Supplementary written evidence submitted
by the Financial Services Consumer Panel
At the inquiry proceedings on 18 November you
asked a number of questions about the Panel's role currently and
what we envisage for the future and encouraged all the Panels
to come back and provide more information in relation to the costs
and benefits of regulation and the role of the Bank of England
in the new structure. This further information is provided below.
Clarification of the role and remit of Panel and
its role in transition and in the future
1. The Financial Services Consumer Panel
(FSCP) is a statutory body by virtue of s10 of the Financial Services
and Markets Act 2000 (FSMA 2000). Initially established by the
Financial Services Authority (FSA) in December 1998, the Panel
advises the FSA Board on the interests and concerns of consumers,
including SMEs', and reports on the FSA's performance in meeting
its objectives in the regulation of financial services.
2. The emphasis of the Panel's work is on
activities that are regulated by the FSA, although it may also
look at the impact on consumers of activities outside, but related
to the FSA's remit. The Consumer Panel works to advise and challenge
the FSA from the earliest stages of its policy development to
ensure the FSA takes the consumer interest into account. The Panel
also takes an interest in broader consumers issues in financial
services where it believes it can help achieve beneficial outcomes
and where it thinks there is a lack of consumer representation.
This is an important role; the consumer interest in the financial
services sector is not well represented by consumer bodies because
of their focus on particular issues relevant to their membership
and their limited resources for research.
3. Members of the Panel are recruited through
a process of open competition and encompass a broad range of relevant
expertise and experience. FSMA 2000 provides that the Panel membership
must have a fair degree of representation to consumers of financial
There are currently eleven members of the Panel as listed below
and these positions change every three years on rotation.
|Adam Phillips (Chairman)||Caroline Gardner
|Kay Blair (Vice Chairman)||Tony Hetherington
|Stephen Crampton||Nick Lord
|Bill Martin||Claire Whyley
4. The Financial Services Act 2000 provides that the
FSA must have regard to any representations made to it by the
Panel and that it must
consider any representation made to it by the Panel
and if the FSA disagrees with a view expressed, or proposal made,
in the representation, it must give the Panel a statement in writing
of its reasons for disagreeing.
5. Beyond its statutory basis the Consumer Panel has
a Memorandum of Understanding with the FSA and formal terms of
reference set out its role and responsibility as follows:
(1) The Financial Services Consumer Panel ("the Panel")
is established by the Financial Services Authority (FSA) under
the Financial Services and Markets Act to represent the interests
of consumers. The Panel is independent of the FSA and can speak
out publicly on issues where it considers this appropriate.
(2) Panel members are appointed by the FSA, in accordance
with Nolan principles in order to represent consumers, with HM
Treasury's approval in the case of the Chairman. The FSA Board
approves the Panel's annual budget and provides a dedicated secretariat
to support the Panel.
(3) The main purpose of the Panel is to provide advice to
the FSA. As such it does not carry out responsibilities on behalf
of the FSA. For example, the Panel does not undertake consumer
education, nor does the Panel take up individual consumer complaints.
(4) The emphasis of the Panel's work is on activities that
are regulated by the FSA, although it may also look at the impact
on consumers of activities outside but related to the FSA's remit.
(5) The Panel will have regard to the interests of all groups
of consumers including those who are particularly disadvantaged
in the context of financial services, including consumers who
have little or no access to financial services.
(a)represent the interests of consumers by advising, commenting
and making recommendations on existing and developing FSA policy
and practices as appropriate;
(b)speak on behalf of consumers by reviewing, monitoring and reporting
to the FSA on the effectiveness of FSA's policies and practices
in pursuing its duties; and
(c)keep under review and influence actual and potential developments
in financial services to enable it to fulfil (a) and (b) effectively.
(7) In addition, it can advise the Government on the scope
of financial services regulation.
(8) The Panel can consider other matters that assist it in
carrying out its primary functions.
(9) The Panel shall publish an Annual Report on its work and
(10) The Panel can speak out publicly when it wishes to draw
attention to matters in the public interest and when it disagrees
with the FSA.
6. From the above terms of reference and the wording
of the statute it is clear that the Consumer Panel's focus has
been on advising, influencing, supporting and challenging the
FSA rather than having a more public campaigning role. The Panel's
powers are related principally to this internal lobbying role
rather than having external powers of public persuasion or a campaigning
objective. However this role is significant because it is an opportunity
to influence thinking, to represent the consumer interest and
advance the cause of consumer protection as a counter to the industry's
powerful lobbying machine.
7. During the transition to the new twin peaks model
of regulation the Consumer Panel will continue to discharge its
role. We will be specifically concerned to ensure that current
consumer protection initiatives are carried through and the more
interventionist, outcome approach to regulation comes to fruition.
8. We will want to ensure that stated commitments to
improved regulatory outcomes and the new approach to the regulation
of conduct of business are taken forward and indeed gather momentum,
that the organisation maintains sufficient resources and expertise
to operate effectively and that the transition does not distract
it from its regulatory functions.
