Select Committee on Treasury Minutes of Evidence

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 improvement?

  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 the better.

  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 to mind.

  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 action?

  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 actual enforcement?

  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 basis?

  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 Panel—commission 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 it—that 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 in doing.

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