Examination of Witnesses (Questions 40-59)|
15 DECEMBER 2008
Q40 Mr Brady: Mr Vicary-Smith ...
Mr Vicary-Smith: No. The only
information I would have would be of an anecdotal nature. There
what we see isacross the whole area of credit agreements,
of advice given and so forthprecious little improvement
in the overall standard of the industry. However, that is not
specific to credit agreements; it is a general tale of woe about
the industry and its progress.
Q41 Mr Brady: Can I suggest that
it may be worth a more detailed look at that?
Mr Vicary-Smith: Certainly.
Q42 Mr Crabb: Mr Prettejohn, we hear
what you are saying about the Treating Customers Fairly initiative
being welcome in principle; but would you say that the burden
entailed in complying with TCF for small firms is an unwelcome
burden at a time of economic downturn?
Mr Prettejohn: I think that all
firms, as you say, thoroughly support the principles of Treating
Customers Fairly. I would say that the FSA's definition of the
outcomes around Treating Customers Fairly was a very useful contribution
to the thinking of the whole industry and has made a big difference
to firms, large or small. I will perhaps let Simon comment on
the smaller firms, if I may.
Q43 Mr Crabb: Perhaps you would just
respond to my question about the burdens involved with complying
with TCF. Is that an unwelcome burden at this time for small firms?
Mr Prettejohn: In general, our
criticism of the Treating Customers Fairly initiative was that
it applied a one-size-fits-all approach to the industry, rather
than concentrating on the areas of greatest risk. Whether that
is actually for a larger firm or a smaller firm, or a particular
issue within a large or a small firm, we feel that all firms were
treated equally and the same approach and process was applied
to each. Almost by definition, therefore, the burden would seem
on some firms, large and small, to have been too high.
Mr Bolam: As far as small firms
are concerned, there is a basic concept within them that their
very survival is dependent upon treating their customers fairly;
that if they did not treat their customers fairly, then their
local reputations would soon be damaged and their businesses would
contract. The difficulty over the volume of work as far as small
businesses are concerned is this. I run a small general insurance-broking
business in Edinburgh. This is my TCF policy. It is 16
pages long. This is what a well-run business should have in order
to prove compliance. It is the way you have to extract management
information to show that you are actually physically treating
your customers fairly, even if you think you are. It is the extraction
and the documentation of some of that information, or all of that
information, that is quite time-consumingwhen people in
smaller firms are also trying to run the business, be the financial
director, do the banking, and all the other responsibilities that
you have within a small business. It did seem a bit disproportionate.
Q44 Mr Crabb: Given that the very
survival of these firms would be at the forefront of many of their
managers' minds at this particular time, do you think that firms
should be given more leeway in how they conduct their business?
Mr Bolam: I very strongly support
the FSA's more principles-based regulation, which gives that flexibility
as you move away from ruleswhereby a firm can actually
sit down and work out, in a more flexible way, the manner in which
they should be running their business. That certainly helps smaller
firms run their businesses, as long as their brains are focused
sufficiently to understand that they still have to prove that
they are complying with the regulator's requirements.
Q45 Mr Crabb: So more leeway in terms
of complying with TCF?
Mr Bolam: I would welcome that
in terms of smaller businesses, yes.
Q46 Mr Crabb: Mr Vicary-Smith, what
evidence are you seeing of any deterioration in firms' commitment
to the Treating Customers Fairly agenda at this time?
Mr Vicary-Smith: I think that
it is less a question of the deterioration of commitment but rather
that, when you measure who is doing it, it is such a small number
that it is hard to think of deterioration. I would argue that,
if anything, Treating Customers Fairly is even more important
for the consumer in harder times, because the financial pressures
on firms to cut corners are greater. It is not something that
we can select as being only for the good times; it applies all
across the board. I would not support the idea of leeway, therefore.
I think that there are some important dimensions that the credit
crunch raises about TCF, for example on mortgage repossessions,
which raise new issues that were not really thought of at the
beginning. For example, if the FSA is finding that firms are not
treating customers fairly on mortgage repossessions, it will not
be good enough if their home has been repossessed and they find
out that they should have been given some information before that
happened. We therefore need to see a more up-to-date and a more
transparent process of regulation through it. It has to work in
the bad times as well as in the good times.
