Financial Services Bill

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Q185Mr. Walker: I have one final question, and then I will allow other colleagues to get in. There are obviously very technical financial instruments, which people perhaps did not understand fully, that caused some of the problems we have had, but there are also some much more obvious things, such as 125 per cent. value mortgages. Do you hope that the CFS will do better, not just at looking for fraud in the selling of mortgages, but in saying, “Hang on a second, are we really comfortable allowing people to borrow 125 per cent. of the value of their home?” I doubt we will ever allow that to happen again, but if it was to start re-occurring, would you expect a more interventionist approach?
Adrian Coles: I would expect a more interventionist approach. I do not think the CFS would be looking at that sort of detailed thing. We have got a mortgage market review that is going through the FSA; it is out for consultation at the moment. I would have thought those sorts of detailed rules, analysing those sorts of loan-to-value ratios, would be within the FSA and handled at a lower level than the CFS. That is what I would envisage. I would imagine the CFS being more macro-prudential.
Angela Knight: I would agree with that, but just add one rider to the point that Adrian Coles has made. The drop in value of property can mean that you have people who took out a lower loan-to-value mortgage on their property. Now, because of the drop in value, the loan-to-value is much higher. I think we have got a transition phase where there will be some high multiples, simply because of that. We must deal with them in one pot. Then there is the new lending, and on that I agree entirely with what Adrian Coles has said. In addition, the application of the new capital rules against risk will reinforce a certain type of lending, which will be different.
Matthew Fell: The distinction between what it will be the job of detailed regulation and the regulator to do, and what you would look to the Council for Financial Stability to do, would be—I absolutely agree with Adrian—that the regulator would look at what is going on in an individual institution. The job of the council would be to say there is scope for diverse product-offering right across the market, provided that the products are priced accordingly and the right checks and balances are in place. Of course, to have choice and competition in the market, you are going to have some riskier products that are priced accordingly. If every single player in the market is offering that riskier product, the job of the council would be to identify that risk right across the piece. It is the job of the regulator to look at the individual firm and say, “What is the product offering? What is the risk appetite and are the proper safeguards in place against that?” That is how I would see the distinction.
Q186Mr. Colin Breed (South-East Cornwall) (LD): Adrian, you said that there is a modest step in the right direction on the tripartite because, essentially, the proposals formalise certain things. We now know we are going to have quarterly meetings, and apparently the minutes are going to be published. That does not preclude it having meetings at other times. As soon as it has a meeting that is not a quarterly meeting, it will appear on Mr. Peston’s blog, and there will be scurrying around, and phone calls and everything else about the reason why. Then somebody will be paid a sum of money to say what it is all about. The very stability that we are trying to identify and address could be the cause of that happening.
With the old tripartite, we did not know when it met, or whether it ever did meet. We never saw any minutes. Therefore, to a certain extent, discussions concerning the sensitivity of things would have been under the parapet. Suddenly, the formalised stability council would have to meet and publish its minutes, presumably within some period of time—there is not much point in publishing them a year later; I assume that, a bit like the Monetary Policy Committee, that will be done within four or six weeks, or something like that. Do you think that might precipitate instability rather than address it?
Adrian Coles: I suppose it is possible that the circumstance you describe could happen. The Bill says that it must meet at least every quarter. It does not say that it must meet only every quarter. It may well meet monthly, or even more frequently. I don’t think it precludes other less public conversations between members of the tripartite, if that proved necessary, in respect of particular institutions or particular circumstances arising in the markets. No, I think it is helpful to formalise relations between the tripartite, but I do not see the Council for Financial Stability—I don’t know what others think—as the only mechanism for the tripartite getting together and discussing current events.
Angela Knight: In many respects I think you have hit the nail on the head—
Q187Mr. Breed: Scrap the council?
Angela Knight: No, I wouldn’t do that, but you can put in place steps for stability and then find that they are themselves the cause of instability. Indeed, we all see what happens in the run-up to the Monetary Policy Committee meeting when there is a view that perhaps interest rates are going to change. There is much speculation in the market beforehand. There is much breath-holding, and then commentary on whether people think it has made the right decision or the wrong decision, and whether people are disappointed or not.
Q188Mr. Breed: That’s a scheduled committee.
Angela Knight: Absolutely. To a certain extent, you can see that a similar sort of thing could happen with this council, certainly at the start and at times of difficulty. That is why we made reference in our written submission to things such as a no-surprises regime. By that I mean that you have to have clarity of what is said. I suspect that everybody sitting around the tables here is well aware that you can read a civil service report that says everything, but in which the clarity of what is meant is not good. We put that in our written evidence for that reason, and secondly, because there will be times when either you can’t wait for a formal meeting, or if you had one it could cause a problem. I am sure that people are very capable of picking up the telephones and having the necessary discussions. We cannot, surely, afford to have a regime put in place in which the proper issues are not discussed in a manner that allows decisions to be taken in the right and proper way, and in which there are destabilising consequences, unnecessary delays or obfuscation about what is meant and the issues that are being considered.
Adrian Coles: I am absolutely certain that the members of the Council for Financial Stability will meet without calling their meetings “meeting of the Council for Financial Stability”. That is absolutely clear.
Q189Mr. Breed: There will be formal meetings—the quarterly meetings—which will be pretty uninspiring, unhelpful and everything else, and the meetings that have any substance will probably be held informally.
Adrian Coles: That might well be the case. If you look at the published minutes of the FSA, for example, they are hardly the most open and useful set of documents. One of the fears, I suppose, is that the CFS minutes that are published might be closer to those of the board of the FSA, and further away from the useful minutes published by the Monetary Policy Committee.
