Examination of Witness (Questions 100-119)|
TUESDAY 5 FEBRUARY 2002
100. Do you think you should not have had briefings
about those issues? There was quite a major consumer issue there,
was there not?
(Mr Brown) The issue of Equitable Life's prudential
position is ultimately a very serious consumer issue. At the time
when the Consumer Panel was formed, it was put together with some
continuity with the old PIA Consumer Panel and there was a feeling
within the old PIA and among some panel members in the past, a
widespread feeling, that the consumer issues were the conduct
of business issues and the prudential issues were not ones that
the Consumer Panel paid much attention to. Over the first two
years of this Consumer Panel's life, it became very clear that
that old distinction was incorrect and that prudential issues
were central consumer issues and Equitable Life has proved that.
101. When we saw Howard Davies before, some
of us were concerned that the thinking of the FSA following their
taking over responsibility for Equitable Life was focused on keeping
that business going and hopefully getting over the problems that
it was experiencing, rather than perhaps highlighting the issues
of concern to consumers who might be new investors in the company.
Is that not highlighted and are not those concerns legitimised
by the fact that this major, central, single, most important issue
of the FSA when the FSA was set up, you were not given any information
about as the Consumer Panel. If there is value in having an insider
group to look at the consumer issue, surely you would expect it
to show itself in that particular case?
(Mr Brown) It is very clear from the Baird Report
that communications between those concerned with front line consumer
protection, if you like, and prudential insurance regulation were
not good in that there were serious errors and problems of management
in the regulator at the time. That is what it says in the Baird
Report. The Panel takes the facts of the Equitable Life affair.
The Panel cannot try to run its own investigation or second guess
those investigations that are taking place, but we take our facts
from the Baird Report and that is what it says.
102. Are you not worried that there is potentially
a conflict of interest here between your role within the FSA and
your role in protecting consumers? Can you not imagine circumstances
where the FSA may have as its prime aim keeping afloat a company
in these difficult circumstances and compromising your ability
therefore to warn consumers of the danger to their money by investing
in such a company?
(Mr Brown) I understand your question. We have all
learned an enormous amount from the Equitable Life affair. The
problem of what to do in between the two states of a company being
open for business with everything running smoothly and a company
failing, the problem of what happens in that gap in terms of information
to the public and information, I suppose, to the Panel, is an
important one. We have raised this with the FSA.
103. Would you like to have known at an earlier
stage than you did about this problem?
(Mr Brown) My feeling is we should have approached
the FSA ourselves about Equitable Life at an earlier stage.
104. They should not have approached you?
(Mr Brown) From the way you put it, if there were
substantial internal briefings on the issue, we would have probably
appreciated one ourselves.
105. You mentioned that you have learned a lot
from Equitable Life but would you agree we have an awful lot more
(Mr Brown) Yes. We communicated with this Committee
some time ago about the fact that the Baird Report picks up only
events from the beginning of 1999 and there is a lot more to the
affair. We look forward to the results of the Penrose Inquiry.
There is also the inquiry of the Parliamentary Ombudsman. There
is a lot more to learn, yes.
106. When the FSA takes on its full powers and
expands to cover mortgages and insurance brokers, is that going
to make a big difference to the way your panel functions?
(Mr Brown) First, I ought to say we are very pleased
about this change in scope because, on the mortgage front, we
have been campaigning very hard to bring mortgage advice and intermediaries
into scope. We also think it is a very good idea about insurance.
It will certainly mean big changes for the FSA because there is
so much of it. This is a large piece of business which is going
to be brought under regulation. Whether it means there is any
difference in the relationship between the Panel and the FSA I
do not know. I do not think so. I just think it means there is
more of it.
107. Recently there has been a third managing
director appointed with special responsibilities for consumer
relations. Is that improving the focus of the FSA on consumer
matters and is that affecting your panel at all?
