Examination of Witnesses (Questions 60-79)|
10 OCTOBER 2006
Q60 Chairman: Mr Haddrill, welcome to
this session. Can I start then with a question regarding the FSA.
Do you think it is successfully applying risk-based regulation
to the general insurance industry by targeting intervention on
those areas with the greatest risk of consumer detriment while
taking a light touch approach to sectors where markets are working
Mr Haddrill: I think you have
hit absolutely on a problem with the new general insurance regime.
We feel that the product is very different in some parts of general
insurance than others, and the regulatory regime should be targeted.
We feel, at the moment, we have got a regulatory regime which
cuts the same across all of the products. We did some research
and published that earlier in the year, and that identified that
there was, for example, consumer benefit from the existing regime
in relation to quite complex products, like critical illness protection
products, but a consumer detriment in relation to products that
people better understand, like motor insurance and household insurance.
So we have been rather encouraged recently that, firstly, the
FSA has agreed to review the whole area and, secondly, that in
reviewing it it has indicated that it wants to look at the distinctions
between the products. We feel it should also look at the distinctions
between the way the product is sold: are you getting the product
direct from an insurer, through a broker or through some other
form of intermediary?
Q61 Chairman: What sectors of the
market are working well, what are working not so well and what
areas should the FSA give higher priority to?
Mr Haddrill: In relation to general
insurance the areas that I think are working well are those where
the product is relatively straightforward and where people understand
itso motor insurance, household insurance. We do not see
any significant problems there. The Treasury is obviously reviewing
the travel insurance market at the moment. We feel, again, it
is a relatively cheap product but, obviously, if something goes
wrong when you are abroad that can have quite serious consequences,
so we can understand why the Government is looking at that, but
we feel that there can still be a relatively light touch regime
across the whole sector, however it is soldthrough the
high street or direct from an insurer. The area where we felt
there was more difficulty, where the product was complicated,
was in the critical illness area. That is why the ABI, over the
last few months, has issued a statement of best practice that
is now being adopted by the industry. So within the general insurance
area we feel that as problems emerge we, as an industry, want
to address them, whether it is on issues like critical illness
or on issues like PPI.
Q62 Chairman: On travel insurance
and extended warranties, would you like something to be done about
Mr Haddrill: Well, as I said,
on travel insurance we do feel that there should be a level playing
field across the market as a whole. We do not feel it needs a
heavy regulatory regime; we feel a light touch regime is appropriate.
So, yes, we would like to see regulation extended into shops and
the high street. I think there is probably a question that needs
some careful thought about whether the FSA is then some kind of
enforcement authority, given how much else it has got to do, or
whether it is just setting the regulatory regime. Maybe there
is a role for trading standards; maybe there is a role for other
Q63 Chairman: Your submission notes
that the implementation of the Insurance Mediation Directive has
been gold-plated by applying the requirement for intermediaries
to direct sales by insurance companies. Is this imposing significant
costs? What can the Government do about it?
Mr Haddrill: The Directive was
designed to apply just to intermediaries, not to the providers,
and in some countries it has only been applied to intermediaries.
We know that there is quite a significant level of costsI
think it is about £250 millionand obviously that is
falling both on intermediaries and on the product providers. Some
of that cost could be reduced if the FSA had not extended it to
the whole sector but just concentrated on the intermediaries,
which is where the European Union felt the problem existed.
Q64 Jim Cousins: PPI. You probably
heard the exchange we had earlier. I would like to ask your views
about that. Is it the case now that refunds are universally available?
Mr Haddrill: The ABI members are
committing now, for their part, to make refunds available whenever
a loan is repaid early. So yes, that is the case. We have been
working with the BBA and other trade associations to establish
Q65 Jim Cousins: I am not clear from
that answer whether this is something that applies now or something
that is going to apply.
Mr Haddrill: It does apply now,
Q66 Jim Cousins: On the question of eligibility,
whether the product being sold is even appropriate for the particular
individual (I do not mean "appropriate"; whether they
are even in a position, given their circumstances, to ever make
a claim) what guidance and tests are you making about that?
