Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 100-119)



  100. Do you think you should not have had briefings about those issues? There was quite a major consumer issue there, was there not?
  (Mr Brown) The issue of Equitable Life's prudential position is ultimately a very serious consumer issue. At the time when the Consumer Panel was formed, it was put together with some continuity with the old PIA Consumer Panel and there was a feeling within the old PIA and among some panel members in the past, a widespread feeling, that the consumer issues were the conduct of business issues and the prudential issues were not ones that the Consumer Panel paid much attention to. Over the first two years of this Consumer Panel's life, it became very clear that that old distinction was incorrect and that prudential issues were central consumer issues and Equitable Life has proved that.

  101. When we saw Howard Davies before, some of us were concerned that the thinking of the FSA following their taking over responsibility for Equitable Life was focused on keeping that business going and hopefully getting over the problems that it was experiencing, rather than perhaps highlighting the issues of concern to consumers who might be new investors in the company. Is that not highlighted and are not those concerns legitimised by the fact that this major, central, single, most important issue of the FSA when the FSA was set up, you were not given any information about as the Consumer Panel. If there is value in having an insider group to look at the consumer issue, surely you would expect it to show itself in that particular case?
  (Mr Brown) It is very clear from the Baird Report that communications between those concerned with front line consumer protection, if you like, and prudential insurance regulation were not good in that there were serious errors and problems of management in the regulator at the time. That is what it says in the Baird Report. The Panel takes the facts of the Equitable Life affair. The Panel cannot try to run its own investigation or second guess those investigations that are taking place, but we take our facts from the Baird Report and that is what it says.

  102. Are you not worried that there is potentially a conflict of interest here between your role within the FSA and your role in protecting consumers? Can you not imagine circumstances where the FSA may have as its prime aim keeping afloat a company in these difficult circumstances and compromising your ability therefore to warn consumers of the danger to their money by investing in such a company?
  (Mr Brown) I understand your question. We have all learned an enormous amount from the Equitable Life affair. The problem of what to do in between the two states of a company being open for business with everything running smoothly and a company failing, the problem of what happens in that gap in terms of information to the public and information, I suppose, to the Panel, is an important one. We have raised this with the FSA.

  103. Would you like to have known at an earlier stage than you did about this problem?
  (Mr Brown) My feeling is we should have approached the FSA ourselves about Equitable Life at an earlier stage.

  104. They should not have approached you?
  (Mr Brown) From the way you put it, if there were substantial internal briefings on the issue, we would have probably appreciated one ourselves.


  105. You mentioned that you have learned a lot from Equitable Life but would you agree we have an awful lot more to learn?
  (Mr Brown) Yes. We communicated with this Committee some time ago about the fact that the Baird Report picks up only events from the beginning of 1999 and there is a lot more to the affair. We look forward to the results of the Penrose Inquiry. There is also the inquiry of the Parliamentary Ombudsman. There is a lot more to learn, yes.

Mr Beard

  106. When the FSA takes on its full powers and expands to cover mortgages and insurance brokers, is that going to make a big difference to the way your panel functions?
  (Mr Brown) First, I ought to say we are very pleased about this change in scope because, on the mortgage front, we have been campaigning very hard to bring mortgage advice and intermediaries into scope. We also think it is a very good idea about insurance. It will certainly mean big changes for the FSA because there is so much of it. This is a large piece of business which is going to be brought under regulation. Whether it means there is any difference in the relationship between the Panel and the FSA I do not know. I do not think so. I just think it means there is more of it.

  107. Recently there has been a third managing director appointed with special responsibilities for consumer relations. Is that improving the focus of the FSA on consumer matters and is that affecting your panel at all?
  (Mr Brown) It is probably too soon to detect a major change. I do know that that director is leading some projects which we are very keen on. To start with, he is leading the project picking up on the points that flow from the Baird Report, all of which we see as important reforms to the insurance industry and to the way the FSA regulates it. He is doing various other projects which we are keen on. I hope that that appointment means that consumer issues are regarded as more central to everybody's work at the FSA because there is a major cultural project going on in the integration of these regulators. It is not simply an administrative effort to bring these regulators together. Those people from the more rarefied areas of banking and insurance regulation have to think now in terms of consumer protection. That appointment signifies that the FSA wants that horizontal consumer theme across the whole of the regulator's activities.

