UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 71-viii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

Treasury Committee

 

 

Restoring Confidence in Long Term Savings

 

 

Thursday 20 May 2004

MR MICK McCATEER, MS ANNE FOSTER, MR NICK LORD

and MS JILL JOHNSTONE

Evidence heard in Public Questions 1432 - 1571

 

 

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Oral Evidence

Taken before the Treasury Committee

on Thursday 20 May 2004

Members present

Mr John McFall, in the Chair

Mr Nigel Beard

Angela Eagle

Norman Lamb

John Mann

Mr James Plaskitt

________________

Examination of Witnesses

Witnesses: Mr Mick McCateer, Senior Policy Adviser, Consumers' Association, Ms Anne Foster, Chairman, Financial Services Consumer Panel, Mr Nick Lord, Head of Money Advice Strategy, National Association of Citizens Advice Bureaux and Ms Jill Johnstone, Director of Policy, National Consumer Council, examined.

Q1432 Chairman: Good morning. Can I open this meeting by welcoming you and asking you to introduce yourselves for the sake of the shorthandwriter.

Mr Lord: Good morning. My name is Nick Lord; I am the Head of Money Advice Strategy at Citizens Advice.

Ms Johnstone: Hello, my name is Jill Johnstone; I am Director of Policy at the National Consumer Council.

Mr McCateer: My name is Mick McCateer. I am Principal Policy Adviser at the Consumers' Association.

Ms Foster: My name is Anne Foster and I am the Chairman of the Financial Services Consumer Panel.

Q1433 Chairman: Thank you very much and welcome. Can I thank you for your written submissions which have been very helpful to us. Help the Aged also sent a submission in to us and they said that "the record of the savings side of the financial services industry in talking up the benefits of its products at the point of sale and talking them down at the point of delivery is woeful." Is that a fair assessment of the situation or is the situation that we have had a bear market over the past few years and we just have to accept things as they are?

Mr McCateer: I think it is fair to say that the bear market has contributed to the collapse in confidence but I would argue very strongly that what we have seen is a perfect storm of events which has undermined confidence in the long term savings and pensions industry and that the bear market has simply been the most recent of those events that have caused or contributed to that collapse in confidence. I am not surprised that consumers have lost confidence in the industry given the litany of mis-selling scandals that we have seen like pension mis-selling, mortgage endowment mis-selling, precipice bonds, contracting out mis-selling where, if the current trends continue, people who were advised to contract out would be £20 a week worse off in retirement than they would have been had he stayed in SERPS. I would say the bear market has actually done us a bit of a favour; what it has done is to make people realise that their standards of living, their financial futures are linked to the stock market and not surprisingly consumers do not like what they see.

Ms Johnstone: I agree with much of what Mick has said. One cannot blame the situation we are currently in of very, very low confidence that consumers have in the market - and also other pension providers - on the bear market and a lot of the issues that have led us to where we are now were well before that, including the mis-selling standards of the early 1990's.

Ms Foster: I think we would characterise it echoing many of the points made by Mick and Jill but also some others. I think we see the lack of consumer confidence stemming from a variety of aspects. One is still very, very complex products, extremely difficult for consumers to understand and to differentiate one from another; in many cases poor value for money and as consumers become more aware of the charges that are being made they are beginning to realise what poor value for money some of these products are. There is still evidence of widespread mis-selling; far too often the industry is still mis-selling particularly complex products in an unsuitable way. In many parts of the industry there is still a reluctance to treat customers fairly and you see that in the way firms are handling some of their complaints. There had been poor investment returns which have clearly contributed to lack of consumer confidence and there is still far too limited access to generic financial advice for the mass market. We would characterise it in that way.

Mr Lord: I agree with the comments made by my colleagues but perhaps with one added emphasis as well, which is that Citizens Advice see very little with regard to savings and investment advice and one of the reasons for that is the cultural shift over the last 25 years with regard to consumers taking a short term approach using the developments in the consumer credit market, release of home equity where they are consumers and the lack of confidence and the opaqueness of the savings and investment market we think adds to that and further encourages consumers to take a short term approach and use the consumer credit market.

Q1434 Chairman: In the credit card inquiry that we had this Committee has been very influential in pressing forward the rapid introduction of a Summary Box which was introduced last March displaying the main details of the credit card in a standardised way and in a standardised size of type. The Committee will be examining the Chief Executive and others in the credit card industry later on in the year. In the savings market some of the information is currently laid out for some products in the FSA's key features literature, but it is a very patchy picture. Would a compulsory Summary Box clearly and consistently laying out the key risks, charges and other features in a prominent, standard way for all savings products help consumers' understanding?

Ms Foster: I think anything that would make it easier for consumers to understand exactly what it is they are buying and what it is going to cost them, and anything that helps them to compare products across the market would help. I think an idea like that - which has been a great advantage in the credit market - would have to be consumer tested so that it did achieve what it was designed to do. I do think the FSA made great progress when they started developing the key facts document and that was consumer tested and did appear to show greater levels of understanding amongst consumers. The problem is that that particular development has been delayed now because the FSA wish to link it to their work in projection rates and the panel think this is a source of some disappointment, that the good work has been delayed and yet it was clearly in everyone's interest that it should make much quicker progress than it has been doing.

Q1435 Chairman: I will take that as an answer from all of you.

Mr McCateer: Could I just say that obviously anything that simplifies the way information is presented has to be good, but it is no substitute or replacement for a duty of care on the advisers in the industry to give good advice because information solutions on their own do not work very well in this market.

Q1436 Chairman: From previous witnesses in this Inquiry and elsewhere - from Lord Penrose, from Tom Ross of the Institute of Actuaries, from the Deputy Chairman of the Association of Independent Financial Advisers - we have uncovered repeated cases of senior figures in the industry apparently knowing of potential problems looming for consumers but doing nothing about it. The actuaries knew what was going on at Equitable Life as early as the late 1980's, but said nothing. Some senior figures in the insurance industry knew what was going on with endowment mortgages as early as 1996 but said nothing. Some senior figures in the IFA business suspected likely problems with precipice bonds as soon as they were marketed, but said nothing. Is there a pervasive culture of "hear no evil, see no evil" in the financial services industry?

Mr McCateer: I do not think it is a deliberate culture but I think the fundamental structure of the industry will almost always result in those outcomes because we think the fundamental problem is that there are no meaningful standards of corporate governance and accountability in the sector. We have had huge debates in this country about corporate governance from the shareholders point of view; we have not had a similar debate of a corporate governance and accountability from the policy holders' point of view. I think you put your finger right on it. The sales people who mis-sold mortgage endowment policies were not doing that on their own initiative; this was under instructions from the senior management and the sales directors in the organisations. Until there is corporate governance and checks and balances, and until we have greater regulatory transparency in this country, I think the same causes of detriment will still remain.

Mr Lord: I think that one of the things that came out of the Sandler Report which we found very interesting was the acknowledgement that the industry is confusing, opaque, expensive, but that it is behaving totally rationally and there have been significant benefits. I think there is very much a cross-over wit regard to the consumer credit industry where, in general, there have been significant advantages for UK consumers with regard to a vibrant and energetic industry but with significant pockets of consumer detriment. What we would look to have is a far more level playing field which acknowledges that there are benefits with regard to the industry but also that it would be appropriate that the industry should meet the needs of valuable consumers because of what is effectively an externality.

Ms Johnstone: I think the industry is still in a culture of shifting products rather than meeting consumers' needs as we can see from the mis-selling scandals that we have had. As the Sandler Report pointed out, there are very weak competitive pressures in this market; there is very little incentive from competition to improve things which is why regulation is so essential.

Ms Foster: I think also the regulator has a part to play here. There is nothing more irritating than to hear after the event that everyone knew it was going on. If people know it is going on they must be able to go to the regulator as soon as they know there is a potential problem or suspect there is a potential problem. I think it is the role of the regulator also to investigate these claims and to be fleet of foot ahead of the game. I think that is a very important role for the regulator to be able to play, but it does rely on communication at an early stage between the industry and the regulator and to be able to do so without fear of repercussions whilst initial enquiries are being made.

Mr McCateer: I would like to add a point about this issue of freedom of information because I think it is really very important in the context of financial services regulation. Next year we have the final implementation of the Freedom of Information Act in this country and yet there is a clause in the FOI Act, an absolute exemption, for any existing statutory prohibition. The Financial Services and Markets Act contains a huge exemption for information provided to the FSA. We understand the need to keep secret genuinely commercially confidential information, but there must be a public interest test built into the Financial Services and Markets Act which allows consumer groups to ask the FSA to disclose information on mis-selling. They will not give us that information because they say it contravenes the Financial Services and Markets Act. There is a culture of secrecy amongst regulators in this country which needs to be changed.

Q1437 Chairman: Christine Farnish of the National Association of Pension Funds described the financial services sector as being "behind the game" relative to other more consumer focused sectors. Most of you represent organisations that deal with a whole array of industries dealing with consumers. How would you rate the financial services industry in terms of its handling of consumer issues: above average, average, below average or take your pick?

Ms Johnstone: Significantly below average. An example of that is the way that, in thinking about stakeholder products, they have been lobbying very hard at the moment to reduce consumer protection and access to redress in a market where they already have a huge consumer lack of trust and lack of confidence. It seems to be an extraordinary reaction to the situation in the market that they are facing.

Mr McCateer: About 18 months ago we did an analysis across all the sectors that we cover as an organisation and we cover quite a wide range from supermarkets across to the health service and food safety and whatever. When it comes to any private sector, any retail sector, by far and away the single biggest source of consumer detriment we have ever come across is the life insurance sector. We estimate that the total cost to the consumer and the tax payer is roughly £30 billion over the past two decades, that is mis-selling costs, the products they were selling were substandard per value and so on. That has cost the tax payer an awful lot as well because we spend a fortune every year providing tax relief to incentivise consumers to use the insurance industry and frankly that money is just a direct transfer to the coffers of the insurance industry. It is the single biggest source of detriment.