Mr Haddrill: I think this is an
absolutely essential issue. As the FSA has said, this is a very
valuable product for very many people. It is supporting the level
of debt we have got in this country and being without it would
be a dangerous thing for many people in the country. However,
suitability is an important issue. So the ABI, with the BBA and
with the intermediaries, have worked out a customer code, a customer
guidance that will be published shortly, I think. So we are determined
to get that out into the marketplace. The other thing which I
think also came up earlier, forgive me, was the whole question
of training of staff who sell PPI, and across the trade associations
and the member companies we are also looking to raise the quality
of training of staff.
Q67 Jim Cousins: This code of guidance
on the question of entitlement and eligibility has not yet been
Mr Haddrill: It has been drafted
and it is with the FSA for commentary.
Q68 Jim Cousins: I am sure this is
something the Committee would like to see in due course, but I
am still concerned about this because at point of sale will this
guidance actually percolate down and will the consumer actually
understand what is being communicated?
Mr Haddrill: That is our intention.
It is our intention that this guidance is simple and straightforward
and that it is available at the point of sale, yes.
Q69 Jim Cousins: Will people purchasing
PPI policies, of whatever kind, after this new regime is in place
actually get some piece of paper that very simply explains to
themand not lost in a great deal of other documentationthat
refunds are available and that the question of eligibility is
going to be taken into account, and that that is something that
they should also check for themselves?
Mr Haddrill: I agree. I do not
think we will ever achieve our objectives unless the consumer
knows and has something to remind them in the future that that
is the case. Yes, so we must make sure that happens.
Q70 Jim Cousins: Bearing in mind
that a lot of these policies are being sold in the high street,
they are not being sold, sometimes, in a conventional arena where
financial service products are bought and sold, how do you intend
to take that into account?
Mr Haddrill: They are being sold
through the banks, very largely, so I would dispute whether they
are not sold in a conventional, financial arena. I think that
is the biggest distribution channel; very little is sold directly
by insurers. As I said, we are working with all the trade associations
who have an interest to make sure that this information, this
guidance, is agreed and that it is endorsed by the FSA. Just to
pick up on what John Howard was saying: whenever we produce this
sort of material we do consult with consumer groups and with public
groups more widely. We are very much involved with Citizens Advice,
and I hope that they will take our guidance if they see it as
appropriate as well.
Q71 Jim Cousins: How do you propose
to deal with the issue of where there are loans which are secondary
loansie, there is a primary loan and there is a secondary
loan on top of that? How do you propose to deal with that?
Mr Haddrill: It is important.
Can I write to you separately on that, because that is not something
personally I have looked into? I would be grateful if I could
Q72 Mr Gauke: Can I return to the subject
of rules and principles, which we have already discussed with
Mr Satchell? Perhaps we could ask Mr Haddrill whether you have
any concerns as to the move from rules to principles and whether
there are any particular worries. I know that Stephen Sklaroff
stated that regulatory autonomy is frightening. Do you have any
concerns about that?
Mr Haddrill: Firstly, I think
it is absolutely the right way to go, but yes there are challenges
that it gives rise to. The first one is within the companies there
is often a compliance culture that grows up; people feel that
if they can demonstrate that they have stuck very closely to a
set of rules they are in a better position vis-a"-vis the
FSA or, indeed, the FOS. So there is a cultural issue for the
boards of the companies to address. Certainly all the chief executives
I spoke to are up for that change; they want to see that happen.
Similarly, there is an issue for the FSA in relation to its own
supervisors, to make sure that supervisors are not, effectively,
putting in rules by the back door. We are, therefore, very glad
that the FSA is putting more effort into training of its supervisors.
I think there is an issue about supervisory teams staying in place
for longer periods of time. A number of companies find that they
change their supervisors really quite quickly, so are they getting
a real understanding of the business? You need a real and qualitative
understanding of the business, I think, in order to adopt a principles-based
rather than a tick-the-rules box regime.
Q73 Mr Gauke: Do you think there
is any danger that you could be coming back here in three or four
years' time and saying: "We yearn for the days of the certainty
of rules and can we not return to it"? Is that a possibility?
