Select Committee on Treasury Fourth Special Report

Appendix 2: Financial Services Authority response


This note is submitted in response to the Committee's Twelfth and Thirteenth Reports of the 2005-06 Session and First Report of the 2006-07 Session on financial inclusion. In our response we refer to the relevant paragraphs in the conclusions and recommendations section of each Report.

Twelfth Report of Session 2005-06, Financial inclusion: credit, savings, advice and insurance

Credit unions and Community Development Finance Institutions (CDFIs) - paragraph 13

We welcome the Committee's recognition of our success in developing a risk-based and proportionate regulatory regime for credit unions. We agree with the Committee that the third sector makes an important contribution to tackling financial exclusion. We are already contributing to the Treasury's review of credit union legislation.

Right to Buy lending - paragraph 17

The Committee highlighted evidence from Citizens Advice of abuses in the Right to Buy market and recommended that we view this as a priority area for examination within our mortgage regime.

Whilst the Right to Buy market is diminishing in scale, we recognise that it involves some financially inexperienced and potentially vulnerable customers. However, in our view, many of the issues which may lead to detriment in this area reflect broader concerns which extend beyond the Right to Buy market, such as the quality of financial promotions and firms' assessments of affordability. We therefore believe that they are best dealt with as part of our wider work. For example, our current project on sub-prime mortgages will include an examination of some Right to Buy cases. Should our general investigations bring to light particular problems in the Right to Buy market, we will consider whether further targeted work is appropriate. In the meantime, we will continue our regular dialogue with Citizens Advice and will take into account any intelligence they or others provide of malpractice in our regulated markets.

The basic advice regime - paragraph 18

We agree with the Committee that the Basic Advice regime needs to be reviewed. In October 2006 we published a consultation paper announcing our proposal to do this. [10] We have invited interested stakeholders to work with us in developing and formulating the remit of the Review. In the light of this Review we will decide what is the appropriate regulatory response, which should be proportionate for firms and should help ensure a fair deal for consumers.

We will announce the timetable for this review when we have examined responses to our consultation, which closes on 23 February. We will keep the Committee informed of progress.

Generic financial advice - paragraph 30

The Committee called for further FSA work on defining generic advice—in particular, making clear how it differs from product-related advice—and on the accreditation of generic financial advisers.

Our August 2005 document 'Financial Capability: developing the role of generic financial advice', drawn up as part of the National Strategy for Financial Capability included the following definition:

"Generic financial advice is a set of services and tools that use information about individuals' circumstances to help them identify and understand their financial position and their needs and to plan their finances accordingly. Generic financial advice helps consumers identify:

·  Their current financial position and therefore the choices and possible priorities for action appropriate to their needs;

·  How to take the next steps in addressing their priorities; and

·  How to access other relevant sources of information and advice."

In 2005/06 we worked with the Financial Services Skills Council and others to develop National Occupational Standards for Generic Financial Advice. These standards establish a set of core skills and competencies for those who engage in this activity, whether in the commercial or not-for-profit sector. They are intended to be the basis on which training for generic financial advice can be developed.

In January 2007 the Treasury published the Government's Long-Term Approach to Financial Capability. This complements the FSA-led National Strategy for Financial Capability. The Treasury has announced the establishment of an independent feasibility study, led by Otto Thoresen, Chief Executive of AEGON UK, to research and design a national generic advice service. We will work closely with Mr Thoresen's team and, as part of this, will examine how best to communicate effectively a clear definition of generic financial advice.

We will announce the second round of our Financial Capability Innovation Fund awards in March. We intend to use this opportunity to expand the range of partners with whom we work to provide straightforward money advice to further groups of consumers in priority need (such as the elderly, lone parents and those in social housing). We already provide basic information and signposting on our consumer website——and through other parts of the National Strategy, such as our 'Make the Most of your Money' initiatives in the workplace.

Thirteenth Report of Session 2005-06, "Banking the unbanked": banking services, the Post Office Card Account, and financial inclusion

Opening basic bank accounts - paragraph 10

The Committee recommended that we monitor the implementation of the revised Joint Money Laundering Steering Group (JMLSG) Guidance and produce a report in the first half of 2007 on the variety of approaches taken by the banks, including an assessment of whether these have led to improvement.

As part of our programme of work on reducing financial crime, we conduct thematic work to assess money laundering and fraud risk. As part of this we will assess how the industry has implemented our new rules and the new JMLSG guidance and will give feedback. This review will involve visits to different types and sizes of firm across the financial services industry. In the course of this review we will assess whether firms have chosen to make use of the new opportunities to simplify identification requirements, in accordance with the new JMLSG Guidance. The timescale for completion of the review will depend on our early findings, which we expect will highlight areas for further work. When we have reviewed our early findings, we will consider if we can produce an earlier interim report addressing the issue of opening basic bank accounts.

