FSA Annual Public Meeting 2007: Questions and answers
Questions answered on the day
Callum McCarthy
We now come to the questions, when the speakers will be joined by the three FSA Managing Directors, Clive Briault, David Kenmir and Hector Sants, and by our Finance Director, Martin Walton. Normally, we would also have Deirdre Hutton as the Chair of the Non executive Directors’ Committee and the Deputy Chair of the FSA, but I have to make her apologies. As well as being the Deputy Chair of the Financial Services Authority, she is also the Chair of what we think of as the other FSA—the Food Standards Agency—which is holding its board meeting today. She has asked me to express her regret and to explain the reason for her absence.
We will deal with questions in the same way as we have done previously. That is, we have a number of pre notified questions and it is of course open to anyone to raise questions from the floor that have not been pre notified. I intend to alternate between the two categories. We will put all questions and answers on the FSA website, including answers to any pre notified questions we do not get time to answer.
Ian Hamilton (Compliance Manager; Hichens, Harrison & Co)
What was the rationale behind the compulsory tape recording for a minimum of three years?
Hector Sants, Managing Director, Wholesale and Institutional Markets, FSA
I have a couple of background points, if I may, before answering the question directly. First of all, of course, we should remind ourselves that currently the majority of larger firms do already tape. We should also recognise that this is not always the case with smaller firms, so we are clearly understanding of that fact. The second point by way of background is that we do believe that taping is a key ingredient in combating market abuse, and of course improving market quality is one of our key objectives at the current time.
Against that background, in framing the proposal with the three year period we have been seeking to strike the right balance between the obvious costs involved in keeping recordings set against the benefit we think accrues from our perspective with regard to our market abuse agenda. Of course, firms themselves benefit in terms of other control issues. Having said that, it is currently a proposal; we have already made clear that we are not requiring that to be introduced compulsorily from 1st November. We are in consultation and we will listen carefully to the various responses we get and at the end of the day seek to come back with a proposal that hits that balance between cost and benefit.
Ned Swan (Partner; Middleton Potts)
Does the FSA support the retention of the MiFID exemption 2.1(i) in its present form? If not, what change would the FSA support?
Hector Sants
As I am sure many of you know, this is an exemption from certain MiFID provisions with regard to certain types of firms, particularly those involved primarily in principal dealing activities, particularly in the area of commodities and other related exotic instruments. Now, the Commission is currently working on a review of the commodity exemptions with regard to MiFID and other matters. Our initial input into the Commission is on the website, and you will see from that that we are taking the current position that we do want to reach a firm conclusion on this particular point at this stage of the Commission’s deliberations. I think the straight answer to the question is no; at this stage, we do not want to say exactly what our position should be on the retention of this exemption. We think it should be looked at in the round in the context of the overall discussions with the Commission, which look to come to a conclusion in the early part of 2008.
David Brunning (Managing Director; Brunning Newman Houghton LTD)
Does the Panel believe that the retail consumer should have access to free advice on pensions, investments and life insurance? If not, which I assume is the answer, what steps is the FSA and the Consumer Panel taking to educate clients to be prepared to pay for that? My 18 years’ experience as an IFA reinforces the comments from the Panel that people are not prepared to pay fees for it, and I am just interested in understanding how the FSA thinks people are going to access advice.
Clive Briault (Managing Director, Retail Markets; Financial Services Authority)
I think that is a very good question because it takes us into the second main area of our RDR. The first area was very much looking at what one might describe as the upper, more professional end of financial advice. The other part of it was looking at the availability of advice to consumers who may be less able to afford the more professional advice.
There are two proposals of particular importance that we mentioned in the Review. One is that we referred to the Thoresen Review, set up by the Treasury at the beginning of this year, which was looking at the provision of generic advice and how that can best be provided. We do think that to some extent—depending, of course, on Otto’s proposals—that will be free to the customer. That will be a form of generic advice available to customers to help them in their financial planning and to help them to appreciate the various types of service available in terms of advice and specific products through other forms of advice.
The second tier, which I think is important, is a proposal put forward for something called primary advice, which was for a cheaper form of reasonably straightforward advice leading to the possible recommendation or not that a consumer should take out one of a number of reasonably simple products. Therefore, we think that at that end of the market there is scope both for free to the customer generic advice and relatively affordable for customers less able to afford it, straightforward advice.
In terms of the upper tiers that John and Roy have already talked about, and as I think they both said, we think it is very important that consumers understand at the point at which they take out that advice how it is that they are going to pay for it. When you talk about educating consumers, the key moment in that journey for the consumer is when the adviser has that conversation with the customer about how the advice can be paid for. We think that education at the point at which the advice is about to be given is extremely important.
