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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