Mr Haddrill: Well, I have been
involved in regulation for a large proportion of my life and I
know these things go in cycles. So I hate to say I do not rule
it out entirely. I was looking at the general insurance rulebook
last night. It has some really good, clear principles written
into it. It says that on disclosure information, and so on, the
principle is that the company should produce information that
is clear, fair and not misleading. If the Ombudsman were working
underneath just that line, they would be able to take some pretty
clear decisions, I think, on it. As it is, we have 194 pages which
tells you about the use of colour, the use of logos and so on
and so on, and I think it actually distracts the business, which
has a limited amount of resource, from thinking about what really
matters, which is: "Do I really understand my customers?
What will my customers understand from this piece of paper?"
to "Have I got the logo in the right position?"
Q74 Mr Gauke: Can I ask about the
Financial Ombudsman Service? When I worked as a lawyer in this
area there was a concern that there was an element of "palm
tree" justice about the FOS. How important is that relationship
between the FSA principles and the FOS in this area? If it is
going to work what would be the role of the FOS?
Mr Haddrill: I would not support
the idea that it is "palm tree" justice, not least because
there are 1,000 people under the palm tree.
Chairman: Can you explain that term?
Q75 Mr Gauke: The sense of sort of
sitting under a palm tree; what is the right thing to do here,
and taking a case-by-case approach. That is how I interpreted
Mr Haddrill: Yes.
Q76 Jim Cousins: I thought it was
something to do with avoiding being hit by a coconut!
Mr Haddrill: I think there is
a risk that if the FOS, in taking judgments and explaining those
judgments, produces a rulebook that companies then, in order to
avoid having a judgment against them by the FOS, effectively a
rulebook comes into being by the back door. That is something
that I do not think any of us have bottomed act yet, and that
does require a lot of further discussion between the industry,
consumer groups, the FSA and the FOS, and it does require us all
to work that one out. I think you are right, there is a risk there.
Mr Satchell: I absolutely endorse
what Stephen said there but just to go back to something that
John Howard made clear, we will not be getting rid of all of the
rulebook. There will still be, I think, a significant body of
rules in place and the key is to identify which ones should be
dismantled and which should not. Going back to Stephen Sklaroff's
speech, I think he was suggesting that we need to pick some pilot
areas and just try to dismantle rules in those areas to see how
it would work. That is where we do need to work with FSA, also
to get an understanding of how the Ombudsman Service would actually
approach their deliberations in those areas.
Q77 Mr Gauke: Given that we are going
down the principles-based route, the other point that Stephen
Sklaroff made is the point about guidance producedI think
guidance on the paths of righteousness, to use his phrase. Do
you think more guidance will be produced? Who will be producing
it? Is there a danger that that guidance may itself become "rules
by the back door", as it were?
Mr Satchell: I think there is
definitely a place for industry guidance. We have seen a number
of ABI guides come out in different areas over the last two or
three years. Those are not going to get endorsed by the regulator
but we involve the regulator in developing those. I think the
benefits of the guides is that they can be responsive, so they
can change relatively quickly over time if needs be; they can
be relatively loose; they can be a framework within which companies
can innovate, can promote competition and the development of competition,
which is good for the consumer. I think there is definitely a
place for those guides. I think you are absolutely right, the
key is we must make sure they do not become too definitive, so
that ultimately we have companies relying upon the ABI guide and
when talking to the FSA staff the response is: "Well, it
was in the ABI guide so it was okay". It would be helpful
if there was some form of breakwater there, but I think it has
been made very clear that ABI guides will not become safe harbours.
Q78 Mr Gauke: In your submission
you say that in the past you have been inhibited by producing
such guidance in some circumstances for that very reasonthe
concern about the FSA treating it, if you like, as rules. Are
there other examples you can give of that, and how can that be
solved in the future?
Mr Haddrill: I think it is still
relative. Until the last year the FSA has not particularly welcomed
guidance. Indeed, the FSA has been taking over the role of guidance
that was produced in the 1990s and before then. Just to add to
what Keith was saying, another thing I have seen over the last
year is that the generation of guidance by the industry gives
the industry ownership of the guide, and if we are going to discuss
the guide with consumer groups, as we would, and with the FSA,
the process of producing it means we have got something palpable
that the industry has adopted rather than something it sees as
being done to it.
Q79 Angela Eagle: Mr Haddrill, your
evening reading sounds fascinating.
Mr Haddrill: It is a sad life
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