Examination of Witness (Quesitons 40-59)|
10 OCTOBER 2006
Q40 Angela Eagle: That is very interesting.
I was also interested in your comments on financial promotion,
and the fact that breaches of the rules seem to be extremely widespread.
I think the overall percentage of non-compliance with the rules
is 57%, which is bad enough, but it went up to 79% in general
insurance promotions, and 47% in mortgage promotions and 43% in
investment promotions. The key issue here is that if some people
are breaching the rules and basically paying for dodgy adverts
you are rewarding the bad people instead of rewarding good behaviour;
because everybody else thinks, "Well, if they're getting
away with it, we've got to do the same and its our competition".
What do you think can actually be done? Do you think breaches
of the rules are being handled well enough or there should be
bigger penalties for breaches of the rules?
Mr Howard: The Panel feels that
the solution to this is in making financial promotions an exception
to the rest of the FSA's regime, and that here we would like very
quick naming and shaming, because I think that is the way that
you bring the marketplace into line over this quite strict advertising
rules regime. At the moment the FSA has the policy of seeing an
advert, maybe in a Sunday newspaper, which is in breach of the
rules; on Monday or Tuesday the staff will ring up and negotiate
with that individual firm to make sure that advert does not appear
again, or negotiate a way in which it can be altered for the next
time it is published, and it is left there, which means that the
advert has gone out on Sunday, other parts of the industry may
have seen it: "Look what they have done;" (because they
are all watching how each other is advertising) "maybe we
could get away with that", and so the fact that the FSA has
decided that something is not clear, fair or is misleading is
not communicated to the marketplace.
Q41 Angela Eagle: It is all in retrospect;
it does not actually stop the breaches happening, does it?
Mr Howard: No, but that is because
the FSA, unlike the Advertising Standards Authority, does not
feel it is able to provide advice on advertisements before they
Q42 Angela Eagle: You say that if
we could give the FSA a kind of Advertising Standards Authority
role that would need a change of the Financial Services Markets
Act. Is there some other way that does not require primary legislation
in which we can actually get a handle on this?
Mr Howard: There is, but the Advertising
Standards Authority is a voluntary industry code, and perhaps
that is the way forward for the FSA: to maintain those rules but
to encourage a voluntary code amongst all financial services advertisers
which would allow those enforcing that code to immediately publicise
adverts which are breaking the rules. So there is a model for
Angela Eagle: That is a very interesting
Q43 Kerry McCarthy: Does the FSA's
move away from a rules-based system of regulation to a principles-based
system cause you any concern?
Mr Howard: We support the move
to principles-based regulation, but a number of things that have
started to crop up worry us. The first is that the industry, being
so wedded to the idea of rules, especially compliance officers
who seem to hold on to rules like a handrail to save themselves
from falling into the arms of the regulator, still wants some
sort of rules, and it looks as if they are tending towards creating
their own guidance and codes. The worry about that, of course,
is that you are setting up here a system of self-regulation if
you are not careful. What particularly concerns us about that
is that at the moment any rule changes have to be subject to wide
public consultation; the FSA ensures that; that is the way it
works. If the industry starts creating its own codes and guidance
what public consultation will there be about those? So there is
a real concern that although the FSA maintains the high principle,
basically, of treating customers fairly, the way "fairness"
is interpreted by the industry, if left to its own devices, may
not be as fair as we might think and the Financial Ombudsman Service
might think. Once you have created guidance and codes you have
to wonder about their status in the marketplace. Will those codes
be something that the Financial Ombudsman will have to take account
of, or will he say: "We are not having anything to do with
those"? So the status of them is extremely important, I think.
One of the other big concerns that we have about the way that
this will work is that the FSA itself will have to change the
job of its supervisors because at the moment they are enforcing
rules, and that is a job which you can do, reasonably well trained
to a certain level, to enforce those rules. If you are now going
to a principles-based regime those same supervisors (or, maybe,
the FSA has to look for different peopleit depends what
you think about the qualities that are needed) they will have
to exercise judgment, and quite sophisticated, judgments in this
area. So that is going to be a very different role for those FSA
supervisors to undertake. We think there are risks there.
Q44 Mr Breed: I agree with all that
but the smaller firms are going to find it very difficult to challenge
because, presumably, what you are saying is the FSA decides what
the principles are and the FCS decides what the definitions are.
"If you do not like it, hard luck; come and challenge us".
That might be all right if you are the Prudential or something,
but if you are a tiny company and your ability to challenge the
FSA is either going to be costly or difficult, or both, why should
there be a system whereby some particular body not only lays down
rather general principles but when the specific comes up decides
what the interpretation will be?
