Examination of witnesses (Questions 140
TUESDAY 23 MARCH 1999
and MR ROBIN
140. Mr Heath, do you want to say anything?
(Mr Heath) I just announce my existence, my Lord
Chairman, and look forward to questions.
Chairman: Thank you
very much. Shall we take the first subject which we have got down
and which has, in a sense, been alluded to already? This is the
question of consumer protection. Can we see if we can take that
a bit further? Lord Haskel?
141. As you said, one of the statutory objectives
of the FSA is to protect consumers and I wonder whether we are
all agreed as to what a consumer is. Is the consumer just the
man in the street because often the man in the street can be an
expert in financial services? Is the small businessman, who may
know little about financial services, a consumer or is he a professional
person, and how far do we have to go to educate or advise the
consumer so that they can become more expert? I just wondered
whether we were all agreed as to who the consumer is or whether,
in fact, the Bill ought to go some way towards defining that?
(Ms Hall) I think our view is that there is a
difference between retail and wholesale consumers and if we had
been starting off that is where we would have made a distinction,
and although there may be very expert men and women in the street
who are nevertheless retail consumers, you have to make the division
somewhere and the people who are buying it really not as an expert
purchase but as a means to an end, to greater security in old
age or whatever, those people need a different level of protection
from the people who do it as a business and who pay lots of people
large sums of money to look after those interests. I think our
concern is that what is encompassed by the term consumer in the
Bill is too broad.
(Mr Heath) We would agree with the NCC on that.
I think there is a fear in the City that the sort of excesses
we have seen in the retail regulation will invade the City and
that is something we certainly would not wish to see. Equally,
the previous divide was that of the retail consumer and certain
people who were members of the public who were deemed to be expert
investors. The NCC definition is that of are you doing this for
your business or are you doing this without your business? That
is not a bad definition. Frankly, wherever you draw the line,
my Lord Chairman, it is not a clear line. It is not a bad definition
at all, but it does rather leave out protection for your local
cabby who takes a mortgage out to buy a cab. Yes, he really is
one of the more protected people in need of protection, but he
would fall outside of that definition. It is not easy. I suspect
we would agree across the table that there must be a clear definition
between the foxes and rabbits, i.e. the foxes can look after themselves
and the rabbits will need considerable protection in what is a
Lord Poole: Can we
ask David what he thinks?
142. David Roe is here from the Treasury.
The Progress Report implied that you wanted to look at this issue
again and the drafting of it. Do you think that you are going
to be able to meet people's concerns about this question of the
(Mr Roe) I think we will try, although the answers
that witnesses have given explain some of the difficulties in
doing so. I think it is fair to say that the approach in the Bill
at the moment envisages more of a spectrum rather than foxes and
rabbits and recognises that there are certainly different degrees
of experience and expertise which different consumers of financial
services will have. It is really rather difficult to divide them
into boxes. It is better to think of them in terms of a spectrum
and I think even within the range of retail customers there will
be people who are more and less vulnerable depending on their
circumstances and we would want the FSA to be able to recognise
those kinds of distinctions as well. So the drafting of clause
5 is an issue which Ministers are thinking about, but it is not
very easy to come up with black and white difference in legislation.
143. Have you considered the possibility
that professional traders and expert end-users might explicitly
be able to contract out in terms of asserting for themselves that
they do not require the retail consumer protection and so if I
was dealing with you and we both had said we were professional
traders then I would know we operated within a different set of
(Mr Roe) It is certainly a thought. In the consultation
document that we have just produced on financial promotion we
address some of the possibilities of this kind of approach where
we are considering the idea that it might be desirable to allow
people from whom capital might be raised for start-up ventures
and so on to exclude themselves from the regulatory system. Whether
you could apply that more generally I think is a good question
which certainly does bear thinking about. Some of the practicalities
get rather difficult when you deal with a situation where a particular
firm may be dealing with a mixture of expert and non-expert investors
and you then start having to ask yourself whether those kinds
of arrangements apply to a very broad range of transactions which
might be quite difficult.
144. If it is difficult to put the consumers
into specific boxes and you say we are dealing with a spectrum,
how does the Treasury think it would be possible to divide up
the costs attributable to the different types of regulation? It
seems unfair to me that firms who deal only with wholesale customers
should have to bear part of the costs of regulating firms that
deal with retail consumers who need much more protection.