Mr Lord: My concern from the Citizens Advice perspective is that the contacts we tend to have within financial services companies tends not to be on a win/win scenario: how can we work with you to ensure that the consumer needs will be met? It is rather with regard to: how can we work with you to ensure that we get a commercial advantage over our competitors? For instance, over the past last 12 months financial literacy, financial capability has been very high profile. I have lost count of the numbers of letters and phone calls from financial services companies talking about how they have a wonderful idea to provide information to consumers which would help consumers to make informed choices because, of course, their company is the good guy, they are the ones that want to help consumers. Actually, what they really want is our brand; they are wanting us to authorise and have the CAB brand and that is different from some of the approaches we get from the non-financial services sector.

Q1438 Norman Lamb: At least there is a sort of competitive tendency to perhaps improve things. Is that not in some ways an encouraging sign?

Mr Lord: There is quite a difference I think sometimes when you talk to people in the corporate responsibility sections of financial services companies. They genuinely do have the task and the objective of making things better for consumers. It is then quite apparent when they go back and talk to their press and their marketing people they then come back to us with a slightly different perspective because their press and marketing people have asked for something particular to come out which will be an advantage they can use in the press.

Ms Foster: I would not characterise the industry by being product driven and not consumer led, but on the point where competition can and cannot help the consumer we have another example where we think the industry could easily work together in a non-competitive way to the advantage of consumers. We did some research earlier in the year about financial reviews. There are so many high street banks now advertising: "Come in and have a review of your finances" so we did a mystery shopping exercise to find out what these were like, what the quality of advice was and what people were getting. In some cases it was quite a useful exercise and some people really benefited from it. What we did see, though, was that there was a huge variation in what was a financial review. In some cases it was quite comprehensive and in other cases people did not even know the name or status of the person they were talking to, or did not get a written summary of what they had. We have suggested to the British Bankers Association that what really ought to happen is that their membership could decide on a basic minimum standard of what a financial review should be and they can then do competitively over and above that what they want. We have yet to get a response from them on that suggestion.

Q1439 Chairman: Did the consumer go away with any written material about their finances?

Ms Foster: Some did and some did not, it depended on the bank. Some people had to ask for a summary; some got it automatically; some did not get anything at all. One of our mystery shoppers asked if she could have a summary of what had been said and she was given a hand-written torn off piece of paper. What we were saying is that it would be very good if the industry could cooperate in agreeing this basic set of criteria for financial review and then on top of that they could compete and offer additional benefits and additional incentives or whatever they wanted to. It is a suggestion we have made to the industry and have not yet had a response from that. We are disappointed at the lack of interest in our suggestion.

Q1440 Chairman: I will focus this question on yourself because I want to move on: you mentioned a role for the regulator. The FSA Complaints Commissioner told us that, based on her experience to date, there was "a need to address the extent to which the FSA focuses adequately on consumer as well as on industry issues." First of all, would you agree with that implied criticism of the FSA? Also, should the FSA have a strategy for raising its profile with the retail consumer, via advertising, direct mail shots, et cetera? Callum McCarthy has admitted to the Committee that many consumers may not even have heard of the FSA and therefore there is a need for the FSA to establish itself as the single reference point for consumer protection, advice and general information on financial issues.

Ms Foster: You have made a lot of points there; I will try to take them all individually. We do think the FSA could do better to be aware of the consumer interest right across the organisation. There are some parts which are very much alive to the consumer interest and build it into their thinking and policy making. However, there are still some gaps. In some cases, for example the parts of the FSA which are dealing with the wholesale markets, I think they sometimes fail to realise that changes in wholesale markets do actually have implications for the consumer. In many cases it is simply raising awareness that everything the FSA does has implications for the consumer, direct or indirect, intended or unintended. I think they have to be more aware of that. In many ways we think the FSA are getting more effective, but they could still be doing better. Some of our suggestions have been that they should be less accepting of what the industry says to them; they should be more cynical on occasions; they should be making more use of mystery shopping to see what is really happening on the ground and not just what they are told. There should be more publicity for the enforcement activity that is carried out so people know what is going on and in some cases bigger fines and bigger fines for individuals - the senior management of the company - if they were at fault in the first place. More emphasis on treating customers fairly and much more effort and activity, and we are pleased to see this is happening with financial promotions. In terms of the role of the regulator and its profile in the market, I think the FSA actually has to question more whether its profile amongst consumers should be much higher. I know that Callum McCarthy has said that it does not matter whether consumers recognise or are aware of the FSA; what really matters is that they are doing their job. To a certain extent that is true, but I think that now is the time for the FSA to examine that approach. If there were a crisis in the industry, if consumers are reading in their newspapers about a crisis with the firm with which they have a policy, if they are reading a concern about a particular product they may have bought, who do they have to turn to if it is not the regulator? I actually think the regulator has a role there in communicating more effectively with the public in times of crisis, but generally speaking throughout the year and to be an independent, respected, objective source of information and help to the consumer; not advice, but I think generally they have to consider having a profile with consumers to raise awareness and to help consumers take on more responsibility for their individual decisions.

Q1441 Mr Beard: Are you saying that consumers should turn to the FSA? Turn to the FSA for what?

Ms Foster: For information about products, for information about companies. If they are reading in their newspaper day after day after day about problems with Standard Life, for example, they might be wondering if their policy is safe with Standard Life. They would like to turn, for example, to the FSA website to get some basic information about what is happening. I realise there are sometimes difficulties in how much information can be put out, but if a consumer cannot turn to the regulator for reassurance or information in times of trouble, who can they turn to?

Q1442 Chairman: You give the example of Standard Life, but with the reporting regulations and negotiations between FSA and Standard Life, it is very hard for the FSA to come out with confidential information. We have to be sympathetic to the FSA's position here.

Ms Foster: I agree entirely that there has to be a threshold beyond which the regulator cannot go. My question is whether they are going up as far as that threshold at the moment. There is no easy answer to it, but I think it is something the FSA has to consider and examine whether they are giving consumers as much information as they are able to at the time, so that consumers know they have somewhere to turn to.

Q1443 Mr Plaskitt: The advice on the website can only be as good as the information you have. What about the instances where companies simply are not telling the regulator what is going on, then you put something up there that might turn out not to be true.

Ms Foster: As I said, they have to decide where that threshold can be and it is not easy. The kind of information the FSA deals with is highly market sensitive.

Q1444 Mr Plaskitt: It may be that the regulator does not know all that is going on because the companies do not tell him.

Ms Foster: I think what I am saying is that where they can put something out which they are able to do and which would be helpful to consumers, then they should consider doing more.

Q1445 Mr Plaskitt: Is there not a serious risk of putting potentially misleading advice out there which would bring your institution into disrepute because you have relied on companies who have not told the truth?

Ms Foster: I want to make it absolutely clear that we recognise that they cannot put out market sensitive information or misleading information. What I am saying is that where there is some information that can be put there, it would be helpful. It is also simple things like improving the quality of the search engine of the FSA website so that if consumers just want to tap in a word about a product they might be considering buying then they can do so and get a clear factual statement about what it is they are buying. The FSA does superb fact sheets and information sheets. I am saying that we want it to be easier for consumers to have access to this kind of information. The second point is that regulators should consider how far they can go in giving information to the consumers when there is a problem. I appreciate everything you have said about misleading information and market confidentiality, the only question is, could they be doing more?

Q1446 Mr Beard: There must be a question that the FSA take over the responsibilities belonging to the board of whatever company it is.

Ms Foster: Again I think they have to discuss with the company whether they should be giving out more information at a sensitive time. This, again, is the role of the regulator. Could they be asking the individual firms to be saying more at a critical period?

Q1447 Mr Beard: That may be the route forward. Going back to the main theme which is restoring confidence in long term savings, there are likely to be many different elements to doing that: better information, better products, better education and so on. However, all those will be swamped if the industry is not really making a concerted effort to stop the long sequence of mis-selling that we are all aware of. Are you seeing a concerted effort on the part of the industry to stop this scandalous train of events?

Mr McCateer: I think it is fair to say there has been a temporary improvement in the quality of products, particularly in the with-profits sector. However, I do question whether there has been any permanent or fundamental improvement in the way the industry runs its business because it all comes back to this business about corporate governance accountability. There is still an inherent conflict of interest. If you are the director of a board of a life company between your shareholders and the policy holders, you have an explicit duty to your shareholders under UK company law. The only counterbalancing duty to your policy holders is a very ill defined and abstract duty to treat customers fairly, yet you, as the director, actually defines and interprets what treating customers fairly means. There must be an explicit duty to policy holders as well to counterbalance the duty to shareholders and until they address that corporate governance issue I do not see any chance of permanent improvement.

Ms Johnstone: I agree with Mick. In a sense it is a massive cultural shift that is needed. As I said earlier, they are still very product orientated rather than consumer orientated. We are seeing that things are perhaps slightly improved at the moment but I have no confidence that that will remain.

Ms Foster: I think also we have to look at methods of remuneration of sales people. Whilst it is predominantly a commission driven industry then clearly the emphasis is going to be on the volume of sales and hitting targets.

Q1448 Mr Beard: I will come back to that in a moment. Most of these problems that have arisen actually arose before the FSA was properly established. Is it your view that the FSA is now doing enough to secure a reduction in the level of mis-selling in the different elements of the financial services industry?

Mr Lord: It is difficult from a Citizens Advice perspective to address that question because the evidence, as I have explained, is not with regard to savings in investment; CAB clients are categorised generally by low income so their questions are more with regard to debt and to consumer credit, but we think that is a very important part of the element with regard to storing confidence in long term savings. What we are appreciative and supportive of is the work the FSA is doing with regard to the Financial Capability Initiative and we think that is a major way through to actually addressing this cultural shift with regard to consumers taking the short term view.

Q1449 Mr Beard: You believe that will start to address this problem of mis-selling that has established.

Mr Lord: What we are hoping it will do is encourage consumers at all income levels to take a long term view. It will encourage them to accept that what has happened over the past 25 years is that they have had a wonderful opportunity to spend often more money than they have had coming in. That has been good; it has been good for consumers; it has been good for the wider economy but clearly there are going to be implications down the line. One of the crucial questions for us at the moment is whether or not, as a consumer group, we should actually be saying to consumers: whilst you do have this opportunity to have an enhanced standard of living - you have the opportunity to go to Florida for you annual holiday rather than to Bognor - you actually need to think whether that is the best decision for you and your family, and whether we should actually be doing more to put forward the message which says that savings are important. It is not something that consumers are particularly going to want to do because it means postponing consumption, but that is a question for us and that is where we hope the Financial Capability Initiative will start to bear fruit.

