Examination of Witnesses (Questions 299-339)
Chair: Shall we begin?
Thank you very much for coming to see us this morning. Things
have already been livened up by the first session, which I think
all of you heard. I think I saw all of you in the room already.
Could I begin by asking each of you whether you think that this
new system of regulation is going to be cheaper or more expensive
to the consumer? Why don't we start with you, Mr Sinclair?
Mr Sinclair: I
think our general view is that when you, I suppose, increase the
number of entities, it is bound to cost more. Certainly, even
within the paper itself, it recognises there is initial transitional
cost. But having, I think, more senior sets of management across
a range of entities is liable to cause an increased cost in any
event. I think the other part in terms of—
Chair: The transitional
cost is the £50 million that is in the impact assessment.
Do you agree with that number?
Mr Sinclair: We
consider that might be understated, but we have no evidence to
underpin that, which I think is the concern. Our emotional intelligence
tells us that in these types of transition, that would tend to
be understated, but we wait and see. Part of this will be down
to perhaps the IT infrastructure that has to be built to support
the various entities. And then I think it comes to part of our
view in terms of what might be required in terms of shared services.
While there is talk of sharing fee-gathering, then there might
opportunities for more shared services. We might get that cost
back down, but I think it depends on how that gets played out.
Chair: So the answer is
you don't know, £50 million sounds a floor for transition,
and we might have higher long-run costs, because we have two institutions?
Mr Sinclair: More
institutions, and I think also a genuine desire for more to be
done. I think that more to be done was always an issue, and we
always anticipated that as the FSA was changing to its conduct
risk strategy we would be running two systems in parallel for
a period of time—when they were doing conduct risk, when
they were assessing product, and when they were doing conduct
of business, when they were still monitoring what had not yet
been conduct-risked through the process, so we were anticipating
increased costs anyway.
Chair: We will get on
to whether we are getting value for money for this corpus of regulation
in a moment. Could I just have a quick answer to the same question
from Mr May and Mr Gazzard?
Dr May: I think
certainly there is a danger of costs going up. I think the control
of regulatory costs is something that there is still an opportunity
to look at. Just thinking back, when one went from SROs to FSA,
the whole idea was costs were going to go down because we would
make savings. That doesn't seem to have been the case, as reported,
and going back to what Robert said, I think when you have more
than one institution involved, there could be an opportunity to
keep the costs reduced by having shared service companies and
so on. For instance, even just member authorisation could be put
in one entity across the PRA and the CPMA.
Mr Gazzard: Yes,
very similar views on that. I think the initial reaction is that
if you split between two bodies, you are going to end up with
increased costs. It has been our experience in the past that you
have ended up with increased costs. It remains to be seen—the
devil is in the detail, I guess, in terms of how this will affect,
in particular, our members. I think we would be pleasantly surprised
if it turned out to be £50 million.
Chair: As you have probably
noticed in a number of other sessions, I have asked those representing
institutions to tell the Committee what the full compliance cost
is to their firms, and therefore ultimately to their customer,
of the regulation. So far, no one has been able to answer that
accurately, and unless you have come armed with that number today,
I would be very grateful—because we are taking this very
seriously—if you could go away and give this considerable
thought with your respective members. This needs to include not
just the cost of the amount that is paid to the FSA to create
the FSA, but also the amount that is required to run a compliance
department within firms, plus of course all the time spent by
people within that firm who are answering queries from the compliance
department. So it is a full cost to the consumer of the regulation,
not necessarily because we think that regulation is wrong, but
because we need to know what that costs the consumer, if we are
going to do a proper analysis of the corpus of regulation.
Jesse Norman: You will
have heard me ask a question earlier about the retail distribution.
I would like to leave that question to my colleague, Mr Garnier,
and open by asking a question briefly to all of you about the
Bank of England. Obviously, in the new arrangements with the CPMA
and the PRA, the Bank is going to be predominant. Are you comfortable
that it has the expertise required, either as a result of it,
or as a result of its existing expertise, to deal with the specific
challenges posed in each of your sectors. You could start, Mr
Sinclair.
Mr Sinclair: I
think the IFA sector is a little different and unique in terms
of it operating predominantly through effectively a large number
of disparate smaller businesses. Sometimes they are gathered together
in very large businesses that are partially-owned subsidiaries
of large insurance companies. So it is a very complex mixture
that sits in there. Whether the Bank of England has any direct
impact in terms of that, I would think it is uncertain. Whether
the structures that sit underneath that will get that close to
them in terms of the IFA part of the landscape, in terms of life,
pensions, investments, I think is much more around how they deal
with the providers of those products, rather than the way they
are sold directly to through IFAs.
I think across in the other part of the landscape,
which is the other half of the area that a large number of IFAs
operate, which is the mortgage part of the world, then there is
more liable to be direct impact, as was mentioned earlier, which
I think comes around to this fact of how we will apply medicine
at various points of the journey, particularly where we might
have a situation where the Monetary Policy Committee has a view
of what they needed to do to move things one way or the other.
The PRA might have a view where they have to take action against
certain parts of the market, but then the CPMA may also be taking
action against firms in that marketplace and product in that marketplace.
Therefore, making sure that all of that works in a structured
way, where everybody is aware of the interdependencies and of
the likely outcomes of the individual actions when they are then
threaded together, is one of the major problems that we foresee
around some of this—how we get that right level of understanding
when those decisions are made.
Dr May: On financial
stability, the Bank is extremely well placed, which tends only
to affect a particular sector of the market, and we've seen previously
those that were very systemic in a financial sense. There is no
doubt they're going to have to build up expertise that doesn't
now exist at the Bank, to take on all the things that Robert said,
and probably a number of other aspects of interrelationship between
the FPC, the PRA and the CPMA. So it's a challenge for one specific
aspect, yes, but I think for the rest, it's to be seen how that
will build up.
Mr Gazzard: I think
in terms of financial planning specifically, we're still building
a relationship with the FSA, and building understanding within
the FSA. I think there is a general misunderstanding of how financial
planning fits within the whole marketplace, including the IFA
marketplace. What has not helped in the past is a mix-up of definitions.
