Speech by John Howard
Chair, Financial Services Consumer Panel
Ladies and gentlemen, thank you very much indeed for inviting me here today. I took over as chairman of the Financial Services Consumer Panel last October and I would like to thank my predecessor, Ann Foster, for all the work that she did for the Panel. I hope that we have carried it along in the same vein.
Methodology
The Consumer Panel, along with the Practitioner Panel, is part of the unique accountability arrangement of the FSA. We are required to advise the FSA and to monitor its effectiveness on behalf of our constituents. How do we do that? Senior staff regularly come to each of the Panels and tell us what they are thinking of doing; they ask what we think and we tell them in no uncertain terms. They go away with, no doubt, mixed messages and try to come to some sort of a consensus. It is an arrangement that I think works terribly well.
Monitoring
We are here to advise but our terms of reference also give us a role in monitoring the FSA’s effectiveness. The monitoring is something that the Consumer Panel has found a challenge in the past, but this year we have devised a way of doing it in the annual report. It is essentially the opinion of the current members of the Consumer Panel, who I would hope are a little better informed than most consumers, about the markets and also the constraints placed on the FSA. We have rated the FSA’s performance on a scale of very weak to very strong. It is a publication I would recommend to you, especially if you are having trouble sleeping on these hot evenings. For example, we thought the FSA had been very strong in Europe, and just as well.
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European Engagement
The bulk of new financial regulation coming down the line originates in Europe. Sadly, consumer input at the European level has been minimal. Concerned by this, we organised a conference of EU consumer groups to discuss what could be done. The conference’s final resolution called on the EU to introduce greater consumer representation and we were delighted to see in a recent EU white paper that a European consumer Panel for financial services has been proposed. However, in the meantime we have tried to influence new rules about share dealing and investment – this is MiFID – by writing to the EU Commissioner with our concerns and lobbying the European Parliament. We are still very worried that the new rules may take away some of the consumer protection already existing in the UK; we would view this as dumbing down, if it happens.
Treating Customers Fairly
We felt that the FSA performed very well in areas such as the Treating Customers Fairly initiative. If this principle is universally adopted, it could make substantial improvements for consumers. However, in the past year, the FSA has gathered evidence that if senior managers are signing up to Treating Customers Fairly, that is not filtering down to their staff. The evidence for this has come from mystery shopping, sending in researchers to pose as customers. We are very pleased that the FSA has been using this invaluable tool, as we see it. However, research on equity release mortgages, payment protection insurance and critical illness insurance all showed poor advice and treatment by many firms selling these products. From this, it seems fair to conclude that some firms have not wholeheartedly embraced Treating Customers Fairly. They are talking the talk at head office, but not walking the walk in the high street. We have advised the FSA that we want to see dramatic improvements when it next looks at this. Otherwise, we would want them to take much stiffer action.
Principles based Regulation
Treating Customers Fairly is part of the FSA’s initiative to move towards principles based regulation and reduce the number of rules. There are apparently some 8,500 pages of FSA rules, which the FSA believes it may be able to slim down considerably. The Panel supports this. Some parts of the industry have pointed out, though, that principles are less certain than rules. Although senior executives may welcome moving to principles, compliance officers who like the certainty of rules will find it difficult. One suggested compromise has been for the different parts of the industry to produce guidance and possibly industry codes to give more certainty to the FSA’s principles. This gives us some concern, I have to say. First, what is the point of scrapping lots of FSA rules only to replace them with lots of guidance and codes? Where is the benefit in that? We also have other concerns if there is too much of a move in that direction. We would much prefer firms to find a new way of satisfying themselves about whether they are treating customers fairly and complying with all the other principles. Fairness is a question of judgement; we would like to see firms rise to the challenge of making good judgements about what is fair. Most firms spend a great deal of money and effort on consumer satisfaction surveys. Perhaps there is room here for fairness surveys, to ask your customers whether they think what you are doing is fair. That may be one of the ways forward.
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Mortgage Regulation
Self certification mortgages
There have been two aspects of mortgage regulation that have troubled us in the past year, both backed by FSA research. First, on self certification mortgages, the FSA concluded there was no evidence of widespread abuse or a systemic problem in this market, but we did not feel that was necessarily the interpretation that ought to be put upon it and that the results could hide a much bigger problem. That still worries us.
Interest only mortgage arrangements
The other is the worrying level of interest only mortgage arrangements, where the lender had no knowledge of how the capital would be repaid at the end of the mortgage term. We are worried that perhaps lenders are not explaining the significance of this to consumers. I am pleased to say that the FSA has taken up some work in that direction too.
Financial Capability
We are very pleased with the work that the FSA has done on Financial Capability. The survey it undertook was an excellent piece of work but we are still concerned about the slow progress on generic advice. I know that the practitioners are as well. Consumers are having to do so much more now in making decisions about increasingly complex financial products. We think there is a great opportunity for a generic advice service to step in to help them. We are worried too with the advent of the Turner proposals. This means that there will be a whole new range of questions that consumers will be asking themselves; again, generic financial advice would help enormously here.
Caveat emptor – ‘buyer beware’ – has been quite a controversial issue. This is a discussion between ourselves, Mark, Roy and the FSA on whether consumers can be said to have responsibility to do certain things when they buy a financial product. One example would be reading documents carefully to be clear as to the commitment taken on. This means that if they had not read and understood the paperwork, this could be taken into account if they subsequently complained and it could affect any compensation. I think it is accepted in a strictly legal sense that consumer actions are not prescribed or codified, and so cannot legally be described as responsibilities. The FSA regulates firms; it does not regulate consumers. The Consumer Panel therefore felt it inappropriate to sign up to any list of responsibilities that could affect consumers in this way. It may be advisable that consumers act in a particular way, but we felt that anything resembling regulation of consumer behaviour or requiring them to do certain things was ill advised.
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If there is one change in the financial services marketplace that could make a real difference, it would be to end bias in the sales process. We believe that this has been a major factor in many of the cases of mis selling. In my view, this bias comes down to two sources: the setting of product sales targets to staff by companies and the payment of commission to financial advisers. It is in the last where I have noticed that there is a change in sentiment. Even the industry is starting to question whether commission payments are the right way forward. What should we be replacing it with? We are very keen to encourage a debate on this and we have signed up to that action.
In the coming year, we look forward to continuing the excellent relationship we have with the FSA and the other Panels. We may not agree with all of them all of the time. We may not agree with any of them some of the time. However, I think this is an extraordinarily effective way of developing financial regulation.
More transcripts from the FSA Annual Public Meeting 2006