Ms Foster: The regulator cannot, unfortunately, stop mis-selling, but they can take steps to do something about it. I do think the FSA has improved greatly in the area of enforcement action, and the more that they can clamp down on firms that persistently mis-sell and publicise the enforcement action and fine heavily those who are involved, then I think that is better and we welcome greater FSA activity in this respect.

Q1450 Mr Beard: Are you seeing it?

Ms Foster: Yes, more enforcement activity. We have also welcomed the emphasis the FSA are putting on treating customers fairly. We think this is an extremely important part of their strategic approach to stamping out mis-selling. Anything they can do will help, but actually - and I agree with what Mick said earlier - it still must come from the top in the form of a culture change.

Q1451 Mr Beard: Are there are some major gaps in the FSA's new product risk framework approach whereby they are now tracking how financial products are launched and marketed? The FSA has in the past been criticised for coming on the scene when the damage has been done. Are you now confident that the FSA's new approach through this framework will allow a more proactive and preventive regulatory intervention?

Ms Foster: I hope so. We welcomed the work being done on the product risk framework. At our next meeting we will be getting more information on this. As I understand it, it should enable the FSA at a much earlier stage to work out the potential risks of the product.

Q1452 Mr Beard: That is the theory, but is it happening?

Ms Foster: I have yet to see how it is going to happen. As I understand it, it is going to be an internal tool and not an external tool because the risks inherent in the product are associated with the method of selling and with the suitability of the consumer for this particular type of product. I think it is still too soon to say whether it will work or not. We hope it will but I do think it is an area where perhaps the FSA should be answering this, whether it will be more effective. We hope so, but we certainly welcome the work they have done on it so far.

Mr McCateer: In fairness the FSA were given a bad hand when the Financial Services Markets Act was set up. The statutory objectives they were given do contain an inherent conflict of interest. It is a dilemma because of those objectives. When the FSA was being created we took the view that the FSA should be given a very explicit objective to improve the quality of the financial services markets. Instead they were given what we thought were very passive statutory objectives. Even though they were given a bad hand I think they played that hand pretty badly. We have no complaint about the prudential regulation or the wholesale regulation; by all accounts they are doing that pretty well. However we are not satisfied at all by the way they regulate the retail markets. It is quite early to say and quite early to judge, but we have seen an indication that they are adopting an aggressive pro-active role that a regulator of the financial service industry needs to do. They ought to be building into the rules that firms stress-test financial products before they sell them and I do not mean stress-test them in terms of financial engineering, but in terms of understandibility, making sure that different groups of consumers understand them to just restrict and limit the ability for mis-selling. My big concern now is that the way the FSA is actually going with its new proposals for guided self-help on stakeholder products, they are talking about lowering the duty of care on firms.

Q1453 Mr Beard: Where are they talking about that?

Mr McCateer: This is in the discussion paper DP19. This is trying to devise a new sales regime for stakeholder products. Our view is that even if these products are simple people's lives will still be complex and you cannot remove all the risks just by simplifying the products. The FSA is talking about lowering the duty of care. As they admit in their own documents that will restrict access to the ombudsman service if they introduce this new regime.

Q1454 Mr Beard: When you talk about a new regime, you mean the Sandler products.

Mr McCateer: Yes, the Sandler or stakeholder products. I am deeply concerned that they are not stress-testing this new regulatory reform sufficiently well before they release it to the market. Anything that actually reduces the duty of care on these companies and restricts access to the ombudsman, I think it is going to undermine confidence even further.

Ms Foster: We would be very, very concerned if the FSA did go ahead with a simplified selling process if there was, indeed, evidence that people were making inappropriate or unsuitable decisions as a result of a simplified selling method. We entirely agree that it should be stress-tested.

Q1455 Mr Beard: We have been told that it can now take several hours to go through all the regulatory hurdles to make a sale and several witnesses have told us that, as well as the cost involved, this process is also guaranteed to deter the average consumer. Has the current regulatory approach, focusing largely on the sales process and little else, gone about as far as it can to be practical?

Mr McCateer: We have heard these kinds of concerns and criticisms from the industry, that the regulatory burden for stopping them selling products consumers on medium incomes, I think we have to dispel the regulatory burden for stopping them selling products.

Q1456 Mr Beard: That is now what I am asking. I am getting at the question of focusing all the regulatory attention on the sales process.

Mr McCateer: I think it has to be combination. You have to focus on the products and the process and the people; it cannot just be one element, there has to be a full menu. The regulator has to address all the potential causes of detriment, not just the process. We are aware of some banks who claim that they check one hundred per cent of their sales recommendations at the point of sale because they are so worried about compliance and they are saying that the FSA cause them to do this and this increases cost. The FSA does not require them to do that; they are doing that voluntarily. The reason they are doing that voluntarily is because they do not trust their own staff.

Q1457 Mr Beard: Five or seven hours, is that not excessive?

Mr McCateer: It does not have to be seven hours.

Q1458 Mr Beard: That is what we have been told.

Mr McCateer: The other reason is that the FSA requires a fact find. The FSA requires a firm to know its customers and to make sure a product is suitable. It is then up to the industry to determine the mechanism for knowing the customers. The reason the process takes seven hours is that because the industry do not trust their own staff; they do not trust their own internal control procedures; they do not trust their own front line staff to make proper recommendations so you have the compliance people double-checking every single sale that the firms make. Again that comes back to the fact that there is no proper governance at the boardroom level. The FSA is not imposing this burden; the firms have voluntarily adopted the burden because they know themselves their own structures and their own control mechanisms will not prevent mis-selling.

Q1459 Mr Beard: Has the regulation of sales advice gone as far as it can go?

Ms Foster: I cannot comment on this five to seven hours; I have not heard it before. However, firms are required to know their customer and to keep accurate records. I think both of these are perfectly fair and sensible requirements and I would not like to see them watered down. Whether it has gone as far as it can, I could not comment on that.

Q1460 Chairman: On the seven hours aspect, ABI mentioned it to us; also Aviva have mentioned it to us as well. It is a figure that is used fairly regularly.

Mr McCateer: I do not think that anybody disagrees with the desire to streamline the sales process; we all accept that. The real issue is where the liability for mis-selling lies. The essence of guided self-help and the real purpose behind the industry's desire to adjust the burden of regulation is not to cut the sales time. The real reason is to transfer the liability and risk of mis-selling from the firms to the consumer. Any perceived cost savings will simply be a transfer of cost from the firm's balance sheet to the consumer's balance sheet. It is all smoke and mirrors.

Q1461 Mr Beard: I have some figures here. Oliver Weinmann from Aviva found the typical time to complete a fully advised purchase was seven hours rising to twelve hours when account is taken of the time spent on unsuccessful leads.

Mr McCateer: That was a survey commissioned by the insurance industry to justify an increase in price caps and so on. Again, the reason that unit costs have risen is partly because consumers are not buying as many products so naturally that pushes up the unit costs. It also comes back to the points I have made: those costs have risen because the industry do not trust themselves to sell the products on a proper basis.

Q1462 Mr Beard: I think you are focusing too much on the length of time. My point was that at the moment all the regulation of mis-selling focuses on the sales processes.

Mr McCateer: I do not think it does; I think it is a combination.

Ms Johnstone: I think I agree with what Mick says. You have to look at the training of the people who are doing the selling, the sales process and the products. You cannot just look at one pillar of the problem, if you like. I do not think any of us are saying that one has to have a seven hour test; what we are saying is that we do not want to see any weakening of the current consumer protection that is there (the know-your-customer and the suitability tests). If they can be delivered in a more simple way, fine. The industry seems to be arguing that because of the time it takes we should weaken consumer protection and access to redress.

Q1463 Mr Beard: With all this palaver it has not been working very well because we still have the scandal. However, let us move on. Payment by commission is often put forward as a fundamental cause of the high level of mis-selling (as Ms Foster was saying a few moments ago). Rather than applying ever more draconian regulations to the selling process, might it be more effective to focus on the basic business model in use in the industry and move away from commission altogether?

Mr McCateer: Yes, I think that is absolutely right.

Q1464 Mr Beard: If we did, have you any views on where we would move to?

Mr McCateer: I think it could be done by regulation or it could be done by codes of practice.

Q1465 Mr Beard: How would you reward the advisers?

Mr McCateer: The whole business model would have to move towards a more John Lewis type arrangement where the staff are rewarded on how they perform overall within the business rather than their remuneration being linked to a specific sale. That direct link between commission and remuneration I think does incentivise volume sales which may not be suitable for the consumer. I think the commission model is one of the fundamental causes of mis-selling; maybe not deliberate mis-selling but reckless selling.

Q1466 Mr Beard: Is part of the problem that the relationship between the product producer and the independent financial advisor is not transparent enough?

Mr McCateer: I do not think transparency has actually changed anything because although this disclosure came in originally in 1985 there was this great expectation that disclosure of commission would cause competition to drive prices down; it did not at all. It was only when stakeholder pensions came in that you actually saw costs coming down. In fact, the moment the OFT abolished the maximum commission agreement, commission costs spiralled as well.

Ms Foster: I think it is self-evident that if a person's only means of remuneration is commission on the sales they make there is clearly going to be pressure on them to sell by volume. However, I do detect quite a lot of interest in the industry itself in changing to a different business model. As I understand it there have been some quite interesting examples within the industry. I would have to let you know the examples of where they are changing from commission to a salaried approach and where it does appear to be quite effective.

Q1467 Chairman: Could you give us an example just now.

Ms Foster: I believe one of the IFA networks called Sesame is doing that or planning to do it. It is one of these big networks. I do not know enough details to give you now, but I just believe there is more interest within the industry to move away from commission.

Mr McCateer: We have certainly had big firms through our door recently who are desperate to move away from this commission model but the problem is that they do not want to go first because they know that if they move away from this commission driven model there will be slaughtered in the market. That is the commercial reality.

Q1468 Mr Beard: Is this relationship between the producer and the independent financial adviser always damaging to the consumer? Is there nothing to be said for it?

Mr McCateer: We have always found that IFAs generally have given the better quality advice and they have been more economic in terms of distribution when compared to the big banks or the insurance companies.