So you can have financial planners who are tied agents working
for a bank, you can have financial planners who are IFAs, you
can have financial planners who work for other large organisations.
I think there is a lack of understanding in the marketplace. Our
concern would be, specifically for financial planning, there would
currently be a lack of understanding within the bank, but we would
hope that in the transition, where staff were moved over from
the FSA to the new entities, that that knowledge and experience
would go with it.
Jesse Norman: Let me push
you a little bit further on that question, Mr Sinclair. Are you
comfortable that the senior reaches of the Bank know anything
about retail financial markets at all?
Mr Sinclair: In
the conversations I've had at Deputy Governor level, I am very
happy they do have a fairly good understanding of how things work
in the lending side of markets. On the investment side of markets,
I have not come across anything that helps give me comfort in
that area, but I have no reason to have discomfort at the moment.
Does that make sense?
Jesse Norman: It does,
thank you. It is slightly unnerving but it makes sense. Finally,
Dr May, could you just talk for a second about investment management?
How is that going to fit into the new regime? It's not obvious,
to me at least, where it sits and perhaps you could just talk
a little bit about that.
Dr May: No, it's
not obvious. Just so that Members are aware, we at APCIMS represent
125 firms, who are looking after investors who generally are more
literate. They generally want to take risk in order to gain growth,
which hopefully is important for the economy, particularly in
the current environment. As to where they fit, that is a bit of
a struggle. It looks as though, and we would hope, large numbers
of those firms fit in CPMA. But if a number of them end up going
into PRA that extra cost that we talked about earlier, an extra
overhead, will certainly be there. So I think it's our hope that
they will end up in CPMA with appropriate prudential knowledge
coming from FSA, or in some cases the Bank, so that they can cover
those firms appropriately. But there's no doubt they were not
systemically important. They did not have a systemic issue related
to those firms in the recent crisis, but there will be a cost
overhead for the new regulation for those systemic problems coming
to bear on the marketplace. So we are looking to try and manage
that with the powers that be, and also hope that some of the recent
FSA changes, where they've been spending more time trying to understand
the investment community on the private client side, will go through
into the CPMA and the PRA in a knowledge sense. Because the idea
of the one-size-fits-all for retail is certainly not what we are
putting forward for our community, and I think is an important
point we should keep stressing.
Jesse Norman: That is
helpful, thank you.
Mark Garnier: My question,
broadly speaking, is directed to Robert Sinclair, but by all means
don't feel shy about coming in if you have a comment on this.
There is going to be a short debate tomorrow about the FSA's retail
distribution review, RDR, and its effect in IFAs. Do you think
the FSA has served IFAs well, or do you think the FSA through
RDR has let this community down badly?
Mr Sinclair: I
wish there was a simple answer to this question. I think one of
the challenges is that, if you go right back to when the RDR started
from a speech at Gleneagles Conference, some outstanding objectives
were set for the project. I think we've lost our way a little
through the process. It almost feels as though we've come down
from an excellent model that is about dealing with some fundamental
economic issues within the industry, and getting more savings
and engagement with consumers, to a debate around exams and commission.
It is disappointing that we have gone from what were some very
laudable objectives to a result that is debating two relatively
minor issues.
I understand exactly why a significant proportion
of the RD Committee feel aggrieved by the examination issue. They
feel as though they had been in the industry doing an excellent
job for a very long time and why are they being asked to go through
a hoop of a series of what are process-led exams, when they have
been serving consumers' welfare for a very long period of time.
Therefore, some form of work-based assessment might have been
more appropriate if they were prepared to bring that forward—or
even if the FSA decided to champion it, which they didn't choose
to do.
On the income and commission arena, we've always
been supportive of the view that we could move to some form of
fee-based adviser charging because—certainly I think the
IFP will support this—the better firms have been in that
place for some time. We have always had to talk in terms of independence
but do you want to pay a fee, or do you want that fee effectively
obviated by commission and take commission? We've always had to
be in that place for a very long time with consumers. Therefore,
all we are now doing is forcing the mechanism to make the explicit
cost very clear to the customer and the customer paying it directly,
rather than getting it back through a third party. Whether there
has been any evidence of product bias or provider bias to that
has always been almost lost in the debate. Nobody has ever come
up with real tangible evidence that shows there has been either
product or provider bias, funnily enough, but we are about to
change a whole structure at £1.7 billion cost because of
these issues. I'm still not convinced that even the product providers
are able to deliver some of the stuff that underpins this within
the timescales required.
I think where we are at the moment is that it
is right that professional standards are increased, and we believe
that the aspiration to level four is exactly the right level for
us to get to. Whether we need this cliff-edge date at the end
of 2012, and we need a whole lot of other cliff-edge dates impacting
on the industry at this time, I think is perhaps unfortunate,
and that's where we feel there is room for manoeuvre.
Chair: It would be helpful
if you come out of code and just tell us what you really think.
Mr Sinclair: As
an organisation we have always supported the move to increase
professionalism. Do I believe in grandfathering? I don't think
we've ever believed in grandfathering. My council has never supported
grandfathering. The firms that sit there have not supported grandfathering,
but then again they've always wanted to get to a better system
of work-based assessment or something other than pure exams.
Mr Mudie: But that does not—
Chair: Sorry, it's my fault for
interrupting.
Mark Garnier: No, I was
just about to give you the opportunity—
Mr Sinclair: Because
this doesn't just impact on our fees, this whole thing impacts
on the APCIMS community, it's not just an IFP issue, it has a
much wider base.
Mark Garnier: It does,
and one of the things that I am very concerned about with this
is that I am not sure that RDR is going to ensure that you have
a good and wide range of consumer choice. I think it's going to
end up affecting some of these organisations where you're going
to have people with a lot of grey hair and a lot of experience
in these markets who are just going to turn around and say, "To
hell with this; I've lost interest in the whole business. I'm
going to leave it". I suspect that that body of knowledge
in the retail end of this market is going to be a big loss. You
will have read the articles where I have been quoted, no doubt—
Dr May: Grey hair
is not a bad thing, obviously, and particularly in the financial
marketplace, because you build up experience in all those years
of many situations, including the most recent crisis. Thinking
of my point about one-size-fits-all, I think the shame for the
APCIMS sector is that the FSA has let down our community and others
in not explaining what the RDR was supposed to be achieving, particularly
if you're more service and relationship led. We tend to have an
investor base who is quite happy to pay for advice. They're quite
happy to have things explained to them—
Mark Garnier: Through
commission or through a fee?
