Examination of witnesses (Questions 180
TUESDAY 23 MARCH 1999
STRETTON and MR
180. I am a professional economist and I
find it completely incomprehensible. It just seems to me that
whilst it is highly desirable that one should have an educated
consumer, it is simply not credible.
(Mr Stretton) I understand the question and I
agree with it. The question really is what do you do about it?
Do you pretend that you can protect people in this situation when
you cannot or do you just acknowledge that there is a problem
and try to make sure that customers are genuinely on their guard
and will ask the basic questions like "what does this do
for me?, what are the risks involved in what I enter into?",
and at least hope that we can get customers able to do that? I
really fear an environment in which customers regard any action
that they take here as being one which has been sanitised and
safe and is bound to work out to their advantage, even though
they will find it difficult to make those decisions themselves.
181. Just on the back of that, somebody
spoke in the last session about being against league tables of
costs and charges. Clearly that is too narrow but is it not part
of this consumer advice or consumer information to empower consumers
to make informed choices by having comparative tables of all sorts
of things: persistency rates, performance over years, charges,
hidden charges or open charges? Are those not all a part of trying
to promote competition through allowing the customers to have
the information they need to make their decisions?
(Mr Stretton) I am perfectly happy with league
tables, we just need to make sure that in a world where some of
the important things are not measurable we do not get people spending
all of their time looking at things that you can measure. This
is a very strange product, it is not manufactured until some time
over the next 50 years, so getting a league table which is really
helpful is difficult. We should measure what we can and that should
be available to customers.
(Mr Boléat) My Lord Chairman, can I add
on that all those league tables are available and are published.
Indeed, a month ago we had the PIA's latest effort which ran to
60 pages of tables giving all of the costs and charges, performance
tables are published every month in any number of journals, persistency
figures are published by the Personal Investment Authority, and
the overall impact of this on consumers is not a lot.
182. Not measurable.
(Mr Boléat) I very much agree with the
point that Lord Eatwell mentioned. I am a professional economist,
like him, and I stopped buying the Economic Journal after
30 years when I realised that I had not understood any of it.
It is not just in financial services where there is this problem.
We know from any amount of research that consumers do not read
literature until they need to. That is not to say we should not
do everything we can to make that literature as readable and as
user friendly as possible for those who wish to read it, but the
majority of people do not read literature until they have a problem.
If we actually build a regulatory system on the basis that people
read and understand everything it will fail. Having said that,
there is more that can be done to make products easier to understand
and easier to compare but we need to look at financial services
in the context of all other goods and services where the same
183. I just want to check out with those
members of the panel who have not spoken recently whether they
are struggling with this statutory objective of public awareness.
Is it too woolly? Have you worked out what you think it means
for your area in terms of meeting that statutory objective or
does a lot more work need to be done on the objective of public
(Mr Ross Goobey) I was keeping deliberately quiet
because fortunately we do not have to sell directly to the retail
customer, thank goodness.
184. Come on, you are not allowed to get
away with it that easily! You know far too much to sit in complete
silence, you must have a view.
(Mr Ross Goobey) What worries me as an institutional
investor is actually the question of the cost of informing these
consumers which does not give us any benefit at all. If we are
going to get charged that, there was a question that was raised
about the cost of cross-subsidising between the institutional
professional investors and the private client investors. I think
it is very difficult to inform sufficiently the individual. The
individual does not take a great deal of interest in these products
and does not understand when they are explained to them. In my
limited experience, and I was on the board of Cheltenham and Gloucester
for a long time, even in mortgages, which are the most widely
taken out products, people do not understand what they have got
and there were many complaints to the ombudsman about fixed rate
mortgages when people thought they had been robbed by the building
society and please could they now have the variable rate because
rates had fallen. There was a great danger when we reported to
the Building Societies Ombudsman that he was actually taking some
notice of it. I am not confident that consumers, even well informed,
well educated, exposed to education, will make well informed decisions.
