Select Committee on Constitution Minutes of Evidence


Examination of Witnesses (740-759)

WEDNESDAY 25 JUNE 2003

MR P SMEE, RT HON J GUMMER MP AND MR R SANDERS, ASSOCIATION OF INDEPENDENT FINANCIAL ADVISERS

Lord Holme of Cheltenham

  740. Thank you for that very interesting description of the problems you have to face as an association. I am very struck by how much, in your paper, you do not like process. Is it that you do not like the process of consultation and do not like the process of regulation or that you do not like the particular way it operates? It is very difficult to see how accountability could work without some sort of process. You put a lot of emphasis on collaborative initiatives, to which Mr Gummer has just referred. Clearly there is a different model for a trade association than the one you have, which is that it becomes a co-regulator with statute and the FSA setting a general framework of principles within which you police yourselves. At that point of course you have the problem of free riders to deal with. How would you make sure that the public knew which advisers were inside your framework of standards and probity and which ones were outside? That presumably would mean a very great change for you if you were to move from the model you have at the moment, which is where you represent the interests, to one where you define the standards within a framework of co-regulation. I was not quite clear, when you used the term collaborative initiatives, whether you wanted to move in that sort of direction. Two questions really.

  (Mr Gummer) May I just talk about process? We are not in any way opposed to the concept of process. The issue is a practical issue which is just simply this, that if the process is so heavy that there are, for example, a dozen consultation documents out at one time or in fast succession, when you have people who are trying to earn their living—and it has to be those who are the fee earners, because that is how the regulation lies, and the organisation which they pay for has to be at least in some way commensurate with their ability to do so—are merely saying that the process sometimes defeats the end and you do not get the proper consultation which you want. You are absolutely right, we are not anti-process in that sense. On the collaborative issue, we refer to ourselves not as a trade body, but as a representative body. We are technically a trade body and that is why that is the reference in our memorandum, but amongst ourselves we use the word "representative" to explain exactly what you are saying: we see ourselves as moving towards a position in which we can take a more responsible role of a collaborative kind and uphold standards which are standards which may work better than outside regulation for some things. We do not in any way disagree with outside regulation but the collaboration we look for is precisely to move towards—we are not capable of doing it now—the kind of collaborative arrangement which we should like.
  (Mr Smee) On process, the key question for us is the strain under which the process is put. The processes have been put under great strain, wise processes though they were when they were first set up. That has led to a feeling of disengagement from IFAs, who really should be keeping on top of what is developing in their sector, but just feel overwhelmed by it. As for the question of collaboration there is a risk in any regulated sector that you let the regulator do your thinking for you. I do find IFAs, who, when you suggest ways in which the business should be improved and in which professionalism should develop, will respond "Well, what does the FSA think?". That is a bad mindset for businesses to get into. Clearly there will always be statutory regulation. We know the framework within the Financial Services and Markets Act, but there could be room to breathe for firms which would get them more focused on what they should be doing, on what is right for the consumer and for their businesses.

  741. May I press you a little bit more on what exactly you have in mind when you say "collaborative initiative"?
  (Mr Smee) There is one issue, to give another trade body example, which is that the Association of British Insurers has a raising standards initiative where it accredits its members if they meet certain standards, which goes beyond regulation. I would not say that I would necessarily re-invent that wheel for the IFA sector, but one can imagine areas where the independent financial advisers would sign up perhaps to a statement of values: "this is what an independent financial adviser stands for". There are areas where you could envisage the IFA community saying that this is what a competent adviser does when advising on such and such an area. Areas where, if you like, the profession would be in the lead in setting out its parameters within a regulatory framework. Those are the sort of initiatives I had in mind.

  742. If you had such codes and standards, which in a very large diverse, plural industry does seem to have a lot to commend it, would you police the borders of that to make sure that people who did not live up to the code or standards left, what I gather now is not a trade association despite what it says here, a qualified trade association.
  (Mr Gummer) I am sorry, I was making a distinction. We are technically a trade association and we do not hide from the fact that we represent our members, that is true. I was saying that our own description of the movement from the traditional way of looking at it to where we think we need to be is to say that we need to represent our members in that wider sense of realising that their interests cannot properly be represented unless you do have precisely the attitude which you adumbrate; in other words that you raise standards, that you have values which you expect your members to keep to and if we were in that position and as we are in that position we would extend what is already true, which is that we admit to membership only people on conditions. Those conditions are not what perhaps in the future we would like to go to, but that is the circumstance. You have exactly described the direction in which we should like to go.

