23 November 2004
Speech by Clive Briault

Thank you for the invitation to address your annual retail banking conference. It is a great pleasure to be here.

These are challenging times for the financial services industry. And the range of topics on today's agenda suggests that things are no different for the banking community. It promises to be an interesting day.

I would like to thank Ian Mullen, and all the staff at the BBA. They continue to do an excellent job representing the banking industry, your priorities and concerns. And judging by the number of BBA events that I have spoken at since taking on my new role in April this year many of these priorities and concerns are clearly on my patch.

I want to share with you today our key regulatory priorities for the retail market.

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.

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.

In retail markets for financial products and services – where our regulatory scope now includes mortgages and will shortly also extend to general insurance intermediation - there is at present a large information gap between consumers and producers. This gap is most pronounced for complex and long-term financial products. But it also arises to some extent even for simpler products and services. 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.

What does correcting this failure require?

We think that there are three key components to this:

  • Capable and confident consumers.

  • Clear, simple and understandable information available for consumers.

  • And soundly managed and well capitalised firms who treat their customers fairly.


Financial Capability

Increasing consumer understanding and awareness to deliver more capable and confident consumers is a key element in improving how the retail market operates.

We face a huge challenge in this area due to the very low levels of financial literacy in the UK. For example a recent survey found that one third of people lack confidence in their financial affairs and only 30% could calculate a simple interest rate.

More confident and capable financial consumers will be better equipped to exercise a stronger influence in these markets; to take greater responsibility for their own actions; and to protect themselves through less mis-buying and being less susceptible to mis-selling.

So what are we doing here?

We offer various information and awareness services to help consumers make informed financial decisions, including our consumer website (which was recently awarded The Times website of the week accolade); our comparative tables; a range of consumer publications, including guides and fact sheets on a range of topics; and our consumer contact centre.

We also lead and coordinate the national strategy for financial capability. This is a long term, ambitious project – involving numerous stakeholders including the industry and the government who also share our interest in this subject – that aims to deliver a step change in financial literacy.

A number of working groups have been established to deliver the financial capability strategy: the groups focus on schools, young adults, borrowing, workplace, retirement, families, and generic advice. The groups are already generating a range of ideas and initiatives. For example:

  • the schools group has already developed costed proposals to embed personal financial education within the school system;

  • the workplace group – chaired by Peter Ayliffe of Lloyds TSB – is developing pilots to test how to widen the delivery of financial capability messages through the workplace; and

  • the borrowing group is developing messages to help consumers understand affordability in relation to borrowing, and is developing tools to help consumers identify their own credit position and in particular whether they are 'on the brink' of credit problems.

The national strategy for financial capability is a huge challenge. To be a success, we will need to reach millions of individuals across the country and persuade each of them to learn more about personal finance. They need then to apply these skills and knowledge in their day-to-day financial decisions. We also need to increase the willingness of consumers to engage with a financial purchase in the same way they would if, for example, they were buying a mobile phone.

So financial capability will continue to be a key priority for us over the next few years.

We are commissioning an extensive baseline survey on standards of financial literacy in the UK. This is a vital first step in establishing a benchmark against which we can measure our progress and the impact which the strategy has on financial capability.

Collaboration and support from all those with a stake in financial capability will be essential to our ability to deliver the strategy. Your keynote speakers today are excellent examples. Both Stephen Timms and Luqman Arnold are active participants in the main Financial Capability Steering Group, and a number of BBA members contribute to the various working groups.


Clear and simple information

Moving on to the second component of an effective retail market, we want consumers to have access to simple, clear and understandable information to help them make financial decisions. We know that there is more work to do in this area and that the industry finds it difficult to set out complex information clearly and succinctly.

A number of initiatives are underway which aim to increase the quality and accessibility of information for consumers. Some examples include:

  • Rolling out the new Key Facts documents, beginning this month with mortgages and moving on to general insurance in January, and to investment products later next year;

  • Developing the so-called 'Menu' which financial advisers will be required to give to their customers to explain the costs of investment advice; and

  • We have increased significantly the resources we devote to monitoring financial promotions to ensure that they are clear, fair, balanced and not misleading.


Treating Customers Fairly

The third 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.

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 better quality information being provided to consumers, improvements in standards of risk management by firms and a generally higher quality of complaints handling by firms. We have also seen the impact of industry initiatives such as the Code of Banking Standards.