185. That is such an indictment, is it not,
of ordinary retail consumers faced with ever increasing complex
products on the market and you are saying that you are not even
convinced after they have been taken through the process that
the majority of them will understand what it is that they are
being sold and the ramifications of the product. There is an awful
lot of work still to be done on how we can simplify the information
and the process that consumers go through. Would anybody else
like to comment on that?
(Mr Boléat) The consumers are also balancing
the price of the product against the time it takes to discover
all of these bits of information. If you apply that analogy to
it, why does anybody buy Coca-Cola in a pub when they can go to
a garage and buy it at a tenth of the price? If you look at any
good and service there is that balance to be made all of the time.
That is part of it. How many people can operate a video recorder
without the help of a ten year old? The literature is all there,
indeed it is there in 18 languages to make it easy for everybody,
but do people use it? The chances are they probably cannot programme
a video. It is not saying that they are unable to, it is that
they do not think that is a sensible use of their time and they
are buying sometimes on the basis of the reputation of the product
provider or salesman. We know they take far more notice of what
a salesman says than what is written down. If a salesman said
the opposite of what is written down the chances are that the
salesman would be believed, that is human nature. It is not a
criticism of consumers.
186. Can I come back to one of the points
that was made earlier. I cannot remember whether it was this group
or the previous one, it is melding together. Somebody said in
regulation in the past if you sold a rotten product but actually
went through the procedure correctly you were okay and the regulator
thought that you had behaved correctly. That does not sound very
pleasant, it does not sound the sort of thing that one would like
to encourage. Are we getting into a position, from Mr Stretton's
position, that if the company selling the product describes what
it does clearly, sets out all the conditions and sells it then
as far as the regulator is concerned that is okay even though
it might be a quite inappropriate product for the person buying
(Mr Stretton) There are duties on the seller to
make sure that, if asked, the product is at least relevant to
the customer. The customer cannot escape the duty to decide whether
it is the most relevant thing that he or she is faced with. There
will be people who do buy, and the regulator will regard the sale
as perfectly proper, things which they subsequently regard as
not having been their priority. There will be expensive products
which are sold perfectly properly through that system.
Lord Burns: Maybe
at this point it would be sensible to ask whether or not David
Roe has anything to say on this issue and the general question
we heard earlier that maybe there should be more in terms of the
principles, not only about how it should operate with respect
to the industry but how it should operate also with respect to
consumers. What has come out of this discussion is that the sentences
in the Bill are, if anything, rather terse and rather short and
they have led to a certain amount of ambiguity. Is there a case
for spelling out a little bit more some of these principles; about
different kinds of consumers and what are some of the responsibilities
are towards consumers and what responsibilities the consumers
187. Can I just add to that, we have had
this discussion about consumers and nobody has mentioned the Consumer
Panel. There is to be a statutory Consumer Panel, I wonder if
Mr Roe could give us some idea as to whether the Consumer Panel
could play some role in this? What we may be doing is saying we
will leave a lot of these decisions to the Consumer Panel.
(Mr Roe) I think one thing I would say is that
there is a general matter of judgment about how much detail one
wants to put in legislation of this nature. The Government has
been very keen to take a framework approach and set out very clearly
what it is expected that the FSA will achieve and leave the task
of actually writing the rules and codifying the behaviour to the
regulator. I did want to say something about clause 5 generally
before answering the specific question, Chairman. What clause
5 effectively does is to say that the protection of the consumers
objective is about securing an appropriate degree of protection.
In the second sub-clause it sets out three separate considerations
which have to be taken into account in determining what that appropriate
degree of protection is. The first one talks about different degrees
of risk involved in different kinds of investments and other transactions.