Baroness Gould of Potternewton

  743. You indicated that you had an elected council. Could you perhaps tell me a little more about your organisation, because it is completely new to me, I have to say? How did you become established, how long have you been going, how do you collect your membership, who funds you and so on? Just so I have a bit more of a feel about you.

  (Mr Gummer) If I give you the present and then Paul gives you the history, you will see. The present is that we represent an important element in the whole provision of financial services which is the independent financial adviser to whom very large numbers of people, usually inexpert in financial matters, go, seeking a range of services, but seeking to have advice at a particular level. We also have in membership the big groupings and we also have in membership the individual, one man, one regulated person and every section between that. We are a product of our history which Paul very quickly will describe.
  (Mr Smee) Up to 1999 there was one trade association and two informal groupings representing particular parts of the market. It was felt at that point that there was need for a single voice bringing together the largest and the smallest IFA into one body. That was set up in 1999. We are funded entirely by subscription from our membership. We do not undertake commercial activities, because that would very often put us in competition with certain of our members. The council is elected by constituency, so there is a constituency for the larger firm, the middle sized firm, etcetera. There is a system of rotation on the council involving the election of one third of council members each year. Roger was very much involved with the foundation of the association.
  (Mr Sanders) I am actually a rare breed, I am an IFA, a practitioner and duly elected as deputy chairman and a founding member in 1999. We have a council, which, as our chairman has said, covers small firms, regional firms, national firms and networks and ex officio non-executive members as well. We do represent 75 per cent of the current market for independent financial advisers. I should like just to touch upon a comment which was made earlier, if I may? We are a representative body and we represent firms. We are in the business of raising business standards for firms and the quality of advice that goes to the public. Running in parallel with this is a separate initiative to raise the professional standards of the individuals in our industry and our profession and we are at the forefront of bringing a higher professional standard, better exams, more searching examinations in the future. This is all part and parcel of what we have referred to as the collaborative efforts with third parties. In terms of collaboration, we also would endeavour to have a closer relationship with the FSA, our regulator. We would like to see more of a dialogue in terms of discussing and assessing what the priorities are that the regulator deems necessary. We are currently facing 17 consultation and discussion documents in the period June to beginning of September and a further 19 are planned to be consulted on to the end of the year. The regulator, to an extent, is bound by what is coming out of Europe, where something in excess of 40 per cent of the consultations can be seen to be in some way or other driven from Brussels. Nevertheless, we as a representative body would like to see more control over the water coming out of the tap. We accept, a bit like the London Eye, that even if a decision were taken to stop the process and slow it down, quite a few of the cabins would need to be emptied first.

  744. In fact Mr Sanders has touched on two other points I was going to make. You talked a bit about having a code of conduct, you want to raise standards. How would you implement that as a body? Would you have some recourse, if in fact members of your organisation did not follow those standards? The second part is the question of having a dialogue with the FSA. You referred to the complicated documents which come from there. Maybe you should talk to the Plain English Society and send them a few and make them change their minds. The reason I am relating the two is that if you are actually trying as an organisation to raise the standards and therefore putting some further pressures on the bodies you represent, on top of the pressures which are coming from the regulating body, is this not going to make it worse?
  (Mr Gummer) May I just take that last point? The issue is a rather different one. We think that one of the ways in which we can improve the way in which people approach these matters is by establishing what we have called the values: what are the things these people are there to do? What are the standards which they need to meet in order to do the job which they have elected to do? Many of these things cover areas which are quite difficult to regulate in the sort of detailed way. These are trying to get the sort of professional values which one expects in other occupations and which have never really been part of how the structure is. You are perfectly right that we are rather leery of adding to people's difficulty, but this is an area where we are really trying to bring the best practice together and helping people to raise themselves to that best practice so that they instinctively behave in a particular way. It is very hard for regulators to get that instinctive behaviour. We think we can help very much in that and that this is in many ways a better protection of the public than anything else. If people instinctively behave in the way they ought to behave, then we do not get into a whole argument about hindsight and whether people would have known that at the time. It is not that, it is about how you behave. That is what we are trying to do and it is there that we might well wish to bring in particular sanctions.
  (Mr Smee) Questions have been asked about enforcement and all this sort of thing. There is a condition precedent to all this which is that there is some room for the industry and sector to breathe. If I went out to the members now and said "Let's have a code", I think there would be a hollow laugh of derision, because actually, what are we doing? We are coping with 18 consultation papers and the like. There has to be some withdrawal of the statutory approach to regulation, there has to be some room to breathe before we can even think about addressing that sort of question.
  (Mr Gummer) That is why we have concentrated on values, on the more general rather than the specific rather than try to change the tone and the attitudes of people who have been brought up in very different circumstances.