Q47 Mr Crabb: Mr Phillips, would
you like to comment on the implications of the current economic
downturn on TCF?
Mr Phillips: There is a real risk
that firms will abandon the efforts that they have been making
to treat customers fairly, because they will inevitably be forced
to focus on prudential issues, and that things could get worse.
We have no evidence of that yet. We have asked the FSA to provide
us with evidence of what they observe going forwards, but there
is a real risk that things could get worseyes.
Q48 Mr Crabb: Coming back to Mr Bolam,
if I may, the FSA's December deadline requires firms to be able
to demonstrate that they are consistently treating their customers
fairly. Perhaps you could describe for us what this will entail
for a typical small firm?
Mr Bolam: First of all, a small
firm should have its policy in place, similar to the example I
showed you from my own business. It means that you need to collate
information that is seen as relevant, such as how many complaints
you have had; how many cancellations you have had; checking files
to make sure that the process within the office in terms of giving
advice to consumers is good and robust; making sure that your
staff, in terms of competence and training, are up to scratch.
There are a large number of measures that need to be down in writing
so that, if the FSA walks through your front door, they can actually
see that you have done it. It is that documentation area that
takes up a lot of time.
Q49 Mr Crabb: What if firms do not
bother about complying with this by December? What will be the
consequences for firms of just not doing it at this time?
Mr Bolam: We accept that that
may happen. As a Panel, we obviously would be very against it;
but the FSA are doing their best, with the resources they have,
to try and see 11,500 smaller firms over a period of three years.
It would be great if that could be accelerated, but there are
Q50 Mr Crabb: Mr Prettejohn, your
Annual Report expressed disappointment at the FSA's progress on
the issue of consumer responsibility and looked forward to the
publication of a discussion paper from the FSA in late 2008. Can
you update the Committee on what progress has been made on this
issue since then?
Mr Prettejohn: We have seen a
draft discussion paper from the FSA at a recent Panel meeting.
We think that the notion of consumer responsibility is extremely
important. Efficient and effective markets work best when you
have empowered and well-informed consumers, and the notion of
consumer responsibility actually equips consumers better in their
interactions with firms and also, if the worst comes to the worst,
if they have complaints or they have to go through a process of
law. Having empowered consumers who are conscious of their responsibilities,
therefore, seems to us to be a very good defence and protection
for the consumer, as well as also making sense for firms.
Q51 Mr Crabb: Mr Vicary-Smith, given
the level of financial capability held by the public, what do
you believe is the appropriate level of consumer responsibility?
Mr Vicary-Smith: Clearly consumers
have a responsibility to act honestly, to declare information
openly, to provide information that is asked for by advisers,
and to deal in an honest way. What is not rational, I think, is
to expect a consumer to be given a lengthy and complex document,
drafted by lawyers and teams of investment experts and then to
say, "As you have had your document, it is clearly your responsibility".
I think that the key thing here is what is going to persuade consumers
to engage in this marketplace. What is going to get people to
invest, to save, to take out protection, and so forth? That will
be when they feel that they are being treated fairly and they
are being looked after and looked out for. Telling people "It's
your responsibility. You had the document. It's your fault"
will not get them to play in this marketplaceand that is
what society desperately needs. I would say that pushing too far
on a caveat emptor principle beyond "You must deal
truthfully" raises real risks that consumers will simply
disengage from the industry and will go further back to where
Q52 Mr Crabb: Are you satisfied so
far with the progress and the tone that the FSA has adopted on
Mr Vicary-Smith: I have not seen
things yet with which I am dissatisfied. I am sorry if that sounds
rather cautious and negative. This debate has raged on, and I
have had conversations with too many in the industry who have
wanted to pass so much responsibility onto a consumer that it
looked like an abdication of responsibility from the firm, and
so I am nervous about this debate and where its implications could
lead consumers. Consumers need to be absolutely engaged and we
want to make consumers more empowered. We tell people to shop
around; we tell them to negotiate; we give them as much advice
as we can; but there is a limit to what you can really expect
an individual consumer to do, in all the other things they have
to do in their lives.
