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 representthe Treasury and the FSA have important representation
on itand 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 worldand 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 togetherall
the various constituent parts who have an interest in the industryand
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 ourselveswhich 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
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
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 guideswe have produced one already as the ABIbut
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 borrowingborrowing
from families, looking for local authority help with grants for
housing repairs and so onare 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 beyou have made your position clear about that;
you think it is going to be more or less resolved by 2012but
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
Q9 Jim Cousins: That is a bit of
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
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
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 arewhether 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 peopleand I absolutely accept
your point that you are not prepared to redesign the business,
but talking about it is a good starteverybody 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
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 areaslike on contracting-out, like on
the compensation billthere 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
suitablefar 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.