14 October 2004
Speech by Clive Briault

 

Thank you Mr President for the invitation to come to Glasgow to address your Annual General Meeting. It is a great pleasure to be here.

It is particularly wise of you to choose Glasgow as the venue for your meeting, since it is rich not only in culture but also in its long tradition of Friendly Society and credit union activities, building on the benefits of mutuality, and of prudence - or 'canny-ness' as it might be called here - in both saving and investment. Indeed, as my host well knows, Scottish Friendly Assurance has been here in Glasgow for over 140 years.

More generally, the Friendly Society movement has a long and admirable history and has, over the years, played a key role in the UK's financial services industry, not least in providing services for the less affluent in society. Over six million people have savings and investments with your members and you manage £15 billion of funds on their behalf. Some of these less affluent investors might otherwise face financial exclusion, as many other financial institutions continue to concentrate their efforts on the more affluent end of the market.

Going forward, as the responsibility for making adequate financial provision - be it for retirement, for health care, or for education - moves increasingly from the state to the individual, there are increasing opportunities for the Friendly Society movement to assist people in providing for themselves and for their families.

As I look down the long list of Friendly Societies I become slightly anxious that few of you would accept me as a member. Perhaps in a world where the number and size of regulatory agencies has increased over the years – where we now have two FSAs, even without including the Football Supporters Association – there is scope for a Society devoted to regulators. But at least the founding objectives of some of your members, Mr President, strike a rich chord in our own work as a regulatory authority, which is why I have chosen them as my title today – teaching, communication and temperance.

Let me explain.


Market failure

Our approach to our regulatory responsibilities is to intervene only where we see a market failure and where we can be reasonably certain that the benefits of intervention will exceed the costs. We are not a competition authority, and we are not an economic regulator - we do not impose the prices you charge your customers.

In retail markets for financial products and services there is at present a large information gap between consumers and producers. This gap arises in part from the complexity and long-term nature of many financial products. One of the consequences of this is that these markets tend to be inefficient, with consumers failing to act as a powerful market force and producers being able to take advantage – deliberately or otherwise – of consumer ignorance.

Another consequence is that consumers who do not always understand their own needs may not generate a natural demand for some products, for example in making adequate provision for their retirement, or they may be led too easily into purchasing products that are not suitable for them, as we have seen in a succession of mis-selling episodes.

We regard all this as representing a serious market failure, and one where the benefits of correcting this failure are potentially very large indeed. So we are seeking through our regulatory activities to make retail markets for financial products and services work more efficiently and effectively, and thereby to deliver through these markets a fair deal for consumers.

What does this require?

We think that there are three key components to this:

  • Capable and confident consumers.

  • Clear, simple and understandable information available for consumers.

  • And responsible firms who treat their customers fairly.

Or, to return to my title today, teaching, communication and temperance.


Building financial capability

As well as having a statutory objective to promote public understanding of the financial system, there are a number of reasons why we want more financially capable consumers. In particular, we want consumers to be able to:

  • exercise a stronger force/influence in retail financial markets;

  • take greater responsibility for their own actions; and

  • protect themselves better through less mis-buying and being less susceptible to mis-selling.

Regrettably, we are a long way from this. For example research for the Financial Services Consumer Panel shows that many consumers do not understand what products are linked to the stockmarket and what the term "equity" means; and that two-thirds of consumers think that financial matters are too complicated for them and that they do not know enough to choose suitable financial products. The research also shows that across most life-stages and across a range of income/debt levels, there is considerable evidence of reactive, rather than proactive, financial management.

On the issue of financial inclusion we know that 7% of the overall population remains completely outside the financial services market, having no mainstream financial products. In families where household income is between £150-£200 a week this figure rises to 14% and to 25% where the head of the household is a lone person. Some of these consumers may have made a rational decision not to engage in the financial services market. Our concern is that others may not be engaged due to their lack of understanding and confidence.

Clearly it will be a real challenge to increase financial capability and involvement from its current low levels.

We are working in a number of ways to help consumers make informed, correct decisions about their financial affairs.

The FSA has its own dedicated consumer website, which has been updated and improved this year. Indeed, it recently won a “website of the week” award from the Times newspaper. The site contains lots of information, tools and other resources – including product information, tips on financial planning, access to our register of regulated firms, advice about financial advertising, decision trees, and comparative information tables for a wide range of products. The website had over 410,000 visitors in the first nine months of this year.