Dr May: Either.
It depends on the client. As long as it's properly explained,
it is back to Martin's point; if there is that understanding the
clients can go with you on both those points. You do have to make
sure everything is properly in place.
Mark Garnier: There is
a very big issue about this—sorry, I am cutting across you.
There is a very big issue about this commission versus fee thing.
My sense is that I am sympathetic to the role of the IFAs who
say that if you sit down and start charging £100 an hour,
£200 an hour, you are crossing a boundary into being perceived
as being rather like an accountant or a solicitor. Whereas if
you are an independent financial adviser who has disclosed but
hidden, to a certain extent, having a commission, that is an easy
way of doing it. But people are very happy to subscribe to a pension
scheme or insurance or whatever it happens to be, safe in the
knowledge that there is going to be a fee coming out of it, but
they just do not feel like writing a cheque to the provider and
then writing another cheque to the IFA.
Dr May: And there's
a danger if you're charged, as you say, on the basis of hours
or time, that it would send quite a number of consumers away.
They may not be willing to sign up to just have a conversation
on financial matters.
Mr Gazzard: I think
if we're saying, "Are there thousands of consumers out there
waiting, if only IFAs were better qualified, were paid for by
fees, were to sign ethical—are there thousands of investors
out there waiting for that to happen so they'll go along and invest"?
No. Are the basic principles of what the RDR is trying to achieve
correct in terms of moving the industry forward? Yes, in terms
of professionalism. To say that you can go out and you can advise
clients with the equivalent of a level three qualification is
ridiculous, in our opinion. To have a level four qualification
is an absolute minimum. At some point, if the financial planning/advice
industry wants to be considered professional, it has to be seen
in the same light as accountants and solicitors. We are dealing
with the same issues. We are dealing with complex tax affairs.
We are dealing with some of the biggest financial situations in
life, in terms of pensions and investments. In terms of the qualifications
issue it's right that we should set higher standards; it's wrong
to say grandfathering those individuals—and a lot of them
have been effective IFAs working at level three, but they've been
dealing with the issues that are tested in these exams on a day-to-day
basis. To revise and take the exams within the timescales, as
Mr Sinclair has suggested, is a slight pressure. But they should
be able to go through the process and achieve these exams within
that timescale.
The ethical component is important, and I think
that should be taken forward. I think there's a whole area of
regulation that should be looking at the whole ethical aspect
of whether the job that's being done for the consumer—I
guess that's whether you're in IFA or whether you're a product
provider—the right one? Is this in the best interests of
the consumer? I think all of these things are.
Finally—if you will let me just finish—the
remuneration aspect, yes, what the regulation is saying is let's
take away any hint of commission bias in terms of product choice
by saying, "Mr Client, when I set this up for you I will
charge you X." You can then take that through commission
if you so wish, as long as you have explained to the client clearly
upfront what the fee is for conducting that particular piece of
business.
Dr May: So just
to complete this. "Commission" in my terminology for
our sector is normally "brokerage commission", which
is another reason why people have to be very careful using just
generic terms.
Mark Garnier: Yes, sure.
The RDR was originally expected to cost something like £400
million, the cost is now £1.7 billion. That is not exactly
a moment of glory for the FSA on cost overruns. These costs are
probably going to be borne by the consumer. Do you have an opinion
on that?
Mr Sinclair: I
certainly believe that's where they will end up, because there
isn't anywhere else for them to go. But I think the consumer also
suffers at two levels in here. One is there are going to be a
large number of consumers who are going to lose access to advice
here, which has to be wrong.
Mark Garnier: As a result
of this exercise?
Mr Sinclair: As
a result of this exercise. I think that's undoubtedly the case.
Or they're basically going to end up with this different advice,
or not very good advice, because they're going to get driven away—almost
self-help or website-based advice. That's the comfort of sitting
down with somebody and having a good piece of analysis done, in
order to get the correct solution. And we go back to where we
were earlier with Martin. Often a large part of the advice is
very much a case of trying to help consumers understand the right
things to do in the right order.
I think another part of this, to be clear, is
the single premium debate that we keep getting dragged into—i.e.
if I have £10,000 to invest, how do we begin to get people
to acquire money, the regular saving process, and how does somebody
pay a significant fee when we're talking about putting £50,
£100, £200 a month into a pension arrangement? That's
the much harder piece here that we need to get right, because
we don't want to lose sight of that. The cost will be significant.
While I don't want to take issue with the professional body here,
I think the other part of the cost that comes out of this is—and
we will respond formally on the costs, because we have some good
figures around the cost of regulation. The cost of this is not
just the cost of sitting the exam. It's the number of hours you
have to take out to prepare to do the exam, which means you're
then not earning. I think when we are talking about—if you
start on the structure of those papers—a couple of hundred
hours, and if your normal charge-out rate is even £50 an
hour, that begins to be a significant opportunity cost lost for
most people involved in the industry.
Mark Garnier: Taking all
that into account, because it is very useful stuff, what does
the CPMA have to do to ensure that independent advice is going
to be available to everybody?
Mr Sinclair: That
is a very good question. I think it is changing the whole landscape,
because at the moment people are allowed to hide behind something
that they call advice that isn't advice. We've always been of
the view that, as said, advice should be very clearly advice from
somebody who is on your side working on your behalf, i.e. not
tied to provider. That is not usually advice. We've always taken
a view that independent advice, or advice from the person sitting
working for you, is not quite the Holy Grail but certainly—and
FSA reversed well away from that as part of this RDR process unfortunately,
in our view.