Angela Knight: Perhaps we should say that we look forward to the subsequent scrutiny by the Treasury Committee of the Council for Financial Stability.
Mr. Breed: We shall enjoy that.
Q190John Howell (Henley) (Con): I want to pick up on some consumer issues, starting with the consumer financial education body. I would like to know what it needs to offer, in your view, that is not already being done in the market and that is going to make a difference.
Matthew Fell: The starting point is that in this whole debate consumer education clearly has a very important role to play. What is important, and what perhaps needs greater clarity than is suggested in the Bill at the moment, is who derives the benefit from it, and therefore who picks up the tab, essentially. There is broader public interest in improved financial literacy right across the public; that does not come across in the Bill at the moment.
Q191John Howell: I think we would all agree with the need for financial education in that. What I am trying to get at, on the way in which the body is set up, is whether you have any confidence that it is actually going to deliver that, and whether it is going to deliver anything that is in addition to what is already being offered.
Matthew Fell: The fundamental that it needs to get across is that individuals should fundamentally understand the risks that they are taking on and what situation arises if things don’t go to plan, or if their circumstances change and payments cannot be made; they should understand the consequences of that. I think that it should be all about promoting understanding of the risk that consumers take on.
Adrian Coles: We need to be very clear what the new body is going to advise people on. If you look at the impact assessment that the Treasury published on this, it says that 38 per cent. of those getting face-to-face advice are getting advice on social security and tax credits, and 8 per cent. of them are getting advice on tax. It seems unfortunate to me that building societies and banks would have to pay to fund an institution that is offering advice to people about the complexity of the tax and welfare benefit systems. I think that there is a strong case for saying that perhaps the Government ought to be financing questions about the way that they provide financial support and the way that they tax people.
If you look at what proportion of face-to-face advice is given on mortgages, which is clearly a big building society interest, you see that only 9 per cent. of those going in to get face-to-face advice—this is in a pilot run in north-west England to test how this would all work—are getting advice on mortgages. We need to be very clear what advice specifically the new body is giving, or is paying other agencies to give. One big difficulty will be if it moves out to being general financial advice, according to the broadest possible definition of that term; that will demand an almost bottomless budget, and we must guard against that very carefully.
Angela Knight: In answering your question—what will the body add to what is being done at the moment—what is being done at the moment is actually pretty significant. There are individual programmes done by individual banks, both in schools and in areas, and various other initiatives provided through a number of organisations, such as Moneymadeclear and the Personal Finance Education Group, which deals with financial education in schools. There is a plethora of different programmes and initiatives focusing on the business of financial education both in and out of schools.
If the new authority is going to be able to contribute positively, there needs to be careful scoping of what it is going to do. It needs to be very well managed, because you tend to get people with lots of good intentions getting involved on these sorts of bodies and that is excellent, but it has to be managed well. They have to decide right at the start how they are going to measure outcomes: what counts as success in this area? Part of that is about getting to people, but part of it is about getting to them in such a way that they recognise the information as being the information that they wanted and that is going to help them with their financial affairs. The body needs to be subject to some form of external scrutiny, such as that provided by the National Audit Office, so there is a proper review of what it is spending, how it is doing against the targets that were set, what those targets should be and how you measure outcomes. Otherwise, we will all continue to pour money into financial education without enough observable result.
In part, we see this as a separate authority and in part we see it as picking up the failure in the education system to get financial education across. Clarity at the start, a review process, proper understanding of what the targets are and measurements of the outcomes are vital. Otherwise, it will take over from what has already been done and we will just move from one not particularly coherent system to one that is perhaps more coherent, but is not coming up with any better answers, and the price that we are all paying will be much higher.
Adrian Coles: Just one further point: I think that there is a risk, in a very low-margin environment in the building society sector, that if there was a significant call for fees on building societies to pay for this new body, the obvious route for a pressed board of directors to take would be to reduce the expenditure that many societies undertake already on this issue voluntarily, in their own areas. So not only might it not add to what is currently available, but it might also ultimately reduce what is currently available. I am not saying that that is a threat or even a likelihood, but it is a possibility.
Angela Knight: It is a reality of life. I think the levy for financial education at the moment by the FSA is about £25 million on our members, and we can add probably another £50 million or £60 million, perhaps more, that is being spent on that area already. If I am getting close to £100 million right now, then that is a lot of money, which is another reason why we have to be clear, careful and coherent. In some of the welfare areas—this is what has come through from the various studies—it seems that that is almost a better role for something like Citizens Advice, which has huge expertise in that area already; of course, we already partially fund it. So let us get into a bit more detail first.
Q192Mr. Horam: Given that it is going to be largely the same people doing the educating who have been doing it so far, do you have any problems about the credibility of the new body?
Angela Knight: Yes, of course, there are problems about credibility and that is why we say we have got to scope it properly in the first instance. If it looks like it is just some sort of endless quango, then it joins the other list of quangos. There are some good people who work in this area already. If it is scoped properly, has a good board, is obvious how it reports, has clarity of message and purpose and good management, it will have credibility. You have to start it off right.
Adrian Coles: If I may pick up on a point that Angela made a moment ago, I had assumed from reading the Bill that this new body will provide finance to bodies such as CABs, so that CABs can deliver what the new body wants delivered. I assumed that CABs were going to be an agency of this new body.
Angela Knight: That is why I say it has got to be clear because it is not clear.
Adrian Coles: Yes.
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Prepared 11 December 2009