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Joint Committee on Financial Services Minutes of Evidence

Examination of witnesses (Questions 174 - 179)




  174.  Good afternoon and thank you all very much for joining us. I think a number of you have been sitting in and have heard some of the discussions we had in the first session. We would like to begin with a similar set of issues. I understand, Mr Stretton, that you have to go at 5.45. If we are still going, if you would just leave when you think you have to leave.
  (Mr Stretton)  Thank you, I am very grateful for that.

  175.  I would like to start on the same basis we started the previous session. This is to ask you to introduce yourselves and tell us briefly what your main views and concerns are about the Bill; how far the Government in their responses so far have met your concerns; and what you think the outstanding issues are. We have labelled this section "objectives". We are trying to divide up sessions into broad topics but we will understand, particularly in your opening remarks, if there are wider issues you would like to cover at this point as long as you are reasonably brief. I will start with Mr Stretton.
  (Mr Stretton)  I am Jim Stretton. I am here as the UK Chief Executive of Standard Life, a company which is a major supplier of products to the retail financial services market so what I would like to talk about briefly is solely in relation to retail customers and taking up the point of what the retail customer needs to do in order to secure his or her own interests. I would like the customer to be as secure as the customer possibly can but I am concerned that we should not promise something that we cannot deliver. The problems arise normally not in relation to the product itself. In the kettle analogy it is very unusual that the kettle actually does not work. People may buy expensive kettles or they may find that they have bought a product that is basically unsuitable for them. It is at that level that the model gets a lot more complicated in financial services than in normal product areas. The decision about what you want to do, how you want to protect yourself or your family is chiefly a subjective one and ultimately nobody else can take that decision for you. Inevitably there is a residual responsibility on customers to decide just what is important. There is a duty on the industry to make sure that the products are properly described, fairly and fully. There is a duty on an adviser to act competently in enabling the customers to get to their priorities as rapidly and accurately as possible but ultimately the decision that says, "I want to insure this. I do not want to insure that. I am going to take a particular risk of either the performance of the contract, if you are talking about an equity against gilts type of investment, or the issues and risks of my own lifestyle", is entirely for individuals themselves. That is the situation today. It is actually going to get worse in the sense that with Individual Savings Accounts and with Stakeholder Pensions there is going to be much less of an advisory process costed into the product. The whole drift of policy is to make it more feasible for customers to act on their own and therefore to operate more cheaply. In that environment it is absolutely imperative that the customers do realise there is a responsibility lying on them otherwise we will finish up eventually with disappointed customers and that will damage them, the industry and the regulators.
  (Mr Ross Goobey)  My Lord Chairman, I am Alastair Ross Goobey, Chief Executive of Hermes Pensions Plans and a nominated member of the Council of Lloyd's. I am also a member of the executive committee of IFMA, the Institutional Fund Managers Association, which manages over two trillion pounds of assets. Hermes is 100 per cent owned by the BT Pension Scheme, Britain's largest with over £25 billion in assets, and it manages the bulk of the assets of the Post Office pension schemes with over £15 billion in assets. I have been a nominated non-executive member of the Council of Lloyd's since December 1997. I have 30 years' experience working in financial markets businesses. While welcoming the general thrust of the Financial Services and Markets Bill with its integration and regulation, I believe this is an opportunity to make certain that the regulatory regime in the United Kingdom comes as close to the best fit as possible to the appropriate protection for customers, called consumers in the Bill, without over-burdening suppliers as legislative tailoring will make it; not too tight and not too loose. I am concerned that there will inevitably be a tendency to err on the side of reducing the risk to the regulator at the expense of the regulated. The regulatory objectives do not include the principle that the FSA must have due regard to the competitive position of the London financial market and I believe that the DTI Ministers have said that is a matter for them. That is not a statutory objective. The FSA and its Chairman will probably be judged harshly if there is even modest wrongdoing that escapes their gaze. The idea that there can be 100 per cent success in any regulatory regime must be dismissed. Your Lordships and Honourable Members have been passing laws for hundreds of years but I regret there are still some who disobey them without being found out until too late. The Treasury Progress Report acknowledges that there has been some confusion about the expression "consumer". My strong preference is that the regime should be prepared to treat more consumers as professionals, defined as willing to act under the principle of caveat emptor, whilst maintaining a suitably strict regime for those supplying services to the less sophisticated, those more usually referred to as consumers. Let me give you one really concrete example. In February 1993 pension funds came under the occupational pension scheme regime of IMRO. This was a response to the Maxwell scandal, one in which IMRO had proved completely unwilling to intervene when warned, as I know personally. The burden on those providing investment services to such clients exploded. My two client sets of trustees, the largest and fourth largest schemes, were faced with the prospect of receiving many feet high of transaction reports periodically which you may be sure they would never read. Fortunately, they negotiated a waiver with IMRO. However, and this is the point, since the 1995 Pensions Act pension fund trustees are themselves regulated by the pensions regulator OPRA. They are obliged to take professional advice and breaches of self-investment and other restrictions must be reported to the regulator by the scheme secretary or auditors or actuaries, and yet the OPS regime continues. So we have double regulation. We are agents for sophisticated investors. We may even be treated as wholesale counter parties as we are under the current S. 43 of the Financial Services Act for dealing in currencies and money markets, yet the Bill makes a distinction between our status for some of these instruments and that of our clients, even though they are considered to be sophisticated. I am slightly worried about Howard Davies' view that we should subdivide into three areas, which is the professional wholesale investors, the professional investors and the man in the street. I accept entirely that we should have a greater duty of care for retail investors, not that we are addressing them, than our counter parties would to us but regulated entity to regulated entity transactions seem to demand a single caveat emptor regime rather than the possibility of three parties becoming subject to three different levels for disclosure and reporting. My last point, if I may Chairman, as a parenthesis, is a point about the regulation of Lloyd's of London which will not come up very often I suspect, although my recent colleague Jonathan Agnew is here. Here I speak in a personal capacity rather than representing the views of the Council. Council members of Lloyd's are to be authorised persons under the putative Act and subject to the disciplinary powers of the FSA. These have a civil burden of proof and the authorised person is assumed to be guilty unless innocence can be proved. The Council of Lloyd's is like a board of a plc. Non-executive directors of insurance companies would not be subject to such potential discipline, having the duty of care that all plc directors must demonstrate and being subject to criminal action only for negligence and similar failings. The working members of the Council of Lloyd's must, by definition, be more familiar with the workings of that market than the nominated members who, as I say, are equivalent to non-executive directors and they should rightly be subject to the normal rules of the FSA for market professionals. However, under the current proposals I personally would be in double jeopardy. If the Council was deemed to have fallen down on its responsibilities on a matter it might be unreasonable to expect a non-executive to have full information on, I would not only be subject to fines, I might also have my authorisation removed, preventing me from carrying out my day job as an investment manager. Anyone who works as an executive in another part of the financial services industry would be a fool to put themselves in that position. I can say categorically today if the legislation makes no distinction between the position of a nominated member of the Council and working or executive members of it, I shall resign from it. I cannot see why anyone working in another regulated part of financial services would take the risk of being a Council member. That would seem to be a pity for the strategic guidance of Lloyd's in the future. The last thing I would say is I am very, very happy to take questions but I would ask that they remain at a high level. If you want me to delve into the individual clauses of the Bill I think you would find me failing.