  108. You said you hoped it would have this effect. Has that effect not been particularly obvious now?
  (Mr Brown) I have spoken with members of my panel about this. We do believe that this is changing. We believe we see changes in the regulator, but it is a big project.

  109. You mention in your report your unease at the way the concentration on money laundering was affecting the evidence that people had to produce to open a bank account. You represented this to the FSA and they changed their views on it. Could you explain what changes you propose from the Panel and whether and how they are being implemented?
  (Mr Brown) We have not proposed specific changes. We have highlighted the area and pointed to the fact that the money laundering requirements are interpreted with a considerable degree of variation at the counter when people are trying to purchase financial services products. Often, I have seen people turned away in the last day of the financial year because they have brought the wrong gas bill with them so they could not take out a simple ISA. It is the bad implementation of these very important rules that we are concerned about. We do understand that the Treasury is setting up a committee to look at this and we will be attending that committee. There is a lot still to play for on this.

  110. What assessment has the Panel made of the latest proposals from the FSA on polarisation?
  (Mr Brown) The Panel has not met yet to discuss CP121 on polarisation. The consultation period runs to 19 April and we are meeting early next week to have our first crack at that consultation. It is obviously an extremely important piece of policy for consumers. In the run up to it, we have had a lot of discussions with the FSA and attended meetings. We have collaborated with the Consumers' Association on one seminar and we are organising one of our own to bring together people from the consumer side and the trade associations to discuss some of the issues. Our main desire in the debate is to try to bring the problem of providing advice onto the agenda. We think the real problem is that a large proportion of the population among middle and lower income groups does not have access to independent advice and, as they are expected to take more and more responsibility for their financial affairs and for their retirement, people need access to that advice. We will be examining the polarisation proposals very much in the light of that concern.

  111. If you abolish the sharp distinction between partisan advice and independent advice, how is that going to enhance the number of independent advisers available to people?
  (Mr Brown) That is one of the things we will examine. At the moment, one of our big concerns is that, whatever distinctions are made formally in the distribution channels at the moment, the majority of people do not one way or another have access to independent advice. The situation as it stands is very poor. We have made a heartfelt plea to the FSA throughout the pre-consultation period that whatever they do they should not make things worse.


  112. I notice from your report, page ten, you say one in five people who have taken out a financial product over the past five years have regretted it. I wonder if that is the tip of the iceberg. The FSA consultation period is three months. Will you be producing your report for public consumption before the end of that consultation period?
  (Mr Brown) Perhaps one in five is an under estimate. I think one fifth of people regretting a recent purchase is quite a big figure and it is one that gives us great concern. It may be larger than that. Once people have made an investment, they have an investment in something. On the question about when we will produce our response to the polarisation consultation, I would be very much surprised if we submitted it at the last minute. We intend to engage in the debate during the forthcoming period. I am reluctant to talk about it now because I have not had the advantage of speaking to my colleagues about it, but we are starting that next week and we are holding a seminar in March at which we will be expressing views about it. I think we will be publishing our report before the last moment.

  113. I think it would be helpful to this Committee if you did publish that response and sent a copy to us.
  (Mr Brown) We will do that.

Mr Plaskitt

  114. Can I refer you to figure 2.4 in your report on page 14? I was interested in how you interpret what you are finding here because you have just been talking about financial advisers and also customer satisfaction with products purchased. If we are looking for a trend on this chart—admittedly, it only goes across two years—what we see is that, although independent financial advisers are the main source of information, there is a pretty sharp reduction in the number of people who have consulted them and what is replacing that? People talking to their mates at work, reading magazines bought off the shelf or scanning through the internet. All of those latter ones are unregulated and who knows what sort of advice you get in the canteen or on the net? How are you interpreting this drift away from the independent adviser?
  (Mr Brown) This is only over two years. I could not be confident that this is a sign of a major drift away from advice. We do know two things. One is that independent financial advice is tending to drift upmarket at the moment.

