Intercontinental Hotel, London
Friday 3rd September 1999
Howard Davies
Chairman, Financial Services Authority

Introduction

I am grateful to David Hunt for inviting me to address this the AIFA’s Launch conference. As the regulators, we at FSA have not attended on the birth of the new organisation as the father or even the midwife. But we have been observers with a close interest. [Let me congratulate you on the baby’s acronym. It does I think put you nearly at the top of our alphabetical league of trade associations. ABI are ahead by only a neck now.]

More seriously, I must congratulate Paul Smee on his appointment at a time of so much challenge and interest for everyone involved in financial services and their regulation.

In my remarks, and in wishing AIFA every success in the difficult rôle which a trade association has to play, I want to touch on four main points:

First, the important part which your sector plays within retail financial services, which testifies to the need for it to achieve high standards in meeting the interests of consumers.

Second, the influence of government decisions, recently taken and yet to be taken, on the future challenges and opportunities which will face IFAs. [Paula Diggle] will have touched on some of those this morning and I want to draw out some possible implications, both for regulators and for advisers.

Thirdly, what lessons we as regulators should be drawing from the past in planning our future regulatory strategy, as it will affect IFAs and other sectors.

And finally – to coin a phrase – I will deliver a few improving words on where we are in the regulatory reform programme, and where we go from here.

This will leave room for my colleague Clive Briault, later this afternoon, to describe in a little more detail how we are tackling the preparation of a consolidated Handbook of rules and guidance, to cover both prudential and conduct of business aspects for N2. And David Jackman will be updating you on our ideas on Training and Competence.

Effective consultation with the industry, with firms and through trade associations, is essential for FSA as we build the future regulatory framework and as, in real time, we tackle current regulatory issues. AIFA is right to highlight in its mission statement that consultation function of a trade association.

So we look forward to close interaction with the new Association and its leaders. We welcome the prospect of receiving a more co-ordinated, and perhaps better researched set of responses from IFAs in future. We may not always reach judgments you like, but it is essential that we seek and weigh your input and explain our decisions.

The IFA Sector

The Government, and indeed all the major political parties, recognise the growing importance of financial products as a means through which ordinary consumers can make savings provision of their own for old age and also provide protection against vicissitudes like ill-health, unemployment and premature death. We all know that individuals now face far more, and more complex decisions about their finances than they did even in the recent past, as the State’s rôle has diminished, and as financial products have become more diverse and complicated.

IFAs should, and in my view will play a vital rôle in the retail financial markets of the future. But regulators will, too. And my own vision is that that rôle should be more proactive and constructive than it has been in the past. The Government have recognised the need for a more active regulatory rôle by giving us, in our legislation, a new statutory duty to promote consumer understanding of the financial system. It will, of course, take some considerable time, particularly to build improved consumer understanding of the risks of financial products and services and how to shop around. But we have made a start.

We set out in May a focussed FSA strategy on consumer education, designed to work with the grain of others efforts over the years. I hope there are some elements of that strategy on which we can work with IFAs. But there are things that can help consumers in quicker time than that.

League Tables

You will all know that in March the Chancellor announced, in his 1999 Budget speech, that he wanted the FSA to set to work on publication of league tables of costs and charges in savings, insurance and pension products.

To do that in a form which will be genuinely helpful and informative for consumers involves some real challenges. And some in the industry have expressed their scepticism about the feasibility of preparing league tables which are accurate and meaningful. We shall see.

But one thing is abundantly clear from our research. Consumers today are not confident about buying financial services products, that they find financial literature difficult to read, that they don’t shop around widely and that they have limited trust in the information and advice that is currently available.

For example, over a quarter of people making decisions on their finances say they find purchasing a financial product "a minefield". Our research suggests that it’s not that people find the subject boring (although it’s true they don’t actually claim to find it interesting!). Rather, for many people it is the language of finance that is so off-putting – jargon, complex concepts expressed in technical terms, poorly explained figures – all these can contribute to consumers’ unwillingness to find out more about financial services. Not surprisingly, consumers tend, as a result, to do too little by way of shopping around.

We all know that a market that operates like this is not a truly healthy one. As the DTI said in its recent White Paper on consumer strategy "confident, demanding consumers are good for business. They promote innovation and stimulate better value, and in return they get better products at lower prices".