John Howard
This is a very interesting area, and you have opened up something that is important to address. At the moment, consumers are paying for their advice through the commission. They are paying that commission through extra management charges; that is what is happening. It is not as if the consumer is getting the advice for free. If they are getting the impression that they are getting the advice for free, then you are devaluating the product that you are providing. I think it is time that you made it clear to consumers that advice you are giving needs to be paid for; it is a valuable commodity and the only way to do that is to make it all transparent. I think that would have enormous advantages for the industry, and it will be a great asset for the consumer. They will recognise that there is an importance and a value in getting advice. If you set this up correctly, they will realise that getting advice is the right thing to do. I think those are the important issues.
Just to make it clear, when we have been suggesting an end to commission, we do not suggest that it is simply replaced with a fee that is paid upfront. We do not think that would be acceptable because a lot of consumers will not have a chunk of money to pay a fee upfront. However, under the customer agreed remuneration system, that fee would be spread over the lifetime of the product in exactly the same way as commission is at the moment.
David Brunning
I wholeheartedly agree that we should agree remuneration with the clients. We do that already and we have found that there is quite a large number of people prepared to pay for our advice, be that by commission offset or outright fee. They tend to be wealthy and more sophisticated people who already understand the value of independence because they have accountants and solicitors already. We are advising fewer and fewer less wealthy, less sophisticated people because they simply cannot afford us with the regulatory costs that we have to apply.
Second, I take issue with the comment about free advice. There is no such thing as free advice. Are we suggesting that either it is provided through something like the Citizens’ Advice Bureau or that it is paid for by the taxpayer? Ultimately, someone somewhere has to be giving advice even on the most basic, very generic level.
Callum McCarthy
I think that this discussion illustrates the importance of the issue. On your second point, I would reinforce that those are the issues with which the Thoresen Review is absolutely grappling at the moment and will clearly take forward.
Peter Free (Proprietor; P R Free)
My question follows on from the last one. As a consumer, will fee based advice be an answer to my prayers for independent financial advice?
Callum McCarthy
It is very much the same thing. Is there anything else you would like to add to the mini debate that has just occurred?
Peter Free
There are a number of things. First of all, I think people are prepared to pay fees. It is a bit like when you go to your solicitor, though; you do not know what you are going to get when you pay for the fee. If you have a relationship with the IFA you are going to see, then you do have some idea what he may or may not be doing for the fee that you are going to pay. Regarding commission, I have an issue with whether it should be based on the value of the investment you are going to make. For instance, if you are putting in £50,000, should the commission be based on that or should it be based on putting in £20,000? The work involved, I would suggest, is the same. I think the FSA is missing the point. The sophisticated investors are not the people who really need help; they have the money already, and it is the people you are describing as unsophisticated—I do not know what that definition means—who need help. I do not feel that any of you are addressing that.
Callum McCarthy
One of the things of which we are very conscious is the requirement to ensure that access to financial advice is not confined to a small proportion of the population. That is absolutely a concern of ours, and the issues that have been discussed are issues that are going to have to be dealt with in one of a variety of ways.
Clive Briault
That last point is precisely why we are so encouraged by the proposals that have come forward in the area of primary advice, and why we are also so encouraged by the government’s actions in setting up the Thoresen Review to look at generic advice. We absolutely agree that there is part of the population who very much need advice, but who currently are not getting access to it in any form. It is important that we address that, and we are addressing that.
Peter Free
The section of society about which I am concerned is getting advice at the moment through the commission system. When you introduced the menu two years ago, it only made people realise that they did not want to pay a fee so they went down the commission route. That whole form, which you produced, has only done that.
Callum McCarthy
I think this absolutely confirms the relevance of the RDR. I think it demonstrates that over the next six months, there are going to be many detailed discussions, for which the comments this morning are just a curtain.
Alan Macarthur (Director; Compliance Andover LTD)
In the context of an IFA, could the FSA explain whether it links the word ‘independent’ to the advice that is given or the method by which he is remunerated?
Clive Briault
I think you are probably referring to the proposals in the RDR where we ask a very open question to yourselves and other stakeholders as to how you think that word can be best used. There is no clear proposal from the FSA itself at the moment; we are not consulting on a change to the use of the word ‘independent’. We are trying to have a debate over the next six months to take views from all of you, to listen carefully to those, and to decide which way to go. You are quite right that the proposals as put forward suggest that there are various things to which independence could be linked, including the form of remuneration and the standards of professional qualifications reached by the advisers. As we have seen already, there has also been some feedback to the RDR that independence should also be limited to those advisers who are giving advice across the whole of the market rather than on a narrower basis. We have not yet reached any definitive position on that whatsoever. As in the previous discussion, we have undoubtedly begun a very interesting and very fruitful debate on the subject, which we will carry forward for the next six months.
