yes. The good idea of the Committee's at the start was, although we would persuade the trade associations to fund it, that the people sitting round the table would actually be the chief executives of the companies, the most actively involved in this business.

  Chairman: I think the work the Financial Services Authority, the ABI, the British Bankers' Association, the Investment Management Association and Which? did, to get the group established, should be recorded as well.

  Q3  Ms Keeble: I wanted to ask some questions about equity release. I wonder if you could say, what were the main reasons that led the group to examine that market, and what were the main points of discussions?

  Mr Lambert: I was very interested that it was actually both sides of the table who wanted to discuss this question. The consumer groups wanted to discuss it because of their concerns, manifested most obviously in the FSA's mystery shopping exercise in 2005, which rasied some serious questions about the way these products were being sold; but the companies were also very anxious to talk about it as well. I sensed that was because they could see that there were large numbers of citizens who had substantial capital tied up in their homes which, if the right sort of products could be designed for them to capitalise on that, would help them in their older years; but that companies were concerned, rightly so, for their reputation; because here was a product which, in previous guises, had not served the public well at all and companies were anxious, I felt, to get a good idea of what the issues were because at the time there were very few companies selling these products and they wanted to have a better idea of what the issues were before they jumped into the marketplace. That was how we came to talk about it. It was just about the first thing we all agreed to do, and everybody around the table was keen to have that on our agenda.

  Q4  Ms Keeble: Can I just ask a bit about advice. There is an issue which the FSA noted about financial advisers encouraging consumers to release more equity than they needed and then reinvest the "spare equity" as it were in different products, thereby getting two lots of commission. That is one issue. The second issue is do you think it is the advice that is a problem or the product design that is a problem?

  Mr Lambert: I will start off trying to answer that and then I will ask my expert colleagues to answer. My personal feeling was that the evidence thrown up in that first FSA mystery shopping, which showed that in some cases salespeople were selling a product and then urging the customer reinvest it in another product, was very poor advice. I could not imagine easily circumstances in which that would not be poor advice where, in a sense, double commissions were being taken, and it is a very expensive way of raising money. For me that seemed a clear case in the FSA's judgment that that was not to be encouraged.

  Q5  Ms Keeble: Are not some of the products designed inherently risky, and should there not be some regulation around those; or should there not be some tighter pointing towards—

  Mr Lambert: If I may say so, that is a slightly different question. Question one was: "How about selling this thing and then reinvesting immediately?" That is what I was commenting about. Before I get completely out of my depth I would just say this: the conclusion we came to was that the problem is about advice; and that these are very complex products which have different impacts on different customers, depending on their age, their total wealth, experience and expectations; and that to sell them you would need to have a very broad understanding of tax structures and of the individual's own position. It is for this reason, as I understand it, that relatively few IFAs are actually selling this product.

  Mr Satchell: Just to echo what Richard said, it is around the advice area I think we have the real issue; because it is such a complex personal set of circumstances that you have to deal with. If you take the equity release, it can affect your taxation position; it can affect your interaction with state benefits. So you have a whole range of things which need to be considered when you look at that product and look at the person who is potentially taking the product. As Richard said, it is only a small proportion of advisers who are sufficiently qualified to act in this area. I noted that the Financial Services Skills Council was actually looking at introducing a qualification on this. I think anything that can be done of that nature we would welcome as an industry because we do need to lift the quality and expertise within that area. As to whether the product design can help, yes, it can. I think I would step back from regulating products. We have regulation of sales advice as a regime. I think to regulate both products and sales regime, which we saw for example in stakeholder, tends to then get you into an area where it is just too regulated. We can help as an industry with some best practice guides—we have produced one already as the ABI—but there is definitely a need there for people to turn capital into income. That may mean reinvesting in another product, so again I would not necessarily damn the fact that people reinvest in another product. I think it is the appropriateness of the product that they invest in, and to be absolutely clear about the rewards for the adviser that that entails. I think that there must be absolute openness in this. Product design has moved on. For example, we now have drawdown equity release so that people can take down tranches which can replicate an income; so this is an evolving area of product design and advice. There is a lot to be done.

  Q6  Ms Keeble: Just before Peter comes in, can I just add my final question because this deals in particular with some of the views of consumer groups which would maintain that equity release should be a product of last resort. Is this reasonable given the pressures on pension income and strong rises in house prices? Given the interest in step-up debts, set-down arrangements for share in equity in property, do you think that equity release should perhaps be seen, rather than as an option of last resort, as a reasonable option for people who might otherwise be asset-rich and cash-poor? Where does a balance lie?