Q1469 Mr Beard: So it is not all bad.

Mr McCateer: No, it is not all bad. IFAs have, in many cases, had a positive impact on the producers. The real thing coming up now is this depolarisation stuff which is going to reduce access to truly independent financial advice.

Ms Foster: We are not opposed to incentives at all, but I think incentives should be linked to good performance: lower level of complaints, higher incentive.

Q1470 Mr Plaskitt: Ms Foster, can you tell us what the budget is that the FSA Consumer Panel has in a year to spend on helping consumers with advice and education?

Ms Foster: None of our budget goes to that. Our statute prevents us from having this role within the FSA; that is a role for the regulator, not for us. Our sole purpose is to advise the FSA on the impact of its proposals and policies on consumers.

Q1471 Mr Plaskitt: Is the FSA as an organisation as whole putting any of its budget into consumer advice and education?

Ms Foster: It is putting a lot of its budget into consumer education but I do not know the precise figure.

Q1472 Mr Plaskitt: Mr McCateer, the Consumer's Association, how much in a year are you investing in consumer advice and education?

Mr McCateer: We cannot give advice because we are not a regulatory authority, but clearly a substantial part of our research budget in our magazines like Which? or Which On-Line? service is dedicated to financial services.

Q1473 Mr Plaskitt: Can you give us a ball park figure?

Mr McCateer: We have a turnover of £57 million a year. A substantial part of our turnover is dedicated to research and of that I would think maybe a third of that research budget is on financial products. I cannot come up with a more complete answer; I am not the financial director. It is our biggest campaign area, there is no question about it.

Q1474 Mr Plaskitt: Where does that money come from?

Mr McCateer: From subscriptions to the magazines.

Q1475 Mr Plaskitt: From consumers' subscriptions?

Mr McCateer: Yes. We have no funding from government or advertising.

Q1476 Mr Plaskitt: Nor from the industry.

Mr McCateer: Nor from the industry, no.

Q1477 Mr Plaskitt: Ms Johnstone, the National Consumer Council, can you give us a rough idea of how much you are spending on consumer advice and education?

Ms Johnstone: We are in a similar position to the FSA Consumer Panel; our statutes do not let us do it. Our Memoranda and Articles of Association say we are not there to give individuals advice.

Q1478 Mr Plaskitt: Are you putting anything into promoting and supporting consumer education in financial literacy?

Ms Johnstone: We cannot provide services directly to individual consumers. Within our work programme we do put resources in. We are involved, for example, in the FSA Capability Scheme so we do put some of our staff resources and research budget into that, but we cannot advise individual consumers.

Q1479 Mr Plaskitt: Where does the National Consumer Council's money come from?

Ms Johnstone: The Department of Trade and Industry give us most of our money. We do also raise money from other sources.

Q1480 Mr Plaskitt: Most of it comes from the tax payer.

Ms Johnstone: Yes, most of it comes from the tax payer.

Q1481 Mr Plaskitt: Mr Lord, the CAB is very much involved in giving advice and counselling. Can you estimate roughly how much of your budget goes on that in a year?

Mr Lord: It is difficult because each local bureau is funded locally so I do not have a figure with regard to a local bureau, but we could make it available to you in writing. Centrally £23 million comes to Citizens Advice in order to support the activities of the Bureau and to run the costs of central office.

Q1482 Mr Plaskitt: Is that in total?

Mr Lord: Yes.

Q1483 Mr Plaskitt: Where does that money come from?

Mr Lord: It comes from the DTI.

Q1484 Mr Plaskitt: It comes from the tax payer.

Mr Lord: Yes.

Q1485 Mr Plaskitt: Local bureaux are supported by some local authorities as well.

Mr Lord: A combination of local authorities, community legal service and also from some financial companies who fund the Bureau in a very limited way.

Q1486 Mr Plaskitt: You have told us about a pilot scheme that you have to give generic financial advice to consumers. It is a £90,000 scheme. Barclays Bank have put some money into that. How much?

Mr Lord: I think the amount from Barclays is £40,000.

Q1487 Mr Plaskitt: Again if I can quickly go down the line, give me some impression of the extent to which you think the network of advice and counselling is falling short of what is ideal.

Mr Lord: Where we are falling short is with regard to the advice to clients to try to move them out of the short term approach, telling them they need to take a more rational approach - or what we think is a more rational approach - to their financial circumstances. The difficulty as I see it is that the vast majority of CAB clients will have debts and clearly the rational financial approach is to say to somebody: "You should pay your debts first". What we are wondering is whether or not there is a psychological factor which says that even though you may not be completely financially rational, it would be helpful to say to consumers: "You should start saving" because the act of saving makes them feel a bit better about it. It does not give you a big buzz to see your credit card has gone down but it does having your savings book go up. It also brings a pause into the buying process. If, in order to buy something major you have to go to your building society and get a counter cheque or you have to take the cash out, it actually moves people away from the consumer aspect that they are often looking at at the moment.

Q1488 Angela Eagle: Instantaneous gratification.

Mr Lord: Exactly. However, we are also acutely aware that the debt advice approach now far more imposes on the balance of financial advice; 70 per cent of UK householders are home owners. Even though they may be low income home owners they will have equity in their property. For a consumer who has consumer debt but has equity, a re-mortgage is an option. It may be a very good option and that would be the option - when I have seen daytime television - which is pushed at them. It may be an appalling option because what it will do is that it will swap unsecured debt for secured debt then six months down the line they will be further in debt on their unsecured credit cards. We are very aware that when people come into our bureaux with non-financial issues, let us say you have a single parent who comes into the bureau and she asks for information about child support, it may be that another issue that need to be raised is life insurance. Her needs for life insurance have dramatically changed because she now has responsibility for somebody else. Do we have an obligation with regard to doing the best by our client to actually raise that? If so, how far do we go and how do we overcome the pinch point which says to people in a generic way: "These are the kind of things you should think about." Then the person says, "That's great, thank you. That's really helpful. I trust you. Who do I now go to?" How do we interact with the financial advice sector? I think that is a crucial area where we need to make progress quickly in order to ensure we are doing the best by our clients.

Q1489 Mr Plaskitt: Ms Johnstone, the same question, where is the shortfall? What are the gaps? What should be provided that is not?

Ms Johnstone: We think there is a very big gap in the market for independent and affordable basic financial advice, particularly for consumers on low income and modest incomes. The decisions consumers have to make about long term savings are very complex and they need to be able to understand means tested benefits, contracting out; they need to be able to understand the occupational system as well as the private market. They need to be able to put that in the context of their mortgages, the assets that they have and that part of the market simply is not being catered for at the moment and we need to find a new income stream to be able to do that and new funding mechanisms need to be found and I think there is a case for the public sector to be part of that. Public sector products are also part of what consumers need to be thinking about.

Q1490 Mr Plaskitt: Mr McCateer, the same question: what are the gaps in the advice system? How much more needs to be filled in?

Mr McCateer: I do think that this is an area where certainly all consumer groups are agreeing that more and more people are realising that there is a need for some other network of access points for financial advice to complement private sector capacity because the private sector cannot serve that part of the market in terms that suit the shareholders' interest. The FSA estimates that six million families are in trouble meeting debt repayments or having some kind of problems with debt which is clearly an issue of providing access to general financial health checks for people on low to medium incomes where the market cannot afford to serve. The DTI are doing some good work on credit stuff; the Treasury is doing some good work on generic advice with the FSA; the Department for Work and Pensions is doing some work on advice on pensions. My concern is that there does not seem to be a single consumer champion within government who is pulling all this together and that is one of the core recommendations that I would make to the Committee, that someone champions financial advice within government.

Q1491 Mr Plaskitt: Thank you, that is very helpful. Ms Foster, what is the gap in the advice and education network that you see?

Ms Foster: I tend to agree with my colleagues on the panel here. I think it is important, as consumers are expected to take on more and more responsibility for their own financial decisions, that they have access to this generic advice service however it is provided and funded so that they can become more confident in the market. I think that is really important. I think the solution will be multi-layered; I do not think one agency can fill this gap. I do think that as well as advice agencies more emphasis will need to be put on availability of financial advice in the workplace, employers, for example. There are tax incentives for them to do that now. Also, the industry will probably have to play its part. We are pleased that the whole issue of advice is part of the FSA's Financial Capability Strategy.

Q1492 Mr Plaskitt: In a sense you have all identified a significant gap in the system. There is some disagreement between you as to whether a single champion somewhere can be established to help plug that gap and one or two of you have mentioned the need for a new funding stream to underpin that sort of network which would plug the gap in the system. If there were, say, a £20 million annual fund which could be used to devote solely to this, is that the sort of order of money we are looking at, or are you looking at more to put in place a really robust accessible advice network and counselling service to concentrate on these issues and plug the gap in financial education? Is that the sort of order we are talking about or is it more than that?

Mr McCateer: Much more, I would say. We have done some preliminary estimates and we think it is probably in the order of £200 million a year. However, I should stress that this is not necessarily new money; I am talking about money being redirected from existing resources and harnessing that better.

Q1493 Mr Plaskitt: So some of the money is out there but it needs redirecting.

Mr McCateer: Yes, it needs some redirecting; it needs coordinating and harnessing. We have all these fantastic organisations which offer help around this country so the infrastructure is actually there; the access points are actually there but the consumers do not know where to go.

Q1494 Mr Plaskitt: When I went down the line asking you where your money comes from, it is either the tax payer or charity.

Mr McCateer: Or it could be the £11 billion of unclaimed assets that the Treasury has identified.

Q1495 Mr Plaskitt: The one figure that we did extract was £40,000 from Barclays which has gone into your programme. The reason why I came up with the £20 million figure was that it happens to represent 0.1 per cent of the profits made last year by the five biggest banks. Fifty million pounds would be 0.25 per cent of the profits made in the UK by the five biggest banks last year. Do you not think there is a case for the industry itself - which is massively profitable - putting something into the pot to plug the gap in consumer financial advice and counselling services?

Mr McCateer: Absolutely. I think it has to be a public/private partnership.

Q1496 Mr Plaskitt: Do you not think a levy on those profits would be reasonable?