(Mr Brown) It is probably too soon to detect a major
change. I do know that that director is leading some projects
which we are very keen on. To start with, he is leading the project
picking up on the points that flow from the Baird Report, all
of which we see as important reforms to the insurance industry
and to the way the FSA regulates it. He is doing various other
projects which we are keen on. I hope that that appointment means
that consumer issues are regarded as more central to everybody's
work at the FSA because there is a major cultural project going
on in the integration of these regulators. It is not simply an
administrative effort to bring these regulators together. Those
people from the more rarefied areas of banking and insurance regulation
have to think now in terms of consumer protection. That appointment
signifies that the FSA wants that horizontal consumer theme across
the whole of the regulator's activities.
108. You said you hoped it would have this effect.
Has that effect not been particularly obvious now?
(Mr Brown) I have spoken with members of my panel
about this. We do believe that this is changing. We believe we
see changes in the regulator, but it is a big project.
109. You mention in your report your unease
at the way the concentration on money laundering was affecting
the evidence that people had to produce to open a bank account.
You represented this to the FSA and they changed their views on
it. Could you explain what changes you propose from the Panel
and whether and how they are being implemented?
(Mr Brown) We have not proposed specific changes.
We have highlighted the area and pointed to the fact that the
money laundering requirements are interpreted with a considerable
degree of variation at the counter when people are trying to purchase
financial services products. Often, I have seen people turned
away in the last day of the financial year because they have brought
the wrong gas bill with them so they could not take out a simple
ISA. It is the bad implementation of these very important rules
that we are concerned about. We do understand that the Treasury
is setting up a committee to look at this and we will be attending
that committee. There is a lot still to play for on this.
110. What assessment has the Panel made of the
latest proposals from the FSA on polarisation?
(Mr Brown) The Panel has not met yet to discuss CP121
on polarisation. The consultation period runs to 19 April and
we are meeting early next week to have our first crack at that
consultation. It is obviously an extremely important piece of
policy for consumers. In the run up to it, we have had a lot of
discussions with the FSA and attended meetings. We have collaborated
with the Consumers' Association on one seminar and we are organising
one of our own to bring together people from the consumer side
and the trade associations to discuss some of the issues. Our
main desire in the debate is to try to bring the problem of providing
advice onto the agenda. We think the real problem is that a large
proportion of the population among middle and lower income groups
does not have access to independent advice and, as they are expected
to take more and more responsibility for their financial affairs
and for their retirement, people need access to that advice. We
will be examining the polarisation proposals very much in the
light of that concern.
111. If you abolish the sharp distinction between
partisan advice and independent advice, how is that going to enhance
the number of independent advisers available to people?
(Mr Brown) That is one of the things we will examine.
At the moment, one of our big concerns is that, whatever distinctions
are made formally in the distribution channels at the moment,
the majority of people do not one way or another have access to
independent advice. The situation as it stands is very poor. We
have made a heartfelt plea to the FSA throughout the pre-consultation
period that whatever they do they should not make things worse.
112. I notice from your report, page ten, you
say one in five people who have taken out a financial product
over the past five years have regretted it. I wonder if that is
the tip of the iceberg. The FSA consultation period is three months.
Will you be producing your report for public consumption before
the end of that consultation period?
(Mr Brown) Perhaps one in five is an under estimate.
I think one fifth of people regretting a recent purchase is quite
a big figure and it is one that gives us great concern. It may
be larger than that. Once people have made an investment, they
have an investment in something. On the question about when we
will produce our response to the polarisation consultation, I
would be very much surprised if we submitted it at the last minute.
We intend to engage in the debate during the forthcoming period.
I am reluctant to talk about it now because I have not had the
advantage of speaking to my colleagues about it, but we are starting
that next week and we are holding a seminar in March at which
we will be expressing views about it. I think we will be publishing
our report before the last moment.
113. I think it would be helpful to this Committee
if you did publish that response and sent a copy to us.
(Mr Brown) We will do that.
114. Can I refer you to figure 2.4 in your report
on page 14? I was interested in how you interpret what you are
finding here because you have just been talking about financial
advisers and also customer satisfaction with products purchased.
