Written evidence submitted by Citizens
Advice
INTRODUCTION
1. Citizens Advice welcomes this opportunity
to make a submission to the Treasury Select committee enquiry
into Financial Regulation. The Citizens Advice service is a network
of over 400 independent advice centres that provide free, impartial
advice from more than 3,000 locations in England, Wales and Northern
Ireland. In 2009-10 the CAB service dealt with over 140,000 enquiries
relating to a broad range of financial services. In addition the
CAB service dealt with 115,000 issues relating to mortgage and
secured loan arrears and over a million problems relating to consumer
credit agreements. We believe that this experience makes us well
placed to comment on the problems faced by consumers entering
markets for retail financial services and credit and related products
in particular.
2. As a consumer advice organisation, Citizens
Advice is mainly concerned with the parts of the Government consultation
relating to the CPMA and our observations in this submission will
be focused on the following question:
The Consumer Protection and Markets Authority
(CPMA)—Do the reforms provide adequate protection for the
consumer.
3. Citizens Advice welcomes the intention
to establish the CPMA as a strong consumer champion. In recent
years we have seen a succession of widespread problems with financial
products and services including payment protection insurance,
bad practice in sub-prime mortgage markets, irresponsible lending
of unsecured credit and the ongoing saga of bank charges. We continue
to see cases of consumers suffering often severe detriment in
each of these areas. As a result we believe that a powerful market
regulator with the tools and the appetite to deal with consumer
problems quickly and effectively is absolutely essential to re-build
consumer confidence in the financial services sector.
4. Implicit in the current HM Treasury (HMT)
consultation is the suggestion that the current regulatory set-up
has failed to deliver such a champion. Citizens Advice would agree
that the regulation of financial services could and should be
improved. Moving forward requires a reasoned critique of the performance
of the FSA (and the Office of Fair Trading (OFT) with respect
to the Consumer Credit regime) in the recent past as regulators
of financial services.
LEARNING THE
LESSONS OF
THE PAST
5. Paragraph 4.24 of the HMT consultation
states that the CPMA will build on "the progress recently
made by the FSA towards a more interventionist and pre-emptive
approach" and that the starting point will be the current
FSA Retail Conduct of Business Strategy. Citizens Advice believes
that this is the right call on both counts. From our perspective
the current FSA is unrecognisable from the organisation that five
years earlier frustrated us with a slow and inadequate response
to PPI problems. Today's FSA seems more focused on consumer problems,
with a better understanding as to how these can arise and a greater
appetite to intervene when necessary stop further bad practice
and organise redress for those consumers that have already suffered
detriment.
6. We believe that this change rests on
some key foundations that will have to both carry over to the
CPMA and develop further if the new body is really going to be
a strong consumer champion. Three stand out points are as follows.
OUTCOMES BASED
REGULATION
7. Firstly we are impressed by the move
to a more "outcomes based" view of regulation. For too
long the FSA seemed bogged down in debates about the structure
of the regulatory regime—rules, principles and they way
the related to a preference for market "self correction"—rather
than getting on with the job of ensuring that markets worked well
for all consumers. Philosophical debate about the relationship
between the regulator and the market is pretty irrelevant when
sub-prime mortgage lenders are lending irresponsibly and aggressively
seeking to re-posses families in financial difficulty. It is outcomes
that matter.
FOCUS ON
THE CAUSES
OF CONSUMER
PROBLEMS
8. Secondly the FSA retail conduct strategy
appears to be moving away from an over-reliance on disclosure
as the main consumer safeguard to a more rounded and complete
view of the causes of consumer problems. This is welcome. While
consumers will always need clear and reliable information about
products and services, these paper safeguards are never going
to be by themselves sufficient to prevent consumer detriment.
This is because detriment can be embedded in the way that products
are sold, the way that the relationship between the firm and consumer
unfolds over time and also in the way that products are designed
and brought to market.
9. Again we believe that payment protection
insurance provides a good example. Consumers bought (or were mis-sold)
unsuitable products despite the product disclosure rules because
of bad sales practices but also because of features built into
PPI products—excessive complexity that did not seem to benefit
consumers and product features such as blanket exclusion clauses
(such as those excluding mental illness for disability cover)
that set bear traps for consumers to fall into.
10. Therefore we welcome the recognition
in the FSA's Retail Conduct strategy that the regulator must be
prepared to intervene at all stages of the product cycle including
the way that products are designed. Working with firms to spot
the features of products that could cause consumer detriment and
pre-empting these before they come to market is a better approach
than just relying on enforcement and redress to clear up after
a mess.
11. These approaches must be carried over
to the CPMA and developed. For instance the FSA currently has
no clear remit to look at whether products offer consumers value
for money. While the FSA does have a remit to look at aspects
of this under Unfair Terms legislation, it is not a price regulator
in the full sense that it can question whether charges are reasonable
or whether the charging structure of a particular product tends
to disadvantage some consumers more than others. Both these questions
have been raised in connection with bank charges for instance.
FOCUS ON
PREVENTION
12. The third point is about the need to
take this emerging concern with preventing consumer problems a
step further, to ensure that markets for financial products and
services work better for consumers. This was one of the key aims
of the mortgage market review and implicit in the FSA's self-criticism
is an understanding that an effective regulator needs to take
a more active and strategic role in shaping the way that a market
or markets as a whole meet needs of different groups of consumers.
