14 June 2004
Speech by John Tiner

1. I am delighted to be here today to give the keynote address. This is the first time that I have spoken at a money advice conference and it is particularly timely given that much of our current work, for example the forthcoming regulation of mortgages and general insurance, holds a particular interest for money advisers.

2. Change is the theme of this conference, and so in my address today I want to tell you about some of the changes in the financial services sector that we are dealing with at the FSA.

  • Firstly, I want to tell you about our work on financial capability and our progress so far. You may have seen our recent publication on this subject, announcing the details of seven key priorities for action and the partnerships that have been created to deliver them.
  • Secondly, in October the FSA takes on responsibility for the regulation of mortgages, and this will swiftly be followed in January by general insurance, so I will say something about our approach to the new regimes.
  • Moving on to investment products, we are also about to consult on how we might implement the Sandler proposals on simpler financial products - so I will explain more about our work on that issue too.

Some of you will no doubt be attending the workshops on some of these subjects that members of my team are running during the conference, so I intend to focus on the wider issues and leave the detail to them.

Financial capability

3. As many of you will know, last November I launched a new initiative to develop and implement a national strategy for financial capability – that is, improving consumers’ ability to make financial decisions with confidence. If consumers know what they want and how to get it, the financial services market will become more efficient, and consumers will be able to demand better, cheaper and more appropriate products and services. I should stress that our intention is not to duplicate or get in the way of the excellent work that is already being done by a number of different organisations. But we do think that better coordination of this work will enable ideas and approaches which have proved to be successful to be captured and spread and that any reinvention of the wheel can be minimised. New projects and new work will only be added where there are gaps that need filling or where current initiatives are not achieving the desired outcome. One area germane to all projects would be to consider the needs of those who are financially excluded.

4. We have just published some more information about how we will be taking the financial capability work forward. We have a large group of people who are taking part in the working groups on the seven priority areas that we have established – your own Chief Executive being among them. One of the projects is to improve consumers' understanding of borrowing. Michael Coogan of the Council of Mortgage Lenders is chairing the working group which will guide this project, and I am delighted that Yvonne has agreed to participate in that group. Another of the projects is generic financial advice, that is, advice services that are personal or interactive and which help people to plan their finances and identify their priorities for action. Whilst generic advice won't lead to the recommendation of an individual product or service, it might help bridge the gap for consumers who need financial services and are not currently accessing them. This project will establish what role generic advice has to play in financial capability; it will look at the nature of such advice, how it might be delivered, using people and/or technology, and how it might be paid for. Anna Bradley, who is both the Director of Retail Themes Division, and our Consumer Sector Leader, is chairing this working group, and from the voluntary advice sector, representatives of both the Money Advice Trust and Citizens Advice are taking part.

5. I cannot yet give you details of or timescales for all of the actions which will see the seven projects come to life. Over the next several months the working groups will:

  • develop specific proposals which will build on existing good practice;
  • determine plans and costings;
  • carry out pilot projects where necessary; and
  • oversee the roll out of new initiatives.

We have set up a financial capability page on the FSA website, and we will publish updates on our progress. Equally, we welcome comments on – and indeed contributions to – the financial capability strategy.

6. Of course we need to know the current state of financial capability in the UK, in order to establish where we need to get to, and to measure progress along the way. So we will carry out a baseline survey to establish the current state of financial capability. The survey will be designed to allow each of our intended outcomes to be assessed now, and to be re-assessed in the future to establish whether there have been any changes. The survey will also inform the evaluation of individual projects within the strategy.

7. Alongside the financial capability work, we have been looking at how consumers identify that they have a financial need. We believe that if consumer needs are not properly understood (by firms, consumers and regulators), there is a danger that many consumers will not find what they require to meet those needs, and others will buy the wrong thing. Our research so far suggests that the main triggers - the points at which consumers might identify the fact that they have a financial need - are changes in accommodation, family and personal life, health, occupation, wealth/income and leisure activities. None of these is particularly surprising, as I'm sure you'll agree, but we need to take into account that they are also affected by the external environment - such as changes in government policy - and behavioural factors such as individual attitudes and motivations, and cultural differences. Again, we will publish updates on this work on our website, and of course it will feed into the overall financial capability work.

Mortgage and general insurance regulation

8. While our work on financial capability is very important in strengthening the demand side of the retail financial services marketplace, there are important developments on the supply side as well. Which brings me on to the subject of mortgage regulation, where the customer has been at the heart of our work in developing the new regime. Those of you attending the workshops this afternoon will hear a more detailed explanation of our rules, but I wanted to say something here about our approach.