The second one talks about different degrees of experience and
expertise which different consumers may have in relation to different
kinds of regulated activity. I think there is an awful lot in
the idea of different experience and expertise, some of which
we have touched on, either talking about wholesale/retail or talking
about vulnerable or less vulnerable consumers. The ideas are all
consistent with subsection 5(2)b. The third of the general things
that needs to be taken into account is the general principle that
consumers should take responsibility for their decisions, on which
we have had some interesting discussion. My point, I think, is
that in looking at this we need to look at the clause as a whole.
It is very important to talk about particular elements of it but
it does help and it will help the Committee if you look at these
as three considerations which in some ways are complementary.
On the point about whether there should be more in the Bill which
sets out the responsibilities of the industry, clearly in the
current regulatory regime there is a large amount of material
which does set out the responsibilities of the industry both in
terms of broad principles and specific obligations. A lot of that
effectively codifies some of the general propositions about agency
law and so on. That is broadly the approach that we have been
taking forward. Clearly there is an argument for bringing into
the Bill some of these ideas about what the particular responsibilities
of firms ought to be and I am sure this is something that Ministers
would be quite happy to reflect on if the Committee comes to the
view that they should. The other question that I was asked to
talk about was the role of the Consumer Panel which, as has quite
rightly been said, will be a requirement in the Bill, one of the
changes that Ministers announced a month or two ago. We do think
that the Consumer Panel could have an important role to play in
helping to inform the kinds of decisions which the FSA are making
about how best to give effect to these objectives.
188. Yes, Mr Roe, can I just ask you about
this protection of consumers objective again? I think you explained
that we should look at the clause as a whole and that the FSA
would clearly have to write those rules specifically in the interests
of the consumers. I assume that those rules will not be available
in draft before the Bill is introduced to Parliament? I would
also like to ask whether the FSA will be obliged to consult with
the practitioner bodies on the appropriateness of the proposed
rules before they are introduced as secondary legislation?
(Mr Roe) Yes, the Bill does require quite extensive
consultation with the industry and other interested parties on
the rules. If I may perhaps refer the question about precisely
what the FSA is doing in terms of developing its rules back to
my FSA colleague.
(Mr Whittaker) We have a detailed programme that
we have published and can make available to the Committee if it
is not already availableI thought we had attached it with
our submission to the Committeesetting out the way in which
we intend to consult on the proposed rule book over the coming
year or so. It is the case that because of the process of consultation
that we are going through we will not have final rules, or indeed
even draft rules, at the time that the Bill is introduced to Parliament.
We are doing a very extensive consultation process to ensure that
people's views are taken into account.
189. I want to put a very general question.
We have been running around this subject of how we can define
consumer protection more effectively and we have identified a
lot of problems but we have not identified any solutions. I hope
that perhaps in some way the Civil Service will be able to draft
something which is a little more specific but I am not sure if
they can. I wonder whether in the end, and this is what I would
like to ask you about, is not the most effective guarantee the
closest possible consultation at every stage with the Consumer
Panel and indeed the practitioners?
(Mr Boléat) Yes, but not just the Panels.
I think we would like to see widespread consultation, anybody
who has got a view should be able to comment. Recently the Government
has been trying to produce a more effective method of consultation
with the Cabinet Office having published some guidance which almost
every department ignores, except the Treasury, which is quite
disturbing. There are many industry bodiesyou are going
to see some of themand I think it is important that those
looking at the responses are able to weight them according to
who they represent. The Panels have a major role but consultation
needs to go wider. We hope that the FSA will publish the results
of the consultation exercises and where there is a strong view
against what the FSA proposes we hope that the FSA, if it decides
to do something there is a view against, will justify that to
Chairman: Maybe we
can move on to the other issues and wrap up the questions on market
confidence, competitiveness, competition and the regulatory burden.
190. On the question of international competitiveness,
speaking to some City firms one would suppose that the moment
this Bill receives Royal Assent the City is going to empty and
they are all going to leave and set up in Zurich or New York.