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 despite these improvements, we remain concerned about the treatment of consumers of retail financial services, including in retail banking. We have seen cases of firms developing products without assessing which consumers these products are likely to be suitable for, which consumers they are not likely to be suitable for, and how the products are likely to be sold and advised upon in practice. We see reward systems that incentivise sales forces and branch staff to deliver volume targets without any measurement of the suitability and the quality of those sales. And we continue to see cases of poor complaints handling.

Relying on our general regulatory philosophy of the responsibility of senior management, we are looking to senior managers 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.

We have chosen to focus initially on how firms address the fair treatment of customers at each stage of 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. And firms need to do more to develop systems to measure their performance in these areas. So there is plenty here of relevance to the wide range of products that constitute the retail banking market.

We realise that this will create challenges for firms, who may have to adapt the management, reward and operating systems they currently use, and to enhance the controls they have in place to monitor whether they are meeting the Treating Customers Fairly objective.

Looking ahead on Treating Customers Fairly, our approach will depend on the behaviour of firms. 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.

Following on from the initial pilot work we are now undertaking cluster work on elements of the product life-cycle. 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 have established a Consultative Group to help us to draw out these case studies of good practice from our existing and proposed work.

So yes, we will be helping firms to recognise what does – and what does not – constitute treating their customers fairly. But – and here we have a different approach to that being applied in the Banking Code - we will not be defining precisely what 'fair' means, or prescribing a list of behaviours which meet this classification.

We realise that an approach based on high level principles rather than detailed rules will be challenging and is not straightforward in practice. But we believe this is the right direction for you, and for us, to go.


Risk-based supervision

The final item on our retail markets 'to do' list is to enhance the efficiency and effectiveness of our risk-based supervision.

We are in the middle of a fundamental review of our Arrow risk assessment framework. Its purpose is to ensure that we identify, assess and mitigate risks to our statutory objectives in a consistent and prioritised way.

We want to strengthen the link between risks and the allocation of our resources; we want to embed the Treating Customers Fairly principle more fully into the Arrow framework; we want to improve the capabilities of our staff; we want to introduce closer dialogue with firms throughout the Arrow process; and we want to make further progress in differentiating our approach to firms according to the risks they pose to our statutory objectives.

In addition, we are now operating a streamlined process to identify, assess, prioritise and (where necessary) mitigate emerging retail market and product risks, including in mortgages and general insurance. Our aim is to be as 'fleet of foot' as possible – tackling problems at an early stage and anticipating where new problems may arise. In many cases we decide that further regulatory action is not necessary, but in others we may pursue 'short, sharp' scoping investigations or more extensive thematic work across a number of firms.

The Capital Requirements Directive provides a further aspect of a more risk-based approach. This will be of particular importance to banks with significant retail assets. And, of course, well capitalised and well managed banks are of critical importance to the delivery of our consumer protection objective.

I have a close personal interest in this as I represent the FSA on the Committee of European Banking Supervisors, where we are working to deliver greater convergence of supervisory practice across the EU.


Changes in the retail market

Finally, the retail market may change significantly as a result of depolarisation and of our simplified advice regime for Sandler products.

Our final rules on depolarisation will be published shortly. The rules will come into force on 1 December, with a six month transitional period. All firms will need to comply by 1 June 2005.

This is the culmination of a fundamental review of financial advice. Our aim was to tackle anti-competitive or consumer-unfriendly aspects of the old polarised market. We also wanted to make the costs of advice clearer to consumers.

We expect depolarisation to promote lively competition in the retail investment market, while still protecting consumer interests through improved disclosure and transparency, and greater consumer choice.

This month we also reached another key milestone for the retail regime when we published our final rules for the new 'basic advice' sales process. These rules will come into force in April next year.

This new, lower-cost form of advice has been developed following considerable research. It will enable authorised firms to sell stakeholder products simply and quickly to consumers.

We will also review in due course whether the basic advice regime should be extended to a wider range of products.

Clearly this is a time of change. It will be fascinating to see how the market develops at a time when both advisers and product providers are facing a number of pressures. We will keep a close eye on the strategies adopted by the banks. And we will be particularly interested in the impact of these strategies on the range and quality of financial advice and products that will be available to consumers.


Conclusion

I conclude by returning to my vision for an effective financial services market in the UK. I believe that increased financial literacy, clear information and the fair treatment of consumers will be a winning combination. It should deliver healthy, renewable business for you, and it should lead to more people taking advantage of more retail banking products and services that will help them to save, to borrow and to invest for the future. And it should enable us to rely less on detailed rules and guidance.

We are some way from this – there is a lot more to be done. This has been a busy year, and there is plenty more on the horizon. We look forward to continuing to work closely with the BBA and the banking community.

Thank you.

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