John Donachie(Compliance Officer, Fairfield Greenwich (UK) Ltd)
Could the scale of FSA fees be made easier to locate on the FSA website? My suggestion would be a one page list.
Callum McCarthy
I am very keen on establishing clarity about the whole of the FSA’s activities, including fees.
David Kenmir (Managing Director, Regulatory Services; Financial Services Authority)
Your question is actually more complex than it seems. The fees that a firm pays are determined by a number of factors. First are the activities that it undertakes, second is the scale of its activities, third is the fee rates, fourth is a series of discounts that apply to certain activities if they are de minimis, and fifth is the amount of enforcement fines that we collect that are rebated to that individual firm. Therefore, it is very difficult to encapsulate all that on one page. We are also very conscious that at the end of the day, a firm is really interested in the size of its invoice and not so much how it is being calculated.
In 2006, we launched a fee calculator on the FSA’s website, which allows firms to input data about its activities and the scale of those activities to calculate for itself what the invoice is likely to be. If you can think of ways that we can improve the fee calculator to make it easier, we are more than willing to consider them so please drop me an email or a letter.
Jérôme Lussan (Partner; Laven Partners)
Which key regulatory aspects will the FSA focus on in relation to the hedge fund industry and potentially increasing the access for retail investors?
Callum McCarthy
There are two aspects to this. One is our interest in financial stability in hedge funds, which is principally Hector’s responsibility. The other is a retail and consumer protection aspect, which is Clive.
Hector Sants
In terms of our general regulatory focus with regard to hedge funds, I think we fairly clearly set out some 18 months ago the types of risks that we feel hedge funds can pose to our statutory objectives. Our general increased regulatory focus is obviously going to be applied to those particular risks. However, I would like to re emphasise a point we made a number of times that per se hedge funds themselves are not necessarily posing any unique risks to our statutory objectives. Rather, they are a form of asset management and asset management technique. We do think that, because of certain of their characteristics, they merit having particularly focused supervisory engagement and we do have a specialist team working with the hedge fund community. In general, though, we see them as a type of asset manager and a type of investment technique. We think the risks they pose have not changed significantly from that body of work that we published over the past 12 18 months.
Clive Briault
Moving on to the specific point about availability to retail investors, our starting point is that a number of firms have expressed an interest in making alternative investment instruments more easily available to investors, in particular funds of hedge funds. Our approach is that we are keen where possible to facilitate and encourage innovation and competition in the market. We are not in the business of saying that we should stop these things being available to retail investors, but of course in constructing a regime on which we have now consulted we are looking very carefully at what disclosures around those instruments would be necessary so that people are properly informed about the risks and opportunities of those products. We also have to make sure that sufficient information is provided by the manufacturer of those products to the distributors, so that where advice is given it can continue to be of a suitable and high quality so that these instruments end up in the right hands for the relatively small number of consumers for whom they are suitable, rather than end up in the wrong hands.
Roy Leighton
This is an industry perspective, and I think the ball is in the industry’s court. However, ‘hedge fund’ is an enormous generalisation. I think the industry does not do itself any good by constantly talking about hedge funds. It is like saying of the mainstream fund management business that they are all the same, that you can invest in a highly volatile emerging market or have a tracker fund in the FTSE 100. There is a giant difference and I think there is some onus on the hedge fund industry to start to be differential in terms of the risk it is taking. I personally am old enough to have had my pension fund crystallise. I had a hedge fund in my pension fund, and it was the best performing asset over 12 years. At worst, it went up 3% and at best it went up 23%, so it was not wildly risky. The fundamental point is that it went up, so I was quite satisfied with it. I think the hedge fund industry needs to come out to the consumer and say it can do this, which is quite low risk, or that, which is geared up and very volatile.
Callum McCarthy
I would make one general point about a myth, which I think is prevalent, that hedge funds are an unregulated activity. At least in relation to the UK, where more than 70% of the European hedge funds are under management and where about a quarter of global hedge fund assets are under management, we actually do regulate and supervise hedge fund managers in the way that Hector in particular has described. It is a myth to treat them, at least in the UK, as an unregulated activity.
Chander Hingorani
My question is to John Howard on retail banking, especially in relation to the Small to Medium sized Enterprise (SME) sector and the private account holders. If you remember a few years ago, there was a report by Cruickshank that said that overcharging in the retail banking sector was to the tune of about £6 billion and probably more. This problem has been on the horizon for many years and the problem still continues. Do you think that the regulatory regime is too soft? Do you think that the FSA needs to be more proactive in managing banks, especially in relation to retail banking?