I think the other part is, and I hesitate to
say it, it has to be something that people view as an industry
they want to get into. And I'm not sure people see it as very
sexy at the moment, for some strange reason. I've been involved
in this industry, in various parts, for 30 years now and I've
always loved and enjoyed it. People don't see it as sexy. People
worry about the risks as well. A large part of this is as you
are in this industry longer and longer you build up this iceberg
of liability potential behind you of all the rack of complaints
that could come at you—not all of which might be your fault,
but because you give the advice it's wrapped around you. Because
you've taken that personal responsibility to say to somebody,
"I think this is the right thing for you"—because
that's what genuinely independent advice is—you then have
to take that and wear that coat for the rest of that customer
or product's life. Now most consumers, 70% say that that should
stop at some point in the future, 25% roughly in our research,
and certain research has been done, say that should stop when
the relationship stops, but we have no ability of terminating
that at the moment, which is also part of the equation. What would
make it more attractive? It would be things like that.
Dr May: I think
what I would say is that our firms act as agents for clients,
so we give that advice on that basis. It is not for somebody else,
so my best advice to the CPMA is listen, talk to us and use the
grey hairs, while we still have them, to understand how that can
be fed into the industry in a safe way.
Mr Gazzard: Obviously,
in the IFA sector, the level of paperwork that needs to be maintained
when you give a piece of advice is enormous, and one area to look
at would be what ensures the right consumer outcomes in terms
of what advisers need to maintain, in terms of the paperwork,
to back up the process they've gone through. There's a couple
of other points here as well, and going back to the earlier session,
certainly one of the first points of advice you would give to
any client would be to pay off, certainly, any high-rate debts
they have. I think there's a process to be gone through here.
One is to try and get clear with people on what their goals and
objectives are, because too much of the industry is about, "The
solution is a product. Now, what's the question?" and it's
all of the advertising, it's all of the regulation, it's all about
product. The piece about getting people clear on what they want
to achieve in their life is something that's better facilitated
face to face, but is possible through using online tools and other
tools, and certain organisations have tried to start doing this.
I think then in terms of getting an accurate picture
of where people are with their finances, most people would come
along with a shoebox full of papers that they've bought this from
a bank, they've bought this from a salesman that they met 20 years
ago, they bought this from an IFA, they bought this from the mortgage
adviser. It's not all pulled together. It's not easy for them
to pull it together, so you have to help people pull all that
information together and give them tools to be able to do that.
And again, that's an important piece of what the IFA does. I think
then you need to come up with a plan that says, "Right, based
on everything you want to achieve and everything you have, this
is what you need to do," and this is where debt repayment
I think comes in, importantly.
Then there may be a place within this whole process
to say, "What you need to do is take out an ISA or a pension
or some protection". Obviously they're all regulated in slightly
different ways, and at the end of that process, you might say
to them, if you're an IFA, "And my selection from the marketplace,
based on your personal circumstances, are company X, Y and Z".
That's the bit that's regulated. It's the company X, Y and Z that's
regulated, your selection there. You then go on and say, "Right,
we'll come back and review this in a year's time, because we need
to check we're still on track". We're focused with regulation
on a very small part of the process. It's the part of the process
in research—I think it goes back to some Cerulli research
that was done in 2002, 2003—that shows it's one of the least
valuable parts of the process, as far as consumers are concerned.
But that's where regulation is focused, that's where all the cost
comes, and I think we need to realign regulation with what the
consumers need. I think in doing that, if we looked at that more
carefully, then we might be able to bring independent advice to
the masses.
Chair: Now, we're just beginning
to get to the point. The fact is regulation is in flux. Anecdotally,
people working in all three of your areas are telling us that
a high proportion of this regulation is a complete waste of time,
it doesn't benefit anybody, it costs a packet, it's a box-ticking
exercise, often designed to cover the backs of the FSA. What we
need from you is candid, independent evidence that can enable
us to offer advice on how this area that is now in flux, in regulatory
terms, can be redesigned for the better for the consumer. So what
I'm asking of you today is to have that in mind as you're giving
this evidence, and what else you may decide that you may need
to put to us in written form as a consequence of what you've heard.
Mr Mudie: I just want
to go back to where Mark was pushing you on exams. The Chairman,
Mr Sinclair, asked you to stop speaking in code on the question
of grandfather rights. You started off then saying, "The
board of my association and I are against grandfather rights"
and then you seemed to say you weren't certain on this examination,
but you had the view there were other methods of assessment. What
is your position? Now, I'll tell you where I'm coming from. I
have a man in his late 50s who's been in the industry 20 years
and you've left him abandoned now because he's not passing the
exams. What on earth does he do? He's out of a job. Now, tell
me in the context of that fellow what you answered to the Chairman.
Mr Sinclair: We've
always taken the view that says—and I think we're agreed
in terms of this—that level 4 qualification is the appropriate
level or standard for people giving personal financial advice
to customers, particularly on an independent basis. We have to
look across the market and have a good understanding of what's
available there. Therefore that's the position we're in.
Mr Mudie: So
you're in favour of that qualification, that examination?
Mr Sinclair: Of
that standard of assessment. How you get to that standard of assessment
is the difficult bit, because that could be an examination or
it could be some form of work-based assessment, or it could be
somebody comes and looks at your files, work-based assessment,
and says, "On the basis of what I can see, you are at that
level, given the type of advice you give". The problem we've
had is looking at somebody who's able or wants to do that type
of work. We've not been able to find people in the marketplace
prepared to do that type of activity, to do that work-based assessment.
Mr Mudie: Oh, to do the
assessment.
Mr Sinclair: Do
the assessments, to give them that sign off.
Mr Mudie: But how hard
have you looked, because as I say, you're abandoning people and
it can't be totally impossible to find assessors. Are you saying
it is, Andrea?
Andrea Leadsom: No, I'm
saying it's absolutely not totally impossible among their peers.
Mr Mudie: Yes, thank you.
That's the first time you've agreed with me.
Mr Sinclair: Among
their peers, and I think one of the issues is we've tried to get
to a point with the professional bodies and examination bodies
who ultimately have to sign this off. There hasn't been the same
level of preparedness to have that open door approach to get to
that point.
Mr Mudie: No, but come
on, the lad's sitting here, where the hell is he going to get
a job in his late 50s? Now, you're an association representing
people. They're in a real difficulty about earning a living now,
and you say there is a way forward, but there's some difficulties.