  745. I do actually think that is probably a very good thing, because it is an industry where at times there are criticisms of the way the industry operates.
  (Mr Gummer) Of course.

  746. My final point, and again this is part of my ignorance, under paragraph 7 of your interesting paper you talk about the ombudsman and the fact that you could end up with different sets of rules. I do not understand that. Surely the two should be working in parallel.
  (Mr Gummer) This is a very real worry. You have put your finger on something which worries me personally very significantly. The reason is that they work in different ways. The ombudsman makes decisions on individual cases. Our concern is that those decisions do become precedents and the precedents can mean that they do not quite run with what the FSA has decided, but, given that you can appeal to the ombudsman, those decisions cannot be ignored. We have had a couple of cases recently which might illustrate that and which Paul could perhaps point to.
  (Mr Smee) As a preliminary, I would say that this memorandum was written in March and there has been evolution even since then. There is a memorandum of understanding between the ombudsman and the regulator. We have seen ways in which that is starting to work better than it was and that is a very welcome development. The key is to spot a case where an individual judgment, which may be perfectly reasonable in the circumstances, actually has much wider implications for the way in which an ordinary, competent IFA would have done business. One of the areas for example in which we are particularly interested now is the question of how an IFA establishes an individual's tolerance of risk; the industry has approached it in a certain way but is being second-guessed by the ombudsman in certain cases. That is a very difficult position because it seems to move the goalposts.
  (Mr Sanders) May I as a practitioner additionally comment that there are two aspects which concern our members and indeed concern me as a practitioner? Firstly is the fact that the ombudsman has had the ability to make rules by the back door, which have major implications for the industry across the piece, without due process and consultation, which has been of concern to us all and to the FSA. Secondly are the unforeseen consequences where an apparent change to rules takes place as a result of a finding in an ombudsman case, which then has a major impact on the professional indemnity insurance market and impacts on all firms in terms of the costs, the level of excesses and, in certain cases, whole rafts of certain types of business being excluded from cover without any action having been taken by the regulator.

Lord Elton

  747. May I start off with a retrospective declaration of interest as the former chairman of the Financial Intermediaries, Managers and Brokers' Regulatory Association, which attempted to do much of what you appear to be doing now? Therefore I understand a good deal about the difficulties you speak of. Much that I wanted to ask you has been answered, but you started by saying that you exist because there was a manifest need to raise the standards of your members. Above those required by the FSA or in different areas?

  (Mr Gummer) I meant that to indicate the fact that we are not an organisation which was set up in order to avoid or to oppose or to disagree with the concept that standards concerning the way in which IFAs operate are needed to meet the kind of expectations which people now have. That can be done, as I have suggested, in two different ways: one is outside regulation, again something which we agree with and support; but it can also be done, and I believe increasingly, by the profession itself taking responsibility for much of its own standards. I think there is a manifest need for that. None of that could happen until there were such a body and that is why the body was to some extent set up.