Mr Howard: That is the difficulty
of moving to principles, is it not? The big advantage of moving
to principles is that with rules you have always got gaps between
the rules which can be exploited by companies who want to exploit
the gaps between the rules. If you have got a principle then there
are no gaps, or there should not be, but it is open to someone's
judgment. I think that is a very difficult issue. It is clear
now the FSA has got to do a lot of thinking down the line to see
how this is actually going to work in practice. You have highlighted,
I think, one difficulty for small firms. I think the advantage
that small firms have is that they are already, one would hope,
closer to what the FSA, in my view, is trying to achieve. Small
firms know their customers, maybe, much better than large firms
do, and if you are moving to a principles-based form of regulation
what you are trying to do is encourage large organisations which
are anonymous to have a more human face; to be able to look at
individual cases and say: "On the basis of your individual
case, Mr So-and-so, we think we have treated you unfairly and
we are going to recompense you." If a small firm is already
much closer to its customers and thinking about its customers
and their point of view, one would say that they stand a better
chance of getting it right. They have not got all these systems
in place, all the rules that have been imposed from head office,
which bind them into making decisions which may be unfair in individual
Q45 Mr Todd: What do you think the
FSA should actually do? You said they should think about this
issueI am sure they are doing that.
Mr Howard: So are we. There are
a lot of issues down the line in all of this. The FSA says: "We
have got 8,500 pages of rules and we really want to slim those
down." The way to do that is to have high level principles
and then you can ditch a lot of the rules, but I think it is already
acknowledged that you can never get rid of all the rules. So now
I think we are starting to think how many rules can you get rid
ofcan you get rid of half? Can you get rid of three-quarters?and
maintain the confidence in the industry but allow the degree of
flexibility for them to make more appropriate decisions on behalf
of consumers, decisions that are fair. Leave them the latitude
to make decisions with individual consumers which are fair.
Q46 Mr Todd: Is there a methodology
they should follow in deconstructing their rulebook along those
lines? What you have basically done is repeat the statement they
need to think very carefully about this, with which I think we
would all agree.
Mr Howard: What we are waiting
for is to see which rules they are actually going to dump. We
have not seen that yet. Which ones are going to be struck out?
We are waiting with bated breath to see how they approach this.
It is their idea. We will give them the latitude of thinking how
they are going to do it, but we reserve the opportunity to
Q47 Mr Todd: The impression I have
is that it is their idea that you do not entirely endorse.
Mr Howard: We endorse the idea
of reducing the size of that rulebook. We like the idea of moving
to principles but we would be very concerned if we just replaced
the rulebook with 8,500 pages of guidance and industry codes.
Q48 Mr Todd: You have suggested that
a far broader approach should be taken to measuring the benefits
of regulation. How do you think that should be done?
Mr Howard: I am sorry; could you
explain what you mean by that?
Q49 Mr Todd: The Panel has suggested
that the FSA needs to take a far broader approach to measuring
the benefits of regulation. How do you think that should be done?
Mr Howard: Again, I have not got
a solution but I would hope those with much greater knowledge
and experience might be able to come up with one. The work they
have done on benefits at the moment is through an organisation
called Oxera which looked at a framework of how the benefits might
be quantified. If I can give you an example of how I think it
is difficult to quantify the benefits in trying to balance out
costs and benefits, it is when you think about market confidence.
How do you evaluate a particular change in rules or a particular
decision made by the FSA when it comes to the level of market
confidence that that decision might engender? There is no doubt
that we all feel that confidence in the marketplace is the big
missing element at the momentthere is huge lack of confidence
on the part of consumers. If you start to undermine the regulatory
process you damage that confidence even further. So that has to
be a big benefit in the equation and it is very difficult to measure
the benefit from individual actions taken by the FSA. I think
that is the problem that we are up against.
Q50 Mr Todd: I think the report you
referred to indicated that perhaps too much stress was placed
on the economic efficiency argument of regulation and its benefits
as opposed to the supposed benefits to the consumer in terms of
outcomessay, addressing financial exclusion or something
like that. Do you agree with that view?
Mr Howard: Yes, there are clearly
consumer benefits that you can measure, like the degree of advice
available, the quality of that advice; you can measure those sorts
of things, but there are a number of aspects as I have indicated
there that it is much harder to measure. I think we must try and
do that because it is no good just saying: "This costs an
awful lot so we will get rid of it"; you have got to see
what it is doing on the other side of the equation; you could
be undermining the marketplace even more.
Q51 Mr Todd: Do you feel that the
proposed widening of the range of funds that could be marketed
direct to retail investors is being addressed appropriately? You
have expressed a concern there.
Mr Howard: Yes, that the FSA could
not identify consumers who were more sophisticated and able to
deal with more sophisticated products. We thought it was disappointing
that they had not been able to grasp that nettlea little
bit like the risk-ratings, I think they felt that it was too troublesome
for them but, perhaps, did not deny it would be valuable to do
it if it could be done. I still think there must be ways of doing
that to discriminate between different sorts of consumers to enable
those products to be more specifically targeted. One of the things
that the FSA's approach to principles-based regulation says is
that in the design of particular products you must have the target
market in mind. If you cannot divide up your target market how
are providers going to be able to target? So I think the FSA,
although it said: "We are not prepared to do this",
is still expecting someone else to do itmaybe in the industrybecause
they have got to clearly identify their target market when they
are designing the products and selling them.