Mr McCateer: It can be done in a number of ways, but some contribution is perfectly reasonable. I see no reason to argue against it. It could be done by any fines that are paid by industry or a direct levy. Either way, I think a lot of the money is out there already. It will be good to have a proper study done of the real cost of delivering a network to see where the gaps are.

Q1497 Mr Plaskitt: Mr Barrett has very generously dipped into his pocket and given you £40,000 but his bank last year made £3.8 billion profit. Do you not think there is scope for a bit more support?

Mr Lord: There is certainly scope for a lot more, but coming back to your £20 million, the IFA pilot that we will be running for six months from late summer we estimate will see about 400 clients within that six months and of the budget of £90,000 a fair bit will go on evaluation. However, the ball park figure as we think is going to be about £150 per head of the cost of each client who is seen. With regard just to the Citizens Advice Bureau we estimate we see about 350,000 consumers a year who have debt problems. If you then accept the argument that actually it is not only people with debt problems you to suck into this - you need to basically suck in people with life changing events when they access advice - so my best guess is 800,000 people a year who go into a Citizens Advice Bureau who could benefit from this and it would make them more informed consumers and hopefully have more confidence with regard to the savings industry. When you multiply that out it comes to far more than your £20 million. May I just make one other point with regard to the interaction of the not for profit sector and financial advice? The IFA pilot is a way for us to test out the water. We feel we have an obligation to our clients because there is this need to see whether or not there is a possibility to have this combination: the trusted brand to bring in trade advisers. There is no pre-set agenda to take the Citizens Advice Bureau down that road. There was research conducted and released by the FSA last week which looked at the attitudes of CAB clients and CAB advisers into the provision of financial advice through Bureaux and it was very clear that a significant proportion of Bureaux advisers were very concerned about a possible reputational risk to the Citizens Advice Bureau in the event that we get involved in financial advice. The reality of financial advice is that it does not matter how good it is; in a significant proportion of cases it will turn out to be less than optimal because of the fact that people's lives do not work out in that way. The big question for us is that if this pilot shows this is the way forward, would we be putting the reputation of the Citizens Advice Bureau at risk because in ten years' time somebody who had received advice through the CAB service - although that may have been absolutely accurate and high quality advice at the time - will come back and say "With hindsight I should have done something else."

Ms Foster: In the past we have asked the FSA if they could undertake a study of the nature you say to establish what is required by consumers, how this could be delivered, what the costs would be and how this money could best be sourced. I hope they are going to do that as part of the Financial Capability Strategy. I think in terms of your argument about the industry paying for this, I think it is clearly in the interests of the industry as well as consumers that consumers are better informed and more confident operating in this market.

Q1498 Mr Plaskitt: After a record of mis-selling and mis-information, obscure, multiple and confusing products the least the industry can do is put some of its massive profits back to support the consumer trying to understand this and promote better financial literacy in general.

Ms Foster: The industry is clear in their desire for consumers to have more responsibility for their buying decisions; we do not disagree with that.

Q1499 Mr Plaskitt: They have created a massively complicated market do you not think they have to put something back to help the consumer?

Ms Foster: Exactly. Consumers need to be supported in this desire and access to generic advice would be such a valuable way of helping that to happen.

Ms Johnstone: I agree absolutely. The industry could and should be part of the solution to the funding gap there is for financial advice. One of the suggestions that we made was that perhaps one could think about top sizing the charge cap as part of the pool of money one would need. Certainly the industry should be part of the solution.

Q1500 Mr Plaskitt: With tens of billions of profits every year out there, there is some source, is there not?

Ms Johnstone: Yes, of course.

Q1501 Angela Eagle: I have been quite frustrated in this whole Inquiry because we have a very, very complex industry that focuses really on the top ten per cent because that is where all the profits are to be had in the way that they sell; they do not really care that much about any other bit of the market. They are being made to care because of the introduction of simple, regulated Sandler products which is the best chance of opening up the capacity to save for those who have been excluded, and yet they constantly blame the consumer for not having a crystal ball when they go to get advice. Their answer to this is to create ever more sophisticated, colossally expensive structures of advice so that they can carry on earning their commission at the top ten per cent. Is that not a fair assumption of the structure of the industry, of the complexity and opaque lack of transparency that we are all so familiar with?

Mr McCateer: At the moment there is a huge debate about these price caps and stakeholder products. I think the industry has been rather disingenuous to say the least. They are trying to argue, "Let us face the price cap so that we can sell products to people on lower to medium incomes" as if they have discovered a social conscience. If you just look at the ABI's own figures very helpfully provided to the Committee, they were hoping to levy charges like nearly four per cent a year to actually sell products to people on lower incomes anyway. They never were interested in people on lower to medium incomes.

Q1502 Angela Eagle: They cannot make a profit, can they, so they are not interested.

Mr McCateer: In the old days before stakeholders they were selling to people on lower to medium incomes but on terms that were just so detrimental to consumers that it was taking consumers ten years to break even on a product, even when the stock market was growing at 11 per cent a year.

Q1503 Angela Eagle: Most of this industry is a big con, is it not?

Mr McCateer: I do find the industry posturing on the offensive at the moment. If the price cap goes up all they will do will maximise revenue from that top ten per cent. They will not all of a sudden decide to go after the lower to medium income consumers.

Q1504 Angela Eagle: Do you not think that they would rather destroy the simple product - or at least make them more expensive - to prevent restructuring their industry?

Mr McCateer: Of course they would.

Q1505 Angela Eagle: The answer is really that they have to restructure their industry and then regulate products that are simple for the vast majority or people in the savings market rather than concentrating on the ten per cent where they can get the biggest trail commissions and hope that nobody notices that they are paying.

Mr McCateer: I think it needs fundamental reform.

Q1506 Angela Eagle: How can that be done?

Mr McCateer: The first thing the Government has to do is not panic and give in on the price cap stuff because I actually think we are moving in the right direction. We are seeing the necessary consolidation. This industry has not gone through the trauma it has to yet; there are still too many companies and too many products out there and that complexity really does benefit the industry because they are not going to present the argument that they need the seven hours in order to fact find because people's lives are so complex. The reason people's lives are so complex in terms of financial services is that because the industry has made it so complex. There are two thousand retail funds that are invested in the UK stock market and there are only 800 shares in the whole share index. That level of over-capacity, complexity and confusion marketing was unsustainable during the boom times; it is simply unacceptable during the bear market.

Q1507 Angela Eagle: Is it the case that the value that they add is wholly eaten up in the costs of selling their products and their own commissions?

Mr McCateer: It is, yes.

Q1508 Angela Eagle: What an extraordinary glass bead game that is.

Mr McCateer: Exactly; I think it is a glass bead game. Not only is the value for consumers eaten up but the value of the tax payers is eaten up as well. There seems to have been an illusion that what the industry is lobbying for is a minor increase in charges, but if the price cap goes up to one and a half per cent, for example, that means you - as a consumer - have to contribute 11 per cent more every month to deliver the same pension in retirement.

Q1509 Angela Eagle: Just so they can keep their earnings capacity.

Mr McCateer: When we have concerns about people with massive debts and concerns about affordability, when we are worried about pricing people on lower to medium incomes out of the market, to raise the price cap I think would be perverse and twisted in this environment. That is one way to be sure they are pricing even more people out of the market.

Q1510 Angela Eagle: What struck me, Nick Lord, when you were talking about your ginger step into generic advice and wondering whether it would stain your brand to be associated with Barclays, an understandable worry was that you can give general advice of the sort that we would all give to our friends about what they ought to do in certain circumstances but you are very unconfident about what will happen then because the people providing the products are so untrustworthy. You do not actually trust what the industry will come up with if somebody goes out to find a life insurance product or whatever.

Mr Lord: That is a real issue for us within the Bureau at the moment, for instance with regard to endowment shortfalls where clients come in and say, "I've got a £20,000 endowment shortfall, what do I do?" The CAB adviser will say, "I can give you the options." "What would you do?" "I'm sorry I can't help you." "Who can help me?" "You need to go and see an IFA." "But they were the people who mis-sold me in the place. Where do I go?"

Q1511 Angela Eagle: We had the IFA Trade Association - such as it described itself - come to see us last week and when we said that commission might not be the best way forwards they immediately said they would charge £450 an hour for advice if commission were abolished. Their whole assumption in this industry is that the cosy little cartel between the providers and those who distribute is maintained as, of course, are the profit margins and their earnings. Somehow the rest of us have to fit in with, I suppose, their expected very high standards of living. This seems to be the wrong approach to reform of this market.

Mr McCateer: I think you have hit the nail on the head. To sum up the attitude of the industry in the past has been that they have expected consumers to live their lives around their commercial models rather than actually designing products to suit consumers' lives. There is a complete mismatch in the expectations of the shareholders and consumers.

Q1512 Angela Eagle: Does it never occur to them that they should put their prices down?

Mr McCateer: Can you imagine any other industry apart from the railways where you have an industry that has been guilty of massive mis-selling in the past few decades yet the government solution is to propose raising the charges. Whoever heard of an industry as being so guilty of such mis-selling and poor quality products to increase prices to encourage people back into the market?

Ms Foster: I think one of the advantages of the FSA proposal to give more information about the cost of advice is this menu approach, is that it will make consumers more aware of what they are being charged and hopefully it will encourage them to ask what it is they are getting for this. If they are being charged either through commission or a fee - and I hope £450 is not going to be the norm - then at least they will be able to ask, "What am I getting for this?" and perhaps ideally shop around a bit. That would be the ideal although I think it will be a long time in coming.

Q1513 Angela Eagle: This assumes that the consumer has a power in the market and they do not, do they? This market does not even focus on consumers. I do not know what their advertising budgets are but I bet they are considerably more than their education budget for consumers, but it mass-markets dodgy products.

Mr McCateer: £1.3 billion in advertising last year.

Q1514 Angela Eagle: That does not provide people with information; it sells products to people by under-mentioning things like trail commission and the other amounts of money and costs that they will incur. I do not see how the consumers can change this market. I think it has to be re-engineered before consumers can be given power in it. I am interested to hear from you as representatives of dissatisfied consumers how you think the Government, the FSA, the authorities, the market itself can re-engineer. Mr McCateer, you are quite right; they are behaving rationally at the moment because they are making a very nice living, thank you very much, from the top ten per cent of the market. However, it is in the public interest for there to be a re-engineering so how do we bring it about?

