Joint Committee on Financial Services Minutes of Evidence

Examination of witnesses (Questions 180 - 199)



  180.  I am a professional economist and I find it completely incomprehensible. It just seems to me that whilst it is highly desirable that one should have an educated consumer, it is simply not credible.
  (Mr Stretton)  I understand the question and I agree with it. The question really is what do you do about it? Do you pretend that you can protect people in this situation when you cannot or do you just acknowledge that there is a problem and try to make sure that customers are genuinely on their guard and will ask the basic questions like "what does this do for me?, what are the risks involved in what I enter into?", and at least hope that we can get customers able to do that? I really fear an environment in which customers regard any action that they take here as being one which has been sanitised and safe and is bound to work out to their advantage, even though they will find it difficult to make those decisions themselves.

Mr Kidney

  181.  Just on the back of that, somebody spoke in the last session about being against league tables of costs and charges. Clearly that is too narrow but is it not part of this consumer advice or consumer information to empower consumers to make informed choices by having comparative tables of all sorts of things: persistency rates, performance over years, charges, hidden charges or open charges? Are those not all a part of trying to promote competition through allowing the customers to have the information they need to make their decisions?
  (Mr Stretton)  I am perfectly happy with league tables, we just need to make sure that in a world where some of the important things are not measurable we do not get people spending all of their time looking at things that you can measure. This is a very strange product, it is not manufactured until some time over the next 50 years, so getting a league table which is really helpful is difficult. We should measure what we can and that should be available to customers.
  (Mr Boléat)  My Lord Chairman, can I add on that all those league tables are available and are published. Indeed, a month ago we had the PIA's latest effort which ran to 60 pages of tables giving all of the costs and charges, performance tables are published every month in any number of journals, persistency figures are published by the Personal Investment Authority, and the overall impact of this on consumers is not a lot.

  182.  Not measurable.
  (Mr Boléat)  I very much agree with the point that Lord Eatwell mentioned. I am a professional economist, like him, and I stopped buying the Economic Journal after 30 years when I realised that I had not understood any of it. It is not just in financial services where there is this problem. We know from any amount of research that consumers do not read literature until they need to. That is not to say we should not do everything we can to make that literature as readable and as user friendly as possible for those who wish to read it, but the majority of people do not read literature until they have a problem. If we actually build a regulatory system on the basis that people read and understand everything it will fail. Having said that, there is more that can be done to make products easier to understand and easier to compare but we need to look at financial services in the context of all other goods and services where the same problems exist.

Mrs Blackman

  183.  I just want to check out with those members of the panel who have not spoken recently whether they are struggling with this statutory objective of public awareness. Is it too woolly? Have you worked out what you think it means for your area in terms of meeting that statutory objective or does a lot more work need to be done on the objective of public awareness?
  (Mr Ross Goobey)  I was keeping deliberately quiet because fortunately we do not have to sell directly to the retail customer, thank goodness.

Lord Poole

  184.  Come on, you are not allowed to get away with it that easily! You know far too much to sit in complete silence, you must have a view.
  (Mr Ross Goobey)  What worries me as an institutional investor is actually the question of the cost of informing these consumers which does not give us any benefit at all. If we are going to get charged that, there was a question that was raised about the cost of cross-subsidising between the institutional professional investors and the private client investors. I think it is very difficult to inform sufficiently the individual. The individual does not take a great deal of interest in these products and does not understand when they are explained to them. In my limited experience, and I was on the board of Cheltenham and Gloucester for a long time, even in mortgages, which are the most widely taken out products, people do not understand what they have got and there were many complaints to the ombudsman about fixed rate mortgages when people thought they had been robbed by the building society and please could they now have the variable rate because rates had fallen. There was a great danger when we reported to the Building Societies Ombudsman that he was actually taking some notice of it. I am not confident that consumers, even well informed, well educated, exposed to education, will make well informed decisions.

  185.  That is such an indictment, is it not, of ordinary retail consumers faced with ever increasing complex products on the market and you are saying that you are not even convinced after they have been taken through the process that the majority of them will understand what it is that they are being sold and the ramifications of the product. There is an awful lot of work still to be done on how we can simplify the information and the process that consumers go through. Would anybody else like to comment on that?
  (Mr Boléat)  The consumers are also balancing the price of the product against the time it takes to discover all of these bits of information. If you apply that analogy to it, why does anybody buy Coca-Cola in a pub when they can go to a garage and buy it at a tenth of the price? If you look at any good and service there is that balance to be made all of the time. That is part of it. How many people can operate a video recorder without the help of a ten year old? The literature is all there, indeed it is there in 18 languages to make it easy for everybody, but do people use it? The chances are they probably cannot programme a video. It is not saying that they are unable to, it is that they do not think that is a sensible use of their time and they are buying sometimes on the basis of the reputation of the product provider or salesman. We know they take far more notice of what a salesman says than what is written down. If a salesman said the opposite of what is written down the chances are that the salesman would be believed, that is human nature. It is not a criticism of consumers.

