Examination of Witness (Quesitons 28-39)|
10 OCTOBER 2006
Q28 Chairman: Good morning. Welcome to
this session on the Financial Services Authority Annual Report.
Could I start off with questions on regulation of the general
insurance market. You rated the FSA's performance on general insurance
regulation as acceptable. What aspects of the FSA's performance
have you been pleased with, and where is there a need for further
Mr Howard: I think the main thing
that we were commending the FSA for (although there are still
a lot of weaknesses) was the fact that they really decided to
use the tool of mystery shopping in a big way in this area, to
find out really for the first time what the customer experience
was. It is all very well relying on returns from insurance companies
about the number of complaints and whether they are complying
with the rules, but it does not necessarily (in fact I would say
rarely) reflect what consumers are actually experiencing in the
high street. The fact they went out and looked and, once they
had turned the stone over, discovered some rather horrible things
there, I think was very credible because it allowed them to move
forward and actually try and tackle some of the issues they discovered.
PPI, payment protection insurance, in particular was a big issue
for us. The mystery shopping revealed there were real problems
there. At the moment we are pleased with the way the FSA is going
forward on trying to tackle the issues that they uncovered.
Q29 Chairman: The Panel has expressed
concern that consumers buying insurance from firms that had been
part of the FSA's initial amnesty would not have access to the
protection afforded by the FOS and FSCS scheme. Has a lack of
protection led to any consumers losing out?
Mr Howard: I do not know the answer
to that, to be honest. It is a little bit difficult to judge.
Every time that the FSA has brought another area of financial
services under its regulation it has decided to place the risk
with the consumer rather than the industry by saying, "Well,
we're going to check out everybody and give them an authorisation
to start with, and if we feel unhappy about that we'll delay and
look into them". During that period though they will be able
to continue selling the products that they are selling, but they
will not be in the position of being able to say to their customers,
"Well, if we've got it wrong, as we're not authorised you
can't go to the Financial Ombudsman Service; you can't claim compensation".
That is putting, in our view, the risk on consumers unfairly.
Each time they have moved an area of financial services into financial
services regulation under their belt they have had the same attitude.
We did not feel that was fair to consumers.
Q30 Chairman: I notice from a recent
comment from a Norwich Union representative he was mentioning
there are important gaps that need to be plugged in the market,
and he referred to travel insurance and extended warranties. I
presume you will agree with that? We know the Treasury has undertaken
a consultation exercise in that at the moment. Should the FSA
regulation be extended to cover this area?
Mr Howard: We have said from the
outset that we think it should. We were disappointed that the
Treasury did not take that view in its original discussions. Subsequently
they drew up the regulations and left out those two important
aspects. We feel there has been consumer detriment during that
period, and the sooner those areas are brought under FSA regulation
Q31 Chairman: We hope to look at
that in the future as part of our inquiry into the FSA and general
insurance industry as a whole. Are there any other areas of the
general insurance industry outside of the scope of the FSA regulation
that we should address?
Mr Howard: I do not think there
are any others. The bulk of the market is now under FSA regulation
which is why those two areas being left out stick out like sore
thumbs really. I do not think there are any others that come immediately
Q32 Chairman: So these are the big
issues for us?
Mr Howard: Yes.
Q33 Chairman: The FSA is currently
consulting on whether to remove the requirement for direct insurers
to provide status disclosure and a demand and needs statement.
First of all, do you support this change and, if you do, will
this change bring any benefits to consumers in your opinion?
Mr Howard: The whole question
of disclosure documents is a difficult one. Some of this now comes
under the Markets in Financial Instruments Directive so the FSA's
hands are tied to some extent on what it can do about some aspects
of disclosure. We feel that there is a big job to be done on the
disclosure documents that people get. We have indicated that to
the FSA but they have clearly got to wait to see what the implications
of MiFID are in this area. Overall, we think it important that
all documents that consumers receive are in simple English; and
they are fair and brief I think would be the other thing I would
add to that. The other aspect I think that is of concern in the
disclosure regime at the moment is when you have telephone sales.
We went and visited a firm to see how they were dealing with the
regulations and it was very clear to us that the amount of information
that they had to give over the telephone was far too big. That
was partly because of FSA regulation, but partly because it was
car insurance we were looking at and the Motor Insurance Bureau
required them to say certain things, Companies House required
them to say certain things and the Data Protection Registrar required
them to say certain things. So there were four lots of regulation
requiring that insurer to give information over the telephone.
The effect of that was they had a huge script to read which each
adviser on the phone had to read out something like 40 times a
day. You can imagine how much of an automaton they sounded at
the end of the day, and they could hear people on the other end
of the phone having conversations, talking and going off and doing
other things while they were reading it out. There clearly is
a big job to be done in simplifying the information certainly
in that area in telephone sales.
Q34 Jim Cousins: You described yourself
in your opening statement as happy with the FSA's actions on payment
protection insurance; but in your annual report you said that
you wanted more enforcement action. Has there been more enforcement
Mr Howard: They have now lined
that up. I think one of the big areas that creates the mis-sale
is in the high street again; that is where mis-selling always
happens. It is the relationship between the person who is selling
PPI and the customer. The customer usually goes in with one purpose
in mind, and that is to buy some particular product, or a house
even if it is a payment protection insurance to cover a house.