9. As an adviser to the FSA the Panel anticipates that
it will be influential in ensuring that the new Consumer Protection
and Markets Authority has the powers to act as an effective champion
of the consumer interest delivering more effective consumer protection
than has been the case with the FSA. We will advocate the cultural
change necessary for the elements of the FSA which transfer to
the CPMA to develop their consumer protection credentials, their
expertise, an effective approach to consumer engagement, improved
transparency and to develop effective accountability mechanisms
in the new structure. We will also be advocating the development
of formal processes for co-ordination and communication between
the peaks to ensure the benefits of an effective supervisory approach
are not lost and that overlap/underlap does not occur.
10. We have argued in our evidence to the HM Treasury
consultation that the Panels need to be given an enhanced role
under the new structure. Specifically we have suggested that the
Consumer Panel be given greater resourcing in the transitional
stages, of which the FSA have been supportive, so that it has
the power to more strongly represent the consumer interest. We
will also need to consider the powers and resources required for
the future role, particularly as it will be dealing with a new
and evolving structure and should have formal relationships with
the FPC and PRA. We have also argued that the Panel should regularly
appear before the House of Commons Treasury Committee to ensure
greater accountability for the new regulators to Parliament.
11. We expressed this in our evidence to the HM Treasury
consultation as follows:
59. We believe the role of the Panels should be enhanced
in the new regime to improve the CPMA's governance. In particular,
we would like to see increased and effective Panel resourcing
and a stronger obligation on the CPMA through statute to consult
and take note of the Panel's recommendations and challenges.
60. Moreover, the three Panels representing consumer and
practitioner interests should not only provide input to the CPMA.
We believe the Panels have become an effective part of the FSA's
governance structure and should be enabled to advise the FPC and
PRA, to ensure that consumer and practitioner interests are adequately
represented. When applicable, the FPC and PRA should have a duty
to liaise with and consult the Independent Panels to ensure that
there is proper scrutiny of decisions.
61. Specifically in the case of the Consumer Panel, we
recommend that it has a formal duty to report to the Treasury
Select Committee on a regular timetable.
12. Responses to the Treasury consultation supported
an obligation on the regulator to consult and reflect on views
from the Panels in relation to key decisions and to ensure that
there was greater transparency as to how the regulator would take
account of the panels' recommendations. Requiring this would assist
13. A key element of the Panels' ability to provide effective
oversight and challenge to the CPMA and PRA will be the power
to request information relevant to the performance of their role.
At present, the Panels do not have this power. It is therefore
possible for the regulator to refuse to answer questions in a
way which obstructs the work of the Panels. This has not happened
in the history of the relationship with the FSA, but the new less
integrated architecture means that this power will be essential
to ensure the exercise of effective governance.
Costs and benefits of regulation
14. The Panel's evidence emphasised the need for effective
and efficient regulation. Our concerns about the costs of regulation
relate to the likelihood that increased regulatory costs will
be borne by consumers. It remains in the consumer and public interest
to have effective regulation and it is important that the value
of regulation is given proper recognition in public debate rather
than being constantly portrayed as a burden on business.
15. Regulation protects and acknowledges good players.
The extent of regulation is often equated with the extent of market
failure. The work commissioned by the FSA and the Practitioner
Panel on the costs of regulation confirms that much of what regulation
requires is good business practice and that separating costs of
regulation versus business as usual is difficult and often arbitrary.
Treating customers fairly, good complaint handling, transparency
about performance and meeting consumers' information requirements
are all examples of what customers would expect in a retail environment
where competition is effective at delivering products and services
which are good value and which meet customers' needs.
16. The level of intervention currently required in these
areas points to a failure of culture and a lack of embedding of
a consumer perspective in financial service and product provision.
Where the market is failing to deliver good outcomes for customers
the cost of regulation is high and the regulator is in effect
pressing the industry to introduce good business practise in those
firms where they are not already embedded.
17. The real cost of regulation to society is in the
failure to regulate effectively. The social and economic impact
of withdrawing financial services is underlined by Government
measures to ensure their continuance. A good example is the impact
of exclusion from access to transactional banking services which
are now effectively a utility. Utilities have to be regulated
so that charges are kept to a reasonable level and the poor do
not pay more. Transactional banking is an obvious example of where
intelligent regulation is needed, but Investments and long term
savings are necessary for individuals and the economy, the terms
on which people engage with these can not be left solely to a
market which inevitably services only the more profitable segments.
18. As the report by the Better Regulation Executive
for the Department of Business, Innovation and Skills pointed
"But looking at costs alone distorts the picture.
Better regulation also seeks to maximise the `net benefit', ie
benefit minus costs. Although regulation may have a cost for society
it is intended to deliver benefits and can have an overall positive
effect for society. For example, competitive markets create benefits
like extra trade and reduced prices. Regulation means cleaner
air and water, safer workplaces and food as well as the safety
net created by the minimum wage."
19. The analysis of the benefits of regulation has often
been weak and driven by quantitative rather qualitative analysis.