  Mr Vicary-Smith: Let me roll those two questions together, if I may. I would say that the issue, to my mind, is that there are some poor products, there is some poor advice and there is some poor marketing; and certainly in two of those areas, if not all three, things are getting better than they were a while ago. There have been changes and there has been movement but there are still problems in this marketplace. In terms of the nature of the products (and this deals with your comment about last resort) we have been clear that we feel that home reversion loans are not generally a good deal for consumers because of the poor market value that consumers tend to get for it. Within the lifetime mortgages we have been much more supportive of drawdown mortgages than we have of other types because then you can only pay interest on the amount you need to borrow at any one time. The introduction of that product was an improvement in the marketplace, and that is a comparatively recent phenomenon. I think there are still a lot of products out there. Why we say it is an option of last resort: it can still represent quite bad value for many consumers in many situations; the interest rates can be higher; and there are often early repayment charges. We have one Which? member who is paying an 8.1% rate of interest at the moment and has a £27,000 early redemption charge so cannot get out of that to remortgage onto a lower rate. That is an example of where we feel there is bad product design which is putting people in positions where they do not have the flexibility they need later on. I have not looked at the scheme in detail but I understand the Age Concern scheme where the rate of interest charge is, I believe, just above a number of standard variable rates; and I think I am right in saying there is not an early redemption charge. That kind of product design then means it is a product you can use much more flexibly. With most products at the moment, by and large, other forms of borrowing—borrowing from families, looking for local authority help with grants for housing repairs and so on—are better routes to go first before you get into equity release.

  Q7  Jim Cousins: One of the things you looked at was the state second pension and advice on whether to opt out of the state second pension. Do you think now there is a reasonable consistency of practice?

  Mr Lambert: What we were concerned about was that around the table there was a sense that it was not clear what the Government intended in the contracting out regime; so we asked for clarity on that and then it was dropped. One way or another, the picture was clearer!

  Mr Satchell: We did write to the Government because there is a general feeling within the industry that we are not quite clear about the Government's strategy on this; whether the general view is that the Government is encouraging people to opt out or opt in; or what does "neutral" mean?; so the letter went off. I think to some extent we have got clarity through the publication of the White Paper, because in 2012 of course contracting out will be scrapped for those in the defined contribution environment. There is certainly clarity about the figure from 2012. There is a slightly uncomfortable period in the run-up there because of course it is an annual decision that people have to take. I think that is leading companies generally to be rather more cautious as the perception is that the value of the rebates is falling.

  Q8  Jim Cousins: As I understand it the concern of the group was not just with what the future Government policy will be—you have made your position clear about that; you think it is going to be more or less resolved by 2012—but at present the state second pension is probably one of the best pension products available to low income earners. There was some concern by your group about the kind of advice that was being given to low income workers about whether or not to stay in the state second pension. Was that an issue that you took up? Is it something that gives you concern? Do you now feel that there is a broad consistency of advice between the various product providers about this issue? I think it is very much a question for you.

  Mr Satchell: Absolutely. I think the first thing to say is that most of this business is actually transacted in the independent intermediary marketplace. Your providers can give some form of guidance but we are not directly responsible for—

  Q9  Jim Cousins: That is a bit of a cop-out.

  Mr Satchell: It is the clarity between what the distributor is responsible for, which is advice to his client, and the guidance which we as companies give. If we feel very strongly about particular issues then we will give really quite strong guidance to customers and to the distributors. There is still, I have to say, a variety of views across providers as to the strategy to take depending on particular ages and how it cuts into the income groups. Generally, providers are now being very cautious about that. If in doubt, generally providers are suggesting that people opt back in or stay opted into the state scheme.

  Q10  Jim Cousins: Let me be clear about this. You are saying that the general practice now is not to advise low income earners to opt-out but indeed, where appropriate, to advise people (typically in their 50s going back to work, many of them women) to opt into the state second pension?

  Mr Satchell: What I am saying is that the balance is moving that way. For me to generalise right the way across the market is very difficult when it is a distribution issue.

  Q11  Jim Cousins: There is no code of practice about this? There is no written guidance to which the Committee could be referred that would inform us about what people actually do?

  Mr Satchell: I do not believe that there is a general piece of information that would give and draw all that together across the marketplace.

  Mr Lambert: If I could be clear about what the group was concerned about. We were looking forward on this question; we were not looking back in the past. We were saying there was no clear impression from Government as to the basis upon which terms the contracting out should be set. Indeed, over time the indications, according to our members, seemed to be different. Sometimes it would seem to be encouraging contracting out and sometimes not encouraging contracting out. We felt we should write not to discuss the merits of particular alternatives but to say we would like clarity on this policy question, otherwise giving advice was very difficult because you did not have a sense of where you were coming from.

  Q12  Jim Cousins: Contracting out rebates at present, the scale of them is roughly (and I do not have the figures in front of me) £10 billion or £11 billion a year. It is not small change; this is a big component of the welfare system that we have.

  Mr Lambert: Indeed.

  Q13  Jim Cousins: It is important to be clear about whether this huge scale of investment in rebates is good value for money for consumers?

  Mr Lambert: That was why we asked for clarity, because our members did not feel they had the basis upon which to give clear advice going forward.