9. Firstly, I should say that the mortgages that we regulate from 31 October will be first charge mortgages, on UK property, for occupation by the borrower or his or her family. So second charge mortgages will remain under the Consumer Credit Act, as will unsecured lending. I know that later on you will be debating whether the FSA should regulate consumer credit and I would simply note that the scope of FSA regulation is a matter for the Treasury. We simply deal with how to regulate. So even if I were able to join you for the debate, I couldn’t take sides! In any case we already have plenty to keep us busy, and in addition the Treasury has recently announced that we will in future have responsibility for regulating home reversion schemes, although it is too early to say very much about how we will deal with that but I would say that we felt very much welcome this decision in bringing coherence to the regulation of transactions which realise equity in people's homes and for consumer protection. We do, however, maintain regular contact with the DTI and OFT to share information, and given the regulatory boundary we are of course very interested in the current review of the Consumer Credit Act.

10. Our mortgage rules are very much designed to address consumer detriment in the market, and to build on what has already been done under the Mortgage Code by the Mortgage Code Compliance Board. We want to facilitate customers' ability to shop around, and we are concerned that the information they currently receive does not enable them to effectively compare different mortgage products. They do not always understand the features of the mortgage taken out, and may end up with an unsuitable or poor value mortgage – in some cases because of poor advice. We also wanted to address the risk of high pressure selling, and of unfair treatment during the life of the mortgage, especially where customers encounter financial difficulties.

11. So our rules are designed to give customers clear and comparable information both about the products and the service offered by the firm, be it the provision of advice or information. We have banned cold-calling except in very limited circumstances, and our other financial promotion rules are designed to show the benefits and drawbacks of a mortgage product, without key information being buried in small print. We have rules on advice that are designed to make sure that the consumer is recommended a suitable product, and for equity release mortgages aimed at older consumers – which we have called lifetime mortgages – there is a tailored regime to reflect the higher risks of those products. Information requirements then extend throughout the life of the mortgage, and there are rules covering the treatment of customers in arrears or facing repossession. We have also published a factsheet for customers in arrears, which will be compulsory for firms to issue in future.

12. We are, of course, already helping consumers in other ways on mortgage matters. We have comparative tables for mortgages, and also a range of consumer information. I will now give a quick ‘plug’ for our exhibition stand, where you can get copies of the mortgage publications and more besides. So please do visit it!

13. The regulation of the sale of general insurance flows from a European Directive, the Insurance Mediation Directive, and regulation starts on 14 January 2005. The scope of regulation covered by the directive includes not just the insurance brokers we are all familiar with, but also what we call ‘secondary intermediaries’ – those for whom insurance is not their main business. This will include firms as diverse as vets, dentists, and jewellers for example. It will also include retail outlets providing payment protection insurance with loans. Again, our rules require firms to disclose information about their services, and about the product itself. Importantly, at the pre-sale stage, customers will get information about significant and unusual exclusions from the policy, whether or not the insurance is obligatory and details of how much it costs. So, for example, they will know what payment protection insurance will cost separately from the loan itself, that it will not pay out for pre-existing medical conditions, and that it may not be obligatory to take it out with a loan. As with mortgages, when firms advise customers they will need to ensure that the insurance they recommend is suitable. And there are further rules on cancellation rights, on the protection of client money and after the policy is in force, on claims handling and renewals.

14. There are some measures that apply to both mortgages and general insurance. For example, customers will be able to recognise where the really important information is, by being drawn to the ‘key facts’ logo which firms must include on certain documents. For example, there is the key facts illustration which is the product information for mortgages, and the policy summary which will provide the product information for insurance. The key facts 'brand' stands for a document which:

  • is important;
  • has an official quality but is not wordy or technical;
  • has content influenced by the FSA;
  • is what you need to know - not what the firm wants to tell you; and
  • is written in plain, straightforward language

We think the key facts logo will help to draw customers’ attention to the documents and encourage customers to read them.

15. Importantly, in the protection of consumers, mortgage and general insurance customers will in future have access to the Financial Ombudsman Service, and the Financial Services Compensation Scheme. Training and competence is another subject that I know is important to money advisers, especially since the introduction of the Debt Arrangement Scheme regulations. It is very important to us too, and for both mortgages and general insurance we have set out clear requirements for firms, which in some cases include the need for staff to pass appropriate examinations.

16. Mortgage and general insurance firms will need to be authorised by us, and we are working very hard to deal with applications for authorisation as efficiently as possible. At the end of May, we had received around 11,500 applications, and overall we are expecting to authorise some 20,000 firms for mortgage and general insurance activities. Of course we then have to supervise them effectively too, and we are working on the precise details of that supervision process. We recognise that we will need to work with others in this area – for example the OFT and Trading Standards - and it is an area where I can see Money Advice Scotland and the FSA working together as well. We know that money advisers have a great deal of information and intelligence that will be useful to us in supervising our new population. We are working out how best to gather that information from you and others in the field, and we will say more about that as soon as we can.

