Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 140-159)

SIR CALLUM MCCARTHY AND MR JOHN TINER

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 problem?

  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 on it?

  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 way.

  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 with mortgages?

  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.[1]

  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 benefits—now Pension Credit, Housing Benefit and Council Tax Benefit—are 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 incentives—i.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 of activity.

  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-compliance—79% 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 sanction?

  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 helpful?

  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.[2] 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 to do.

  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 on this.

  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 points—in 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 rights are.

  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 there not?

  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.


1   Ev 77 Back

2   Ev 74 Back


 
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