Q52 Mr Todd: So, clearly, it is inappropriate
to market hedge funds to unsophisticated consumers. What ideas
do you have as to how they can separate out consumers into groups
who could possibly handle those sorts of opportunities for themselves?
Mr Howard: I think their previous
history has got quite a bit to do with that. If they have a history
and a background of investing in products then they are more likely
to have an understanding of what is going on. There is also a
role here, I think, for the FSA's task in educating consumers
and providing them with more knowledge and background. If the
FSA can tackle that and deal with that in a way which becomes
effective and spreads knowledge and experience round the marketplace
then that is going to help, too.
Q53 Chairman: Regarding hedge funds,
if funds were being distributed to retail investors would you
agree with that?
Mr Howard: That clearly spreads
the risk but I am still worried about the nature of those products.
When you look at the FSA's research, which says that most people
do not recognise that an equity ISA is invested in shares, you
do worry, don't you?
Q54 Mr Newmark: I have been involved
with financial services for 20 years and every year that goes
by is the same message: the regulations are getting more and more
complex and there is an inverse relationship between those that
you want to protect and the increasing complexity of the actual
warnings or health warnings that go with them. I have been sitting
listening to you and I still get no warm fuzzy feeling in my stomach
that, at the end of the day, for those that we ultimately want
to protect, which are the widows and orphans and the most vulnerable
of investors, you have a solution, other than sticking something
up which says caveat emptor (most of which they would not
understand but "let the buyer beware" which is the simplest
message that you can give). Really, what is it you are going about
in any form of granularity to simplifying it, as you said at the
beginning of your talk, and trying to give these health warnings
in very simple terms? Most people switch off as soon as the health
warning comes on, whether it is over the 'phone, on the TV or
even the microscopic print which you need a microscope to actually
read, and they do not actually help the consumers we are trying
to protect. I still do not know where you are heading in terms
of protecting those people.
Mr Howard: Shall I give you my
solution, for what it is worth (which does not have Panel endorsement,
by the way)? This is how I view the marketplace and how we might
try and deal with this. First of all, there is no doubt that the
most influential interaction is person-to-person, so an adviser
to an individual consumer is the most influential arrangement.
My suggestion would be that what we need is an easy entry point
for all consumers to advice, to a generic advice service. So that
they would go along to a generic advice service and get very basic
advice about their situation, which may end up with them being
told: "Well, what you need is this particular product now.
You have got everything else sorted out; you need this particular
product; now go out into the marketplace and find an independent
financial adviser who is not paid for by commission but paid in
some other way, who can give you truly independent advice and
get a product suggested by him as the best one for you in your
circumstances." So we need a generic advice service and then
we need independent financial advisers who are not financed by
commission. This is my design. I think the generic advice service
will then take out a lot of the work that the independent financial
adviser has to do in the first place, and make their model of
advice more economic, because the generic advice service will
have done a lot of the groundwork, the basis"Pay off
your debts first". That sort of advice will be taken out
of the equation.
Q55 Mr Newmark: A great model, but
who pays for it? The people you are trying to protect are those
that invest least and have the least money.
Mr Howard: There are now, fortunately,
a number of possibilities coming through. I think Resolution Foundation's
latest research shows that there are huge savings to be made if
you set up a generic advice service. Also, the new savings bank
which will use the unclaimed assets is another possibility for
providing finance for a generic advice service. Can I give you
one example from the Panel's own experience of the level of advice
that can be beneficial? We took a trip to Glasgow and we were
struck by the number of cheque-cashing services there were in
Glasgowshops where you go in and cash a cheque. When we
enquired further we discovered these cheque-cashing shops charged
15% of the value of the cheque to cash the cheque. A lot of the
people going into those cheque-cashing shops were going in there
with cheques they had acquired for loans to get them through the
next month or the next period. They were not very large sums of
money but 15% was being taken out in a cheque-cashing shop. It
does not need a terribly sophisticated advice service to point
all those people to a bank or to credit unions. The level of advice
need not be terribly sophisticated but you can save some of the
poorest people an enormous amount of money overall.
Q56 Chairman: You have given us simple
solutions to very complex problems. We are grateful for it all
Mr Howard: I do not mean to suggest
that it is completely easy.
Q57 Chairman: We have looked at it
as a Committee and we are still looking at it in the financial
exclusion report. Last question: the FSA is currently undertaking
a review of its regulation of the general insurance market. What
outcomes would you like to see from this process that would benefit
Mr Howard: The general insurance
Q58 Chairman: Yes.
Mr Howard: One of them would be
that they again look at the remuneration model that we have got
here. At least in the other areas the commission paid is disclosed
but in insurance it is not. I think that would be helpful. The
outcome that consumers really need at the end of the day is to
be able to rely on and feel confident in the sales process; that
they are getting all the information that they need; that they
are getting a product that really does suit them and then, at
the other end of the chain, that their complaints and their claims
are dealt with efficiently and effectively. So those are the outcomes
we really want to see being targeted by the FSA.
Q59 Chairman: Thank you for your evidence
this morning, Mr Howard. We are very grateful to you for that.
Mr Howard: Thank you.