Examination of Witnesses (Questions 140-159)|
24 OCTOBER 2006
Q140 Angela Eagle: Are you happy
that the level of "rip-off", if I can put it that way,
has gone down significantly in the year since you discovered the
Sir Callum McCarthy: There are
signs already of some improvement in a position that we regard
as inadequate. We are determined to keep on pressing in that direction.
Q141 Chairman: Just to take Angela's
point, I questioned the ABI on this. The question I asked them,
and I will ask you, was: is it in line with treating customers
fairly if, on the evidence we have before us, you have a £5,000
loan over three years and you are paying £750 in commission
Sir Callum McCarthy: I do not
think, Chairman, the thing that concerns us first is the level
of the commission. The thing that concerns us is that people should
understand that if they have a £5,000 loan
Q142 Chairman: Sir Callum, I think
that is a bit complacent. The reason I say that is this: I went
for a loan from my bank, a major high street bank, and they sent
PPI letters. They did not send me one, they sent me eight. Now,
they overloaded me, as a consumer, with that. The impression given
to a lot of people would be that this has to be a really important
issue for you to take on. So you are getting pressured in that
particular area. If you come before a Parliamentary Committee,
to politicians, who receive constituents' issues and problems,
I think the issue of commission is really important, because at
the centre of it is treating customers fairly. If you do not look
at it in that way I do not think you are looking at it in a proper
Sir Callum McCarthy: Chairman,
it goes back to what John said a moment ago, which is: what is
the information that customers will actually find most useful?
Q143 Chairman: I will ask you: if
you were paying £750 commission on a £5,000 loan?
Sir Callum McCarthy: My concern,
Chairman, is whether I am paying £1,000 for Payment Protection
Insurance on a £5,000 loan. That seems to be a very bad deal
for me. That is the first thing I want people to recognise.
Q144 Chairman: Would you publish
tables on your website, then, of what the levels of these commissions
and others are, so that the customer can understand what they
are doing, as you have done with mortgages?
Sir Callum McCarthy: We are concerned
to make sure that people understand how much they are paying,
and we are concerned to make sure that people should understand
that they can get a loan without paying for PPI.
Q145 Chairman: Would you put something
on your website for us then?
Mr Tiner: Yes. I do not deny the
points you are making at all. As I said last year, I think this
is a market that does not work well and does not work in the consumer's
interest. I agree with Sir Callum it is fundamentally not a bad
product and a lot of people, when they lose their jobs, thank
God they have got it because they can repay their loan. However,
it has been, in my mind, over-sold, and it is because of the incentive
structures and the cross-subsidisation between the underlying
credit and the insurance. These are all issues which are right
at the heart of the Competition Commission's referral, and I very
much support their work, I must say.
Q146 Chairman: So will you do something
on your website in terms of making this information available
to consumers so that they can compare prices, as you have done
Mr Tiner: We will look at it.
Q147 Chairman: Will you write back
to us within a month and tell us what you are going to do on this?
Mr Tiner: Yes, we will.
Chairman: It is an issue we are going
to keep pressing on.
Q148 Peter Viggers: In May, Mr Tiner,
you told us that work to improve access to generic advice needed
a real injection of effort. What additional work has been undertaken,
please? Can you give us a progress report?
Mr Tiner: Yes. I think I reported
at the hearing on Financial Inclusion that I was a bit disappointed
about that aspect of the financial capability work, and that seems
to have stimulated some activity. What we have now done is to
work with a whole range of agencies who are quite rapidly able
to reach the sort of communities that we think are most in need
of money advice, generic advice. So we are working with the Chartered
Institute of Housing for people who are housing tenants, we are
working with cancer charities, and with the national offenders'
charities to help former prisoners; we are working with the Citizens
Advice Bureau, Age Concern, Help the Aged, and so on. I think
through providing them with very straightforward materials and
content, and then using them as trusted advisers to the people
they serve, we are able to get money advice quite rapidly into
communities. The evidence so far, and it is only a few months
since we spoke in May, is that that is beginning to take hold.
I feel myself that that approach to getting money advice into
the community is more likely to be successful on a cost effective
basis and more quickly than setting up a central infrastructure
to try and build something from scratch, as has been suggested
by some. The evidence so far is that that is beginning to take
root and is quite easily scaleable. If you take the housing association
example, we gave £50,000 to a housing association called
London and Quadrant. They have experimented with that, worked
out how they could use the materials for their tenants, and then
through the Chartered Institute of Housing they have launched
that nationally, and it is beginning to take root. So I think
we are on the journey now, whereas we were not in May. I think
it has probably got a long way to go but all these things will
only pay off over a period of, in my mind, 10 to 15 years.
Q149 Peter Viggers: The most general
question of all relating to pensions: the means-tested benefitsnow
Pension Credit, Housing Benefit and Council Tax Benefitare
considerable, so that in retirement a rich person who has saved
and has substantial funds is, of course, quite well off. Someone
who has not saved at all is protected, but there are a large number
of people in the middle who may perhaps not realise that unless
they have saved something like £200,000 to £250,000
they are not going to be any better off by saving at all; all
they are doing is providing their own resources rather than relying
on the State. Do you accept some responsibility for trying to
educate people in that area?
