Financial Regulation

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