They are not thinking about the insurance aspects. This is very
often subtly tagged on in the spur of the moment. The purchaser
is very keen to get on with the deal, sign whatever bits of paper
are put in front of them and I think that situation is really
detrimental to the consumer. I think that is where the FSA has
to target a lot of what it is doing. They have been out already
to sample what is happening in the marketplace. They have already
taken some firms to task about the way that their advisers are
dealing with customers but this is a big job of course, because
payment protection insurance is sold by a lot of companies whose
main business is not insurance, it is selling other items and
other products. Many of them are not necessarily big organisations
with the training initiatives in place to train people to sell
insurance; that is not their main task. I think the FSA has got
a big job on its hands to turn that round.
Q35 Jim Cousins: Indeed. The FSA
has taken action to identify just those problems you have now
set out. What I asked you is, what is being done about them? What
is being done about better tests of suitability? Has there been
any enforcement action?
Mr Howard: There has been enforcement
action already, yes.
Q36 Jim Cousins: Of what form? Not
the issuing of advice and the general tap on the shoulder, but
Mr Howard: There have been enforcement
cases. I cannot remember the name of the big case recently which
had publicity, but there has been enforcement action. They have
required companies to change the wording of their documents. You
can now, we understand, recover original payments you have made
if you subsequently cancel. A lot of the documentation meant that
you could not recover the sums you had paid out if you wanted
to cancel the policy subsequently; and the FSA has negotiated
with companies to take that provision out, so things are happening.
Q37 Jim Cousins: In how many cases
do you think there are these refund conditions? There were companies
that were not giving any refunds at all when people discovered
that there were exclusions and limitations, which meant they could
not take advantage of the product. Can you tell the Committee
that in every case now people will be able to get refunds on some
Mr Howard: As I understand it,
and we spoke to the FSA staff responsible only last week, that
is now the situation. What we did query with the FSA was that
they did not seem to have done much about promoting the fact that
people with policies who wanted to cancel them could go back and
get a refund; so we have pressed them to make sure that they make
as much publicity about this as possible because, clearly, getting
an agreement from the companies is one thing but making sure consumers
know about it is very much another.
Q38 Ms Keeble: Do you not think you
are being a bit naive or disingenuous in saying that the mis-selling
just occurs on the high street; let us see the local person who
does that? Often the companies who are doing this are very big
companies, and the person who has got the face-to-face encounter
with the customer is reading to a script and doing what they are
trained to do; they are meeting company targets; and is it not
about the major companies, who sell all kinds of products, just
tagging this stuff on the end, sometimes giving huge incentives?
I am just thinking about going into a shop where you have got
a glass of champagne before they have proceeded to sell you all
kinds of things, including insurance. This is company policy,
is it not?
Mr Howard: I was very interested
in the debate you were having about commission bias just before,
and I was itching to have a say on that because this is one of
our biggest issues on the Consumer Panelcommission bias.
We, like you, really want to see something done about this. You
say, "Why hasn't the industry done something about it?"
My view is that it is very much not in the industry's interest
to do something about it; because in marketing departments the
use of commission to buy market share is the main lever that they
have and they are not going to let that go easily. We have been
looking at this in some detail now. In the annual report we said
we were going to make this an issue we wanted to encourage debate
upon because we would certainly like to see commission bias ended.
My view is that there are ways of doing that. Some Scandinavian
countries have now done away with commission. It is outlawed under
the law. I think they felt they had to do it that way to make
it work in the marketplace because producers and providers of
products see it as such a valuable marketing tool to be able to
manipulate commission levels that it required legislation to change
it. There may be a case for legislation to change it, because
unless you get all insurance companies and all the other providers
doing it at the same time, those that do go down this route will
be disadvantaged. There is a real problem here in keeping a level
playing field for all the firms in the industry if we get rid
of commission altogether. There are ways of getting rid of commission
and we are investigating those and hoping to continue this debate.
I am always pleased to see what the Committee says about this,
because we feel very much the same way about itthat there
ought to be another model. I was extremely pleased with Sir Callum
McCarthy's comments on this as well, because it shows the FSA
is thinking in this direction too.
Chairman: I think we discovered trail
commission, did we not?
Q39 Angela Eagle: I am glad to hear
what you have been saying and perhaps you could tell us a little
more about how they are changing these models in Scandinavia.
I would certainly be very interested if you could say a word about
that, and then I am going to ask you about promotion and advertising,
which I think is also a similar problem.
Mr Howard: Yes. What we have discovered
at the moment, I think it is Norway, Sweden and Finland have banned
commission as a method of rewarding advisers. I am not entirely
sure how their system works at the moment, but clearly one aspect
of it is to have gone over completely to fees. That is what some
parts of the marketplace are doing here. There are other ways
of structuring payments so that you can get rid of commission
but still ensure that advisers are paid fees but the consumer
does not have to pay that upfront. One of the ways of doing that
is to attach the fees to the cost of the product; so that at the
outset the adviser would say, "These are my fees. Whatever
product I select from you; whichever provider, that provider will
be asked to attach the cost of my advice to the product".
In most cases I can see that being the same amount of money as
commission is at the moment. The thing is that you have taken
the bias out of the process by saying that the fee is the same
upfront no matter which provider is selected. There are models
which could be pursued further and that is what we are interested