We also produce consumer publications, with nearly 50 different guides and fact sheets on a range of important topics including financial planning, mortgages, and savings and investments. In the past year we have distributed more than 10 million of our consumer publications, including those distributed by firms on our behalf, mostly on mortgage endowments.

We also provide a free consumer contact centre which deals with over 20,000 calls, letters and e-mails each month.

As well as this 'business as usual' activity, we are also leading and coordinating the national strategy for financial capability. This is a long term project, involving government, the industry, the voluntary sector, consumer groups, employers, the media, trade associations and others, to bring a coordinated approach to meeting the very challenging objective of taking a step forward in providing consumers of all ages with the education, information and tools necessary for them to be able to make informed financial decisions.

We are also seeking to bring about a step change in the levels of awareness and interest shown by consumers in financial services. The ability of young people to master the complexities of mobile phones or the internet show that, where people's interest is engaged, they are able to understand and make use of quite complicated concepts. The challenge is to engage people's interest in their financial affairs and to signpost where they can get information and help.

The financial capability initiative was launched in November 2003. In the past year we have made significant progress, with seven working groups each leading a work stream focused on the financial challenges and requirements of a different subject or 'life stage'. The seven groups are schools; young adults; borrowing; workplace; retirement; families; and generic advice. There are already many examples of the enthusiasm and ideas that are being generated. These include:

  • The schools project aims to give future generations a good grounding in personal financial education before they leave school. The schools group is looking to achieve a step change in current levels of personal financial education by providing teachers with the support – both in terms of specialist advisors and specialist resources – which they need and by embedding personal financial education in teacher training.

  • The generic advice group has been considering options for the national provision of tools and services which would use information about an individual’s circumstances to help identify and understand their financial needs and to plan their finances. In particular, the group is assessing the potential of a range of solutions, including face-to-face, telephone and website delivery, using innovative IT-based mechanisms.

  • The families group is seeking, among other things, to maximise opportunities presented by the information channels (mailings etc) being used for the Child Trust Fund to communicate wider messages on financial issues to parents and children.

  • The workplace group is developing ways of using the workplace to deliver personal finance initiatives, building on the trust that employees have in their employers, and the relevance of a number of work-related events (recruitment, promotion, relocation, parental leave, flexible working, redundancy and retirement) to key financial decisions. The group is developing pilots to test how best to deliver financial capability and awareness through the workplace.

There is much more to be done here, not least in funding these initiatives and defining what are the desired outcomes of the various work streams. But we are confident that this work is essential and that we will generate momentum and support, including from the industry. We are clear also that we are only one of a number of agencies and groups with an interest in this area. We have seen a need for more leadership and coordination, but do not believe that we can or should be responsible for all aspects of implementation.

The FSA and the Friendly Society movement share a common goal in increasing the public's understanding of the financial system and enabling consumers to be capable, competent and confident.

The Working Groups established as part of the National Strategy on Financial Capability have been specifically charged with take account of the needs of the financially excluded. Friendly Societies have, of course, always played a particularly valuable role in serving the less affluent, where levels of financial capability are even lower than in the general population. Friendly Societies are therefore well placed to participate in increasing financial capability and awareness within low income families, encouraging people to save and invest for their future financial needs and aspirations. The 'reward' for Societies is a better informed and more financially aware customer base, which should result in higher levels of business, better quality sales and increased persistency of products.


Information

The second of the three core elements of an efficient and effective market place is information.

We want consumers to have access to simple and understandable information to help them to make financial decisions, including when they seek advice. This is not easy. Many financial products are long-term in nature, complicated and difficult to explain simply and briefly.

Even those of us in this room, who ought to be among the more financially literate, have no doubt experienced a sense of apathy or confusion when faced with the many pages of information, and the seemingly endless detailed terms and conditions that accompany most financial products and services. The industry finds it difficult to make this information clear and accessible, and consumers do not always make good use of this information even when it is reasonably clear. So we have to consider what tools can be used to encourage consumers to take an interest in this important information, and to increase the ability and willingness of consumers to understand and to use this information.

We have therefore been working on several areas designed to increase the quality and accessibility of information available to consumers. Let me offer four examples of this.