13. In the context of the mortgage market
this has so far focused on tightening up conduct standing in a
range of areas such as lending, arrears management and default
charges. It has also raised questions about product regulation
and whether some of the products brought to market were suitable
for the needs of the consumers they were aimed at. Were self certificated
sub prime right to buy mortgages ever a good idea?
14. We believe that the CPMA needs to pick up
this more strategic approach and develop it, in particular to
ensure that the position of lower income and more vulnerable consumers
is not ignored, or worse still exploited, by the market.
THE NEED
TO FOCUS
ON FINANCIAL
INCLUSION
15. Here we would highlight the way that
competition in financial services markets may work simultaneously
to the benefit of some consumers and to the detriment of others.
For instance competition in unsecured credit markets may have
driven down headline interest rates, but this was in part funded
this through very high commissions on PPI products sold disproportionately
to lower income consumers. Likewise the OFT market investigation
into personal current accounts showed how the benefits of "free
in credit" banking for better off consumers are paid for
by the often eye-watering bank charges levied on poorer consumers
some of whom get trapped in a cycle of debt-charges-debt.
16. However such unfair and unhealthy equilibriums
may not be unpicked to the benefit of vulnerable consumers by
even robust conduct of business alone. Firms may exit the market
(as we are seeing with PPI) or may discontinue or restrict services
to more marginal consumers. An intervention to deal with market
failure may succeed at the cost of producing a "missing market"
for some consumers who become more financially excluded as a result.
17. As a result we believe that the CPMA,
as a strong consumer champion, should be empowered and expected
to intervene not just to protect consumers against conduct and
other market failures but also to ensure that consumers have reasonable
access to products and services that are suitable for their needs.
The increased emphasis on product design in the current FSA Retail
Conduct Strategy is very welcome. But the CPMA must build on this
and take steps to both influence and if necessary prescribe what
firms should bring to market as well as what they should not.
18. In short we believe that the CPMA should
have a clear and well developed objective to ensure that, as far
as is possible, there is no patterned or systematic exclusion
of any group of consumers from financial goods and services markets
and that goods and service are available that take account of
their specific needs.
19. Immediate priorities here would be ensuing
that lower income consumers have access to transactional banking
without exposure to heavy charges and that lower income consumers
have access to suitable credit products from mainstream providers.
20. So the three points outlined above highlight
our support for the idea that recent progress by the FSA provides
a good platform that the CPMA must build on. However we would
also like to raise four notes of caution where we believe attention
must be paid to prevent this progress from stalling or even reversing
in the handover to a new regulator.
FOCUS ON
PROTECTING CONSUMERS
21. As a consumer advocacy organisation
Citizens Advice believes that the CPMA should have an unequivocal
and unmediated consumer protection objective. We do not believe
that this focus should be sub-ordinated to macro-economic or market
stability objectives or to a view of ensuring confidence in the
markets that might conflict with the consumer protection objective.
We also believe that the financial inclusion objective outlined
above should be a complimentary primary objective rather than
a subordinate "have regard to"—consumers are not
a homogeneous group and a consumer champion may face competing
claims from different groups. We believe that the regulator should
above all be a champion for those consumers least able to champion
their own case.
22. The governance of the CPMA should reflect
its stated role as a consumer champion rather than a referee trying
to balance the interests of consumers and the financial services
industry. The interests of industry would of course be represented
through both what the consultation describes as the `have regards'
principles of good and proportionate regulation and through continuing
practitioner panels. But the CPMA board should be constituted
primarily with the view to ensure that the Authority meets primary
consumer protection (and we would argue inclusion) objectives.
FOCUS ON
SWIFT ACTION
23. The CPMA should be set up with duties
to ensure that it deals with growing consumer problems quickly
and completely. The CPMA should be required to investigate evidence
presented by designated bodies (such as FOS, the Consumer Panel
or specified consumer groups such as designated super-complainants)
within a specified time frame; with an additional requirement
to take action to remedy any detriment it finds within a further
specified timeframe. This would mirror the super-complaint process
under Section 11 of the Enterprise Act 2002 already in place for
the OFT and certain economic regulators but not the FSA. It would
ensure that the CPMA develops sufficiently quick and complete
responses to widespread consumer problems, something that we believe
has been a failing of the FSA in the past.
KEEP THE
GOOD ASPECTS
OF EXISTING
REGIMES
24. We are also concerned that none of the
positive consumer protection aspects of the current FSMA regime
are lost in translation to the new regime. For instance we note
that paragraph 4.50 of the HM Treasury consultation concludes
by describing a "restorative safety net" though FOS
and the compensation scheme, but there is no mention here of a
collective redress role for the CPMA. We believe that the power
to order a firm or firms who have breaches the rules to provide
consumers with redress is one of the most powerful tools in the
regulators argument. Indeed we expect to see the revised Section
404 collective redress scheme powers contained in Section 14 of
the Financial Services Act 2010 implemented.
MOVING CONSUMER
CREDIT TO
THE CPMA
25. Finally it is important to note that
another major transition is outlined in the HM Treasury consultation—moving
consumer credit from the OFT to the new CPMA. Citizens Advice
supports this proposal but believes that the manner of the transfer
will be very important. We are concerned to ensure that the transfer
does not result in any reduction in standards of consumer protection
nor stall progress towards more effective regulation of consumer
credit—a sector of the financial services industry where
we continue to see the most evidence of widespread and enduring
consumer detriment.
October 2010
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