Are you intent on getting that way forward? Is this just words?
Are you intending, is your association working as of now, to set
up an assessment board, negotiate with the FSA that they accept
that as credible and get these individuals out of this difficulty?
Mr Sinclair: As
a trade body, it doesn't sit in our gift. It sits within the gift
of other bodies to be able to deliver that.
Mr Mudie: Which other
body then? Are you marking over to Mr Gazzard now?
Mr Sinclair: I
think the IFP might be that area, you look in that area. The IFP
might be able to work in that area.
Mr Mudie: Okay, come on,
Steve, there you are, but have you not any compassion for a fellow
coming to the end of his working life and you've stranded him?
Mr Gazzard: We
haven't stranded them. The RDR went through—and one of the
things we'd applaud as part of the RDR is the consultation process
that it went through.
Mr Mudie: So you're not
prepared—no, no, but you're copping out. Come on.
Chair: George, just let
Mr Gazzard answer.
Mr Mudie: No, but he's
copping out.
Mr Gazzard: One
of the things we'd applaud with the RDR was the consultation process
that it went through and so we haven't stranded him as a professional
body.
Mr Mudie: No, no, but
you are copping out.
Mr Gazzard: If
he was a member of our professional body and he came to us, we
would look into it.
Mr Mudie: No, no.
Mr Gazzard: None
of our members have approached us, looking at this. We would be
prepared to consider workplace assessments. However, we remain
to be convinced that they will test at an adequate level.
Mr Mudie: Right. But you
have a different position from that fine man on your right, Mr
Sinclair, because he says, "If we could only find assessors
and we're having some difficulty". You don't seem to want
that to happen, if I'm not too unkind. Now, tell us straight,
is there an effort being made to get an assessment system that
will rescue these lads and lasses who have been in this industry
for many years and are now stranded, are now not able to work
in the future?
Mr Gazzard: I cannot
talk to that. It is not an issue that's arisen within our membership.
Andrea Leadsom: Can I
say as a general point—
Chair: Rather than pursue
this, can we move on to Jesse Norman.
Jesse Norman: Yes, sorry,
just a quick supplementary on the issue of the retail distribution
review, I don't think anyone would disagree with you that improving
professional standards is important across the financial services
market, and especially the retail end, but it is also true that
we have small investors to think of when these commission arrangements
are tampered with. Now, what you've said between you over the
last 45 minutes is that you acknowledge that the RDR has cost
four times what it should have cost, the consultation was poor,
and the original ideals that it was set up to achieve have fallen
away. Does it not strike you therefore that it's frankly a bit
of a fiasco, and as far as the retail investor, and particularly
the small investor, who might use a commission-based broker, goes,
it could do with a rethink?
Chair: Why don't you each
answer that question in turn? A quick response. Mr Gazzard? You
can try yes, no or maybe.
Dr May: Yes
Mr Gazzard: I think
in terms of increasing the professionalism of the industry, it
works. I think in terms of increasing the reach of the industry,
it doesn't.
Chair: I think frankly
it would help hugely if you had begun by clarifying exactly what
Jesse Norman began with, because that should be what's at the
forefront of what's coming to you from the people you represent,
and you're not giving it to us, which is why I said earlier that
it would be helpful if you don't talk in code before this Committee.
John Thurso.
John Thurso: Can I pick
up the question of the consumer champion? Broadly, your organisations
don't engage so much with the consumers who are—I was about
to say at the bottom of the structure, but most of the people
who you are selling to are people with a certain amount of wealth
and are people who are coming for advice, whatever—correct
me if I'm wrong on that—but how do we protect the people
that Martin Lewis was talking about, that go into a bank or whatever,
buy a product because somebody says it's a good thing to have
and then find out that they have been stuck with something that's
completely irrelevant, if there is not somewhere in the system
a proper consumer champion? Mr Gazzard, would you like to crack
off?
Mr Gazzard: I think
the difficulty of being a consumer champion within CPMA, for example,
would be that you're in conflict, because I think to—as
Mr Lewis described it—be able to scream and shout and rant
on behalf of the consumer is slightly different from the role
within the CPMA. However, I would agree that a constant factor
within the remit should be, "How will this improve outcomes
for consumers?" and I think that needs to be a constant and
pre-eminent part of the remit of the CPMA and probably the PRA
also.
Going back to a previous point, in terms of improving
outcomes for maybe the part of the market that isn't necessarily
serviced, I think that you have to look at the availability of
money within those areas and, as has already been said, what should
be happening is high-rate lending should be being repaid. That
comes down to not necessarily a product again, but it comes down
to education, and I would absolutely and totally agree with the
need for improved education, both in schools and the adult population,
and I think, talking to a previous point that's been made in terms
of increasing the resources within the industry, if we had better
education in schools in terms of what financial advice and financial
planning is about and the differences it can make to people, I
think you would get a lot more people selecting financial services
related degrees and coming into the industry.
John Thurso: We have heard
evidence from a wide range of people. You have a Treasury document
that says, "The consumer champion role will be within the
regulator" and it uses the words "consumer champion".
Virtually everybody who has come before us has said that you cannot
be a consumer champion and a regulator. The work that the consumer
champion does, the advocacy that's required, has to be somebody
with no regard to anything but to be completely for the consumer.
Is this as big a problem as is being made out, because there's
not one person who has come before us to give evidence to say,
"The structure that the Treasury have suggested is good in
that one respect of the consumer champion"? Do you agree
with all the other witnesses on that?
Dr May: I think
pretty much yes. I think it is the word "champion" that
has probably caused all the emotion.
John Thurso: Yes.
Dr May: I think
going back to something George Mudie said, where there is a need
to have the voice of the consumer much more prevalent—whether
it be in Government or in the regulator—that is important.
As you said, not necessarily for the communities we may represent
but for the consumer at large. Whether you use that "champion"
word, I think has people sadly thinking, "This is somebody
out there as a flag bearer up the front and regulation or some
other things come behind it", which they plainly can't. It
will be a balance, particularly, in our market sector and also
in product sectors. It will always be a balance. So I think consumer
at the forefront and a balance, yes, but perhaps, having put in
the word "champion" has given play to a lot of emotion,
that we need to now get back out of the system but get a balance
for consumers to give a—
John Thurso: Obviously,
there is the matter of semantics, but do you believe there should
be a champion, that there's a good role to be consumer-focused
within the regulator, but there is an additional need for a champion,
or that we don't need a champion at all, as long as the regulator
is reasonably consumer-focused that will do the job?