John Howard
I tend to think the FSA is too soft and ought to take more of a stance in regulating retail banking; now let’s hear what the FSA has to say. You directed the question to me, but I think it is really for the FSA because we certainly tend to agree with you that perhaps the way retail banking is regulated needs to be reviewed. At the moment, the FSA is at a second stage back from retail regulation and maybe it needs to step into the arena and take more control. I think that is a valid point to make.
Callum McCarthy
Can I ask Mr Tiner, who can both express the FSA’s official view and his own views on the subject?
John Tiner
The FSA’s official view is that the banking code in its present review should incorporate a fairness objective. To my mind, very perversely, while we have the key principle of a specific regulatory fairness responsibility on the company for all other financial services and products that we regulate, which we have talked about several times this morning, that does not exist through the code. When we submitted our response to the code review much earlier this year, we said that there should be one and that must be right. That is the FSA’s position.
The John Tiner position, on reflection, as I mentioned in a few remarks I made a couple of weeks ago, is that I think that there needs to be consolidation of how the banking sector is regulated. While I think I understand the reasons why the Banking Code Standards Board was not brought into the FSA when the FSA was created, I do not think those reasons are valid any more. I think the consumers in the high street expect to the FSA to protect them when it comes to retail financial services and expects it to protect them when it comes to retail banking. Therefore, I would put the code inside the FSA.
Callum McCarthy
Since one of my ambitions is to prevent the FSA from growing too large, I view this advice with great interest.
David Thomson (Director, Policy and Public Affairs; Chartered Insurance Institute)
Can I just strongly associate with John Howard’s comments about the RDR and the real prize being consumer confidence? I hope that throughout the whole Review that is the lodestar and that we do not forget what we really want to get out of it in the long term. My question for Clive Briault is more on the practitioner side. Can you describe what you would see as being the regulatory dividend for practitioners?
Clive Briault
Do you mean the regulatory dividend for practitioners from the RDR?
David Thomson
Yes
Clive Briault
First of all, I absolutely agree with the opening comments you made. There is no point in carrying forward whatever proposals come out of the RDR unless we believe that they will be good news for consumers. That is absolutely imperative.
In terms of the regulatory dividends for practitioners, I think there are a number. First, if the Review does lead to greater consumer confidence and a way in which we can make advice more generally available to a larger number of consumers, and if that means that a larger number of consumers both save and invest in a way that is more suitable for them and save and invest in better products, then that in itself is good news for practitioners as well as for consumers. We are talking about a larger saving and investment market if that is the case.
I also think it is good news for practitioners because when you look at the proposals in the Review for raising professional standards at the higher end of financial advice, there are a number of financial advisers who have already moved very strongly in that direction. I am very keen that we should give them a regulatory dividend in the form of recognising that those people have moved into those much higher professional standards. They have met them and as a result of that they can identify themselves very clearly to consumers as having reached that standard. I think that is a real prize and dividend for them.
Callum McCarthy
I would just add one point that picks up on something John said in his introductory remarks. We always aim to try to make efficient, orderly markets work and one of the problems, I think, at the moment is that it is not clear that the present business model for at least parts of the retail market is a good business model. One of my answers would be that if we succeed, we will have a business model that enables reputable firms to make substantive and real sums of money by meeting a real social and economic need. That is the sort of objective you should expect us to have.
Paul Braithwaite (General Secretary; Equitable Members’ Action Group)
I am member of the public as opposed to a member of the industry. My question is a big one, and it is not sectional; it is about the FSA, the Financial Ombudsman Service (FOS), consumer protection and Europe. A year ago, EMAG commissioned éminence grise Lord Neill to investigate in depth the FOS treatment of some three dozen Equitable Life complaints. Despite that being dismissed out of hand by the Financial Ombudsman Service, it was very influential on the European Parliament’s in depth investigation of the way Equitable Life had been regulated in its 400 page report.
That report identified how damaging Equitable Life and the past half dozen years had been to the industry and to the regulator’s credibility. They voted on it last month, and it received the staggering endorsement of 605 MEPs in favour of adopting the report, with only 10 against. That report was accepted by the Single Market Commissioner. The report included at Recommendation 12 that there was a need to strengthen the FOS’s capacities and to ensure that it is truly independent from the FSA and from government.