Mr McCateer: I do think you are absolutely right. It does need fundamental re-engineering. The fundamental question is, how do you provide access to the mass market of ordinary people? It cannot be done using this retail model; that is just the brutal economic reality. An insurance model can be done for the top ten per cent - or whatever that top component is - but I think there do need to be new ways of providing access to pensions on the collective basis like they have in America with the US Federal Thrift Savings Plan which has running costs of 0.35 per cent a year; it is a not for profit scheme with integral corporate governance which means that the consumer interest is represented in those funds. They use the economies of scale, the massive financial muscle they have to demand a good deal from the fund managers in the USA.

Q1515 Angela Eagle: But consumers have to collect together, possibly based on their work places or something, to do it.

Mr McCateer: Or industries.

Q1516 Angela Eagle: We have the Builder's Scheme over here.

Mr McCateer: Absolutely.

Q1517 Angela Eagle: You think that is the way there can be pressure exerted on the industry to change and lower its costs.

Mr McCateer: I am a trustee of the CA pension fund and whenever we come to review our investment managers we get bids in from the industry to run our pension funds at 0.1 per cent a year, 0.2 per cent a year, 0.3 per cent a year because they know there is a board of trustees who are informed and who can take substantial amounts of money elsewhere if they are not happy. That means that the industry has to compete on the consumers' terms. Until there is something out there to level the playing field between a fairly powerless consumer and a very, very powerful industry, competition is never going to work in this market.

Q1518 Angela Eagle: Is that not far more important than education? That restructuring followed by education would solve the problem.

Mr McCateer: Absolutely. You have to get things in the right order. Sort the market out first and then talk about education. That is the way to deal with it.

Ms Johnstone: I think the ability of consumers to collect information is far too fragmented; you cannot achieve that in the short space of time. It comes back to regulation and the Government actually having the courage to take the industry on rather than listen too much to its lobbying.

Ms Foster: There are one or two examples where it is a little bit consumer led and that is in the area of general insurance, where I do think in travel and car insurance - areas like that - consumers are now shopping around and putting pressure on firms for lower prices. However, that is far way away from the kind of market we would like to achieve in life insurance.

Q1519 Chairman: You mentioned about industry lobbying on the price cap and the NCC have given us a submission which was very helpful in this area. Would it be best determined by an economic regulator - as happens with many utilities - pitching the price cap after careful analysis at levels that give a fair return to the most efficient producers but puts pressure on the less efficient produces to cut their costs? Is there a case for a regulator here?

Ms Johnstone: A price cap is a kind of economic regulation and you have to set it properly with proper economic analysis on a basis of fact. At the moment it is just who can shout the loudest; it appear to be just about lobbying and that is a hopeless way.

Q1520 Chairman: So you think there is a case?

Ms Foster: The FSA at the moment is not an economic regulator but if there were to be one then I agree that if there were any attempt to go down this road it really would have to be on the basis of a proper analysis of the situation. The Panel itself does not have a policy on this issue at the moment.

Mr Lord: I agree, but I do come back to what I think is a fundamental point that so far as CAB clients are concerned and, I suspect also a wider range of consumers, the issue with regard to whether is one per cent or whatever is completely irrelevant because at the moment what they are struggling with is with regard to not wanting to get involved.

Q1521 Chairman: It is not irrelevant. The customer is paying this money. It was put to me that somebody taking out a pension plan over a forty or fifty year period put it in at one per cent. The cost to the customer after that period was about 40 per cent to 50 per cent. It matters an awful lot.

Mr Lord: It agree it matters if you have a consumer who is actually considering entering into that market. The point I was trying to make - perhaps I did not make it particularly well - is that our evidence is that the vast majority of people we see who do tend to be on the lower incomes but we think it also holds true for the middle incomes, is that their priority at the moment is with regard to their debts, with regard to what is going to happen with the housing market and their mortgages over the next few months as interest rates go up.

Q1522 Chairman: So there is an order of priorities: if they are in debt, pay off the debt first but if they can put money aside, then put that money aside but get a fair return. I think that is the issue.

Mr McCateer: It is clear from our evidence that we think the price cap is very important not just from the firms' behaviour but from the consumers' behaviour. Our most recent surveys suggest that the consumers are already not very confident about pensions anyway, but anything that puts the prices up I think is going to entrench further their unwillingness to invest for the long term. They are not going to entrust their money to firms for 30 or 35 years with the same companies who have been responsible for mis-selling. Your point on an economic regulator I think is a really important one. Our criticisms on the stakeholder pensions was that they are very good products, they have good competition, but the way they ought to have been introduced was that they ought to be licences, approved providers run by an economic regulator.

Q1523 Mr Beard: Would it be fair to say that all consumer associations really support the Sandler concept of product regulation, reinforcing of the regulation of sales?

Mr McCateer: It comes back to this menu: the process, the product and the people. In term of regulating the product the Sandler approach is definitely the way forward.

Q1524 John Mann: I am listening in - as I have done throughout this Inquiry - and I wrote down a few words: glossy direct mailing, something for nothing, dealing with the top end of the social strata, itemised individuals. Does that sound familiar, Mr McCateer?

Mr McCateer: One of the main causes of detriment is this fragmentation in the itemisation of the market. When it comes to providing pensions that consumers need, we think the retail model is never going to be appropriate or suitable. That is the fundamental problem.

Q1525 John Mann: I get people direct mailing me with these glossy products on something for nothing - I get them from all over, dozens of them - and your organisation is one of them. You do the same; you follow exactly the same approach, the same model, you aim at the same social strata.

Mr McCateer: I think to say that because we are against confusion market when it comes to something as important as a pension or health care that that has some kind of equivalence to buying a magazine, I do not think it stacks up. We think general insurance works very well; we think savings accounts work very well; we are perfectly happy to see firms mail shot people when it comes to simple commoditised products. We are perfectly happy to see retailers use promotions and advertising to attract.

Q1526 John Mann: My constituents, if they want to get your advice, have to pay £65 or £70 a year by direct debit. They are offered something for nothing; you mail me all the time telling me to enter your free prize draw, get something for nothing.

Mr McCateer: I really wish there was an alternative source to information. I really wish there was a publicly funded national financial advice network. We are a charity; we are funded entirely by our subscriptions.

Q1527 John Mann: You mentioned smoke and mirrors; it is a smoke free zone in here and you are mirroring the problem as an organisation in creating the culture: easy gain, something for nothing. Is that not the culture of the financial sector overall, that there is this great pot of gold out there: fill in the form and you will get it.

Ms Foster: I do not think we have any problems with promotion. What we have a problem with is misleading financial promotion where people are told that things are guaranteed when they are not; when they are told about the higher returns but not told that they might lose their capital.

Q1528 John Mann: You do not have a problem with the culture of this "something for nothing".

Ms Foster: If promotions were fair and not misleading, they would not be saying that.

Q1529 John Mann: How come I get them all but some of my constituents do not get large numbers. I get thousands of offers week in and week out.

Mr McCateer: You are obviously a very attractive risk for the firms

Q1530 John Mann: Or it could be that someone is buying and selling my address.

Mr McCateer: We are not against the operation of markets; markets have to function and firms have to sell their products and so on. My point is that when it comes to things like pensions - like the health service, like education - we do not think it should be marketised; we do not think it should be commoditised.

Q1531 John Mann: The critical issue with market forces comes down to regulation and self-regulation. There is a lot of talk about advice and education, but at the heart of it there is this issue: is there regulation or is there some form of self-regulation effective or ineffective?

Mr McCateer: We think there could be better statutory regulation and better self-regulation on both scores, there is no question about it.

Q1532 John Mann: It is very easy for the Government to say, "Let's have more education". I am getting a lot of offers on this Committee of companies who would like me to endorse their education package in my schools, let us go into schools and educate the youths about the financial products on the basis that some education is better than none.

Ms Johnstone: We are very supportive of better consumer education, but we would never say that this is going to solve the problem. It comes back to serious regulation.

Q1533 John Mann: Let us take a group in society, let us take MPs. Have you considered doing research amongst MPs to see what the knowledge base of MPs is?

Mr Lord: The reality, I think, is that it does not matter what income level the consumers are, the expertise, the personal finance sector in the UK has developed so quickly over such a relatively short period of time, it is such a competitive vibrant industry which will always be looking to out-do each other, that the role of education is important but it can only go so far. At that time it needs the regulator to come in and to accept, to understand and to confirm that consumers are never going to be in a position to be able to make completely informed choices with regard to this industry and there is need for consumer protection.

Q1534 John Mann: Have you thought of having some significant training sessions for MPs on financial confidence?

Mr Lord: We would be happy to do that. What we have learned very much is that if you want to encourage people with regard to pensions, there is not much to be gained by offering to run a training session with regard to pensions.

Q1535 John Mann: Before the CAB in my area was shut down, why did I not receive anything - out of an average per constituency of 570 people coming to you for financial advice, taken on a constituency average - from the CAB specifically in relation to the kinds of cases that have come in my area to say that these are the implications in terms of policy making?

Mr Lord: What happens with regard to the policy of Citizens Advice is that the Bureaux send back evidence forms to Citizens Advice centrally which we then collate in order to inform and influence policy on a wider basis. We do have over 70 individual bureaux who, through their own volition, have started financial literacy projects in which they engage with their local community and in some cases have actually brought in outside experts to bridge the gap in consumer financial knowledge.

Q1536 John Mann: Perhaps some kind of interaction on what the problems are would be quite useful in looking at what the policy implications are in dealing with some of these issues. Ms Foster, on the FSA website I believe there are 16 different organisations that the consumer might need to complain to. The word "patchwork" has been used; would you agree with that?

Ms Foster: You are testing my knowledge of the FSA website here and I may not recall everything. In financial services what consumers do have on their side is a very clear mechanism for complaints. The advice is always to complain to the firm first and if you do not get satisfaction in that way then you complain to the Financial Ombudsman Service and we have always welcomed that as a very simple, straightforward way of consumers being able to resolve complaints.

Q1537 John Mann: But it is not always that simple, is it? The Financial Ombudsman is not always going to take the cases forward. Sometimes it is difficult to work out who the firm is who you are complaining to.