(Mr Roe) There certainly is a distinction that
one can imagine between the kinds of business which incur high
costs and those which incur low costs and there is a great amount
of discretion for the FSA within the Bill to develop charging
structures which reflect those differences.
145. At the moment this distinction is in
Clause 5(2)(b), is it not. It refers to the different degrees
of experience and expertise which different consumers have in
relation to different kinds of regulated activity. Why is that
not enough for the purposes of drawing the distinction between
different types of user?
(Ms Hall) I think our difficulty is with this
idea of consumer protection. I know I have admitted that there
are some more and some less expert, but we do not usually divide
up consumer protection according to how expert you are. We do
not usually give more to some and less to others. That principle
is not there. I think I would feel happier if there were a consumer
protection principle. The other difficulty is that the general
principle that consumers should take responsibility for their
decisions applies across the board whether expert or not, retail
146. If we were able to take care of the
issue in terms of the caveat emptor clause you would be
less worried about what goes before it, would you?
(Ms Hall) Yes, but in a sense in order to take
care of caveat emptor I think you have to divide them up.
You have to divide those who I am happy to leave to caveat
emptor and those who I think should not be left to it.
147. Howard Davies mentioned that one might
substitute for caveat emptor a duty of due care to be taken
by a consumer which would certainly moderate the principle of
caveat emptor. Is that something which the Treasury has
considered as a way of distinguishing between wholesale and retail
(Mr Roe) It is certainly a possibility that we
are considering. I am not sure that it necessarily means the same
thing as taking responsibility and I think this is something that
we would need to consider further. In other words, it seems to
me that the idea of taking care is rather less of a responsibility
than taking responsibility. I imagine that Ministers will want
to think very carefully about whether they want to make what would
be a change in that area.
148. The National Consumer Council offered
a different form of this at one stage, did you not?
(Ms Hall) We want to see the caveat emptor
gone in relation to retail consumers, but we did add that
if it is going to stay there then we think that needs to have
some kind of provision such as "as far as they are able"
because I have to say that all the evidence is that it is very
difficult for people to be responsible for their own decisions
in this area. As the only consumer principle in this Bill, the
suggestion that that is the desirable provision is not the way
we think things should go and it does not apply in other consumer
149. The principle of caveat emptor
is not disputed as a principle for the wholesale end. The real
problem is where you divide the wholesale from the retail and
what you put in place of it at the retail end because, as Mr Howard
Davies was saying, it is appropriate that people should take some
responsibility for what they are doing. Even if they are not so
fully informed, they can take the full responsibility as someone
at the wholesale end. What would be your view as to what would
satisfy this requirement at the consumer end?
(Ms Hall) As far as we are concerned, the wholesale
end can take care of itself from our perspective. I do think it
should go at the retail end. In all other areas of consumer protection
there are implied terms that in a contract for the sale of goods
and services you get what you think you are buying. I am not really
clear why financial services should be any different. Clearly
the Bill has strong powers for the FSA to involve itself in advice,
information, consumer education and those are all desirable and
we think it is an extremely good idea that the consumers should
gain more expertise in this, but I do not think it should be a
principle that consumers should look to be responsible for their
own decisions. Of course, you have got to start off with "I
think it is about time I thought about a pension", but it
is a long way from there to saying, "It is me and only me
who is responsible for which one I buy". If there were more
consumer protection principles in the Bill I would feel less unhappy
about caveat emptor along with some kind of qualification
in relation to the skills and experience of consumers.
150. How would you deal with the inherent
risk there is involved in any of these products in respect of
the kettle which you quote?
(Ms Hall) That would have to be provided for and
in that respect would be different from kettles, but I do not
necessarily think that it is insuperable to exclude the investment
151. Have you got a form of words which
would satisfy what you are saying?
(Ms Hall) No, because usually when we draft things
people pick them to pieces. If you would like us to take it away
and imagine drafting one, we would be happy to have a try.
(Mr Heath) However you define the consumer, can
we have it defined at the time we advise them and not have it
defined in retrospect or because the world has changed or whatever?
We rather like the idea of a professional investor against a member
of the public-type of investor, because of this rather cloudy
area it seems to be one of the cleaner lines, but if we are advising
someone who is deemed to be someone who needs special attention,
that is one thing, but if we are advising a consenting adult who
knows what they are doing then that is another thing and we really
need to know that from day one rather than find that at a later
date that is imposed upon us. If I can move on to caveat emptor.