Mr Tiner: Part of this programme
is to educate people better about the benefits system and how
it will work for them right across the board. I think that is
true for the sort of people in the gap you are identifying. It
is not a specific item but, generally speaking, the benefits system
is relatively complex and people need to know how to use it. For
example, people who are thinking about releasing equity in their
house perhaps ought to know whether they are getting the right
level of benefit before they start releasing equity which may
cause them difficulties when they get very aged. So, yes, I think
that is all part of the broader picture.
Q150 Peter Viggers: Sir Callum, in
your speech in Gleneagles you gave a graphic illustration from
slavery, showing how the incentive to ensure that live slaves
arriving in Australia meant a different rate of mortality amongst
those being transported. How are you working in the field of commission
to ensure that commissions are being paid to bodies who are providing
and selling worthwhile insurance and pensions to those who need
it, to ensure that the pensions are paid for those who are selling
worthwhile long-term savings?
Sir Callum McCarthy: There are
two ways we are trying to do this: one is, as part of the Treating
Customers Fairly programme, to ensure that firms recognise the
effect of their commission incentivesi.e. they do not,
for example, offer commissions on sales which are irrespective
of the value of those sales and the complaints associated with
those sales. There are a number of issues that we are pressing
on the firms. The second thing, which I think is particularly
important, is that at the end of last month we published a paper
on the relationship between providers and distributors. In the
past, I think, there has been a very unattractive tendency of
providers to set out their stall in a way which was quarantined
from the mis-selling that often occurred as a result of the way
in which they offered incentives to independent financial advisers,
and we are keen to establish that that set of responsibilities
cannot be cut off in that way. Those are the two main thrusts
Q151 Peter Viggers: The menu of fees
and charges was intended to enable customers to make an informed
choice. In 2003, Mr Tiner, you said: "Over time a menu may
act as an encouragement to more people to pay a fee for truly
independent advice." Is there any evidence that this is working?
Mr Tiner: I think there is what
I might call anecdotal evidence that the number of people who
are now paying a fee, as opposed to commission, has increased.
Somebody mentioned to me the other day that it may be as high
as 20%. I do not, I have to say, know where that number comes
from and it sounds a bit high, but I think that there is a suggestion
that more people are paying a fee. However, my hopes at the time
I made that comment that more would have probably not been realised.
I think what our mystery shopping in this area suggests is that
not enough advisers are making it clear to their clients that
they have an option to pay by fee, and we need to push that harder.
Q152 Peter Viggers: Moving to advertising,
there is a disturbing amount of non-compliance79% in general
insurance promotion is one figure that has been put to us. The
Advertising Standards Authority told us that their primary sanction
for those who break the rules is adverse publicity. Does the FSA's
work on financial promotions suffer from not having a similar
Mr Tiner: I do not think so. Our
experience of financial promotions is that the standards have
improved a lot in the last year. We have done some recent work
which shows that there are still too many below standard, I have
to say, but the number has roughly halved since the previous year.
Out of the ones that are "below standard" only a very,
very small number were high risk. I think it is important to distinguish
in financial promotions between those that do not meet the requisite
standard and those that actually present a higher risk to consumers.
What we do where we see a really problematic advert or financial
promotion is to ask the company to withdraw it, and that has happened
on many occasions, and the company would then, at our request,
write to their customers who have already taken up the offer,
so to speak, and ask them if they would like their money back.
That has happened on quite a number of occasions. That is how
we deal with it. Of course, if we want to put it into enforcement,
and we have had cases go into enforcement, then there is confidentiality
up until the point at which the enforcement case is concluded,
which can be some time later.
Q153 Peter Viggers: You have a hotline
for the public and firms to report misleading advertisements for
financial products. How many calls has this hotline taken, and
do you think that more publicity in this general field would be
Mr Tiner: I am afraid I cannot
tell you, offhand, how many hits the hotline has received, but
I can find that out and write to the Committee.
Generally speaking, it has been overall relatively disappointing.
We do not have a huge number of cases coming through the hotline.
We have quadrupled the size of the financial promotions department
in the last two years, and most of our work (I think we have looked
at 4,500 promotions during the last two years) has more come through
our own efforts rather than people tipping us off.
Q154 Ms Keeble: I wanted to ask some
more questions about information, in particular for John. In May
you said you thought the disclosure regime for information was
too complex; there was too much jargon and so on. Now what you
seem to be saying is that you are going to stick with the existing
regime and improve the way that information is provided, in particular
looking at extending best practice. That is quite a shift, actually,
and I wondered, if that was intentional, why you had reached that
conclusion and when you are going to make the improvements that
you are proposing now under the new improved system that you seem
to accept has taken place?