We hope that a flow of more accessible, comparative information from the FSA will, over time, be good for consumers. But will it be good for IFAs? I’d like to give you four reasons why I think it will be:

First, consumers will still need advice on which product type is suitable for them in their circumstances. There’s no way to produce tables that will compare unit trusts, say, with investment bonds. So league tables will not diminish the importance of the most difficult job you do – helping the customer to determine the type of product which will most closely match her requirements.

Second, there is an obvious case for the tables to compare products across a range of indicators. Consumers will then be made more aware that products scoring well on one indicator don’t necessarily perform well on another. With that knowledge, consumers will be more enquiring and involved, wanting advice on the trade-offs. IFAs are the people best able to answer those questions.

Third, greater transparency should also make consumers more aware that a product from one provider is not necessarily as good value as the product from another. You and I all know there is a wide dispersion of pricing of even simple products. So consumers’ tendency just to contact a well-known name will be tempered by knowledge that this may not result in a good deal. People may be more inclined to stop and think before they buy. Again, if that is what they do, they are quite likely to go to an IFA to help them through the process.

Finally, giving consumers authoritative and accessible information can help rebuild confidence in financial services which has taken a knock over the hard years of the pensions review. And we know from other markets that confident consumers are likely to buy more.

In about a month from now we aim to issue a consultative paper on comparative information, following some consultancy work which has been done for us over the last few months. It will be pretty "green", by which I mean that we are really looking for lots of discussion about the way to go.

I have already said a few times that IFAs ought to find exciting new opportunities opening up in the changing financial markets of the future. And I believe that to be true. But ‘ought’ is the operative word. The ‘oughts’ will only become ‘boughts’ if there is an IFA sector able to take advantage of new business opportunities. Is there one, or has it been so weakened by the pensions review, and other regulatory actions, that it is quite incapable of rising to the challenge? The answer is quite clear. There is a strong IFA sector:

  • The number of individuals registered with us through IFA firms is rising strongly.
  • ABI figures show that through the past five years, IFAs have grown their share of single premium life and pensions business steadily. By 1998 you accounted for 58% of single premium business and 37% of regular premium business, well up on a decade ago.
  • PIA figures continue to show persistency on regular premium policies sold by IFAs to be higher than for company representatives, sales: after four years it is 77%, rather than 68%.
  • Consumers’ complaints to the PIA Ombudsman are estimated to fall out roughly 85% related to product providers, 15% to business done by IFAs. Interestingly, the numbers of Phase 1 pension review cases fell out in just that way as well.

So the last few regulated years have been, on the whole, good for you. Actually I don’t find that at all surprising. The additional public focus on standards of selling, and the regulatory pressure for higher Training and Competence requirements, was always likely to work to your advantage.

Of course standards of advice and customer service still have plenty of room for improvement. And we must allow for the different mix of business between IFAs and product provider sales. But the fact is that well-equipped IFAs, even some of the smallest, are showing they can do business to high standards and prosper. With the trust of a loyal customer base and a competitive cost base they bring a distinctive offer to the market. We want to see more firms emulating the standards which the best are setting.

Recent and Pending Government Decisions

So on that reasonably promising note, what are the other opportunities and challenges opening up for IFAs as a result of recent and upcoming government decisions? Against the background of cross-party consensus on curbing growth of the welfare state and encouraging and facilitating consumers to make their own way, there are two distinct aspects to the reform programme which is gradually emerging. First, we have in CAT-marked ISAs and, now, in the DSS, proposals for Stakeholder Pensions, government decisions to introduce benchmarks for the pricing and structure of certain tax-advantaged mass market products. Benchmarks that, provided consumers understand what the marks on the benches mean, can help guide people to reasonably straightforward products offering reasonable value. This development does not mean that the regulatory régime can become a "soft touch" for providers of these products, though the idea of a "lighter touch" régime in some respects may be worth thinking about. And indeed we are thinking about it.

What is clear is that the pricing of these products will tend to put downward pressure on distributors’ margins and costs. Depending on the outcome of the continuing government consultations on the design of Stakeholder pensions, that product could come to substitute for personal pensions across quite a large section of the market.

These developments will mean continuing change in the market in which IFAs operate. But, as an observer of that market, I would hope that your response will be to strive to increase your value-added. Stronger product knowledge and deeper understanding of customers circumstances can help the adaptable and smarter firms to sustain their business. And if, as part of that, we see fee-based advice increasing in response to consumer demand, that would be a welcome development as far as we are concerned. The more consumers are offered that route as an alternative choice to commission the better. But, as the FSA and its predecessors have said before, we are not looking to ban commission – some consumers may legitimately prefer that route, and some may simply not be in a position to pay an up-front fee.