Mr Sinclair: I
believe, at the moment, there is quite a good consumer champion
within the structure of the FSA, in terms of the consumer panel.
Adam Phillips, who chairs that now, I think has been doing a very
good job developing that panel, particularly over the last year.
That panel could be given more power, and more influence, alongside
the other statutory panel. The intention to increase the power
of the Small Business Practitioner Panel, which is in this paper,
is critical to this because—I think this goes back to previous
issues—it would give the consumer panel the right status
and influence, in order to direct what the regulator does, not
just have a voice on a board meeting, the practitioner panels
similarly, who should have that influence as well, directing the
regulator to where they needed to work. Because it is the people
who work in the industry, and the people who take the products
and services for our industry, who should know what needs to be
done by the regulator. The regulator appears to have its own way
of working, and these panels don't appear to influence enough,
in my view, in terms of what goes on there.
John Thurso: Can I move
on to what is linked in with consumer issues, and perhaps come
back to you, Mr Sinclair, because you've called for a complete
review of the role of the Financial Ombudsman Service. What are
your concerns about the way it works that made you call for that
complete review?
Mr Sinclair: I
think we're always in danger in the UK of running things slightly
differently. Alternate dispute resolution schemes, in most of
the rest of Europe, and the framework they operate under, tend
to be structures where two disagreeing parties are brought to
a compromise. That's more commonly how they operate. Within the
UK we have been concerned, for some time, that that was where
the Ombudsman was, but it had become much more a judicial body
making decisions of right and wrong, and without any right of
appeal. Because what happens is that an adjudicator has an opinion,
and the only person you can appeal that to is the Ombudsman, for
whom that adjudicator works. So that's a very strange process.
For us to appeal anything out of there, on either side—whether
that's consumer or industry—is very difficult, and there
is no independent right of looking at an individual case or a
systemic issue.
I was interested this morning to hear the issue about
the Ombudsman. The Ombudsman has always had the right to take
issues of wider implication to the FSA, and does so on a periodic
basis. The interesting part is what happens when that is done.
Because at the moment all we ever see is that it drops into the
FSA and very little is done, and there is a turf war—almost
embarrassment that it's happened this far after the fact without
the FSA having seen it. That is one of the concerns that we have.
Therefore, that is one of the reasons we want to see that review.
John Thurso: But there's
a huge difference between a resolution process that brings two
people to a compromise.
Mr Sinclair: Yes.
John Thurso: It's the
difference between arbitration and mediation, which is that one
seeks to judge who was right, and judge accordingly, the other
does not seek to judge who was right but it will arrive at something
that both parties can live with. If you have these multi-billion
pound banks flogging dud products, which is what Martin Lewis
told us they were doing, and 81% of the cases brought are upheld,
why on earth should we think the banks would not want anything,
other than to water down being told they're right and wrong, and
simply arrive at a midpoint where they escape their responsibilities
for their actions? What you are suggesting is a serious dilution
of the consumer's ability to get some redress in this unequal
struggle against these financial titans.
Mr Sinclair: Is
81% the right number? Maybe it should be more?
John Thurso: Absolutely.
Chair: Yes, but what is
the answer to the question?
Mr Sinclair: I
don't think it is dilution. I think it's about fear of what their
purpose is because at the moment—I don't mind them being
quasi-judicial, but what I have a problem with is there is no
right of appeal outside of that process, and that's where there
is difficulty.
John Thurso: Which is
a fair point, the point you're making: you don't mind the process,
it is the fact that if you do think you've been shafted you don't
have a comeback?
Mr Sinclair: You
have no comeback at all, on either side.
Chair: Have you written
down, and given in evidence, what you want as an alternative to
the current system?
Mr Sinclair: It's
in our submission.
Chair: All right. Good.
Dr May: Just one
point I would add as well. I think, as we move to the twin peaks,
that there is a need to ensure consumer panels and some of the
other aspects that came from the original FSMA do exist in both
parts. It's not necessarily only the case that you need it in
CPMA. Going back, I think, to the point you made, there could
be some decisions taken in the prudential side that have a massive
impact on consumers for a period of time, and if there is no ability
to finesse such impacts across the two, this could be a problem—we
don't want duplication, as the Chairman has been saying, and costs
going up, but there has to be a way of balancing that across in
this new world.
David Rutley: Dr May,
you've made a big point about the problems of the "one-size-fits-all"
mentality, and you just led on to talk about the twin peaks structure.
But don't you think that's just another "one-size-fits-all"
with two peaks rather than three?
Dr May: Firstly,
I didn't come up with the idea of it. It's not my idea to go to
the twin peaks, but I don't necessarily think it's a "one
size fits all", but I think there has to be good consultation
and the ability to work across the twin peaks. There has been
a decision taken to have the twin peaks. I think the key thing
now is to find the most cost effective way to get that constructive
working and co-ordination across those twin peaks.
David Rutley: Yes, but
I think the point you were trying to make in your comment was:
it's all about the banks and not enough about what you are doing.
Isn't that just going to be the same in the new structure?
Dr May: Well, no,
not necessarily about the banks because, for instance, between
Robert's community and my own there is a difference, in some cases,
with advice for the market side versus advice for products. It's
that sort of "one-size-fits-all" but, certainly in our
case, the sector that looks after market activities for private
individuals, as opposed to wholesale, has almost a foot in both
camps, the prudential and the CPMA, and it's finding that balance.
Not that we should have special treatment, but there is a community
there that is serving 4 million portfolios; £400 billion
of assets. It's a large community that, unfortunately, a lot of
the regulation that has come out, more recently, has just had
a retail size to it, not necessarily banking, and it's getting
that clearer.
David Rutley: Any thoughts
from you, Mr Sinclair, or Mr Gazzard?
Mr Sinclair: I
tend to agree with what has been said there.