Mr Phillips: I would just like
to add to what Mr Vicary-Smith has said. The law is fairly clear
that people cannot be required to understand what they read. I
think our concern is that the FSA may try to circumscribe that
in some way, in order to provide the industry with more certainty
about redress claims. I think it would be a great pity if they
tried to do that and it would work against, as Peter says, the
interests of the consumer and, ultimately, the interests of the
Q53 Chairman: Mr Bolam, this may
not be for the record, but you did say that the FSA ensure that
you "physically" treat your customers fairly. You would
not think of bashing them on the head, would you?
Mr Bolam: No!
Q54 Chairman: Just in case! Eleven
and a half thousand firms over a three-year periodis that
not a tall order? Are you not afraid of that figure?
Mr Bolam: It seems like a tall
order but I have heard nothing from the FSA to indicate that that
target will not be met.
Q55 Sir Peter Viggers: Is the FSA
deadline for full implementation of the Retail Distribution Review
by 2012 realistic and achievable, and what are the problems that
Mr Bolam: We have two IFA representatives
on our Panel. They have been working very closely with the FSA
in terms of developing the RDR up to this particular moment in
time. They are reasonably optimistic that this deadline can be
reached. There are obviously certain things that are cropping
up, which might cause certain delays, such as IFAs struggling
at the moment in terms of getting business as the economy slows
down. As far as our Panel is concerned, we are absolutely behind
the RDR. We feel that, as the thing develops, we should make sure
that such things as professional standards are realistic; that
we are not, in the process, going to bring another layer of costs
on top of what we have already; that the professional standards
are achievable. The one thing at the end of the day that we do
not want to see is a meaningful contraction of advice to consumers,
good-quality advice, in the small towns of the country where the
people need that type of advice. Hopefully it will be achievable,
but there are certain things there which could slow the process.
Q56 Sir Peter Viggers: Mr Phillips,
the Consumer Panel has been concerned, among other things, about
complexity. Would you like to expand on that?
Mr Phillips: We have been encouraging
the FSA to make sure that it has the details sorted out. We have
been pleased by the general direction of movement, although we
found that the latest statement issued by the FSA was a bit of
a step backwards; but nevertheless they are moving forwards. The
particular issue that concerns us is to make absolutely clear
to the consumer whether or not they are receiving independent
advice and whether the person talking to them is actually working
in their interests or in the interests of their employer. We think
that the current approach of the FSA to call this "sales
advice" is not a very helpful approach. We hope that the
research they are doing will lead them to something better. We
would like sales to be called "sales".
Q57 Sir Peter Viggers: And from the
point of view of the Practitioners Panel, Mr Prettejohn ... ?
Mr Prettejohn: I think that it
will be a difficult transition. It is challenging in terms of
its timescale, as Simon described. There is a risk in the short
run that there will actually be less advice available to UK consumers
through the transitional period, and I think that is a very considerable
concern. It is already the case that the regime around advice
at the moment means that only the better-off and the best-off
can really afford the financial advice that many people need;
because, whatever your income and your financial position, life
is becoming more complicated and the financial issues are becoming
more difficult to disentangle. More people need advice, therefore.
Unfortunately, there may well be less, because a number of the
advisers who are advising at the moment may choose not to apply
for the professional qualifications that will be required and
therefore may leave the market. In the short run, therefore, there
may be less advice.
Q58 Sir Peter Viggers: Do you perceive
that practitioners are being sufficiently alive and alert to the
need for change?
Mr Prettejohn: I think that most
practitioners, the overwhelming majority of practitioners in fact,
would say that they welcomed the change and, in particular, the
raising of professional standards.
Q59 Sir Peter Viggers: What about
the employment prospects of the IFAs throughout the United Kingdom?
Mr Phillips: We are concerned
that there should continue to be an independent sector in advice
which is thriving. The issue for us is that the people who are
doing it have to be giving good advice and to be well trained.