So much for where the government’s moves on benchmarked products may take us.

Clearly, the second set of government decisions which will be important for consumers, the industry and the regulator, relate to polarisation. Specifically, the OFT recommendations, published last month, are now before the Chancellor.

As you know, the OFT did not find against polarisation across the board. John Bridgeman said that, in his opinion ‘the benefits to consumers outweigh the significant adverse impact on competition in the case of investment products linked to life insurance’ but not, he added ‘in the case of units in collective investment schemes’. That led him to his recommendations. Some of them have been criticised - particularly the proposals for multi-ties on unit trusts. Clearly it is important that whatever changes are made do not confuse consumers and complicate the present system further. But, with that proviso, FSA retains an open mind on polarisation. It is a long-established feature of the current structure of retail regulation and changes in it could have significant implications for consumers and the industry. That does not mean, however, that we should shrink from reviewing it more than 10 years on. So we are considering the OFT recommendations carefully before forming our own views. We will shortly commission a study of the practical issues, arising from the OFT’s approach or from other possible ways forward. In framing our future approach we shall need to take account of Ministers’ decisions on the current recommendations and obviously we will consult fully on any material changes we propose. Any change in the existing polarisation régime would need to be justified by a clear gain for consumers, taking account of the competition aspects.

For the moment, I would just add that the OFT report itself recognises the value of independent advice, particularly on life and pensions. And whatever view you take on the future of polarisation, there must be a continuing rôle for quality value added advice provided by IFAs as real incomes and wealth rise and social security provision is pruned back.

Proactive Regulation

Let me now offer just a few words on what FSA sees as the lessons for future regulation in the retail sector which are to be distilled from the last ten years: the third of my four promised points.

The Pensions Review – the spectre haunting all of us for some time past – has been an industrial-scale review of firms’ conduct of millions of past transactions. None of us wants to go down that route again if it can be possibly avoided. The background to personal pensions mis-selling was unusual: the combustible combination of a new product, launched with strong encouragement by the government of the day; a new regulatory system, still finding its feet, and, sadly, an industry which incontestably displayed poor standards of business done by many firms. The result was widespread mis-selling, as we now know after the event. And when the extent of the damage, both to individuals and to the reputation of the industry, became apparent a full scale review of past sales was both inevitable and appropriate.

While I am on the subject, I might just remind you that recent announcements on Phase 2 mean that all firms – IFAs or product providers – will be aware of the scope of what is to be done and the timetable to be met. The end date of 30 June 2002 is realistic, and many firms are expecting to better it. But it will be challenging for some: they know who they are. We have been concerned to consult the industry closely about the execution of the review and the Optional Compliance Test, for example, reflects specific industry input on ways to classify cases more effectively.

The PASS scheme initiative is we know proving helpful in resourcing IFAs to meet their obligations and I understand that more than 100 loan applications for more than £10 million have now been approved. It is essential that all firms now get on and complete the review, to deliver redress where it is due and lift the cloud which, in the public’s mind, has been hanging over the whole sector.

What has changed since the launch of personal pensions is that both the industry and the regulator are 10 years older and wiser and both parties have learnt a great deal from pensions mis-selling. Certainly, we for our part would prefer not to be sponsoring further large-scale reviews of past business. The administrative and cost burdens on consumers, on firms and on the regulator could become insupportable. Just as important, consumer perceptions of the risks and benefits of making personal provision through long term savings and protection products could take another hammering. So, we must all work to ensure that business is done right first time and to remove any need for mass production reviews of past dealings.

This, then is why we aim to be a pro-active regulator. One that, listening to and working with the industry and consumers, works hard to spot potential problems and nip them in the bud wherever possible. This means warning and guiding where necessary.

A fair example of that is the PIA guidance issued in March of this year on sales of personal pensions in the run-up to the introduction of stakeholder pensions. A number of product providers and the ABI themselves declared their wish to see proper guidance. We took their views – and indeed IFAA views -into account alongside the consumer interest in finalising what we published. The incipient risk of mis-selling has, we hope, been dealt with. Not everyone was happy – though on balance the industry seems to have reacted positively, appreciating the purpose of our action. Several product providers have tailored imaginative commercial responses which will benefit consumers.

