Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80-99)


10 OCTOBER 2006

  Q80  Angela Eagle: You said that in the general insurance rulebook it said that information has to be clear, fair and not misleading. What percentage of current information produced do you think, in this market, actually accords with that very simple statement?

  Mr Haddrill: I do not think I am going to be drawn to give you a percentage—

  Q81  Angela Eagle: It might not be a very high one.

  Mr Haddrill: The FSA is now regulating according to that principle and also according to a lot of detail underneath it. My test for how well the industry is doing is what is happening in relation to the Financial Ombudsman Service. Are we seeing more cases coming forward in the general insurance area? That is not really the case. So I do feel that, in a way, that is my measure of whether the industry is being fair: are there cases coming forward and are they being upheld or not by the FOS. I think that is something well worth looking into.

  Q82  Angela Eagle: In terms of the financial promotions as well, here we have information but we also have advertising which sometimes melts into sort of information as well. You heard my question to the Consumer Panel about the very worryingly high levels of breach of the rules on advertising that are happening in these general insurance markets. Do you worry about that and what would be your solution to what is going on there? 80% of the general insurance promotions do not comply with the FSA rules.

  Mr Haddrill: The figure that I do not have but I think we all ought to look at is what percentage of that non-compliance is due to a fundamental problem that is important to consumers, what they say that they want to know about—the total price and so on—and to what extent it is due to the logo being in the wrong place. I think that is worth a bit more exploration. I thought John had an interesting point, and so did you, about when there was a problem that the problem was dealt with quickly. I think the FSA does do that, and I do not think we should be too quick to say that you need to name and shame in order to make that stronger. They are there the following day; naming and shaming is not going to make the advertisement that has already been put out go away.

  Q83  Angela Eagle: But their activity is in retrospect, so the advertisement is out there and loads of other people are thinking: "If they can get away with it then we need to market our stuff like that". They are chasing the breach, whereas a different system would actually prevent that breach happening. Do you not agree we should shift to try to prevent rather than be chasing after breaches?

  Mr Haddrill: Which is why in the Customer Impact Scheme that we have been developing for the life industry we are producing guidance on the whole cycle from the development of the product, through its promotion and advertising so that there is advice and guidance out there on best practice for firms just to try and improve that. I can see why the FSA does not want to get into the business of vetting every advertisement before it comes out; I do not think it is that sort of regulator.

  Q84  Angela Eagle: What do you think of the idea of having a kind of voluntary code like the Advertising Standards Agency that the industry could set up, which would essentially try to reward the people that stick by the rules rather than this idea that people who can breach the rules get away with it and get their ads out there and somehow steal a march on a very competitive industry and on their rivals?

  Mr Haddrill: I think we are moving towards it because on the Customer Impact Scheme, as I said, we are producing guidance. We do have a panel that oversees the whole area that includes external members as well as internal members. It is going to be chaired next year by Melanie Johnson coming, obviously, from outside the industry. Whether we want to go a further step and say that we actually need to have a separate body to the FSA I am not so sure, because I think if the FSA is, as you heard, taking action after the fact, I do not know that we need an additional authority to do that.

  Q85  Angela Eagle: This is at the preventative end rather than after the breach has occurred.

  Mr Haddrill: Beforehand we are producing guidance. We can look at whether that guidance is adequate and see whether it needs to be strengthened. I think that is the question for this panel we have set up to look at.

  Q86  Angela Eagle: Finally, on the issue of structuring the industry, are you attracted by what seems to be going on in Scandinavia where commissions and the commission bias that we were talking about earlier and the business model we have at the moment appears to be fading into history and being replaced by something more objective and a bit more reassuring?

  Mr Haddrill: I do not think that we can leap into that Scandinavian world very easily because, firstly, we have talked today about the need for advice and particularly a need for advice with people who are disadvantaged, vulnerable and so on—even in relation to quite simple products. If advice is there it needs to be paid for. What the ABI is doing is looking at whether there are commission structures that would enable that advice to be delivered in a better way than the current commission structure.

  Q87  Angela Eagle: You are trying to modernise the commission structure rather than move beyond it?

  Mr Haddrill: We are looking at options for modernisation. It will be for the companies to decide whether or not to adopt any of those models. The ABI would actually be operating in breach of competition law if we were to say: "There is a model here; you must all adopt it." We cannot do that. The regulator could possibly do it, but we cannot do that.

  Mr Satchell: If I could just add, there is now the offer of a fee or commission as part of the disclosure—

  Q88  Angela Eagle: The point was made earlier that the fees are too comfortable and that, in fact, if you are going to shift away from the harmful business model—

  Mr Satchell: It needs to be attached—

  Q89  Angela Eagle: Everybody needs to be in a position where they do it straightaway; you cannot make the shift.

  Mr Satchell: I understand. I was interested in what John Howard said, but interestingly that was imposed by legislation. The fee attaching to the product is something, in essence, that is done within the market today. Some of the commission models have changed quite a lot. A number of advisers are moving across to fees, to level loads, so that that is a moving piece of the market.

  Q90  Angela Eagle: You are responsible for a kind of business model, albeit in a wider market, where everybody else is working the harmful one. I am just interested in how we can shift from where we are now to something that is healthier for everybody.