Mr Gazzard: Yes.
Andrea Leadsom: This whole
discussion this morning brings out my worst fears, which is that
trade bodies never say what they think. What they do is they take
what is a given and then they fiddle with it at the edges. It
does concern me that what we're doing here is, potentially, solving
the very real problem of systemic risk in the banking system by
changing the regulatory environment, but what we're creating is
potentially the unintended consequences that far fewer people
trust the pensions and savings industry in future; that the cost
of getting into it becomes so exorbitant, because of the additional
costs that are being passed on to the consumer, and that what
we end up with is the completely unintended consequence that people
no longer save for their own retirement. Is there any truth in
that fear?
Mr Sinclair: I
think there's enormous truth in that fear and I think the FSA
didn't do us well, early in the RDR, by junking the gap between
advice and selling. We were trying to say to them, "Look,
some people are sales people, some people give advice. Can you
not make that demarcation absolutely clear, so people understand
that and when they walk through the room they know what they're
getting?"
I share your fears with regard to what we're about
to do, in terms of driving the cost of advice upwards, because
it will become very obvious and transparent to people, to a point
where they will opt out. I agree there is significant market research
coming out now that says that will be the case. Yes, we share
your concerns. But these are the points we've been making to our
regulator for the last four years, and they've been falling on
deaf ears.
Andrea Leadsom: But this
is the interesting point, isn't it? I've been in finance for 25
years, and trade bodies are always terribly nice. They don't turn
round and say, "This will not work", and take the appropriate
steps to get enough media coverage and media on their side to
make it happen. I think this goes back to what George was saying
earlier, which is that you have a problem with some of these things
but your message isn't being heard, and this is your chance to
tell us what needs to be different, so that we, as the Back-Bench
voice of Parliament, can go and tell the Front Bench, "This
isn't going to work because these are the unintended consequences".
So this is your chance, and I just wonder whether you are taking
it.
Chair: To say that you
are giving us evidence in a muted form—
Mr Sinclair: We're
not.
Chair: You could understate
the length of the pause there. That was just silence.
Dr May: Well, I
was waiting for Robert, to be honest.
Mr Sinclair: I
think the challenge is that we have, within the IFA community,
almost three camps, in that we have what I would call the wholehearted
endorsers of the change. There is a group of people who think,
"This needs to happen. In fact it happened five years—we
did this five years ago—why won't people not come with us?"
There's a group in the middle who are going, "We can see
the benefits, we might as well get on with it, and, yes, we'll
just get it done". Then there's another group who are saying,
"Up with this we will not put, and it is wrong". Now,
the proportions of these could be 30/40/30. So therefore, 70%
are saying, "Yes, we can go along with this"; 30% are
saying, "Up with this I will not put". Is that 30% big
enough for us to be genuinely concerned that this will break things?
Given that there is 30% of people who are giving advice to people,
and might well be the people who are giving advice to people at
the middle end of the marketplace, yes, that could be exceptionally
damaging. I agree, it could well be.
Andrea Leadsom: But if
you look now at someone taking out a pension in the Netherlands,
for example, the same pension that they take out in the UK will
pay them up to a third less by the time they retire—I am
generalising here—but the costs throughout the lifetime
of taking out a pension in this country are already exorbitant.
We don't have enough people saving for their retirement. What
are we going to do about it? Should we be having a catchall lifetime
savings account that incorporates ISAs and pensions? What are
the trade bodies doing to propose an alternative that will be
cheaper to consumers, that will give them the protection, that
will defend competition in the industry because, from what you're
saying about the RDR, we will have a real problem in this country,
as well, with lesser competition, fewer people in the industry
and therefore less competition for that. So, from what I can glean,
you're saying this is all potentially disastrous, versus our desire
to get more people saving for their retirement.
Mr Gazzard: I seem
to get the feeling what you're saying is we, as a relatively small
professional body, should be competing against the multi-million
pound PR and lobbying budgets of the banks and insurance companies,
that had a major impact on the outcomes of RDR. While I would
love to be able to put across my case in the same manner that
they would, I think it's just impossible. We fed back into RDR
what we wanted. Mr Sinclair has already mentioned about the fact
that we said—I think we were both the same—there should
be a difference between identifying a sales environment, whereby
you're going in to buy a product, and I've already talked about
the fact that at the moment legislation covers the product end,
not the advice giving process. It only covers one small part.
But we talked in our feedback about the fact that
you should be covering separately. What is a sales environment
where it tends to be a bank or an insurance company and they're
going to sell you a product, versus when you were getting into
an advice relationship, whereby they will take your full details,
they will talk to you about your hopes and aspirations; they will
put together a complete plan that will involve debt repayment,
that will involve protection, that will involve a range of other
products.
We talked about trying to help the market understand
that better and, while the attempts of depolarisation to expand
the marketplace have failed, we have consistently failed, in what
has been produced, to give the consumers very clear indications
of what to expect, purely within the nomenclature used within
the marketplace. So you can go and see a financial adviser; they
could be working for a bank or they could be independent. You
can go and see a financial planner; they could be anybody selling
anything. So, while I would have loved to made a mark with our
feedback, unfortunately, the way the system works it goes against
the smaller professional bodies.
Andrea Leadsom: But to
be in front of the Treasury Select Committee is surely where you
make your mark?
Dr May: Can I say
two things, a slightly different community to the two on my either
side, but we have not given up on RDR yet. We think parts of it
are just unacceptable, and so we are still fighting those pieces.
We've responded—and it hasn't come to you yet, but it's
gone to the Treasury—on what's called "a new approach
to financial regulation", which, for very good reason, is
solving a crisis issue of stability and has come out with ideas.
At this point, as a community, we're trying to assess how those
ideas—from what we have as information already—are
going to affect us and the wider consumer community. When we see
that we are going to start shouting even more, but some of those
pieces are still becoming clearer, almost as we talk.
Andrea Leadsom: But surely,
should you not be putting forward your own plan for, for example,
peer review of people who can't be grandfathered but need to be
able to evidence that they've reached the required standard? Should
you not be putting forward your own plans for that?