First, we have conducted extensive consumer research on the existing Key Features documents, investigating what works well and less well for consumers. Together with additional research on the information that is most important to buyers of mortgages and general insurance, this has led to the development of what we are branding “Key Facts” documents.

These Key Facts documents simplify and focus the information about a product, including risk warnings, that we will require firms to provide to consumers. They are based on the principle that “less is more”. And they are based on an approach that makes greater use of layers of information – so that consumers who are not willing or able to delve further can at least obtain easily a core set of information. The first Key Facts documents will be required for mortgages, from the beginning of next month, and they will be gradually rolled out for other products from next year.

Second, as most of you will already know, we have introduced this year the requirement for firms to set out their Principles and Practices of Financial Management (PPFM) for with-profits funds and we are taking forward the development of consumer friendly versions of firms' PPFMs. These have received positive feedback in our consumer testing, and we are currently consulting on these consumer friendly versions being sent automatically to existing and potential with-profits policyholders from the middle of next year.

Third, we have developed a new “Menu” to describe the costs of advice. Financial advisers will be required to give this to their customers so that consumers can understand better both the costs of financial advice and the difference between paying for advice on a commission basis and paying a fee.

Finally under the heading of information and disclosure, it is important to recognise the powerful influence that financial promotions can have on consumers. We have therefore substantially increased the resources that we devote to monitoring financial promotions to ensure that they are clear, fair, balanced and not misleading. I will say more about this in a moment.

Both of the initiatives above - building financial capability and improving information and disclosure to consumers - are about empowering consumers and ensuring that they have the tools to take control successfully of their finances. The Financial Services and Markets Act requires us to have regard in considering consumer protection to the general principle that consumers should take responsibility for their decisions. However the Act also requires us here to take account of the differing degrees of risk involved in different kinds of investment or other transaction; of the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity; and of the needs that consumers may have for advice and accurate information. So we cannot – and indeed should not – expect consumers to take any more or less responsibility for their own actions than is justified by the progress made on financial capability and on the provision of clear and simple information to consumers.


Treating customers fairly (TCF)

The final core strand of our work to achieve more efficient and effective markets in retail financial services and products focuses on the supply side of these markets – the industry. Our objective here is that those in the industry who produce and advise on retail financial services and products act responsibly and treat their customers fairly. This builds on one of the core Principles for Businesses in our Handbook.

We believe that it must be right to complement our increasing emphasis on financial capability and on the provision of information with the responsible treatment of consumers by firms. These elements should be mutually reinforcing in making retail financial markets work better, and thereby deliver a better deal for consumers.

In the paper on Treating Customers Fairly that we published in July we recognised the significant progress that has been made in raising standards in recent years. This has included the quality of the information provided to consumers, the improvements in standards of risk management by firms, and a higher quality of complaints handling by firms. We have also seen the impact of industry initiatives such as the Code of Banking Standards and the Raising Standards Initiative in the insurance sector. I believe that we now have general agreement on the end-point that we are all trying to attain.

Many firms have accepted the Treating Customers Fairly requirement and are now taking further steps to improve what they do to ensure the fair treatment of their customers. Our July paper included details of a pilot study of six of the largest retail groups to review their procedures at various stages of the product life cycle. We saw examples of good practice where firms have already started to review their strategies and operations for implementing the Treating Customers Fairly principle to identify areas where changes are needed and to begin to put these into practice. And these encouraging signs are not limited to the largest firms.

But notwithstanding these improvements, we also continue to find examples of poor treatment of customers for retail financial services. For example, we have seen cases of firms across the retail financial services markets developing products without assessing the risks to the target customer sector and without considering fully how the products are likely to be sold and advised upon in practice; we see reward systems which incentivise sales forces and branch staff to deliver volume targets without measuring the suitability and the quality of those sales; and we see cases of poor complaints handling. This is in addition to the major and well-publicised cases of mis-selling.

Relying on our general regulatory philosophy of the responsibility of senior management, we are looking to them to embed the principle of Treating Customers Fairly in their corporate strategy and to build it into their firm's culture and day to day operations.

This means addressing the fair treatment of customers throughout the product life-cycle: product design and governance; identifying target markets; marketing and promoting the product; sales and advice processes; the remuneration of sales forces and advisers; after sales information; and complaints handling.