  Mr Haddrill: The FSA is conducting half-a-dozen reviews around various aspects of distribution, and the first thing we would like to see is to make sure that those half-dozen reviews have a strategic coherence to them; that where they overlap they produce coherent results. However, it does seem to me that the regulator does have a role here and we are very pleased that John Tiner has stepped up to the plate. So the process of getting there, I think, is through this work that the FSA has taken on.

  Q91  Angela Eagle: So you think that the way of moving away from the harmful business model and into something more healthy for everybody is for the regulator to lead it, not for the captains of industry to think: "Our business models are awful; we need to think about doing it"? Or is that because everybody needs to be in the same environment and, therefore, the shift can only happen by regulation or legislation?

  Mr Haddrill: It may be that some things can only be achieved through regulation because no one firm can move ahead of the others, but that is not the only answer. You are seeing a market in transition and we know that different firms are developing different solutions in their own space and their own time. I think this is an area where the industry's model and regulation are fundamentally interwoven. So it is not a case of the regulator doing something because the industry cannot; we have to move together because the two fundamentally interlock.

  Q92  Mr Todd: The FSA have rather bravely asserted that they do not gold-plate EU requirements. Is that the way you see it?

  Mr Satchell: I think we have one example within the general insurance industry where they have: in introducing in the Mediation Directive requirements for direct selling as well as intermediaries. That is one example, as Stephen said earlier. There are areas where that happens. I think we welcome the FSA review of their introduction to the general insurance regulation; I am sure that is one area that they will look again at, and we would certainly welcome some differentiation across products and distribution channels so that the customer if he wishes to buy a relatively cheap, pretty simple product can do that relatively easily. We heard John Howard talking earlier this morning about all the various disclosures that have to be given, the interaction of FSA regulation and other regulation, and I think we are all of a mind where if you can distil the disclosure down to three or four key facts that the customer must understand we would all welcome that.

  Q93  Mr Todd: Are you a bit concerned about the FSA's approach to implementing MiFID? Particularly the scope of where it is going to apply.

  Mr Haddrill: The jury is out on that, at the moment. We have a Directive here that does not apply to insurance, but where there are insurance investment products that sit in the marketplace alongside other investment products I think it does make sense for the FSA to make sure there is a level playing field across the products, and that the consumer gets the same sort of level of protection that is appropriate to that product. That is the dialogue that we are having with them at the moment. More generally, what we would like to see more of is the FSA looking around Europe to find out what other people are doing, and seeing whether there are other ways of achieving outcomes for consumers that have been achieved elsewhere. There are quite radically different models adopted in Scandinavia, for example, in this general insurance area.

  Mr Satchell: Some specific comments on MiFID. I think, for example, in the area of complaints handling where it can move more towards principles-based then we would welcome that. So wherever MiFID equates to the implementation of principles-based we would applaud that. Where it actually gets into rather more detail than perhaps we have even now (there is appropriateness of product for sale), that would seem to us to drive us down into ever more detail and actually put in another set of rules, potentially, over suitability of products for customers.

  Q94  Mr Todd: In your submission to us you made the rather coded reference: "a cost benefit case cannot be made for extending MiFID's scope in some areas." I assume you are communicating rather more directly than that with the FSA, are you?

  Mr Haddrill: Yes—protection products, or something like that.

  Q95  Mr Todd: The FSA have given you notice to produce a marketplace solution on contract certainty. Are you going to comply with their target at the end of this year?

  Mr Haddrill: Yes, the FSA has continued to monitor this as it has gone along. I think the percentage of the market that is now completely compliant is around about 85-90%. Whether it is 100% by the end of the year, or indeed what the FSA means by "complete contract certainty", is still a matter at issue. There are occasions where for emergency reasons or others you are not going to get the contract written on the day, but it is going well and I think the FSA endorsed that view.

  Q96  Mr Todd: You, presumably, commend an approach which allowed a market solution to develop rather than simply setting another set of rules.

  Mr Haddrill: Absolutely. I think it was one of the sea changes in thinking when that was promoted by the FSA.

  Q97  Mr Todd: I think both of you were here when I was asking about the Oxera report and the discussion over how to place a value on the regulatory process, and whether there was perhaps insufficient value on the delivery of outcomes, particularly to disadvantaged consumers. Would you agree with that?

  Mr Haddrill: I think that is absolutely right. There are some very direct costs that you can measure, and that is the easy bit. I think the very difficult bit is to measure the intangibles: have we, in effect, withdrawn products or advice from the market in some way? Have we stifled innovation? Have we stifled competition by virtue of the regulation? Very, very difficult to measure. We all have a feel that that is, indeed, the case, and I think it is beholden on the industry to try and point to those circumstances where we have real evidence that that is not happening. I suppose getting back to the basic advice scenario and simple products was an area where, perhaps, more could have been done, and there is a disadvantage in the market to an overlay of FSA suitability.

  Q98  Chairman: I have a final question. Can I go back to the PPI aspect, which Jim was asking about. Have all your members signed up to provide refunds in single premium Payment Protection Insurance if the loan or credit agreement is repaid early?

  Mr Haddrill: I can speak for the ABI committee that has looked at this, and the answer to that is yes.

  Q99  Chairman: When you say "the ABI committee" that is not all your members.

  Mr Haddrill: No, but normally once that has been decided at senior level in the ABI then the members will follow suit. I cannot promise that every member has decided—

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