Select Committee on Treasury Written Evidence


Memorandum from the Financial Services Consumer Panel

NORTHERN ROCK

  This has clearly been an event of major significance and we will be following up with the FSA the substantial issues that arise from it. These include liquidity, compensation limits, consumer communications and credit issues.

Liquidity

  In particular we will be asking the FSA about its assessment of institutional and market liquidity and business model stress testing. We wish to satisfy ourselves that the FSA is looking critically at the events of the summer and responding swiftly to evidence of weaknesses or gaps in its current policies and procedures—or simply identifying now areas where it could work better.

Compensation Scheme Limits

  Although the FSA issued clear statements that it judged Northern Rock to be solvent and that it exceeded its regulatory capital requirements, those statements did not assuage consumers' concerns following rumours and eventual confirmation of the Bank of England's decision to provide the bank with emergency liquidity support.

  Naturally these events have reignited the debate about limits imposed on compensation payable by the Financial Services Compensation Scheme. We welcome the commitment from both Government and the FSA to undertake a fundamental review of compensation structure and limits. Recent events have shown that crucially, if compensation paid to savers in the event of a banking failure is to be anything less than the full amount of all losses, this should be made clear in literature such as bank statements and marketing material. Consumers need regular reminders not to put all their eggs in one basket.

  Our own position is unchanged since the limits were last reviewed in 2006, when we advised the FSA that inflation had significantly eroded the real value of compensation and that in addition the deposit limit should be raised still further. Increasing numbers of consumers have been moving out of equity based products into what are perceived as "safer" deposit accounts. Consumers who sell their homes and wait before buying another, are likely to have large sums of money on deposit with banks and building societies. Even with yesterday's welcome increase in deposit cover to 100% of the first £35,000, the limit is far too low to accommodate these changes in consumer behaviour.

  Nor do we see the rationale for the 10% reduction in cover which is applied to all claims over a certain amount, except those relating to compulsory insurance and from 1 October, to cash deposits.

Consumer Communications

  Consumer confidence in the financial services industry and in the regulator has taken a significant blow following the events in the market and at Northern Rock in particular. The reaction of Northern Rock customers was a clear demonstration of this. We are aware that there could be legal and practical difficulties in the FSA commenting on individual firms, but in the face of intensive media speculation over the summer we believe that there was and still is scope for the FSA to issue clear messages to consumers to assist them to identify what is important for them and so reduce the potential for panic and confusion. Borrowers will similarly be looking for clear and impartial guidance. We have asked the FSA to remind those who are experiencing financial difficulty of the importance of talking to their lenders at an early stage to identify a constructive way forward.

  While most attention has since focused on the position of savers, we continue to be mindful of the position of other retail consumers, such as investors, whose principal concern will be the financial viability and profitability of lenders and other financial institutions with whom they have invested, either directly or through pensions and other investment vehicles.

  Remedying a loss of consumer confidence in the regulator is a problematic issue, but the FSA could make a start by improving the amount, focus and clarity of its communications with consumers. On 12 September we wrote to the FSA setting out our concerns and have since met the Managing Director with responsibility for Retail Markets to pursue this further.

Credit Issues

  With one sub-prime mortgage lender already in administration and credit issues being high on the agenda, in our letter of 12 September we also encouraged the FSA to consider a timely reminder to firms about dealing fairly with borrowers in arrears and the provisions of Chapter 13 of the FSA's Mortgage Conduct of Business requirements. The general principle of Treating Customers Fairly also applies, of course, but the significance of Chapter 13 is that there is an evidential provision in the rules that firms should adopt a reasonable approach to the time over which the shortfall should be repaid. More could be done to communicate this to district judges who are hearing repossession cases. Then in the event that a firm taking possession proceedings was found to have failed to follow the rules, district judges could use this as an argument for refusing to grant a possession order.

October 2007





 
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