We do not like the phrase caveat emptor. We much prefer
consumer responsibility. Caveat emptor also has the unpleasant
effect of anyone to do with consumerism getting the crosses and
garlic out. We much prefer the idea that the consumer basically
needs to take an active role in their financial future, but they
cannot just take little to no attention of what is going on, particularly
as we are (a) trying to educate them, and (b) trying to find a
regime where we can get information to them in a clear and meaningful
way and then for them to have the perfect defence of "I did
not understand". Clearly, there is a distance here somewhere
that we need to agree a position on. Our fear, and it is very
much the same as the NCC's, is that all this regulation is very
undefined. Who are you trying to protect and against what? The
Act fails to answer that question. We have five of these propositions:
who are you trying to protect; against what; is it cost effective;
is it fair; and can you explain to the public? At least we are
going to explain it to the public, which is a big step forward
under this legislation than the previous version. We need to ensure
that the consumer has a responsibility, but I think this is a
little too strict and it would be strange for us to say that.
152. This is more general.
(Mr Heath) Yes, exactly. I think we have got to
try and find a wording which does not allow members of the public
purely to do anything they like in the sure knowledge that it
can be put right somewhere down the line whilst at the same time
ensuring that members of the public are not exposed to being misled,
lied to and what have you and taking responsibility for it. So
there is a position somewhere which we call consumer responsibility,
but we cannot define it for you.
153. If somebody puts money on deposit on
the assumption that they have not gone for some improbably high
rate of interest and the bank is properly regulated then they
have certainty that they will have a return of their funds deposited.
The uncertainty is merely the rate of interest that will be set
by the marketplace whilst that deposit runs. If you wish to make
an alternative form of investment, for example in some equity
product, you give up that certainty in the hope of future reward.
It seems to me that this is why this is such a very difficult
conversation because no truthful adviser can say what the outcome
of a non-deposit investment is going to be other than in bond
markets, for example, which is not quite the point I am trying
to make. The word investment is frequently misused when people
mean a deposit, but if one can accept for this purpose that the
word investment means the giving up of certainty in the hope of
future reward, does it make it more difficult to pin bad advice
on an adviser and make it even more difficult for the consumer
to understand what he is doing? What are your views about this
very complicated area?
(Ms Johnstone) These products are very complicated
products which is why you have had so many difficulties in the
past and why we are all sitting here today. I do not know, I think
there are no straightforward answers, but it does seem very peculiar
to us that we are setting up a system that provides less protection
to consumers for very difficult products than we provide for them
for easy products like buying a kettle. Whilst we quite agree,
we cannot give people a guarantee of what return they are going
to get, we still need to give them protection to make sure that
they know what they are getting and that it is a product that
is suitable for their needs.
154. That leads on to the very difficult
question about possibly imposing on the regulator some sort of
duty to regulate the product rather than just the people or the
process. There are obvious disadvantages to regulating a product
because you can thereby go for standardisation and lessen competition
and provide poorer value for the policy holder, but, nevertheless,
is this an area which you have thought about how one might secure
some sort of obligation for the regulator to see that suitable
products are sold without stifling competition or producing standardisation?
(Ms Johnstone) It is certainly an area we have
looked at and it is an area that we have found is fraught with
(Ms Hall) I think we think there are some types
of products that we think would be unsuitable and something that
should be done and to some extent those will be covered by powers
which I think the FSA will have to control unfair terms in consumer
contract regulations. One might want to look at those sort of
powers where there are obnoxious clauses that allow people to
do whatever they like in relation to the consumer without the
consumer getting any benefit from them. There are difficulties
with the unfair terms regulations which I will not go into now,
but it is to do with the fundamental subject matter of the contract.
So there are things on which we think outright the regulator might
want to say. "This is not fair. This should not be in this
product." But we also take the point that it may be standardisation,
that it may lack competition and that it may stifle innovation.
I think that if we were going to approach this, that we would
look at it through the regulator having the power to expose, as
it were, benchmarks. What a common product across this range looks
like, so that you can say, "Oh, yes, this one is inflation
proofed and this one is not." The regulator would look at
what the central features are and then you would be alerted to
the ones which did not have the things that off your own bat might
not come into your head to think about.
155. Ms Johnstone, the London Investment
Banking Association in some advice it submitted to the Treasury,
suggested that "regulation should be no greater than is necessary
to protect reasonable people from being made fools of. It should
not seek to achieve the impossible task of protecting fools from
their own folly." Would you agree with that?