Now, there is a precedent for such a separation in the energy industry. Ofwat is the energy regulator and there is a healthy tension there with the consumer protection service, energywatch. However, this does not seem to be the current FSA direction with regard to the future of the FOS. John Tiner has recently spoken under principles based regime, which seems to be the new mantra, about the FOS taking on greater legal authority and setting precedent, affecting case law in its decision. Now, this is contrary to the raison d’être of the FOS to be a voluntary, alternative dispute resolution service that provides natural justice and is not subject to expensive, high hurdles of legal proof.
Therefore, can the FSA please articulate a response to the European Parliament’s EQUI Report recommendation of total separation from the FSA and government of responsibility for consumer protection by the FOS and more recently, under Solvency II, for UK accountability for regulatory negligence, which is of course currently exempt?
Callum McCarthy
I think the energy regulator is Ofgem, but that does not change the thrust of the question in any way. I think there are two questions there. One is the relationship with and independence of the FOS, and the second question is regulatory indemnity. Clive, will you comment on the first?
Clive Briault
First of all, I think it is important to say that the structures on which you are commenting are clearly established by the Financial Services and Markets Act. I could just say it is therefore a matter for the government and stop, but I am not so easily stopped. I should also make clear that the government has already said it intends to respond and comment on the European Parliament’s report, but it will do that as part of its overall response to both that report and the forthcoming report of the UK Parliamentary Ombudsman on Equitable Life. Therefore, the government has announced that it will be commenting.
In terms of the relationship between the Financial Ombudsman Service and the FSA, I think it is fair first of all to reflect the statutory position that the FSA is responsible for appointing the directors of the Financial Ombudsman Service. It is responsible for agreeing the budget of the Financial Ombudsman Service and also for writing a number of rules setting out the way in which firms we regulate should handle complaints, including the very important rule that if they have not dealt satisfactorily with a complaint in the eyes of the consumer after eight weeks, the consumer has the right to take that to the Financial Ombudsman Service.
Having said that, it is also clear—and indeed stated clearly in the legislation—that the Financial Ombudsman Service should have complete operational independence from the FSA and the government in terms of handling the individual complaints that reach it through that system. We certainly think, and we believe the Financial Ombudsman Service also thinks, that that operational independence in terms of handling individual complaints is very firmly established. There is no sense in which the FSA interferes in the FOS’s handling of individual complaints. I think it is important to draw a distinction between the statutory responsibilities that the FSA is given under legislation and the operational independence of the Financial Ombudsman Service, which is not only enshrined in that legislation but is also the approach that we have very much taken during the life of the FSA.
Callum McCarthy
I myself will deal with the second question, which is about the statutory immunity of the FSA from being sued for negligence in the absence of bad faith. This too is enshrined in the legislation. It was extensively discussed when the legislation was going through Parliament, and I think that it is recognised internationally that in the interests of regulators doing their job robustly and without undue fear of litigation, it is appropriate for regulators to have the protection that is given by statutory immunity, except for bad faith. This is something that has been a central element of government policy towards regulation for the past 25 years, so it is well established. We observe it and are grateful for it.
Paul Braithwaite
My understanding is that within the 27 member states in Europe, many are accountable for negligence. I think that it is a proposal of Solvency II, if I understand Sharon Bowles MEP correctly, that it will try to introduce accountability for negligence. In that John Tiner is perhaps demob happy, could I ask for his comment? It was interesting that Mr Leighton made the point that European law is Roman and, it seems to me, is in contrast to your principles based regime. We have a dichotomy here.
John Tiner
I do think that the way in which European legislation is based may put a brake on the move towards more principles based regulation, but it will not derail the exercise. I think that if you look at examples of how the Commission has dealt with market failures in the clearing and settlement world, for instance, Commissioner Charlie McCreevy has gone towards—as a first port of call—an industry solution. Perhaps his predecessor would have gone straight for the law as a way of resolving it. I have been very heavily personally involved in the development of Solvency II, and I think much of it is completely consistent of being principles based and risk based. While there are some elements in MiFID that take us the other way too, being a Leeds United supporter I am generally optimistic about life and that the European situation will not put an unreasonable brake on what we are trying to do. However, I agree with Roy that it will require an awful lot of commitment from the top management of the FSA, as we have given it over the past several years, to make sure we have the right level of influence in Brussels.
Callum McCarthy
I would just mention another problem that arises. We are conscious of the difficulties within a single institution of ensuring that principles are interpreted in the same way by different members of the FSA. That problem is clearly exacerbated across Europe, when you have different traditions in different countries and different levels of expertise and approach. Because of that, one of the things that we have been pressing very strongly within each of the three Lamfalussy committees is a real method to get a common training and educational system for regulators across Europe to make it easier to introduce principles in Europe on a comparable basis. However, I think there are some real issues here of the sort that John has indicated, as well as the sort that you have identified. We are taking them very seriously.