The Committee also recommended that we take action if the procedures or practices of individual banks at branch level unreasonably deny access to basic bank accounts to those who cannot reasonably be expected to produce particular documentation as evidence of identity.

Our rules in this area are designed to reduce the capacity of banks and other financial services firms to be used for a purpose connected with financial crime. The Handbook text quoted in paragraph 43 of the Report is in fact Guidance, not a Rule. [11] Firms may take this guidance into account in deciding how to meet the requirements of our rules which require them to have effective systems and controls for countering the risk of financial crime. If a firm does not follow this Guidance, we would expect it to explain how it is complying with our rules.

More generally, we require firms to establish and maintain systems and controls appropriate to their business. Two of our Principles for Businesses are particularly relevant here: Principle 6 requires a firm 'to pay due regard to the interests of its customers and treat them fairly' and Principle 5 requires firms to 'observe proper standards of market conduct'.

In this and other aspects of our work we take a risk-based approach, taking into account the likelihood of consumer detriment. Where we judge that, as a result of a bank's non-compliance, there is a material risk of consumer detriment, we have a number of options, ranging from informal discussion, remedial action plans and private warnings, to public enforcement action such as fines, public censure and withdrawal of authorisation.

We are encouraging banks, for example through two open letters we have written to the Chairman of the JMLSG, to take account of the increased flexibility on identification processes. We will continue to highlight this issue in our communications with the industry.

Wider banking issues: Remittances - paragraph 33

The Committee highlighted the important role which small money transmitters play in addressing financial exclusion for communities that may not engage with the mainstream financial services sector. It noted that a lack of coordination in the current regulatory regime is hindering the ability of small money transfer businesses to obtain business banking services and recommends that we and Treasury resolve this issue in consultation with other relevant organisations.

The decision whether a bank offers banking facilities to a money transfer business is a commercial one for it and not for the FSA. We believe the issues raised by the Committee on this point are best dealt with in the Treasury's review of the regulation of Money Service Businesses. We will continue to contribute to Treasury-led discussions on these issues, involving the UK Money Transmitters Association, the British Bankers' Association, the Department for International Development (DFID) and Her Majesty's Revenue and Customs (HMRC).

First Report of Session 2006-07, Financial inclusion: the roles of the Government and the FSA, and financial capability

The FSA's National Strategy for Financial Capability - paragraphs 1-2

The Committee expresses concern that our National Strategy for Financial Capability does not adequately address the needs of the financially excluded. Our Strategy aims to increase the financial capability of the UK population as a whole; we have already set ambitious targets to achieve this in all areas of our programme. For example, over the next five years we aim to reach 1.8 million children in 4,000 of the 6,000 schools in England, around 2 million young students in higher education, around 1m people not in education, employment or training, 4 million employees in their workplace, and 1.5 million new or prospective parents. Through this work we will reach many people who are financially excluded.

In addition, over the last two years we have been working with the Financial Inclusion Taskforce (FATF) in order to coordinate our respective activities. The FSA is now represented on the Advisory Group of 'Let's Talk Money' established by the FATF.

The Committee expresses concern about the progress we have made in identifying and drawing in extra funding for financial capability work and developing a wider funding strategy. As announced in our Business Plan published recently, in 2007/08 we will spend £17.1m on financial capability, a level which will need to be maintained over the course of many years if the necessary step change is to be delivered. This compares to a spend of £3.6m in 2004/05. This increased budget has been allocated to specific and measurable activities (as set out in Financial Capability in the UK: Delivering Change, which we published in March 2006), in areas where the FSA's intervention can make a real difference.

Many others are contributing additional resources in a variety of different ways, such as providing secondees to work on the Strategy, extra funding for specific projects or leveraging off our initial funding or resources by investing teachers' time, allowing employees to attend seminars in work time, providing presenters, hosting our tools on their websites and allowing intermediaries such as university welfare staff to put into practice their newly acquired skills in the area of financial capability. However, the overall responsibility for literate and numerate adults lies with government and we welcome the Government's recent launch of its long-term approach to financial capability.

Simplicity and clarity in marketing materials and communications - paragraph 5

We agree that work on promoting financial capability needs to be complemented by efforts on the part of the financial services industry to make their marketing and other material clear for consumers. The Committee recommended that we attach greater priority to our work to simplify the disclosure regime and to ensure that financial services companies provide consumers with simple and clear information. It further recommended that the concept of summary boxes, giving clear and succinct information, should be expanded to more financial services products.

We remain committed to ensuring that consumers receive sufficient information to enable them to make informed decisions about whether or not to buy investment products and to promote competition by making it easy for consumers to compare products. We have recently reviewed our point-of-sale disclosure requirements and we have identified a number of areas where improvements can be made.

