Select Committee on Treasury Minutes of Evidence

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 well?

  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 it—so 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 sold—through 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 them?

  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 bodies.

  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 costs—I think it is about £250 million—and 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 that.

  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, yes.

  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 produced.

  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 them—and not lost in a great deal of other documentation—that 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 loans—ie, 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 do that.[1]

  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 it, anyway.

  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 produced—I 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 reason—the 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 I lead!

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