  748. You have spoken about your relationships with the FSA, which I imagine must be difficult, for reasons you have given and for other reasons. I wonder how they actually look to you. To what extent do they take account of your expression of your members' views?
  (Mr Gummer) It would be wrong if you went from this meeting thinking that we find per se our relationships with the FSA difficult; indeed I do not think that is true. We very often share with the FSA the difficulty in seeing how you handle some of these things in an applicable way. For example, I had a recent meeting with the chairman of the FSA and he rightly reminded us of the role which we ought to be playing more widely in Europe as a whole. We have had some helpful letters coming backwards and forwards. He did so, recognising just how difficult that was for us, given the cost, the time and the fact that there is no similar body to the AIFA in many of the countries in the rest of Europe. This organisation is a rather unusual animal, as so often happens in the United Kingdom, so it is quite difficult for us. We have to relate to a whole range of different people. In that case, both of us find it difficult: the FSA finds it difficult and 40 per cent of what it is asking us to do comes from the European Union, so they have to do these things. They recognise the weight on our shoulders. It is very often a joint understanding of what the difficulties are, but Paul deals with them from a day to day point of view.
  (Mr Smee) I would say first that we have always found the FSA very willing to listen and indeed there are cases where there have been significant shifts in their policy view as a consequence of representations which we have made, for example on the future of what constitutes independent advice post polarisation. We have very good personal relations and they are willing to discuss ideas with the association, so that should be recorded. It is, however, a very large organisation and at times messages, which are very positive and constructive from one part of the organisation, do not always permeate through it. This is behind some of the comments we made in our memorandum concerning the culture of the regulator.
  (Mr Sanders) Might I echo that? The trickle-down factor would be a good thing to see. I am sure the leaders within the FSA would sign up to a lot of the views we are expressing and the trick is going to be, particularly with the forthcoming change at the top, to see that the troops in the field within the FSA have a similar culture in terms of the new regulatory style.

  749. In the incoming flow of regulations from Europe, whom do you regard as your interlocutor? Is your regulator concerned to represent the effects of new regulations on your members or is this a job for government counselled by you, is it a job for government counselled by the FSA?
  (Mr Smee) It is a combination of both. We certainly talked to both the Treasury and the FSA and we also go direct to Europe via our trade body in Brussels to put across concerns to the Commission.
  (Mr Gummer) That is an area which we will have to and wish to increase in our activities because that is a necessary part of the tripartite pressure and one of our problems is how we fund and deal with that.

  750. You have given weight to the volume of consultation, which is part of the regulatory burden. How receptive is FSA to your representations on this?
  (Mr Gummer) They are receptive in the sense that they recognise what we say is true. They are unreceptive in the sense that they do not see how they can do anything about it. It is a little difficult. We have the problem that to some extent that is true. If you have a series of European legislative decisions, which are made after all by us all round that table—it is not coming from "over there", it is coming from us—we have to deal with it and one can understand that. That does demand prioritisation of things we do have control over. I suppose that is the key issue for us. How can we get the FSA to be more prioritised in the areas which it does control, recognising that it just cannot say, very sorry, that 40 per cent we are going to have to do anyway is not going to have any effect when we come to weigh in our minds whether we could perhaps put one proposal off for a bit and do another rather differently and find an easier way to do a third?

Lord Acton

  751. You may have answered my question, so I shall try to make it quick and not too bi-polar or whatever that word was that I could not understand. In paragraph 3 of your paper you say "We should acknowledge that there are many instances where the FSA has shown a willingness to engage with the concerns of small businesses; to listen and change its mind in the light of reasoned representations". I take it that the "reasoned representations" often derive from your organisation as opposed to anybody else's and that they listen and act on them often.

  (Mr Gummer) Yes.

  752. In paragraph 6 you say "We should not be in the present position of there being eighteen relevant consultation processes going on at once". I think Mr Sanders mentioned 17 and 19, which slightly lost me, but let us stick with the 18.
  (Mr Sanders) It is when you take a snapshot.
  (Mr Gummer) This was written in March. This is the snapshot from this moment.

  753. I appreciate that. Let us stick with the 18 snapshot. A figure of 40 per cent of regulation emanating from Brussels has been mentioned several times. I am no good at maths, but I imagine 40 per cent of 18 is about seven, so that leaves 11. Do you make representations about the 11? Do they say "Sorry. Bad luck, you have to have them"? Do you say "This is crazy"? Do they say "Sorry. Bad luck, you have to have them"? Do you go on and on and on and on, or what? How does it work? Why are they doing it?
  (Mr Gummer) We have to balance the need for a continuing good relationship.