Ms Foster: If the consumer has kept a record of what they have bought, it should not be too difficult.

Q1538 John Mann: That is not my experience dealing with constituents. They have problems even finding out who the firm now is.

Ms Foster: I see, if they have changed their name or something?

Q1539 John Mann: If they have changed their name or disappeared into obscurity.

Ms Foster: As I understand it, the Ombudsman Service can help them there too. I do think we should give credit to the Financial Ombudsman Service for providing an easy and accessible route for consumers so much so that we would be very reluctant to see it go.

John Mann: What if they do not have enough resources to do the job properly and the detail required with the demands put upon them?

Q1540 Chairman: When you appeared before us on the endowment mortgage area, one of the bright spots was the work that the Financial Ombudsman Service is doing. I think you all agreed on that. However, the industry is now lobbying for reform of that service and does a proposed appeal process risk undermining the effectiveness of the Financial Ombudsman Service or is it only fair that the industry has some right of appeal against decisions which may cost if millions of pounds?

Ms Foster: We would be very reluctant to see any kind of added complication such as a right of appeal to the Financial Ombudsman Service. It would be a great disincentive to consumers. The FOS at the moment is accessible, it is cheap and it is very quick. Any change in that would be against consumer interest. We have no problems at all with the prospect of the Ombudsman Service and the industry and the regulator exploring cases of wider implications; that could be a more transparent process. However, adding an appeal process to the FOS system as it is at the moment would be counter-productive for consumers. I should add also that consumers can enquire from the FSA about firms that have changed their names.

Q1541 John Mann: In terms of the Ombudsman Service, is there sufficient resource there to handle effectively the level of complaints currently being generated?

Mr McCateer: I would certainly like it to have more resources, clearly. On the point the Chairman is making about the appeals process, this industry has powerful lawyers and deep pockets, it has powerful trade associations. If they get a right of appeal against the Ombudsman decisions they will just tie the Ombudsman up in knots for years and it will cause a reduction in the Ombudsman's efficiency and that will have a knock-on effect on consumer confidence. If consumers cannot feel that they have a good chance of getting redress, then I think that will just knock confidence even further.

Ms Johnstone: I completely agree with what my colleagues have said. I think it would be a great mistake to try and tie up the Ombudsman in this way. I do find it a very strange response from the industry. They are facing a massive problem of consumer distrust so what do they do? They try and undermine their redress mechanisms. I just find this extraordinary.

Mr Lord: We would agree with that as well. The Ombudsman goes a long way to helping to redress the balance between consumers and the industry.

Q1542 John Mann: I want to come back to whether or not there is enough resource there. Do you have an analysis? Is it a feel that there is not enough? Do they always need more money? Is there a problem in terms of the capacity?

Ms Foster: As far as I am aware - and we do have a regular meeting with the Ombudsman Service - they do have the resources to do the job that they have to do. What they must do each year is produce a budget where they anticipate the level of activity they are going to have and ask the FSA for that amount of money. I am not aware that there is a significant problem.

Mr Lord: We have no evidence at the Bureau of complaints about the ineffectiveness of the Ombudsman.

Q1543 John Mann: My final question is on the limits of compensation the Financial Services Compensation Scheme can pay. Are these generally adequate in your view?

Mr McCateer: We do not have any problems with the levels, but we do have a big concern about the Compensation Scheme in relation to with-profits funds. The reason we have a concern here is that the actual compensation limits, it is not clear whether that applies to the full value of the policy or just the guaranteed elements of the policy. Sorry, it only applies with certainty to the guaranteed elements; it is unclear whether it applies to the discretionary elements of the with-profits policy, like a terminal bonus for example. As we know, in terms of the value for with-profits policy, discretionary benefits can make up a substantial proportion of the total value. If a with-profits firm goes bust it has to go the courts; the courts have to work out how many assets are left and then you apply the Compensation Scheme. We would rather see the Compensation Scheme beefed up and clarified so that consumers were clear whether the compensation limits that apply to the value of their policy as they understood it. There is a big gap in the regulation at the moment, particularly in a post-Equitable Life world. The FSA had this terrible dilemma: they could not inform consumers but they allowed consumers to continue to invest. They did that before sorting out the Financial Services Compensation Scheme, so I would say that is one of the biggest gaps in the regulatory framework at the moment.

Q1544 Norman Lamb: Finally on the issue of the appeal to the Financial Ombudsman Service, I was contacted by an independent financial adviser who had been found liable and had been ordered to pay compensation. However, new evidence came to light which suggested that they were actually innocent of the alleged mis-selling. They have no rights of challenge to that at all at the moment. Do they not have any rights as well? It is one thing to talk about the big companies; I understand your concerns about them tying the whole thing up in knots, but when new evidence comes to light, do they not have any rights at all? Elsewhere in our justice system it is a fundamental principle that you can challenge a decision that has been reached and yet it does not exist here.

Ms Foster: I still think we have to stick with the general principle.

Q1545 Norman Lamb: Could you answer my specific question, do they have no rights?

Ms Foster: At the moment, no.

Q1546 Norman Lamb: Should they not?

Ms Foster: No, because they have an opportunity to produce all the evidence they have when they provide their evidence to the Financial Ombudsman Service, as has the consumer.

Q1547 Norman Lamb: In all other respects in the justice system someone would have the right to challenge a judgment.

Ms Foster: On balance both parties have a clear opportunity to produce their case, to produce all the evidence they have at the time and the decision has to be based on that evidence. If something comes to light subsequently on either side, I am afraid I think it is just going to have to be bad luck.

Ms Johnstone: I think you have to look at why the Ombudsman Service was set up - it is not just in this sector, they exist elsewhere as well - and it was in a sense to redress the balance in favour of the consumer to give them something that was simple and cheap to enable them to get results because courts are very expensive and intimidating for them. I think we need to keep that principle. This is a simple system for consumers.

Q1548 Norman Lamb: Can I move on to the tax and benefit system now. Thinking back to the name of this Inquiry - which is Restoring Confidence - a lot of people have given evidence to us about the impact of the tax and benefit system on the levels of savings broadly across income levels. Do you think that the current mixture of tax benefits and pension arrangements is simply too complicated for the average person to grapple with?

Ms Foster: I think it is just adding another layer of complexity to already complex products. People do not understand the benefits they are getting out of the tax system.

Ms Johnstone: It is hugely complex and consumers are faced with trying to make sensible decisions about long-term savings. They have to look at the state system, they have to look at occupational pensions, they have to look at the market and their assets (namely, their home). The benefit system is hugely complex and the savings incentives are unfair in our view. Quite a lot of people - particularly women - end up with a broken work history and are unlikely to get their full entitlement. The rules on contracting out are incredibly complicated and very hard for consumers to understand. The extension of means tested benefits is another huge and complicated aspect.

Q1549 Norman Lamb: We are going to come on to that in a moment. Would you say, in summary, that reducing the complexity and increasing the simplicity of the system for the interface between rules on savings and the tax benefit system is a crucial element of improving incentives to save and restoring confidence?

Ms Johnstone: Absolutely.

Mr Lord: We put a recommendation through a few years ago that welfare benefits and tax credits should be financial literacy proofed so that when policy makers were thinking about implementing changes they should specifically think about how to make it less complex. I think a good example is the way in which the Child Support changes have come in. It used to be horrendously complicated to advise somebody with regard to how much they would have to pay or how much they would receive. That led to real difficulties with regard to relationship. Whilst there have been losers and winners with regard to this very clear 15 per cent, 20 per cent, 25 per cent split, it makes it far easier and far easier at a very early stage in a relationship break-down situation for both parties to plan ahead and to move on. That is what we think we should be looking at with regard to welfare benefits and tax credits in general.

Q1550 Norman Lamb: Going back to Jill Johnstone's point about the impact of means testing, we have had quite a lot of evidence on this point and Mr Ross from the Institute of Actuaries said that the returns which people may get because of means-tested system relative to others who do not save at all can be very modest indeed. In other words, there is not much of an incentive to go out and save. The range of people supporting the case for reducing the extended means-testing covers evidence from actuaries, pension fund managers, academics and Help the Aged. The means-tested benefit, therefore, has been widely identified as a disincentive to save. Do you think that is how the public see it or is it something that will only emerge as people realise the impact of the pension credit?

Ms Johnstone: It is very complex and I think people are still grappling with pension credit. Means-tested benefits have all the usual problems of take-up because of their complexity and you are quite right also to point to the disincentives to save. If you can only save small sums of money it may be that the decision is better not to save at all. It makes it extremely difficult for people to make sensible decisions if they are on low or modest incomes and we would like to see a rolling back of means-tested benefits and a better basic state pension.

Mr Lord: I think it is also difficult for consumers, even if they are informed about these issues - which are extremely complex - to actually plan confidently ahead because clearly if they make plans with regard to the welfare benefit system now, there is no guarantee that a future chancellor in ten years' time will not change it.

Q1551 Norman Lamb: I was going to ask, is there a risk that people now decide that it might not be worth their while saving - indeed, a financial adviser might tell them that - only for the benefit system to change in the future and then they are left high and dry.

Ms Johnstone: I think the public policy risk is as big as many of the other risks that consumers face in trying to make sensible decisions in this sector.

Q1552 Norman Lamb: Do you all advocate a reduction of the extended means-testing that we have now got as part of the solution to trying to encourage incentives to save?

Mr McCateer: We certainly advocate greater simplicity and a greater degree of clarity from the regulators and from the Government for advisers as well as consumers. We would not comment on the level of means-testing because that is a public policy issue.

Q1553 Norman Lamb: You comment on other public policy issues.

Mr McCateer: It is up to the Chancellor to decide whether or not he wants to benefit certain groups in society with tax payers' money. That is how we define that.

Q1554 Norman Lamb: But you have been talking all morning about the impact of government policy.

Mr McCateer: I am just saying that we do not comment on tax policy, that is all, but we would welcome a radical clarification and streamlining of the interaction between the state first tier benefits and second tier benefits.

Norman Lamb: Is the only solution to provide a higher minimum floor for the basic state pension and benefits so that people knew where they stood and could then decide what they wanted to save over and above that? Would that be hugely expensive? Is it affordable in any way? Are there any other ways of achieving that objective? We have had evidence from actuaries that you could afford it by increasing the retirement age. Do you have any views on that?