Mr Sinclair: We
have been roundly criticised by some people for developing a qualification
in conjunction with the Chartered Institute of Bankers of Scotland.
We only reached that point because we spent almost a year trying
to work with a whole range of agencies to produce this work-based
assessment process. That's what we spent over a year doing, trying
to get to that point. The only thing that was deliverable, at
the backend of all that exercise, was another exam process, because
that's all the people who are in that side of the world wanted
to deliver up to us. Now whether that's right or wrong—I
believe it's fundamentally wrong. How do I get somebody to do
something they don't want to do? It's difficult sometimes to get
people to do things they don't want to do.
Andrea Leadsom: Going
to a slightly different topic, what about the structure of savings
in this country? Do you think that the ISA pension, the multitude
of products, do you think that confuses the consumer and makes
even more barriers to entry? Should we be looking at a different
structure, some kind of lifetime savings account that's tax advantaged
to the consumer?
Mr Sinclair: We
do. We agree with you. One of the interesting challenges that
we've always had in this country is that most of our products
are derived out of our tax rules, not out of anything else. We
keep changing the tax rules and, therefore, we have all this legacy
product structure that we never quite get our heads round, and
when we change it we don't allow it—only recently when we
changed things around PEPs and ISAs did we roll stuff back together.
One of the biggest issues we have is this continual flux and change,
whether it's in taxation or regulation, which leaves us, as an
industry, with the legacy of stuff, to have knowledge about but
then how to deal with. If we can develop a lifetime product, which
is a simple savings programme with the right tax wrappers around
it, the right tax incentives to save, and whether you give tax
advantage on the way in or whether you give them during the life
of the product or you give the advantage on the way out, is a
choice. There are three places where you can do that, and picking
which of those are the most advantageous to induce people to start
doing the right thing, is not my judgment but certainly something
we would fully support. Rolling together ISA and pension allowances
is something that we're debating internally, as to whether we
think that's a good thing to happen. It's certainly something
we debate internally quite a lot of the time. We think that lifetime
structure that allows limited access, so that people do have a
pot at the end that they can access in order to fund their retirement,
is important because people shouldn't be relying on their property
in retirement. That's absolutely fundamental. So there are all
these kinds of things, but these are fundamental social changes
for us that while I might have ideas the solutions don't sit here,
they sit within the corridors of Whitehall and over the road.
Dr May: Perhaps
also—what you said—if there was somebody at the table,
when tax issues are being talked about, saying, "What about
the consumer?" there might be a balance that comes in from
a Government point of view, because there's no doubt tax issues
that come in do affect it. One other point I would share with
you, to give you an example of the lobbying that's going on in
Europe at the moment, particularly for our financial community—which
hasn't come up in any of this session or the first session but
is not to be underestimated—we have spent weeks just recently
trying to explain that an investment trust is a company, to the
European powers that be.
It's not the trust that they think it is, so they
should put it in AIFM as a directive or something else. We haven't
finished. We haven't given up. We are not in the newspaper because,
sadly, as Martin said at the beginning, most people wouldn't know
what we're talking about, but it is vital for our communities
to get some of these things on the table and say to people—even
in Europe, "Don't keep coming out with rules that are affecting
us. We don't wish to be special because we're British. We wish
to be special because we have the richest financial system in
the world and we want to protect it". That's vital for this
country.
Mr Gazzard: If
I could just add, I think again, coming back to one of my previous
points, it's naïve to think a product will make people come
and buy it; build the product and they will come. It will not
happen. People don't recognise the need to save. They're confused
by the amount of benefits they will get, whether they will suffer
with future benefits because they've saved. The overall marketplace
is very confusing for that mass marketplace, in terms of whether
they should save or not and how they should save. A product isn't
the answer. Better education is the answer, and reassuring people
that they won't suffer if they save is the answer, and then you
can go through the market through to mass affluence and the wealthy,
but it's not a product.
Andrea Leadsom: Can I
ask Dr May a completely off-the-wall question, with your Euroclear
hat on: with 10.4 quadrillion of derivatives around the world,
do you think that putting derivatives that are currently off balance
sheets, through exchanges, like Euroclear, is going to make any
difference whatsoever to the systemic risk issues? That is a completely
off-the-wall question, I realise that.
Dr May: It's completely
off the wall but sadly, again, education has an impact here. No
disrespect to yourself, Andrea, but Euroclear doesn't run any
exchanges.
Andrea Leadsom: No, indeed,
yes.
Dr May: It doesn't
run clearing houses either. It runs settlement systems. You're
quite right, there is this talk of putting as many derivatives
as possible through a clearing type system.
One question that comes up straightaway: does that
mean they have to go through an on exchange type process to get
there, or can they be off exchange and still get directed there?
Nobody can seemingly answer that easily, but that's quite a key
point first. Let's assume they're still off exchange but they
go into a clearer; for those that are more standard, definitely
there is a case for making sure they go through a clearing system.
Why? Because you can potentially net liabilities, as you can with
the markets, a bought against a sold, in effect. As soon as the
contracts get into a colour that's different, no, there is absolutely
no benefit. So I think, sadly, because it is difficult to assess
the size of those that are standard versus the more complex-
Andrea Leadsom: So it's
about half off balance sheet and half—
Dr May: Yes, it's
probably half and half. But then, the last part of that, finding
a player or set of players who, in the current market, will stand
behind the risk that needs to then be put up against that clearing
house, I'd say good luck at the moment.
Andrea Leadsom: Yes, thank
you.
Chair: Well we've learned
quite a bit today. We're here to represent voters and consumers,
and you've sensed some frustration round the table, that we haven't
had it quite as forcefully as we would like. Maybe we need more
regulation, maybe we need less, but what we need with regulation
in flux is very clear advice, from the people you represent, on
what has been wrong with the system. We've all heard it ourselves,
time and again, from the people you represent. They moan incessantly
about the FSA. It seems as if a long shadow of the FSA is cast
over here, muting your concerns and criticisms. So if you have
further thoughts, in the light of this evidence session, will
you please come to us and will you also give thought to what we're
getting for the money we're paying for the regulation, and whether
that regulation should be structured differently, or whether we
can do without some of it. Thank you very much for coming.
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