  754. I am going to do my best to wreck your relationship.
  (Mr Gummer) Recognising too that the FSA have a job to do. Therefore what we try to concentrate on is prioritisation. It is to try to make people understand that we do value consultation. We do not want to have a situation in which they say that the only way to get rid of this is not to consult with you at all; legally they could not do that, but we do not want that kind of tone. We have to say, which is actually true, that we want consultation, but we stress that, if they want a decent response from us, can we please have it one by one and can we try to recognise how hard it is for us to consult properly, if the people we are representing are even less well resourced for this sort of activity than we, the body which represents them. How insistent are we? It is a continuing, continuous battle. They are not unpleasant about it, indeed they very often sympathise, indeed they give the impression that they would like to do it differently if they could, but I have to say, as totally independent from outside, having listened to it all, it does not change.

  755. Then do you go to the ombudsman? What do you do?
  (Mr Gummer) There is no recourse for us to the ombudsman.

  756. Can your 93,000 members go to the ombudsman?
  (Mr Smee) No, the ombudsman does not deal with that sort of case. One of the key issues here, which goes back to prioritisation, actually deals with the cumulative effect. It is not just an FSA issue. We could just about manage, if consultation were just an FSA issue, but we have government departments, for example the Treasury in the aftermath of the Sandler report produced another parallel stream. You have the pensions material coming from the Department for Work and Pensions. At one level we are a trade body and we have to be grown- up about it; we get on and we do our job. At times we do not do as good a job as we would like. The concern I want to express is that if you think about this at one remove, somebody whose livelihood and whose businesses will be affected by the outcomes of these consultations really has no opportunity to stay abreast of these issues. The consequence is that they feel disengaged from the accountability process, they feel that decisions are being taken which affect their lives, but they do not know by whom and how. We do our best to inform them, but the disengagement is still there. I think this leads generally to them feeling that there is a great deal of unaccountability in the system.

  757. Let me try it a different way. Do you go to the press? You are being frustrated. You have put in a paper to us, albeit in March, saying that there are 18 relevant consultation processes going on. You have told us this afternoon that your members hate them and that you have gone on and on at the FSA and they take no notice, very politely. Do you go to the press, do you go to the BBC? What do you do?
  (Mr Sanders) We do and in fact I should like to think that as a result of our intense lobbying, if you look at the FSA annual report which has just been published in the last few days, there is at long last an admission within that report that in the future the FSA should focus on "must-dos" rather than nice-to-dos. We implicitly feel within that that what they mean is that they might just start a dialogue with representative bodies and with industry about some of the consultations they are going to embark upon in the future other than the ones from Europe. There have also been cases in the last 12 months where, as a result of submissions made by AIFA, there have been fairly massive changes made to some of the consultations. When the feedback statements have come out and the policy statements and the rules have been produced further along the productive chain, there have been those changes. The most important one from our point of view of course is in the context of depolarisation.

  758. Of course.
  (Mr Sanders) Of course, because that is our livelihood. There has been a major concession there involving the way in which we define ourselves and define independence itself.

  759. Your answer in fact is that the iceberg has moved, you are getting somewhere, but you would like to get a great deal further.
  (Mr Sanders) Yes, we would.
  (Mr Gummer) If I may say so, there is one other point which is the question of "man bites dog". The press are not in the business of the arguments on this sort of level. When you say "Go to the press", I think I am quite good at trying to present an argument in a way which might catch the imagination, but the idea that there are 18 consultations is not a very easy kind of imagination to catch for anybody who is not an independent financial adviser. The story the press want is some poor little man somewhere has told somebody that he ought to buy this and it turns out to be the worst thing he could have done. That is the story; no other story is likely to catch the imagination. I am afraid that the difficulty we deal with is, even in clear and plain English, that what we do is pretty dull to people outside and not really very sexy.
  (Mr Smee) The outcome of one of the consultations, and a victory for us, where the FSA changed their mind and will go down a different track, is actually another consultation paper.


 
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