Peter Free
It is not only the FSA directors who are immune from pecuniary punishment. In Nationwide’s response to the fine levied against it this year, I saw that none of the directors personally contributed anything towards that fine. Who do you think did pay that fine?
Callum McCarthy
Clearly, eventually the shareholders or customers or some combination of both of the company.
Peter Free
Well, Nationwide has no shareholders because it is a mutual building society.
Callum McCarthy
I beg your pardon; the mutual holders.
Peter Free
Do you think that maintains consumer confidence?
Callum McCarthy
I think that the question of having a system of enforcement that is selective, proportionate and gives clear messages is extremely important. Levying fines is important in the message that it gives and that, I think, remains the case. I am very conscious that in any case there are problems of establishing individual responsibility, where that is more difficult to do than establishing corporate responsibility. However, that is something we have been looking at and working on.
Peter Free
If an institution makes an error, you are saying that you are going to fine it for that error and that the customers of that institution are going to pay that fine.
Callum McCarthy
It is not our policy to take enforcement action against an institution because it has made an error.
Peter Free
We are talking about a case where you did.
Callum McCarthy
On a case when we believe that enforcement action is justified, which is a different matter from what you described as an institution committing an error, we will take action either against the institution or in addition against individuals. That is our policy.
Peter Free
Sorry, I cannot let you go on this. The customers have paid this fine; I do not think that is fair. No director suffered financially as far as I am aware, so I think it is deeply unfair. Nationwide seems to be very dismissive about the fact that the fine was a trivial amount; well, you tell Mr and Mrs Jones who are being evicted from their house in Birmingham today because they have not paid their mortgage to Nationwide that £980,000 is trivial. I do not think that they would agree.
Callum McCarthy
The importance of our enforcement policy is to give clear messages when people have failed to meet the standards that we expect. The relevance of the fine is in terms of giving a message and it is important for corporate responsibility and reputation that that should be done. That is our policy; I understand that you do not approve of it.
Peter Free
It is not right, is it?
Chris Harlow (Project Manager; Oxford Brookes University)
I am just a customer of the industry. I want to ask the FSA how it hopes to achieve the consumer confidence that should result from good governance of the FOS, which I understand you have to follow by statutory regulation. I have talked to several hundred complainants to the FOS over the course of the past five years, every one of whom has had sound reasons for doubting the procedures and the fairness of that body. I would be prepared to give the names of them in confidence if I had their permission to do so and they were prepared to do that.
You will be aware that Lord Neill, a distinguished legal representative, conducted a survey of the FOS’s procedures in a number of cases. His conclusions were that the FOS failed on grounds of natural justice, lack of independence, and its inability to convince anyone of its impartiality. It was delayed and not prompt in its delivery of judgements. It was obscure in the way that it explained awards. Unfair conditions were attached to the judgements that it made. There was an uneven playing field between the judgements made by the FOS in terms of the company’s representation and the complainant’s representation. There was inequality of arms, that is to say of the weapons that could be brought to bear in the disagreements between consumers and the FOS.
I stand as a consumer who did complain to the FOS about my treatment by the industry, as one of those who has been thus abused as I see it by the FOS. It does not, according to Lord Neill, hold the scales of justice evenly. It does not display any form of impartiality. At times, the FOS officials are unhelpful, argumentative, aggressive and appear to be advocates for the industry and not advocates for consumers. If all of these judgements have some substance, and I personally would vouch for several hundred people who say that they have, then how is it that the FSA considers that by continuing to be the main body that supervises and, I suggest, dominates the FOS’s judgements, it can show that good governance is being applied to this body?
Callum McCarthy
The suggestion that the FSA dominates the FOS is not one which, I would just like to put on record, I would in any way recognise as a description of the present arrangements. I would not want to accept that description tacitly.
Clive Briault
It is rather difficult for us to add a great deal to that. The FOS has made a response to the report by Lord Neill, to which you refer. As Callum says, the FOS is operationally independent from the FSA. Quite rightly, it was entirely operationally independent from the FSA in the way in which it dealt with all of the complainants, including by the sounds of it yourselves, with whom it has dealt. It would be both impossible and improper for us to comment on how it has dealt with those individual cases.
The only point I would make more generally is that I am always struck by the in general very high customer satisfaction scores that the FOS receives from its own consumer surveys that it carries out, against a backdrop where the FOS upholds in favour of firms in some 60% of the complaints it receives. It is very interesting that your research seems to be very different from that, and I do not know whether your research is something that you have passed on and discussed with the FOS itself. With all due respect, I think that is the body with which it should be discussed because of its operational independence from us.