Is this a realistic threat? What I want here is some assessment
of the sensitivity of location to the regulatory environments
and in particular the regulatory costs. On the face of it, even
if one grosses up the FSA fees quite considerably, that is really
not going to be a tremendously significant item for the larger
firms. Possibly the compliance costs are rather larger. Some say
that with the narrow margins in international business this is
a very real factor and because the City of London is fighting
a pitiless struggle for international competitiveness we really
have got a duty in this Committee and in this Bill not to disadvantage
a colossally important British industry. I would be very interested
if one or two of you could give your assessments of the sensitivity.
(Mr Foster) I think the regulatory cost is obviously
an important feature. Clearly we want to see a strong regulatory
framework but there is always this balance with the amount that
it is going to cost. You can never make it foolproof. The balance
needs to be maintained in a sensible way. Equally important, there
are a number of other factors which give rise to where businesses
wish to locate themselves. A regulatory environment is one of
those, it is not the only one but it is quite an important one.
I think that flows through from the fact that depending what is
in the legislation and how that legislation is enacted, particularly
in relation to capital as well and the amount of capital requirements
that are needed in a regulatory environment, that is at least
as important an aspect.
(Mr Ross Goobey) Direct costs in our own organisationI
looked it up before I came hereof compliance and internal
audit, which is very closely associated, are six per cent of our
net operating costs. That does not include the cost of the time
that the other people in the organisation spend meeting the needs
of our compliance and internal audit, so you can possibly double
that. That is a huge cost. Perhaps we are just inefficient. Coming
from a relatively low start before the imposition of the OPS regime
in 1993, I think it is not that they are going to go off to Zurich
but some elements of the financial services have already gone
to Dublin. Dublin has a regime which is fiscally very attractive,
where the language is the samegive or takeand the
basic law is much the same as ours and the probity of the regime
is thought to be similar. I think the cost base over there is
probably lower. I have no direct experience, I just observe that
a lot of things like the open end investment companies have almost
all gone to Dublin and that is a potential danger.
191. How much is regulation and how much
is other factors?
(Mr Ross Goobey) It is impossible to distinguish.
I just observe that quite a lot of this sort of thing has gone
to Dublin. I can give you an example of where one of the big Italian
banks has set up its investment management business in Dublin
to service the UK and the rest of Europe rather than in London.
Going back to something Mr Heathcoat-Amory was asking, who bears
the cost of all this regulation, in our case it is the people
we are supposed to be protecting because we are owned by the pension
fund that we are managing. That seems rather perverse and that
may come back to the point I was making in my opening remarks
that we are having to protect them from themselves whereas they
are actually protected under the Pensions Act already.
Mr Loughton: Do you
think that if it is cheaper to do business in Dublin, and interestingly
I think I am right in saying that Ireland is the only place that
has higher stamp duty on equity transactions than we do, have
you seen any evidence of the cheaper costs being passed on to
customers or are they just doing it there because there is far
less red tape involved and they can be far more innovative?
192. And less tax.
(Mr Ross Goobey) There are lots of reasons for
them being there. Part of it is the taxation of the corporates
in the international financial centre which is a tax free zone
and the very low rate of corporation tax, of course, which is
the lowest now in the EU, if they do have to pay tax. They do
not have to transact stock transactions in Dublin, they can transact
it anywhere they like. That is one of the thingsa completely
different subjectabout what is going to happen with Frankfurt
and London, where is the actual transaction going to take place?
If we have got half a per cent stamp duty and the Germans have
got none we can be pretty sure that they are going to go to Frankfurt
to transact their stocks. There are lots of reasons for going
to Dublin, some of which are related to compliance costs.
193. As a general point, do you think that
an awful lot of what we are discussing in the FSA is actually
retrospective because the way financial services are going to
be marketed and the way financial products are going to be produced
in the future, using the Internet or whatever, is very different
from what happens now? In many respects the whole FSA Bill is
being tailored to what has already gone and is quickly being surpassed
and that is a very good example of what is happening in Frankfurt
and in Ireland.