If we are looking for a trend on this chartadmittedly,
it only goes across two yearswhat we see is that, although
independent financial advisers are the main source of information,
there is a pretty sharp reduction in the number of people who
have consulted them and what is replacing that? People talking
to their mates at work, reading magazines bought off the shelf
or scanning through the internet. All of those latter ones are
unregulated and who knows what sort of advice you get in the canteen
or on the net? How are you interpreting this drift away from the
(Mr Brown) This is only over two years. I could not
be confident that this is a sign of a major drift away from advice.
We do know two things. One is that independent financial advice
is tending to drift upmarket at the moment.
115. What does that mean?
(Mr Brown) It means that the advisers report anecdotally
that more of their clients are what they call high net worth individuals
and I think they report that it is more worth their time to concentrate
on their clients who are high net worth individuals. The other
thing we know is that most people do not get independent financial
advice, so I would point to a real problem here and that is that
we have a lot of people in the population who are being expected
to take out complex financial products and think for themselves
about it and they have nowhere to go. They have somewhere to go
if they are in debt because the debt advice agencies, Money Advice
and Citizens' Advice, can deal with that, but they have nowhere
to go if they have even a minor financial query of a generic nature.
Of course, the FSA has done its best with its website, leaflets
and CD ROMs and so on, and I am sure people use those but the
problem is the obvious one: if someone is not geared up to use
the web or pop in a CD ROM and find out, who do they go to? At
the moment, we have all allowed a situation to develop whereby
there is this very large gap in the advice market.
116. Is this not pointing to a pretty serious
problem, especially for people on average incomes? Leaving the
high net worth individuals out of the picture for the moment,
the majority of people purchasing a financial services product
are on average or around average income. Admittedly it is only
a two year snapshot, but it shows a drift away from taking independent
advice. We hear about 20 per cent regretting purchases and these
purchases consume quite a large proportion of someone's disposable
income so 20 per cent dissatisfaction is a pretty high figure.
I doubt you would find 20 per cent dissatisfaction on the choice
of car purchase or washing machine or house purchase but on the
financial services it is a very high figure. Elsewhere in your
report, we find people reporting high levels of complication in
terms of purchasing a financial product. You report 36 per cent
of people saying they found it complicated to take out a mortgage.
It is complicated; it is a large part of their disposable income;
and yet they are not taking independent, objective advice. Does
that not add up to a pretty worrying situation?
(Mr Brown) Yes.
117. What can you do about it?
(Mr Brown) During the run up to the polarisation discussion,
we made this point very strongly. One thing I would say in advance
of the discussion with my colleagues is that we are very pleased
that there is a chapter in the polarisation consultation which
addresses this problem of providing advice to people who at the
moment just are not in the market for it. I am not sure though
that anyone has come up with an appropriate solution to deal with
it. We have proposed in the past very generally that there ought
to be some kind of widely available, new service to provide generic
and strategic financial advice for people. Often, this advice
is quite simple stuff: whether, if you are on a low income, to
start first with some life insurance protection or invest in a
pension. An example I often give is of someone who is not served
well by the system. If a young building worker is thinking about
taking out a stakeholder pension, there is no one in the system
who will advise him that he ought really to be protecting his
family with some life insurance before he takes out a stakeholder
pension. There is just nowhere in the system where this can happen,
but they are not very complicated issues, some of them. The Panel
has argued in the past for some kind of universal financial advice
at low level, perhaps with debt and benefit advice.
118. Given you agree that this is a big problem
for consumers and you are the Consumer Panel, do you think you
are doing enough to help consumers address this problem?
(Mr Brown) We have raised this with the FSA and with
the Treasury. We are meeting with the Economic Secretary. We have
made it the focus of the joint seminar that we arranged with the
Consumers' Association. It will be a central part of our response
to the polarisation consultation. It is in our annual report.
Yes, we could do more, but we have made a lot of noise about it
119. When you say you could do more, what more
could you do? That has all had to be drawn from you. I was not
impressed when I looked at what you had done for the socially
excluded groups. Bit by bit, Mr Plaskitt has had to pull out that
you have made representations about free financial advice for
those on low incomes. What else can you do? Have you done that?
Has it been rebuffed? What was the Treasury's response? What was
the FSA's response? Where are you with it?
(Mr Brown) I have explained what we have done.