Q1555 Chairman: That is a great manifesto slogan. I do not fancy going to the door step of my constituents and saying, "Look, you have worked all your life, you have paid a certain amount of tax but Mrs So-and-So down the road is waiting for an operation. She is paying 30 per cent, you're only paying 22 per cent tax." I don't think it works.

Mr McCateer: Again I think there is a misunderstanding about the fact that you can provide higher universal pensions and also pre-fund them. There is no reason why we cannot have a national pension scheme which is like a national with-profits scheme or whatever which actually pre-funds, for example, a higher universal state pension. That is perfectly feasible.

Q1556 Chairman: Have you costed this?

Mr McCateer: All I am saying is, what are you trying to achieve with employers' pensions ...

Q1557 Chairman: Do not come to this Committee without evidence. To me that is just anecdotal stuff. Have you costed it? That is the question I am asking you?

Mr McCateer: No.

Ms Johnstone: We have not costed it either, but the Pensions Policy Institute has been looking at this very closely and on their figures it is affordable with a small increase in pension age at the current level of means-tested benefits.

Q1558 Norman Lamb: Could you summarise again what you are saying is affordable?

Ms Johnstone: The Pensions Policy Institute has done some costings on basic state pension at the current level of means-tested benefits and say that it is affordable.

Q1559 Norman Lamb: What does that mean? What does affordable mean?

Ms Johnstone: On current expenditure, is what their figures say. We are working with them and others to see whether these ideas can be developed further.

Q1560 Mr Beard: You do not mean on current expenditures that it would mean no increase in expenditure.

Ms Johnstone: I think they are saying that if you have the basic state pension at a means-tested level it can be made affordable with a small increase in the pension age. That is where the money comes from. We are now involved with them and others in trying to flesh these ideas out.

Q1561 Chairman: We had evidence last week on this. People work their lives in the building industry and they do not want to work to 70 years of age. There are big issues involved here, some very complex issues and I do not want to take them across as a simple solution here.

Ms Johnstone: I agree it is complex which is why we are involved with others in trying to do some more work on it. I think 68 was the age they said they thought the pension age would have to rise to.

Mr Beard: That is not, as the building workers told us, an acceptable age for people involved in manual occupations.

Q1562 Chairman: What do we do? That is what politicians have to grapple with in terms of public policy. Moving on to stakeholder pensions, industry representatives tell us that stakeholder pensions prove that price caps do not work because they do not allow the industry to market products profitably and if they are not marketed sales fall (and I quote from the ABI) "like night follows day". Have stakeholder pensions been a waste of time?

Mr McCateer: They have not been a waste of time. I think they have been one the great successes of recent times, actually. The reason stakeholder pensions were proposed was to address a number of issues in the pensions market. The first one was a lack of competition. The second one was mis-selling. The third issue was trying to extend access to people on lower to medium incomes. From the first word in terms of competition it has been tremendously successful; it has brought prices down where market forces failed to work. On that score it has been a great success. It has also made mis-selling almost impossible under properly regulated environment. There have been recent mystery shopping exercises which have found that it is really, really difficult for advisers to mis-sell a stakeholder pension. The reality is that if the industry can sell products to its target market at one per cent the economics do stack up. What I mean is people who can afford to contribute £200 a month. The reality as well is that people on lower to medium incomes, the reason they are not buying is not because the industry cannot sell to them; the reason they are not buying is because they have lost confidence, because they cannot afford, because they have too much debt. The industry has been very clever blaming the lack of extension and access to pensions on price caps. They have been very, very clever and I take my hat off to them. They have been very clever in the way they have marshalled their figures. Turning again to the figures the ABI provided in the last Treasury Committee session where, if you look at the way they were hitherto providing pensions to people on lower to medium incomes it was only on such high charge levels that actually removed any incentive for consumers to save. They were actually better off putting their money under the mattress or taking out a simple savings account. Again, the reality is that the price cap is slightly irrelevant in a sense. For the industry to sell to the Government's target market they would have to at least treble their charges from current levels. Trebling the charges on stakeholder pensions is clearly unacceptable. When you can get 4.5 per cent on a cash ISA, when going forward pensions are expected to go to 6.3 per cent before charges; if you deduct the three per cent from that, what have you got? A 3.5 per cent return for locking your money away for 30 or 35 years. I think it is self-evident that if the price cap is up the industry will not go after the Government's target market; they will simply maximise revenues from the existing groups.

Q1563 Norman Lamb: You are blaming the industry entirely for the failure of stakeholder pensions.

Mr McCateer: Not entirely. What I am saying is that this retail model - this one on one model - is not economic enough to actually distribute products to this mass market of consumers. That is the unfortunate reality. When the shareholders demand a return in capital of around 22 per cent a year - or whatever - for the industry to be incentivised to sell to the Government's target market, it would have to be allowed to apply such high charges that it would remove any incentive; they would actually be mis-selling if they sold pensions to the Government's target market at those charging levels. When you deconstruct what the industry is saying, they cannot sell and never have been interested in selling to the lower and medium incomes; they will never be interested in selling to that target market on terms that make sense to the consumers and the shareholders at the same time. It just cannot be done.

Mr Lord: From the Citizens Advice perspective we have very little evidence with regard to people coming in and seeking advice on stakeholder pensions. Even when we talk about it with out advisers, if you think about it on a very pragmatic basis, you are faced with a low income consumer who has no savings, who has debts. The advice clearly has to be first of all you have to think about the repayment of the debts and then you need to think about building up an emergency savings fund. The definition about being on a low income is that it is going to take you a significant period of time before you actually do either of those things. The issue with regard to stakeholder pensions has been a non-event for the vast majority or Citizens Advice Bureaux. If the intention of the policy was to alert low income groups that this was the way they should be thinking about planning for their financial future, what we can report to you is that it has not impacted upon the people who are coming into the Citizens Advice Bureaux who we would expect to be a key part of your target market.

Q1564 Mr Beard: Would you not expect that to be overcome if they could be sold through the work place?

Mr Lord: Again the difficulty is that if you are advising somebody on a low income and, by definition, they will have debt - whether it is expensive credit card debt or lower interest mortgage debt - and they will not have emergency savings, what is the best thing to say to that individual? You cannot get away from the fact that the usual rational approach would be, well, if you have credit cards at 18 per cent you look to overpay on that. Even if you have low income consumers who do not have debts, I come back to my point with regard to the short term approach so far as consumers are concerned. What they prefer to do in our experience is actually to save short term so that they can have the nice things that we are now attracted to have. There is either not the rationale from the personal finance point of view to go down the stakeholder route or, alternatively, they do not have the mindset to want to do that.

Mr McCateer: I agree with that. The workplace does not remove the need for advice, but our argument is that if you are doing it through the workplace it allows greater opportunities for building up collective funds and I think you have significant reductions in administration costs and fund management costs and so on, which I think makes the economics more effective.

Q1565 Mr Beard: Why does it work so well with the building and civil engineering workers then?

Mr McCateer: It is a good scheme; they have done very well. I believe their costs are something in the region of 0.65 per cent a year, so it can be done.

Q1566 John Mann: Something like collective advice - ie trade unions - is what the employers suggested in evidence to us was of fundamental importance to the success of that scheme.

Mr McCateer: Again, I think we are very keen on the idea of a collective approach whether it is through trade unions or other affinity groups or industry-wide groups or specialist charities or whatever. Anything that can actually deliver that economy of scale is a crucial point.

Q1567 Chairman: Ms Foster, in your submission to us on Sandler products you are concerned that Sandler products could be the next case of widespread sales of unsuitable products because consumers may not understand the risks which are equity based and may even have felt that the Government somehow guaranteed the products. Why do you say that?

Ms Foster: I think it is absolutely essential that people - unsophisticated consumers who may not have been in this market before, who may not have much money to spend - the prospect of selling equity based products without proper advice is to us a real problem.

Q1568 Chairman: Why is currently more dangerous to buy a Sandler product without advice than buy a unit trust off the page without advice?

Ms Foster: I think it is important for consumers to have advice.

Q1569 Chairman: It is going on at the moment.

Ms Foster: Of course anybody can buy execution only, but what we are saying is that if people want advice they should get full advice about the suitability of the product for their circumstances. There are execution only sales; of course there are. Our concern is that people may not understand the risk to their money; they may not understand the length of time they are expected to leave it.

Q1570 Chairman: So we are back into the long hours of advice.

Ms Foster: Not necessarily; we are back into a sales process which could be self-help like the stakeholder pension but as foolproof as we can get it. If the FSA's research shows that people have made good decisions, then that is fine. If the research shows that there is still an unacceptable number of bad decisions, then what we would say is: do not go ahead yet.

Q1571 Chairman: IFA's are typically paid three per cent initial commission and 0.5 per cent a year trail commission. They are the main source of financial advice. Does that not make it quite unrealistic to expect Sandler products to be sold with financial advice and a one per cent price cap?

Mr McCateer: When it comes to the different tiers of contribution levels, we commissioned actuaries to look at the economics of price caps at different contribution levels. What we have found is that for people who can afford to save £200 then one per cent is more than enough; the firms can make a reasonable return on their capital. The lower down you go, then the harder it is for that one per cent to work. My point is that that in itself is not a sufficient case for raising the price cap. If you do raise the price cap then all you do is price more people out of the market and you remove the incentive to save. I just think the bottom line is that we have to find new ways of delivering these products, which is why we always prefer to have a restricted number of licensed or approved providers of stakeholder products, more like utilities or national savings or things like that, rather than leaving it to the market.

Chairman: In our sub-inquiry into endowment mortgages, our main conclusion was that the business model was flawed and we need new business models. We have covered that aspect this morning. We are now looking for positive suggestions from the industry and other people on that. In addition, as part of our Inquiry, one issue was to reach out to the lower paid and, speaking from my own point of view, I do not think we have heard much on that yet. The danger is, as I mentioned earlier, the savings industry is a middle class industry so how do we ensure that it is not middle-class and it is extended to people? That is still the big task and I think there are a lot of very big questions there for us yet and we are hoping for some answers from people on that. Striving towards that, it has been very helpful this morning to have your comments and I thank you all for turning up to give us your comments, especially the shy Mr McCateer.