Where problems do arise we want to address them quickly, ensuring that customer redress is fast-tracked without prejudice to any disciplinary steps it that may be appropriate to take with firms concerned. The FSAVCs problem, on which we brought forward last month a focussed and detailed set of proposals, is I believe an example of that. We have aimed for an effective and proportionate response, providing clear mechanisms for the problem categories to be assessed, in circumstances where across the board review of all FSAVC business was not justified.

We welcome the industry’s recognition that the particular problems do need to be addressed, and its co-operation in fashioning a sensible programme to tackle them. Through the present consultation, we do want to take on board as far as we can the industry’s suggestions and concerns. We want to make the administration of the work as manageable as possible. IFAs seem to have accounted for only a small minority of sales in the problematic categories. And I know that the AIFA has raised, for example, the possibility of the product providers helping with a central database of the transactions concerned. We will look constructively at ways of co-operating with you on this as with other issues.

Legislative Reform

Lastly, then, where is the regulatory reform programme? Where is the famous Bill? Does the FSA exist, or am I just a hologram, existing only in some parallel universe – on the dark side, as some of you would no doubt claim?

It is, of course, well over two years since the Chancellor announced the creation of a single regulator, shortly after the last election. You might have thought that, in the time that has elapsed since then, we should have been able to complete the job.

But I make no apology for the fact that the process has been a lengthy one, and that it is not yet quite complete. We have consulted extensively, as has the Treasury, on all aspects of the reform. And there was a constitutional innovation, in the form of an enquiry by a Joint Committee of both Houses, Chaired by Lord Burns, the former Permanent Secretary to the Treasury. I think we will see the benefits of that consultation and review process in the form of legislation which will attract widespread support when it is eventually passed.

The position now is that, for the present, while the FSA exists – in the sense that we employ the staff of all of the former regulators – the self-regulatory boards themselves remain in existence. So the PIA Board continues to be responsible for policy and disciplinary issues in retail regulation, while all the former staff of the PIA are employed by me. That position will remain until the Financial Services and Markets Bill is enacted. When will that be?

We cannot say precisely. But the Bill was given an unopposed second reading at the end of June. The opposition said that they recognised this was an important piece of legislation and would co-operate with the Government in securing its passage through Parliament, as long as the Government took proper account of the recommendations of Lord Burns’ committee. Our central expectation is that the Bill will complete its Committee stage in the Commons in November and go into the Lords at the beginning of the new session, with Royal Assent in Spring or early Summer of the year 2000.

That will not, however, be the key date as far as you are concerned. There is, inevitably, a transitional period of a few months while the detailed changes we need to make to get the new system working are brought in. We are now beginning to consult on the shape of the new rulebook, and I imagine that it will be around the end the Year 2000 before that process is largely complete. So just over a year from now you will need to change the little stickers on your front windows, so that they say regulated by the Financial Services Authority, rather than the PIA.

In fact, from my personal mystery window shopping exercises in small towns around the country, some of you will need to peel off FIMBRA stickers first, since there are a lot of them still to be seen on the high street.

Of course it is still possible that their Lordships could derail this process. But I am sure we can rely on David Hunt to bring some good sense to the Upper House proceedings next year.

Just one last point before I conclude, and let Clive Briault read through the first 400 pages of the new rule book which we have so far drafted. His will be an exciting session, I can assure you.

The next few years will be a lively time for us all. You have Y2K to cope with, ISAs, the pensions review (still), FSAVCs, continuing concerns about endowment mortgages, then stakeholder pensions and a brand new set of rules, with some changes too on the training and competence front before too long.

Getting all these changes implemented, while carrying on focusing on your customers’ needs, and perhaps making some money as well on the side, will be a very tricky task indeed. The world ought to be a better place at the end of it, but there will be considerable hard work to be done. And our respective efforts will not be crowned with success unless we know what each other is doing. In other words we, for our part, need to understand the dynamics of the IFA sector better than we currently do. And you, on your side, need to understand what regulators, and the Government are trying to achieve.

There will simply be no time for ignorant armies clashing by night. No time to indulge in idle criticism and ritual denigration. What we need in the middle of this machinery of change is, if you like, an intelligent gear-box. In other words an organisation which can translate the views of its members to the authorities, and interpret the requirements those authorities impose for the benefit of its members. I very much hope that the AIFA, which has made an auspicious start today, will operate effectively as that gear-box.

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