(Mr Ross Goobey) Yes.
194. Is that not why the Bill is terse and
speaks in principles and relies on rules that even the FSA themselves
could make, that it is not stuck in a particular time zone and
it can actually respond to the way the markets develop in the
(Mr Ross Goobey) That is obviously very helpful,
not too prescriptive. I agree with everything that the Treasury
and the FSA think about this, that they do not want it too prescriptive.
We can see what level of cost the FSA has by merging all their
SROs together and there is not much sign of it being lower.
195. Would you stick to the view that you
would like to see a separate competitiveness objective? You do
not think it is sufficient that it should be in the principles?
You would like there to be something which is rather stronger
(Mr Foster) That is certainly my comment that
I made earlier on, there should be something stronger.
196. Do you think that there is a danger
instead of firms moving to Frankfurt or to Dublin that regulated
firms will deal with other regulated firms outside regulation,
that large firms know each other and will do business with each
other outside regulation and save the regulation costs?
(Mr Goobey) Some of the most extensive transactions
are not regulated anyway. I think it is going to be much more
a matter of cherry picking about where you do bits of business
and you will go to the regime that is most suitable for the transaction
you want to do and the cheapest and most effective. The base of
where you are is not going to determine where the actual business
197. You have said that cost is a factor.
Do you think that another factor may be the actual quality of
the individuals concerned who engage in the detailed regulation
at the interface, the people who come out of the central regulator
and come and inspect your business? If they do not really understand
your business it is frightfully difficult to get them to work
with you. That may be a very important factor and one that certainly
the FSA, if not the face of the Bill, needs to concentrate on.
(Mr Ross Goobey) We find that we have a perfectly
relaxed relationship with our regulator and IMRO is not notorious
for being very soft on these things. Obviously they are not up
to date practitioners in many of the areas that they are regulating
and that is inevitably true. I do not think that is the real problem,
I think it is the tasks that they are set by legislation or by
the FSA, they have to go through the process of doing it. Again,
like Lord Eatwell, I have forgotten which panel it was but I think
it was the previous panel where somebody was saying he only had
ten per cent of working days when he did not have one of the regulators
in his operation. That is quite a burden on resources.
198. Before we close, and I think we should
close now, can I ask David Roe and Andrew Whittaker whether there
is anything you want to say in response to the issues raised about
Lloyd's earlier? Or whether you would rather reflect on them and
come back to us at a later stage?
(Mr Whittaker) Perhaps I could try to deal with
the issue that has been raised about the way in which regulation
of individuals might impact on non-executive directors. The Bill
does provide powers to enable the FSA to operate a system for
regulation of individuals within an authorised firm. We plan to
issue a consultative paper in June setting out how we expect to
exercise those powers. I do not want to do too much by way of
anticipating that consultative paper. We do expect that it will
treat non-executive directors at Lloyd's no differently from non-executive
directors at any other institution that we regulate. So I think
that to the extent that there was a suggestion that we might view
Lloyd's differently from an insurance company, I do not think
that is currently what is planned. We recognise that non-executive
directors have a different role from executive directors. The
objective of what we are doing will be to try to ensure that responsibility
under that regime reflects the role of the people concerned. We
are not offering that non-executive directors will be entirely
outside the new regulation but the way in which it will apply
to them will be commensurate with their responsibilities as non-executive
directors and no greater.
199. And Jonathan's point?
(Mr Roe) I think Mr Agnew gave me a bit of a let
off by saying that he did not really want to have a debate about
the issue today. We are certainly aware of the point that has
been made and are giving it careful consideration.
Chairman: Thank you
very much for coming this afternoon. This has been very helpful.
As I said to the other group, we are up against sharp time constraints
and we want to get as much evidence as possible. We want to get
people's reactions to what they see as the outstanding issues
that are left and in that context this has been extremely useful.
Thank you very much.