Lord Eatwell

  186.  Can I come back to one of the points that was made earlier. I cannot remember whether it was this group or the previous one, it is melding together. Somebody said in regulation in the past if you sold a rotten product but actually went through the procedure correctly you were okay and the regulator thought that you had behaved correctly. That does not sound very pleasant, it does not sound the sort of thing that one would like to encourage. Are we getting into a position, from Mr Stretton's position, that if the company selling the product describes what it does clearly, sets out all the conditions and sells it then as far as the regulator is concerned that is okay even though it might be a quite inappropriate product for the person buying it?
  (Mr Stretton)  There are duties on the seller to make sure that, if asked, the product is at least relevant to the customer. The customer cannot escape the duty to decide whether it is the most relevant thing that he or she is faced with. There will be people who do buy, and the regulator will regard the sale as perfectly proper, things which they subsequently regard as not having been their priority. There will be expensive products which are sold perfectly properly through that system.

Lord Burns:  Maybe at this point it would be sensible to ask whether or not David Roe has anything to say on this issue and the general question we heard earlier that maybe there should be more in terms of the principles, not only about how it should operate with respect to the industry but how it should operate also with respect to consumers. What has come out of this discussion is that the sentences in the Bill are, if anything, rather terse and rather short and they have led to a certain amount of ambiguity. Is there a case for spelling out a little bit more some of these principles; about different kinds of consumers and what are some of the responsibilities are towards consumers and what responsibilities the consumers have themselves?

Lord Haskel

  187.  Can I just add to that, we have had this discussion about consumers and nobody has mentioned the Consumer Panel. There is to be a statutory Consumer Panel, I wonder if Mr Roe could give us some idea as to whether the Consumer Panel could play some role in this? What we may be doing is saying we will leave a lot of these decisions to the Consumer Panel.
  (Mr Roe)  I think one thing I would say is that there is a general matter of judgment about how much detail one wants to put in legislation of this nature. The Government has been very keen to take a framework approach and set out very clearly what it is expected that the FSA will achieve and leave the task of actually writing the rules and codifying the behaviour to the regulator. I did want to say something about clause 5 generally before answering the specific question, Chairman. What clause 5 effectively does is to say that the protection of the consumers objective is about securing an appropriate degree of protection. In the second sub-clause it sets out three separate considerations which have to be taken into account in determining what that appropriate degree of protection is. The first one talks about different degrees of risk involved in different kinds of investments and other transactions. The second one talks about different degrees of experience and expertise which different consumers may have in relation to different kinds of regulated activity. I think there is an awful lot in the idea of different experience and expertise, some of which we have touched on, either talking about wholesale/retail or talking about vulnerable or less vulnerable consumers. The ideas are all consistent with subsection 5(2)b. The third of the general things that needs to be taken into account is the general principle that consumers should take responsibility for their decisions, on which we have had some interesting discussion. My point, I think, is that in looking at this we need to look at the clause as a whole. It is very important to talk about particular elements of it but it does help and it will help the Committee if you look at these as three considerations which in some ways are complementary. On the point about whether there should be more in the Bill which sets out the responsibilities of the industry, clearly in the current regulatory regime there is a large amount of material which does set out the responsibilities of the industry both in terms of broad principles and specific obligations. A lot of that effectively codifies some of the general propositions about agency law and so on. That is broadly the approach that we have been taking forward. Clearly there is an argument for bringing into the Bill some of these ideas about what the particular responsibilities of firms ought to be and I am sure this is something that Ministers would be quite happy to reflect on if the Committee comes to the view that they should. The other question that I was asked to talk about was the role of the Consumer Panel which, as has quite rightly been said, will be a requirement in the Bill, one of the changes that Ministers announced a month or two ago. We do think that the Consumer Panel could have an important role to play in helping to inform the kinds of decisions which the FSA are making about how best to give effect to these objectives.

Viscount Trenchard

  188.  Yes, Mr Roe, can I just ask you about this protection of consumers objective again? I think you explained that we should look at the clause as a whole and that the FSA would clearly have to write those rules specifically in the interests of the consumers. I assume that those rules will not be available in draft before the Bill is introduced to Parliament? I would also like to ask whether the FSA will be obliged to consult with the practitioner bodies on the appropriateness of the proposed rules before they are introduced as secondary legislation?
  (Mr Roe)  Yes, the Bill does require quite extensive consultation with the industry and other interested parties on the rules. If I may perhaps refer the question about precisely what the FSA is doing in terms of developing its rules back to my FSA colleague.
  (Mr Whittaker)  We have a detailed programme that we have published and can make available to the Committee if it is not already available—I thought we had attached it with our submission to the Committee—setting out the way in which we intend to consult on the proposed rule book over the coming year or so. It is the case that because of the process of consultation that we are going through we will not have final rules, or indeed even draft rules, at the time that the Bill is introduced to Parliament. We are doing a very extensive consultation process to ensure that people's views are taken into account.