We realise that this will create challenges for firms, who may have to adapt the management, reward and operating systems they currently use and enhance the controls they have in place to monitor whether they are meeting the Treating Customers Fairly objective. We are clear that senior management in all firms need to consider and critically review the relevant parts of the product life cycle which are relevant to their business, including how the firm:

  • Develops and markets products for specific target markets, based on a clear understanding of the likely needs and financial capability of each group of customers;

  • Provides clear, fair, balanced and not misleading communications during promotions, advice, sales and after-sales activity;

  • Balances the commercial objective of increasing sales with the treating customers fairly objective;

  • Honours representations, assurances and promises that lead to legitimate customer expectations;

  • Monitors and responds appropriately to changes in the wider environment that may affect products and may have an impact on particular classes of new or existing customers; and

  • Monitors its own performance in treating customers fairly.

We also recognise that what fairness means for a firm will vary, depending on its business and its customers. However fairness needs to be evident, whatever the business and customer base. Friendly Societies' customers tend to be at the more cautious end of the risk appetite scale, and will often have insufficient funds to be able to tolerate riskier products.

A good example of one stage in the product life cycle where the Treating Customers Fairly principle is key is the provision of clear, fair, and not misleading financial promotions, which I mentioned earlier under the 'information' heading.

As many of you will be aware, this summer we sent a “Dear Chief Executive” letter to a number of firms – many of which were Friendly Societies - highlighting our concerns about the way in which some investment products for children have been marketed. Our letter stressed that financial promotions should provide adequate information.

In particular, our letter noted that prominence must be given in financial promotions to the nature of the investment, the commitment required by the purchaser to maintain payments, and the risks that a consumer is taking. And we emphasised our concern that, in some cases, assertions that a product is a safe, reliable or straightforward alternative to a bank or building society savings account, or a guaranteed way to cover major items of future expenditure, may be misleading.

Many of the target consumers may not readily appreciate the nature and risks of an equity-linked element in the “savings plans” referred to in firms' promotional materials, especially in comparison with more capital certain methods of saving such as regular bank or building society deposit accounts. I should stress here that equity-based investments are perfectly suitable for many consumers – but it is important that they understand as fully as possible the nature and risks of these products before committing to them.

It is the responsibility of senior managers to ensure that each financial promotion made by their firm complies with our regulatory requirements. This is an area that we take very seriously. We are prepared to take enforcement action - and have increasingly done so over the last year when we believe that promotions are seriously unclear, unfair, unbalanced or misleading. We also support this by communications and training initiatives to help firms and trade bodies understand what we mean by clear, fair, balanced, and not misleading and how they can put this into practice.

Looking ahead on Treating Customers Fairly, our approach will depend on the behaviour of all firms, both large and small. If firms do not embrace the principle of Treating Customers Fairly by evidencing delivery of fair treatment within a reasonable timeframe, we will reconsider how best to achieve the fair treatment of customers, be it through the introduction of ever more detailed rules or tougher enforcement action.

But we would much prefer not to have to introduce ever more intrusive regulation as a means of countering the poor treatment of customers. We could write ever more detailed rules; we could undertake ever more detailed monitoring; and we could take more, and tougher, enforcement actions. But this would almost certainly create more defensive and costly markets for retail financial services and products, and thus markets that are smaller and less innovative. This would not be the best interests of either firms or consumers.

We would therefore much prefer to see fewer detailed rules, and to rely more on an intelligent, thoughtful and effective implementation by firms of the high level principle that they must treat their customers fairly. We see a payback for firms from this in both market-based success and less intrusive, and therefore less costly, regulation.

We do not see this principle of the fair treatment of customers as inhibiting competition between firms. Indeed, we positively welcome attempts by firms to establish a competitive advantage for themselves by treating their customers even better than other firms.

Our next steps in this area include undertaking some “cluster” work on product design; on staff remuneration; on the interface between product providers and distribution; and on the management information collected and used by firms in checking whether they are treating their customers fairly. We will also be continuing our work in the related priority areas set out in our Plan and Budget earlier this year, including on financial promotions, on complaint handling, and on structural change in retail markets, for example arising from depolarisation.

One outcome of this work will be to develop a series of “case studies of good practice” which we and the industry can use as a form of “benchmark guidance” on what constitutes the fair treatment of customers.