(Ms Johnstone) I do not know how one would view
a definition like that in the Bill. Obviously consumers are very
vulnerable and an awful lot of consumers are very vulnerable when
they are buying these products, because they are very difficult
to understand and they have greater difficulty understanding them.
I can see the point you are making, that if they have been properly
advised and they still choose to buy something which is highly
risky, then that is something they should be taking on themselves.
However, at the moment, the way the caveat emptor is in
the Bill is that they are taking everything on themselves.
156. Do you think there might be a case
for there being a limited range of very simple approved products,
the nature of which would be specialised? Let us say, a ten-year
insurance policy. There would be an approved ten-year policy,
which would have to come from a company which qualified exactly
the same, as you get in Germany. You would say to consumers, If
you buy one of these we will make certain ... (whoever "we"
is, the FSA or whatever body we wish to evolve). This is very
limited rangeit may be fairly bog standard, there may be
a shortage of bells and whistles, some of which are more for the
advantage of the adviser than for the customers but that is another
pointbut when somebody decided to go for a product, which
was not a bog standard approved one, however defined or established,
in so doing they would be accepting a significantly greater degree
of personal care and attention to what they were doing, with obviously
the normal period for rescinding the contract, a fortnight after,
for example. Do you think that would be at all helpful?
(Ms Johnstone) I think the idea of benchmarking
is helpful but I am not sure that it helps with the basic problem
we started with here, which was different types of consumerswholesale,
retailwhere one draws the line.
157. At the very bottom end of the consumers.
(Ms Johnstone) I think having benchmarked products
is helpful but it does not deal with the problem we were addressing.
158. May I follow on from that and ask the
FSA if that is what they regard as one of their public awareness
duties, benchmarking basic products. Is that the requirement in
the Bill: to provide appropriate information and advice?
(Mr Whittaker) We strongly support differentiation
in the way the regime operates. We operate differentiation in
much of what we do at the moment and have already set out proposals
to continue to do so. We think that differentiation ought to be
something that can be designed to adapt over time and across different
sectors. You may want a different differentiation in one market
from the one you want in another. We agree with the idea that
caveat emptor is a very important issue that needs to be
clarified in the Bill. We think it is right that the industry
should have assurance that we will not regulate to the nth
degree, we will not regulate where there is no need, but we do
think there are concerns which need to be clarified as soon as
possible. We look forward to seeing the new draft, which Treasury
has offered, in the new version of the Bill. On the specific point
that has just been raised, as far as the consumer awareness objective
is concerned, yes, I think although we are at a very early stage
in considering how we will operate the consumer awareness objective,
we could see the consumer awareness role being used to alert people
to standard features which they might expect to see in particular
kinds of products or products designed to achieve particular objectives.
What we have been more reluctant about is going from that identification
of general issues to any form of product approval in which we
were, in some sense, endorsing products that met those particular
objectives, which I think we are very reluctant to undertake.
159. Thank you very much. Given the time
I am going to have to move on.
(Mr Jones) May I just make a point. We have been
agonising over the definition of consumer. The problem with the
answer is the confines of the procedures themselves. Every adviser
has to go through the client fact finding process. Part of that
process is identifying whether you are talking to a totally inexperienced
investor or a very experienced investor or in between. So the
advice that you give that individual has to be commensurate with
the expertise that individual has in financial matters. If you
stray very far from that, if you put a non-experienced investor
into high risk investments, you would soon be pulled up by the
FSA monitoring team visiting you. That is probably as close as
you can get to control of this because if you write these definitions
into the legislation, there is no guarantee that this is going
to stop people selling the wrong contracts to the wrong people.
They still have to be found by the FSA monitoring teams.
Chairman: I think
this has been very helpful. This does help in terms of clarifying
it. We are in a position of waiting for the redraft from the Treasury
on these issues. Could I now move on to the question of the market
Lord Eatwell: This
may take you a little beyond what this group would like to comment
on, but perhaps I may ask you very briefly. In the list of statutory
objectives for the Bill is market confidence, public awareness,
protection of consumers, and reduction of financial crime. We
have been rather puzzled on this Committee that one of the objectives
is not reducing systemic risk, reducing risk in the system as
a whole, which is what most of us thought regulators actually
did. We have discovered that is not one of the objectives and
we wondered how you would react: for example, the consumer is
enormously important, it seems to me, because the consumer protection
will protect the consumer who is signing up to a particular contract.
Diminishing systemic risk makes sure that the cash is there at
the time when you want to hand it over.