David Kenmir
When the issue of the Ombudsman comes up in public fora, I genuinely do not envy them their job. You have to remember that the complaints that get to the Ombudsman are the ones that have not been resolved within the eight week period Clive referred to earlier. By definition, there is therefore an element of antagonism between the firm and the consumer because there has been an eight week process where the complaint has not been settled to their mutual satisfaction. The very points you have made have been made to me on numerous occasions by members of the industry from each sector, who actually use exactly the same words to describe what they believe is the institutional customer bias of the Ombudsman against firms. The Ombudsman is in a very difficult position and has to make extremely difficult judgements about the merits of each case on an individual basis.
Graham Livings
Your community affairs programme has a budget of £50,000, which is centred on Canary Wharf. There is a hinterland outside Canary Wharf, and that largesse is quite derisory really. I would like to see more money in that budget, and it coming out to the hinterland.
I am also a consumer. I am here today because I saw your advertisement in The Times. More importantly, however, I was hoping that we would have heard from the new Chief Executive. According to The Times, he is going to be a consumer champion. I share the experiences of our friends from the university with reference to the FOS. I believe that there is a scandal in the retail banking system. We are aware of the penal charges that are coming, and with your attempt to interface, the process really wants to be sorted.
I am retired, but I spent most of my life in the voluntary sector within local government. Frankly, someone wants to get a grip. I would like to address my question to the newly appointed Chief Executive. What you mean about being the champion of us consumers? The FOS suggested that I make representations to the FSA and the British Bankers’ Association (BBA), which I found incredible. I have made representations to the FSA, which had the usual reply that it can only look at this in the abstract.
Callum McCarthy
We apply our community budget and the very high proportion of the FSA staff who contribute their own time to the circle of extraordinarily deprived areas that surround Canary Wharf. Canary Wharf is a very strange island of rather highly paid people in the sector that they work in, surrounded by some of the poorest parts of London and some of the poorest parts of the country. I think it is entirely appropriate that we concentrate our rather small financial contribution and our larger voluntary contribution there.
Hector Sants
I myself did not speak directly to that newspaper, but I assume that that comment is reflective of a comment I did make with regard to my tenure as Chief Executive. As indeed has been reflected in the discussions we have been having this morning, it is clear in terms of some of the most immediate and pressing challenges facing the FSA that the issue of taking forward the retail agenda in its wider sense has to be arguably the most important issue facing the FSA over the next few years. As the FSA and colleagues here have already made clear, there are some structural issues in that industry and there is a sense that stakeholders in the round are not comfortable with the current setup. That has been reflected in the discussions we have been hearing this morning.
It is clear that we do need to play our role—and it is only our role because clearly any solutions are going to be part of a partnership with the industry—in taking forward that debate to get ourselves into a better position for the benefit of all stakeholders, including consumers. I think that was the point being made, and I think the discussion we have had this morning demonstrates some of the challenges in taking that debate forward. However, it is clear that we need to go with the industry to a place where all stakeholders are and feel they are getting a better deal than they currently feel that they are. Obviously there have been some particular questions around the FOS, which I think my colleagues have answered in terms of its autonomy with regard to operational matters. I think the particular comments in the newspaper were drawn from my commitment to pay particular attention to taking forward this retail agenda.
John Howard
We on the Consumer Panel will be holding Hector to that to make sure he does pursue the sort of agenda he is talking about there. I also wanted to come back on the FOS because it has been mentioned a number of times now and no one from the FOS is here. However, I would like to make some comments on their behalf. Although it is not a perfect system and although it cannot find for 100% of consumers who go to it, so there are always going to be some consumers who are disappointed, it is in the main a tremendously important process for consumers to be able to get some sort of justice in financial services.
First of all, there is no cost to the consumer going to the FOS. If you try going through the courts, which is the alternative, it can be extremely costly. Second, it is able to make decisions on the basis of what is fair in all the circumstances of the case. Now, that may be very different from the outcome you might get in a strictly legal context. I think that is tremendously important for consumers, so be very wary about knocking the FOS. It is under attack from other quarters as well, and I think that for consumers generally we need to be very supportive if it.
We have been talking in Europe recently about cross border sales of financial products, and one of the big problems is trying to get redress in other countries. There is no doubt that the UK Ombudsman Service stands up incredibly well within Europe. Some European countries have no Ombudsman Service whatsoever, so if you take out a product and try to get redress in that country, you will have to go through the court system. Just imagine trying to do that in a foreign language. In some countries, although they have an Ombudsman Service, you would be very hard pushed to say they were independent. Some Ombudsman Services, for example, are employees of banks, housed in the bank. I think you would be prepared to say that our Ombudsman Service looks a lot more independent than that, so on behalf of the FOS and speaking on behalf of consumers, be very careful about knocking the Ombudsman Service we have at the moment.