This is particularly so in the area of consumer risk, evidenced
by examples such as the proliferation of mis-selling and competition
concerns associated with PPI and the unfair level of charges on
bank accounts. The FSA's report on assessing the benefits of regulation
recognised that direct benefits are often difficult to quantify
and set out a complicated framework for identifying metric that
can be used to proxy for final market outcomes.
We welcome instead the FSA's commitment to producing a Conduct
Risk Outlook. We hope
that this will provide a framework to identify conduct issues
before significant detriment arises for consumers, and to frame
a dialogue with firms and consumer groups on these issues. We
look forward to this producing a more realistic basis for establishing
the benefits of regulating financial services.
20. There is an opportunity to re-energise the better
regulation agenda by putting the consumer interest at the heart
of regulatory policy and practice. The House of Commons Regulatory
Reform committee urges more accountability to citizens and end
users, a view supported by the FSA report on the benefits of regulation
which notes that in order to achieve some of the benefits of regulation
incentives between Financial Services firms and their customers
need to be better aligned.
New structure vests too much power in role of Governor/Central
21. We believe proper resourcing, increased accountability,
effective governance and good communication and co-ordination
between regulators will be the key in delivering effective regulation
no matter what the structure. However, we have expressed reservations
about the implied hierarchy in the proposed system and expand
below on the some of the issues in relation to a central bank
carrying out the prudential regulation functions.
21.1 Central banks have traditionally not been particularly
open or transparent about their operations. The new role will
be quite a culture change for the Bank. The Panel has been advocating
reform in the area of transparency in the FSA for a long time
and while some progress has been slow. Transparency, accountability
and consumer engagement need to be features of the new regulatory
structure from Day 1. While we welcome the proposed accountability
mechanisms for the PRA there needs to be a specific consumer/public
perspective, proper impact assessment and a focus on accessible
communication. At the very least the PRA should be subject to
the same accountability mechanisms proposed for the CPMA. We will
expect to see, in the words of the IMF, robust mechanisms to ensure
transparency and a high degree of accountability of the Central
Bank's actions in practice.
21.2 The perception of the Bank acting as a narrow advocate
of city interests remains rather than an institution accountable
to Government. John Kay talks of the Bank of England acting as
"co-ordinator of a self-regulating club of financial institutions.
The implicit deal was that financial institutions were permitted
to act as a cartel in return for a commitment to conservative
behaviour. In times of difficulty they would provide mutual support,
which the Bank would co-ordinate, in order to maintain financial
21.3 The main concerns of the Consumer Panel in relation to
FPC and the PRA are regarding the composition of the boards, with
an overly strong Bank of England and industry basis and the lack
of a consumer or broader public policy perspective. We would not
want to see the supervision of business conduct downgraded as
a result of the structural changes and a failure to adequately
consider the possible negative impact on citizens.
21.4 Research has indicated that central banks that are also
responsible for bank regulation will be more sensitive to the
profitability of the banking sector and therefore less likely
to alter interest rates solely on the basis of financial stability
21.5 The FSA was broadly criticised for its failure to balance
competing objectives. The Bank of England will be placed in a
similar position and will need to be clear as to how this conflict
will be managed from the outset. We are concerned that too narrow
a focus on the stability of the banking system could be unnecessarily
damaging to sections of the population. It is not clear that there
is adequate or effective public accountability in the proposed
21.6 The formal mechanisms for communication and co-ordination
across the regulatory system are yet to be detailed. There remains
an area of overlap in prudential regulation between PRA and CPMA
and there are some significant co-ordination issues to address.
I hope this information is helpful and please let me know
if there is any further clarification you need.
FSMA 2000 s10(6) Back
FSMA 2000 s10(4) Back
FSMA 2000 s11(2) Back
FSMA 2000 s11(3) Back
Deloitte, The cost of regulation study. Commissioned by the Financial
Services Authority and the Financial Services Practitioner Panel,
BIS, Better regulation, better benefits: getting the balance right,
October 2009, 7. Back
Oxera, A framework for assessing the benefits of financial regulation,
Report prepared for Financial Services Authority, June 2006. Back
Adair Turner, Speech to the BBA, Protecting Consumers and Winning
Trust, 13 July 2010. Back
Oxera for the FSA, as above. Back
John Kay, "The new financial services leviathan: has competition
been a casualty of the financial crisis?" in Rethinking Financial
Services, Consumer Focus, June 2010. Back
Mark S Copelovitch and David Andrew Singer, Financial Regulation,
"Monetary Policy and Inflation in the Industrialized World".
The Journal of Politics, Vol 70, No.3, July 2008, pp 663-680 Back
The Australian twin peaks model has separate prudential and conduct
regulators in addition to the Central Bank who all have representation,
along with the Treasury on an overarching Council of Financial
Regulators. Similarly the recommendations of the Canadian Expert
Panel on Securities Regulation suggest the need for a permanent
co-ordinating body that will promote co-ordination of regulatory
policy. Eric J Pan, Structural Reform of Financial Regulation
in Canada, A Research Study Prepared for the Expert Panel on Securities