  115. What does that mean?
  (Mr Brown) It means that the advisers report anecdotally that more of their clients are what they call high net worth individuals and I think they report that it is more worth their time to concentrate on their clients who are high net worth individuals. The other thing we know is that most people do not get independent financial advice, so I would point to a real problem here and that is that we have a lot of people in the population who are being expected to take out complex financial products and think for themselves about it and they have nowhere to go. They have somewhere to go if they are in debt because the debt advice agencies, Money Advice and Citizens' Advice, can deal with that, but they have nowhere to go if they have even a minor financial query of a generic nature. Of course, the FSA has done its best with its website, leaflets and CD ROMs and so on, and I am sure people use those but the problem is the obvious one: if someone is not geared up to use the web or pop in a CD ROM and find out, who do they go to? At the moment, we have all allowed a situation to develop whereby there is this very large gap in the advice market.

  116. Is this not pointing to a pretty serious problem, especially for people on average incomes? Leaving the high net worth individuals out of the picture for the moment, the majority of people purchasing a financial services product are on average or around average income. Admittedly it is only a two year snapshot, but it shows a drift away from taking independent advice. We hear about 20 per cent regretting purchases and these purchases consume quite a large proportion of someone's disposable income so 20 per cent dissatisfaction is a pretty high figure. I doubt you would find 20 per cent dissatisfaction on the choice of car purchase or washing machine or house purchase but on the financial services it is a very high figure. Elsewhere in your report, we find people reporting high levels of complication in terms of purchasing a financial product. You report 36 per cent of people saying they found it complicated to take out a mortgage. It is complicated; it is a large part of their disposable income; and yet they are not taking independent, objective advice. Does that not add up to a pretty worrying situation?
  (Mr Brown) Yes.

  117. What can you do about it?
  (Mr Brown) During the run up to the polarisation discussion, we made this point very strongly. One thing I would say in advance of the discussion with my colleagues is that we are very pleased that there is a chapter in the polarisation consultation which addresses this problem of providing advice to people who at the moment just are not in the market for it. I am not sure though that anyone has come up with an appropriate solution to deal with it. We have proposed in the past very generally that there ought to be some kind of widely available, new service to provide generic and strategic financial advice for people. Often, this advice is quite simple stuff: whether, if you are on a low income, to start first with some life insurance protection or invest in a pension. An example I often give is of someone who is not served well by the system. If a young building worker is thinking about taking out a stakeholder pension, there is no one in the system who will advise him that he ought really to be protecting his family with some life insurance before he takes out a stakeholder pension. There is just nowhere in the system where this can happen, but they are not very complicated issues, some of them. The Panel has argued in the past for some kind of universal financial advice at low level, perhaps with debt and benefit advice.

  118. Given you agree that this is a big problem for consumers and you are the Consumer Panel, do you think you are doing enough to help consumers address this problem?
  (Mr Brown) We have raised this with the FSA and with the Treasury. We are meeting with the Economic Secretary. We have made it the focus of the joint seminar that we arranged with the Consumers' Association. It will be a central part of our response to the polarisation consultation. It is in our annual report. Yes, we could do more, but we have made a lot of noise about it already.

Mr Mudie

  119. When you say you could do more, what more could you do? That has all had to be drawn from you. I was not impressed when I looked at what you had done for the socially excluded groups. Bit by bit, Mr Plaskitt has had to pull out that you have made representations about free financial advice for those on low incomes. What else can you do? Have you done that? Has it been rebuffed? What was the Treasury's response? What was the FSA's response? Where are you with it?
  (Mr Brown) I have explained what we have done.

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