As part of this review we tested a number of different approaches to conveying key information, including a 'Quick Guide' approach consistent with the Committee's 'summary box' concept. Despite extensive consumer testing, we have been unable to demonstrate sufficient benefits, in terms of improved consumer understanding or changed behaviour, beyond what can be achieved by the current documents to justify significant changes. We have concluded that much more can be achieved through improving the quality and user-friendliness of Key Features Documents (KFDs). This is consistent with our general move to a more principles-based approach to regulation.

We also set out specific proposals designed to improve the overall quality of KFDs:

ii.  reducing the overall number of disclosure documents that we require (we propose reducing the number of documents required from eleven to a possible five);

iii.  including a regulatory message, a prompt to help consumers recognise the importance of these documents and to make them aware that they should read them;

iv.  using our Financial Capability work to encourage consumers to read these

v.  documents; and

vi.  introducing a 'Keyfacts' logo to improve the prominence of these documents.

We will pursue these aims through our supervisory work, through engagement with trade associations and through a thematic project similar to the work recently carried out on improving the standards of mortgage KFDs. We will establish our baseline in Q2 this year. Following that, we intend to publish examples of good practice and, after the new rules are in force, we will follow this up to assess what improvements have been made.

In October 2006 we published a Consultation Paper which proposed simplified rules to allow greater flexibility for firms in tailoring these documents to the needs of their customers. It also proposed a requirement for firms to explain the nature and risks of any investment in sufficient detail to enable consumers to make informed investment decisions.

The role of the FSA - paragraphs 7-10

The Committee recommended that we should make a commitment to take account of the need to promote financial inclusion in all our activities and report annually on how this commitment has influenced our work. Our Annual Report to the Chancellor, laid before Parliament and published in June each year, sets out our key achievements in pursuit of all our statutory objectives. We will consider how that Report could report more explicitly on the work we have done on financial inclusion. In this context we bear in mind that the legislation which established us has not given us a specific responsibility to promote financial inclusion.

The Committee also recommended that, in policymaking, our cost-benefit analyses should examine the benefits of financial inclusion and the costs of financial exclusion. To the extent that regulation may raise a firm's costs and hence affect the price of financial products, financial exclusion could indeed be affected. Regulation could also lower the price of some products, for example by encouraging greater competition, and lead to enhanced financial inclusion. Our methodology for cost-benefit analysis considers explicitly the impacts of regulation on the costs faced by firms and on the quantity, quality and variety of products offered and sold. In practice, our experience is that policy proposals subject to our statutory cost-benefit analysis impose additional costs that are only a very small proportion of firms' total costs. Moreover, the impacts of the proposed rules or sets of rules are typically spread across a number of economic markets, so the effect on the cost of specific products or services may be even more limited, although we are always vigilant to identify exceptions.

The Committee also recommended that we should commission research into the markets we regulate to determine the extent of any problems of financial exclusion and where we could best focus our resources. As a risk-based regulator, we focus our research activity on those areas that have the greatest potential impact on our statutory objectives. Financial inclusion was addressed by our Financial Capability Survey, carried out in 2005; it highlighted, among other things, the problem of indebtedness and the lack of financial capability among certain groups, particularly those who do not have a current account. As outlined above, our financial capability work programme will target financial exclusion in a number of areas, including services offered to young adults and to children through the school curriculum. We plan to repeat the financial capability survey every 4-5 years.

We have also undertaken and published research which evaluated the effectiveness of our Basic Bank Account leaflet. In addition, we work with a range of organisations whose research informs our work on financial inclusion. For example, the Financial Inclusion Taskforce seeks to monitor progress in tackling financial exclusion. This includes monitoring the provision of banking services to the financially excluded, the provision of affordable credit by third sector institutions and the provision of free face-to-face money advice.

The Committee noted our Treating Customers Fairly (TCF) initiative and recommended that this initiative encourage firms to improve access to, and develop products which meet the needs of, financially excluded consumers.

Taken together, our TCF and financial capability programmes may deliver improvements to financial inclusion. For example, as firms fulfil their obligation to design products to meet the needs of identified consumer groups, we may witness product innovation to meet the demands of the financially excluded. More confident and capable consumers from all sectors of society should, in the longer term, be better equipped to make informed financial decisions and participate in the marketplace.

The Committee recommended that through the TCF initiative, the FSA should encourage firms to develop products for financially excluded customers. We do not believe that it is an appropriate role for the regulator to encourage or require firms to offer particular products; that is a commercial decision for them to take. Whatever business firms decide to do, we expect them to treat their customers fairly when designing, targeting and marketing products.

22 February 2007

10   CP06/19: Reforming Conduct of Business Regulation, October 2006 Back

11   The Select Committee Report says that "The FSA rules require 'appropriate measures to ensure that procedures for identification of new customers do not unreasonably deny access to its services to potential customers who cannot reasonably be expected to produce detailed evidence of identity'." This text is from SYSC 3.2.6G G (5).


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