Joint Committee on Financial Services Minutes of Evidence

Examination of witnesses (Questions 140 - 159)



  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?

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 complex market.

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 distinction?
  (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.

Lord Poole

  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 rules?
  (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.

Viscount Trenchard

  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 or wholesale.

  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.

Lord Taverne

  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 markets?
  (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 protection legislation.

Mr Beard

  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 risk.

  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.

Lord Poole

  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.

Lord Taverne

  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 difficulties.
  (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.

Viscount Trenchard

  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.

Lord Poole

  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 range—it 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 point—but 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 consumers—wholesale, retail—where 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.

Lord Eatwell

  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 confidence objective.

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.

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