Stakeholder Products

17. I would now like to turn to a potentially new regulatory regime covering specific categories of investments on the asset side of the household balance sheet. We are aiming to publish soon our consultation paper on a simplified selling regime for stakeholder products – the so–called ‘Sandler’ products. The Government commissioned the Sandler report to review the medium and long-term savings market and to make recommendations to improve consumer access. One of the recommendations was for a suite of ‘stakeholder’ products, to be sold using a simplified selling process. Some 18 months ago we published our initial discussion paper on this subject, which set out options for this simplified selling regime for stakeholder products.

18. In our feedback on the discussion paper, we said that we would carry out consumer research with the aim of discovering whether these pre-scripted filter questions could be used by someone who was not a qualified financial adviser, to provide basic advice on the suitability of specific products, whilst maintaining an acceptable balance between our consumer protection objective and the principle of proportionate regulation. We have since carried out our research – in fact two rounds of research – and to give you some idea of the size of the project, in the second round there were over 500 interviews with consumers who were representative of those in the market for stakeholder products. We aim to publish our research findings alongside our forthcoming CP.

Consumer indebtedness

19. Finally, I do not feel I can address a money advice conference without saying something about consumer indebtedness, although I must stress that regulatory responsibility for debt is multi-faceted, and the FSA's regulatory remit is not all-encompassing here. It extends to consumer borrowing only in so far as it affects the prudential supervision of authorised firms, the regulation of first charge mortgages from October, and the promotion of public understanding of the financial system. On the latter point I mentioned earlier that borrowing is one of our key projects under the financial capability initiative.

20. I recently addressed the Building Societies Association Annual Conference, and some of the points I made there on prudential matters will, I think, be of equal interest to you. I commented that regulators are fully paid up members of the "Jeremiah Society" of professional pessimists – it is, after all, part of our job to look at the potential downside risks inherent in any given situation. Some 15 months ago, in our 2003/4 Financial Risk Outlook, the FSA said that the rate of growth in consumer indebtedness was almost certainly unsustainable and at some point likely to slow. Since then, consumer debt has risen a further £130 billion to top £1 trillion, and the overall rate of growth, currently 14%, shows little sign of moderating. Most of the increase is, of course, mortgage related and inextricably linked to the extremely high rate of house price inflation - which we also described in January 2003 as "unsustainable".

21. The UK economy experienced an earlier than expected recovery last year, fuelled partly by strong consumer spending funded to some extent by increasing flows of mortgage equity withdrawal. However, notwithstanding improvements in employment prospects and overall confidence, credit risks for lenders may well be increasing. The combination of record levels of consumer debt and rising interest rates comes at a time when research suggests that household budgets are already feeling the strain. Some examples of the credit warning indicators that I know you, as money advisers, are acutely aware of are:

  • there were over 10,000 personal bankruptcies in the final quarter of 2003 – the highest level since the early 1990's and a figure that may be accentuated by the recent coming into force of the Enterprise Act;
  • the amount of debt being chased by collection agents has increased by 70% in the past 2 years to a record total of £5bn;
  • Citizens Advice reported a 44% increase in new consumer debt enquiries in the last six years; and
  • The National Statistics Omnibus Survey found that 6.9m families with a debt said they were either struggling or falling behind with at least one of their financial commitments.

22. In the light of these figures, I commented at the BSA Conference that we expect lenders to be looking carefully at their risk appetite and credit management processes, to ensure that they take account of the cumulative impact on consumers of so much debt. That implies both care in taking on new borrowers and contingency plans for dealing with problems, should the current benign climate turn. On the other hand, we know that signs of incipient problems are currently hard to find in lenders’ arrears statistics, although a pick-up over the next few months would not come as any surprise.

23. It does seem to be the case that some over-committed borrowers consolidate their debts by remortgaging their homes, often spreading short-term debt over a longer period in order to reduce monthly payments. But equally, I am aware of the adage in money advice that ‘you can’t borrow your way out of debt’. So I am sure you will be interested to know that our mortgage regime includes rules on responsible lending, and in advised sales we require advisers to take account of affordability as part of that process. We have also published a factsheet to encourage consumers to consider the affordability of their mortgage payments if their income was reduced or interest rates increased.

24. Of course FSA rules - and consumer education - are not the answer to everything, much as we may wish they were! But consumers will still have to deal with unexpected life events, such as long term illness or a relationship breakdown, and sometimes the result of those events will be debt problems. I would not want to finish my address without acknowledging the excellent work that money advisers do in helping consumers deal with those debt problems.

25. Thank you for your attention. I am happy to take a few questions now.

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