  176.  You may not be alone! Mr Agnew?
  (Mr Agnew)  Thank you, my Lord Chairman. My name is Jonathan Agnew, Executive Chairman of LIMIT plc which is the largest underwriting business at Lloyd's. I was a member of the Council of Lloyd's from 1995 until January of this year. I remain a member of the Lloyd's market board. I really wanted to bring up just one single issue in relation to Lloyd's and the Financial Services Bill which since it is a suggested omission from the Bill I think must fall under other issues. I should also say that I am not speaking for the Council of Lloyd's though I understand that the Corporation of Lloyd's has made representations on this point to the Treasury. As members of this Committee will know, Lloyd's has been going through a period of very rapid change. To give just three examples. In the last five years the capital base has changed to such an extent that corporate capital has gone from nil to 73 per cent of the Lloyd's capital base. Secondly, Lloyd's is now in fierce competition with Bermuda and other overseas financial centres for business that was traditionally a London market insurance business. Thirdly, if the Bill or something like it is enacted ultimate regulation of Lloyd's is due to pass to the authority of the FSA, a move which I may say is welcome to most at Lloyd's and indeed was recommended by Lloyd's itself, a very different attitude, parenthetically, to that which Lloyd's took at the time of the passing of the Financial Services Bill in 1986. However, the regulation of Lloyd's is still governed by a series of Lloyd's Acts, the most recent of which is the Lloyd's Act 1982. Some of you on this Committee may think it inappropriate that a collection of commercial businesses in a period of rapid change should be governed by an Act which was passed at a time 17 years ago which long predated the present situation of Lloyd's and the present state of the insurance market. Worse still, as the Committee will be aware, the Lloyd's Act is a private Act and to repeal it and pass a detailed new Act would require a private Bill or more probably a hybrid Bill. Not surprisingly it has been difficult and is likely to be difficult if not impossible under a Government of either party to find Parliamentary time for the peculiar and lengthy procedures necessary to pass a hybrid Bill. The Committee may ask does this matter? I think it does. Just to give one example. The Lloyd's Act prohibits Lloyd's underwriters from accepting business other than from Lloyd's brokers. Lloyd's brokers under the Act have to be regulated by Lloyd's. This is a very important commercial point at the moment as to whether brokers other than Lloyd's brokers should be allowed to bring business to Lloyd's. Also there is an anomaly in that the present Government has said that it does not consider that commercial insurance brokers should be regulated by statute and on the other hand there is the statute on the books saying that a particular type of commercial insurance broker, Lloyd's brokers, have to be regulated by Lloyd's. How can this be solved? Lloyd's has taken legal advice that it would be possible to insert a simple clause into the Bill to allow the Treasury on the written application of Lloyd's and with the approval of the FSA, to amend by secondary legislation any provision of the Lloyd's Acts which concerns the regulation of Lloyd's. This would be a very simple way of allowing the Treasury with the approval of the FSA to change the Lloyd's Acts to meet changes in the commercial situation and in the regulatory situation which need apply to it. I understand, and I would not wish to enter into discussions on this, that such a clause could be drafted in such a way as to avoid hybridity and that it could come within the present scope of the Bill. I would ask the Committee to consider if that would not be a useful addition to the Bill. Thank you very much.
  (Mr Foster)  My name is Peter Foster. I am Finance Director of CGU which is an international insurance group formed through the merger of the Commercial Union and General Accident. I welcome the creation of a single regulator for the financial services industry and believe it is important that there is a sensible, legal framework that will enable it to function effectively and adapt to changing circumstances and, very importantly, allow companies to operate on an even playing field with its international competitors. As a director of a company with worldwide premium income of some £18 billion, of which 60 per cent is written outside the United Kingdom—some £11 billion, it is very important to us and I believe to the rest of the insurance industry (which makes a substantial contribution to the UK economy) that we are not exposed to undue regulatory burdens, undue compliance or excessive capital requirements relative to international competition. I therefore think it is very important, and the main point I want to make is that going forward adequate weight is given by the FSA in its deliberations in terms of the insurance industry not being disadvantaged on regulatory matters compared with its international competitors. I think generally that insurance regulation has worked reasonably well in the past and one would wish to see that continue.