  Q14  Angela Eagle: I think some of your answers to those questions have hit on this issue of the business model itself and who is the real customer, which we have often considered in this Committee. In fact, Mr Satchell, you have just illustrated that very well by saying that it was a matter for the distributors when Mr Cousins asked a question not for you as product providers, which might be a cop-out but just demonstrates some of the problems with the business model, with the commission-led model which has been described as "unhealthy" and "harmful" by somebody like Callum McCarthy, who recently said that it is based on commission incentives which produce unattractive results to reputable providers, unattractive to consumers and whose benefits to intermediaries are questionable. When are we going to be able to break the industry out of this unhealthy business model, this commission-based driven model which has created suspicion and worry amongst consumers, and a lack of clarity actually about who your customers are—whether it is the distributor who is on commission or the actual customer whose money is being involved? When can we break free of this rotten business model?

  Mr Lambert: If I could explain the role of our group. It is not to redesign business models for the insurance industry, or any other industry; nor is it a regulator, and it has no statutory responsibility.

  Q15  Angela Eagle: Have you had any discussions about this?

  Mr Lambert: We have had discussions about commissions and you will not be surprised to know we did not come to a clear consensus on the way forward. The ABI has done some good and interesting work on commissions, which it is continuing to do as I understand it; and obviously Which? has its own views on these subjects as well.

  Chairman: I think it is going to be a question for the ABI when it comes before us this morning.

  Q16  Angela Eagle: This is quite frustrating because everybody knows that this is a rotten business market. Every time we ask any group of people—and I absolutely accept your point that you are not prepared to redesign the business, but talking about it is a good start—everybody says, "Oh, it's not us, guv. It's somebody else who has got to do it". When the Government introduces Sandler products to try to at least create a section of the industry that is not run on that model they get throttled.

  Mr Lambert: I personally think what the FSA is now doing is interesting. It is, as it were, deconstructing models, as far as I can understand it, with its report on review of retail distribution. I think that will be a very interesting step and will answer some of your questions; and it will also, I expect, show some of the benefits of the current structure as well.

  Mr Vicary-Smith: You will not be surprised to know that we share a lot of frustrations about the distorting effect that commission can have within the advice given to consumers. What is interesting in terms of how this group can take forward an issue like that, we have not reached agreement, we are not going to reach agreement but I think we are ready to sit there and have a frank discussion which enables us to put directly to the CEOs responsible for these business models the issues that it creates for ordinary consumers, and have much more of an open discussion than we could possibly have within the pages of a newspaper. That may be a limited benefit but it is a benefit. In some areas—like on contracting-out, like on the compensation bill—there are specific routes the group can take as a matter of consensus and write collectively to those who make the decisions and say, "We, across all the different arms of this industry, believe there is a route which collectively should be taken". I think that has a degree of power that it does not, if you like, individually.

  Q17  Angela Eagle: It is a kind of very slow, Darwinesque, evolution?

  Mr Vicary-Smith: Some things are quick; some things are slow, inevitably.

  Q18  Chairman: I think this group was established to foster dialogue in the first instance and then to identify issues with which you could talk to others, for example what Angela is talking about there. Your discussions could feed into the retail distribution review which John Tiner established in June. I think that is a model for this group rather than talking fundamental problems and coming up with answers.

  Mr Lambert: That is exactly it. We can find points of consensus and we can find points of disagreement. As long as we are open and frank about where we disagree I think that is fine if we have had a constructive discussion beforehand.

  Q19  Mr Breed: I think that clears it up. Quite frankly, the vast majority of people believe that commission-based advice is biased. The people who are actually prepared to go onto a fee-based situation tend to be the high net worth individuals who will be those who understand, and understand the need and everything else. How are we going to get to a system, with so many people who today are under-insured, have not saved, are not putting the greatest priority onto the sort of planning they need, without resorting to a fee-based system which, quite frankly, they will not pay because they do not believe they can afford that sort of money? I think it is so important to the vast majority of people (who are basically under-insured, under-pensioned and under-save at a time of high indebtedness and everything else) and is such an important issue that someone has got to grab it by the throat and you seem to be the people.

  Mr Lambert: Our mission is discussion and trying to analyse and identify points of agreement and points of disagreement and, from that, allow others to take things forward.

  Mr Satchell: Perhaps I could just make one comment on customers and providers and then run onto advice. If you wish to come back to commission later on then we can do. We are very concerned about customers and we have been treating customers fairly as a high level principle working with the FSA. The ABI has its own `Customer Impact' scheme which translates some of those things into our own practice. They are accepted at Board level; they run through to product design; they are meant to look at how products interplay with broad bands of customers. My comments really for advisers were down into the individual customer and giving advice there. We do not wish to distance ourselves from the customer and the products we provide being generally suitable—far from it. We are all interested in very satisfied customers. It is a great business model. That is where I would be on that. In terms of the advice, yes, we do have to find a way of extending advice into the low to medium income groups. The basic advice regime was designed to go some way to that. Unfortunately, that has been overlayed with a level of FSA regulation, which has taken it out of there.

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