Lord Taverne

  189.  I want to put a very general question. We have been running around this subject of how we can define consumer protection more effectively and we have identified a lot of problems but we have not identified any solutions. I hope that perhaps in some way the Civil Service will be able to draft something which is a little more specific but I am not sure if they can. I wonder whether in the end, and this is what I would like to ask you about, is not the most effective guarantee the closest possible consultation at every stage with the Consumer Panel and indeed the practitioners?
  (Mr Boléat)  Yes, but not just the Panels. I think we would like to see widespread consultation, anybody who has got a view should be able to comment. Recently the Government has been trying to produce a more effective method of consultation with the Cabinet Office having published some guidance which almost every department ignores, except the Treasury, which is quite disturbing. There are many industry bodies—you are going to see some of them—and I think it is important that those looking at the responses are able to weight them according to who they represent. The Panels have a major role but consultation needs to go wider. We hope that the FSA will publish the results of the consultation exercises and where there is a strong view against what the FSA proposes we hope that the FSA, if it decides to do something there is a view against, will justify that to the market.

Chairman:  Maybe we can move on to the other issues and wrap up the questions on market confidence, competitiveness, competition and the regulatory burden.

Mr Heathcoat-Amory

  190.  On the question of international competitiveness, speaking to some City firms one would suppose that the moment this Bill receives Royal Assent the City is going to empty and they are all going to leave and set up in Zurich or New York. Is this a realistic threat? What I want here is some assessment of the sensitivity of location to the regulatory environments and in particular the regulatory costs. On the face of it, even if one grosses up the FSA fees quite considerably, that is really not going to be a tremendously significant item for the larger firms. Possibly the compliance costs are rather larger. Some say that with the narrow margins in international business this is a very real factor and because the City of London is fighting a pitiless struggle for international competitiveness we really have got a duty in this Committee and in this Bill not to disadvantage a colossally important British industry. I would be very interested if one or two of you could give your assessments of the sensitivity.
  (Mr Foster)  I think the regulatory cost is obviously an important feature. Clearly we want to see a strong regulatory framework but there is always this balance with the amount that it is going to cost. You can never make it foolproof. The balance needs to be maintained in a sensible way. Equally important, there are a number of other factors which give rise to where businesses wish to locate themselves. A regulatory environment is one of those, it is not the only one but it is quite an important one. I think that flows through from the fact that depending what is in the legislation and how that legislation is enacted, particularly in relation to capital as well and the amount of capital requirements that are needed in a regulatory environment, that is at least as important an aspect.
  (Mr Ross Goobey)  Direct costs in our own organisation—I looked it up before I came here—of compliance and internal audit, which is very closely associated, are six per cent of our net operating costs. That does not include the cost of the time that the other people in the organisation spend meeting the needs of our compliance and internal audit, so you can possibly double that. That is a huge cost. Perhaps we are just inefficient. Coming from a relatively low start before the imposition of the OPS regime in 1993, I think it is not that they are going to go off to Zurich but some elements of the financial services have already gone to Dublin. Dublin has a regime which is fiscally very attractive, where the language is the same—give or take—and the basic law is much the same as ours and the probity of the regime is thought to be similar. I think the cost base over there is probably lower. I have no direct experience, I just observe that a lot of things like the open end investment companies have almost all gone to Dublin and that is a potential danger.


  191.  How much is regulation and how much is other factors?
  (Mr Ross Goobey)  It is impossible to distinguish. I just observe that quite a lot of this sort of thing has gone to Dublin. I can give you an example of where one of the big Italian banks has set up its investment management business in Dublin to service the UK and the rest of Europe rather than in London. Going back to something Mr Heathcoat-Amory was asking, who bears the cost of all this regulation, in our case it is the people we are supposed to be protecting because we are owned by the pension fund that we are managing. That seems rather perverse and that may come back to the point I was making in my opening remarks that we are having to protect them from themselves whereas they are actually protected under the Pensions Act already.

Mr Loughton:  Do you think that if it is cheaper to do business in Dublin, and interestingly I think I am right in saying that Ireland is the only place that has higher stamp duty on equity transactions than we do, have you seen any evidence of the cheaper costs being passed on to customers or are they just doing it there because there is far less red tape involved and they can be far more innovative?