  177.  Mark?
  (Mr Boléat)  I am Mark Boléat, the Director General of the Association of British Insurers. We have submitted joint evidence to this Committee with the British Bankers Association, an example of joined up trade associations perhaps following the move of the regulators! I want to highlight three points very quickly.

  178.  Your evidence to the Treasury back in the autumn?
  (Mr Boléat)  No, we have submitted to this Committee on Friday our formal evidence of the two bodies together. We fully support the objective of a single regulator and obviously we want to do everything we can to bring the new arrangements into effect as efficiently and as quickly as possible. To us the key issues are ones that have been highlighted to the Committee already. In a way they stem from one point. So far the regulation of insurance and banking has been conducted in a fairly informal but effective way and has not been rule-based. We have no doubt that the FSA marks a move towards a more rule-based approach which has advantages and disadvantages and we wish to minimise those disadvantages. A few key issues. Accountability, we note what has been done so far, the announcement recently, but we think there is a need to go further. We do think the Treasury should be empowered not only to receive proposals of the FSA, but also to comment on them. My colleague Peter Foster has already mentioned the need for the FSA to take account of international competitiveness of institutions in Britain and we think that sensibly should be an objective. I am sure you will have heard about enforcement as well. We believe the provisions still go too far.

Chairman:  We are having two sessions on enforcement at the end of this week.

The Committee suspended from 17.21 to 17.31 for a division in the House of Commons

Chairman:  Thank you very much. We thought that because Mr Stretton has to leave we should start with the whole question of consumer protection and the approach to caveat emptor.

Lord Eatwell

  179.  I want to ask Mr Stretton a question since the point that he made referred to the responsibility of the consumer. He will have heard the discussion previously between the National Consumer Council and the independent advisers and so on. I want to ask him to reflect on that and whether he feels that either through the consumer protection objective or through the advice, the quasi-educational objective, satisfactory consumer protection can be attained?
  (Mr Stretton)  I think the education aim is very important. I do not think that we can achieve a satisfactory position for consumers without having educated consumers. That is a very important aim to pursue. Based on the discussion I heard I feel that too much attention was being paid to the product and not enough to the actual mechanics of the decision making process, which is the complicated piece. I share the view that product regulation inhibits the development of markets and I do not think that it can play as large a part in making sure that customers do not make the wrong decisions as sometimes is made out. If you take the Stakeholder Pension as an example of a decision that people will have to make, they will have to make the decision as to whether they want to have it and if so to whom will they go, will they seek advice or can they do this by themselves, how much will they contribute, should they contract out of the state scheme and if they have an existing pension should they stay on that or should they use a stakeholder pension? These are things that the customer cannot avoid having some responsibility for and some knowledge of how to address themselves and education will be very, very important.

Lord Poole:  I personally find these sorts of issues, such as the ones you have mentioned, utterly incomprehensible and that is after a lifetime spent working at them. That may be a slight exaggeration but these are fiendishly complicated. How do you suggest that can practically be done and, more importantly, how can the regulator ensure that you are doing it?

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