We are also forming a Consultative Group to help us to draw out these case studies of good practice from our existing and proposed work. And we are looking to build the fair treatment of customers more centrally into our Arrow model for assessing the risks posed by firms to our statutory objectives.


Our relationship with the Association of Friendly Societies

The FSA is keen to participate in dialogue with small firms and this is made easier by bodies such as the Association of Friendly Societies, with whom we have enjoyed a close and constructive relationship.

We are grateful that the Association has taken the time to study and comment on our many consultation papers. We are always keen to hear your comments, and I hope that you recognise that we have listened to your comments and have reflected at least some of them as our policies have developed. We also recognise that your resources are scarce, and I hope that you have appreciated the reduction by a half in the number of consultation papers that we have issued over the last twelve months.

We are also working to improve the service that we provide through our contact centres and help lines. And we are working to make our Handbook easier to navigate. This year we have published a guide to our Handbook aimed especially at small Friendly Societies, which is designed to direct these Societies to the parts of the Handbook that are of most relevance to them.

We are also revising the regulatory returns to focus on the more important information required for our regulatory purposes, and we have revised our internal procedures and systems to streamline the processing of applications for changes of control, variations of permission and waivers.

Looking at smaller financial services firms more generally, I am delighted that one of my first achievements at the FSA was to establish the Small Businesses Practitioners Panel in 1999 and to chair its first meetings. It was my great pleasure to work with Edward Chapman, your Immediate Past President, who was a founder member of the Panel. I would like to take this opportunity to thank personally Edward for his work as a member of the Panel member and to thank Mark Rothery, a member of the AFS executive, for his great efforts in continuing the effective representation of the views and interests of Friendly Societies on the Panel.

By way of example of the effectiveness of the Small Business Practitioner Panel, I would mention our current re-consultation on our proposals for Treating With Profits Customers Fairly, directly in response to the concerns that the Panel raised about our original proposals.

I am sure that the members of the Panel from Friendly Societies and from other small firms will continue to meet the challenge of ensuring that the interests of smaller firms are properly represented and communicated.


Reform of insurance regulation and the position of mutuals

My colleague Ian Tower covered a number of other subjects with many of you at a well attended session this morning. So I will restrict my last few words to some brief comments on a few key issues.

Many of you will have followed the progress made in the last couple of years in the reform of insurance regulation. A large number of our recent initiatives are now being consolidated in the Integrated Prudential Sourcebook.

We consulted in July this year on our proposal that the larger friendly societies should move to the Integrated Prudential Sourcebook regime, with their reporting requirements to match those of insurance companies. We are currently in the process of considering the comments that we received on this consultation paper.

Meanwhile, and in keeping with our risk-based approach to regulation, we recognise the need to retain greater flexibility for smaller Friendly Societies. We therefore propose to continue broadly with the lighter regime for such societies, while encouraging them to meet higher standards over time.

The governance of life mutuals has come in for an unprecedented amount of attention over recent months. Consultation on the Myners review has recently closed. We have always made it clear that our approach to mutuals is entirely neutral. We simply require them to meet the same standards as other firms. These include the need to have adequate capital and liquidity, the crucial importance of senior management, having effective systems and controls in place, and ensuring that there is an adequate degree of independent oversight of how the firm is run.

The last few years have been a difficult period for the Friendly Society movement and the investment industry more widely, and there are new challenges to be faced as the market for long-term savings changes. But there are also opportunities. For example, the introduction of Child Trust Funds is a real opportunity for Friendly Societies to expand their market, since they are already a major presence in the medium and long term children’s savings market, and they have a focus - in common with the Chancellor - on the children of less affluent families.

Meanwhile, the regulation of general insurance intermediaries will have an impact on those Friendly Societies that specialise in private medical insurance. This will be a new challenge for these firms, but it will bring benefits for the consumer. However, we remain of the view that general insurance products pose on average less risk to consumers than investment products, as they are easier to understand and switching between products is usually more straightforward. We have reflected this difference in the rules that we have introduced.

Our objectives of capable consumers, clearer and simpler information, and the fair treatment of customers - or teaching, communication and temperance – are I hope shared by all of you. They should be central to the future success of the Friendly Society movement and to the wider financial services industry.

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