Lord Taverne

  192.  And less tax.
  (Mr Ross Goobey)  There are lots of reasons for them being there. Part of it is the taxation of the corporates in the international financial centre which is a tax free zone and the very low rate of corporation tax, of course, which is the lowest now in the EU, if they do have to pay tax. They do not have to transact stock transactions in Dublin, they can transact it anywhere they like. That is one of the things—a completely different subject—about what is going to happen with Frankfurt and London, where is the actual transaction going to take place? If we have got half a per cent stamp duty and the Germans have got none we can be pretty sure that they are going to go to Frankfurt to transact their stocks. There are lots of reasons for going to Dublin, some of which are related to compliance costs.

Mr Loughton

  193.  As a general point, do you think that an awful lot of what we are discussing in the FSA is actually retrospective because the way financial services are going to be marketed and the way financial products are going to be produced in the future, using the Internet or whatever, is very different from what happens now? In many respects the whole FSA Bill is being tailored to what has already gone and is quickly being surpassed and that is a very good example of what is happening in Frankfurt and in Ireland.
  (Mr Ross Goobey)  Yes.

Mr Kidney

  194.  Is that not why the Bill is terse and speaks in principles and relies on rules that even the FSA themselves could make, that it is not stuck in a particular time zone and it can actually respond to the way the markets develop in the future?
  (Mr Ross Goobey)  That is obviously very helpful, not too prescriptive. I agree with everything that the Treasury and the FSA think about this, that they do not want it too prescriptive. We can see what level of cost the FSA has by merging all their SROs together and there is not much sign of it being lower.


  195.  Would you stick to the view that you would like to see a separate competitiveness objective? You do not think it is sufficient that it should be in the principles? You would like there to be something which is rather stronger than that?
  (Mr Foster)  That is certainly my comment that I made earlier on, there should be something stronger.

Lord Haskel

  196.  Do you think that there is a danger instead of firms moving to Frankfurt or to Dublin that regulated firms will deal with other regulated firms outside regulation, that large firms know each other and will do business with each other outside regulation and save the regulation costs?
  (Mr Goobey)  Some of the most extensive transactions are not regulated anyway. I think it is going to be much more a matter of cherry picking about where you do bits of business and you will go to the regime that is most suitable for the transaction you want to do and the cheapest and most effective. The base of where you are is not going to determine where the actual business takes place.

Lord Poole

  197.  You have said that cost is a factor. Do you think that another factor may be the actual quality of the individuals concerned who engage in the detailed regulation at the interface, the people who come out of the central regulator and come and inspect your business? If they do not really understand your business it is frightfully difficult to get them to work with you. That may be a very important factor and one that certainly the FSA, if not the face of the Bill, needs to concentrate on.
  (Mr Ross Goobey)  We find that we have a perfectly relaxed relationship with our regulator and IMRO is not notorious for being very soft on these things. Obviously they are not up to date practitioners in many of the areas that they are regulating and that is inevitably true. I do not think that is the real problem, I think it is the tasks that they are set by legislation or by the FSA, they have to go through the process of doing it. Again, like Lord Eatwell, I have forgotten which panel it was but I think it was the previous panel where somebody was saying he only had ten per cent of working days when he did not have one of the regulators in his operation. That is quite a burden on resources.


  198.  Before we close, and I think we should close now, can I ask David Roe and Andrew Whittaker whether there is anything you want to say in response to the issues raised about Lloyd's earlier? Or whether you would rather reflect on them and come back to us at a later stage?
  (Mr Whittaker)  Perhaps I could try to deal with the issue that has been raised about the way in which regulation of individuals might impact on non-executive directors. The Bill does provide powers to enable the FSA to operate a system for regulation of individuals within an authorised firm. We plan to issue a consultative paper in June setting out how we expect to exercise those powers. I do not want to do too much by way of anticipating that consultative paper. We do expect that it will treat non-executive directors at Lloyd's no differently from non-executive directors at any other institution that we regulate. So I think that to the extent that there was a suggestion that we might view Lloyd's differently from an insurance company, I do not think that is currently what is planned. We recognise that non-executive directors have a different role from executive directors. The objective of what we are doing will be to try to ensure that responsibility under that regime reflects the role of the people concerned. We are not offering that non-executive directors will be entirely outside the new regulation but the way in which it will apply to them will be commensurate with their responsibilities as non-executive directors and no greater.

Lord Poole

  199.  And Jonathan's point?
  (Mr Roe)  I think Mr Agnew gave me a bit of a let off by saying that he did not really want to have a debate about the issue today. We are certainly aware of the point that has been made and are giving it careful consideration.

Chairman:  Thank you very much for coming this afternoon. This has been very helpful. As I said to the other group, we are up against sharp time constraints and we want to get as much evidence as possible. We want to get people's reactions to what they see as the outstanding issues that are left and in that context this has been extremely useful. Thank you very much.

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