Mr Tiner: Yes. What we have, at
the moment, and what we had when I spoke to the Committee in May,
is up to something like 11 mandated documents appearing in front
of a consumer who wants to buy an investment product, plus the
marketing stuff that comes from the company. We are proposing
that that comes down to five; that the documents that then are
mandated are simplified and focus on what is really important
and in as plain a language as is possible. So, yes, we do think
that the sort of sense of "less is more" will work for
the consumer. I think if you go back over the last ten years,
where we have had terribly elaborate "key features"
documents, where companies have gone to great lengths to explain
every single risk in great detail, it has not served the consumer
at all because they do not understand what they are reading, by
and large, and is simply a way for the financial services industry
to offload risk onto the consumer. I think we want to put that
into reverse, or make the companies think much harder about what
does the consumer of that particular product need to know, and
how can they best get it across. So, yes, we are changing the
emphasis quite a bit from a very prescriptive approach to putting
the onus on the distributor and on the product provider to be
very clear with the consumer in brief and simple terms what they
need to know.
Sir Callum McCarthy: If I can
just add one thing, we would also like to try and make a greater
differentiation between those documents which are the essential,
mandated documents, which we hope would have, as it were, an FSA
kite mark on them, as distinct from all the other marketing information
that firms should be allowed to send. That is what we are trying
Q155 Ms Keeble: When is that going
to happen? Also, how are you going to ensure that the documents
produced are actually ones that will be acceptable to consumers?
One of the problems with industry best practice is that it is
often best practice the way the industry sees it, which might
not be the best practice in the way the consumer sees it.
Mr Tiner: That is a fair point.
We are coming up with the proposals in the next couple of weeks,
with our quite significant reform of conduct of business regulation
in relation to investment products, which coincides with the Markets
in Financial Instruments Directive. So we are trying to do the
two together because there is a lot of overlap. That will be implemented
some time towards the end of next year. To the extent that the
industry is now going to be developing best practice, we have
said and will be saying (again in a paper we will publish in November)
that we will be willing to provide some confirmation to those
industry standards, but that if firms comply with those standards
they may be seen to be meeting our requirements, which is quite
a big step for us. However, we will have a set of criteria that
we will think about before we give that kind of confirmation to
those industry standards. One of them will clearly be: "What
input have you taken from consumer bodies? What have they said
and how are they going to ensure that these practices are not
biased in favour of the industry against the consumer?" So
we think that is built into that kind of process. Indeed, our
own consumer panel will make itself available to provide advice
Q156 Ms Keeble: The Consumer Council
has written to us criticising the lack of specific targeted resources
and activities for consumers in Northern Ireland, and also talks
about raising concerns about the low level of public awareness
of the FSA. I wonder what your comments are on those particular
pointsin particular the second because, in a sense, the
public should be aware of you safeguarding the industry for them.
Sir Callum McCarthy: I think we
are much more concerned that consumers of financial services know
their rights. For example, if I go back to the PPI instance, I
am much more interested in the fact that they should know that
they do not have to take PPI than that they know what the letters
FSA stand for. There is another interesting question which we
are thinking about quite carefully, which is how we establish,
for example, a kite mark on the mandatory documents, and that
they understand that that kite mark means something. Those are
the things we are concerned about, but it is not one of our objectives
to have the ordinary man or woman in the street actually know
what the FSA stands for.
Q157 Ms Keeble: People need to know
that they have got some protections and some safeguards when the
industry is so powerful and sophisticated, and when they are increasingly
reliant on it for the protection of their financial security.
I wonder if you are satisfied with whether the consumer actually
feels that they have got some protection and knows what their
Sir Callum McCarthy: I absolutely
agree. Those are the questions that we are concerned about: ie
do people know their rights; and do they understand how they could
apply to the Financial Ombudsman Service when something goes wrong?
Those are the questions we are trying to look at just as we are
trying to look in a very fundamental way at the question of financial
capability as a whole. If I may make a rather narrow point, those,
rather than name-recognition of the FSA, are the things that we
are concentrating on.
Q158 Ms Keeble: There is an issue
about the level of consumer faith (?) you have got. I have tried
referring a particular constituency issue to yourselves and got
bounced around all over the place and finally off to a completely
different department. I think there is a real issue about information
and the public ability to channel their concerns into you. Is
Sir Callum McCarthy: In terms
of the information we have developed, and put more resources into
the information on, for example, MortgagesLaidBare and other campaigns
like that. Again, the essence of what we are trying to do is to
improve access to information so that people know where they can
get it. Those are the things that we regard as important.
Q159 Ms Keeble: The Financial Services
Practitioner Panel, as part of its Treating Customers Fairly,
is talking about defining caveat emptor to be much clearer
about what is expected of the consumer. "Much clearer"
can imply extending the level of the responsibility that the customer
should display. Where do you see that the balance lies between
caveat emptor and information and protection for the consumer?
Sir Callum McCarthy: I think you
have to distinguish between wholesale and retail markets. In the
wholesale market the concept of caveat emptor is much stronger;
in the retail market, for the reasons you set out a moment ago,
I think there is a huge imbalance between the power of the provider
and the knowledge of many consumers. That is why we have worked
very hard (with, if I may say so, very successful work by John)
in terms of financial capability, and it is also why we have been
trying to make sure that people recognise that there are also
responsibilities as well as rights that consumers have got. That,
I think, is quite an important concept to get across.
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