Roy Leighton
As we are on the subject, we have a rare moment of harmony here. David already indicated from the other side of the platform that, as far as the industry is concerned, we are convinced that the FOS is certainly not on our side whatsoever. We are extremely unhappy about a lot of what happens there, which seems to indicate that it is probably doing a pretty good job and being reasonably independent. I see no sign whatsoever of the FOS being other than independent. I see no evidence that the FOS does anything other than act for itself and act properly.
What I think is not appreciated by quite a lot of people is that 95% of FOS decisions are based not on a court of law, but on legal precedence and points. Only a tiny percentage in fact relate to the FSA Handbook rules and all that, so people on both sides of the fence will be unhappy with decisions. However, I think it is doing an extremely competent job.
Peter Beales (Director and Company Secretary; London Investment Banking Association)
My question relates to principles based regulation. What approach will the FSA take to applying its policy formulation disciplines—for example, market failure and cost benefit analysis—to changes in regulatory policy that will affect firms where this policy will be implemented through the FSA’s pre existing principles for business and high level rules rather than new proposed requirements?
David Kenmir
I think the key word in your question is ‘policy’. While there have been some changes recently because of the Regulatory Reform Order that came through Parliament, the basic disciplines set out in the Financial Services and Markets Act are that we cannot introduce mandatory requirements on firms unless we go through a public consultation process. As we said in our April document on more principles based regulation, we remain committed to doing that and using full cost benefit and market failure analysis when we introduce those new mandatory requirements. The Regulatory Reform Order gives us some latitude not to publish certain things, including cost benefit analysis if we want to put guidance in the Handbook in the future. We set out in the April document the criteria we will consider in determining whether to publish cost benefit analysis or not.
However, we do believe that there is a really important role to play for other material that we publish. We produce various things—Dear CEO letters, pages on the website, guides to the Handbook for firms in different sectors—which we believe help firms understand our requirements. We think it is vital that we continue to do that, particularly given the large number of small firms that we regulate which might not have found the rulebook particularly accessible. Where I think we have more to do is to make it clear in the outside world and to our staff what is the different status of that material. Something in a Handbook guide or in a CEO letter that is not a FSA rule is not a mandatory requirement with which a firm must comply. We need to be consistent in only applying to firms rules that have been properly introduced as the minimum standards which they must follow.
John Muldoon (Compliance Director; The Porchester Group LTD)
I am a director of a small firm, the chair of trustees of a large money advice charity, and I am also a local councillor representing one of the poorest wards in south London. I am concerned that RDR and financial capability training are not going to reach financially excluded people. What are we doing to bring these people into the realm of financial services, selling them quality insurance products? In my parents’ generation, the man from the Pru went round door to door every Friday on payday, collecting half a crown. They were not, in hindsight, very good value for money policies, but nevertheless they met a need. Who is the 21st century’s replacement for the man from the Pru?
Callum McCarthy
I would just make a general point first. Among the statutory responsibilities of the FSA, there is actually no responsibility for dealing with questions of social exclusion. I make that point because it is very important to recognise that we do the things that Parliament has charged us with doing. Incidentally, we do take as much as we can within our given responsibilities the question of social exclusion very seriously, but it is absent from our statutory objectives.
Clive Briault
In terms of our financial capability work, we are very keen that that reaches out to the financially excluded as well as the financially included. That is why we have put so much emphasis on doing work within schools and with young adults, including young adults who may not be in education or employment at the time. It is why we have put so much emphasis on doing work in the workplace, including all of the people in the workplace irrespective of their income or other means. Therefore, it is fair to say that our financial capability work is looking to reach the population generally rather than simply those who are financially well off. Indeed, we are very keen to put the emphasis in part on those who may be less included.
On your point about the doorstep salesman of the 21st century, I do not think that is a question for us to answer. When I was talking about the primary advice route under the RDR, it was because a number of firms have said to us that they would like to provide a more straightforward form of financial advice to their customer, either in their branches or through call centres or the internet to give people straightforward advice that might or might not lead to them purchasing one or a number of straightforward, reasonably simple products. That is probably the closest equivalent to the direct sales forces of 25 years ago. Whether that happens, is successful and leads to a mass market is down primarily to the providers of those types of advice. We are happy to facilitate that if we think that it can lead to sufficient standards of consumer protection, but it is down to the suppliers to make that work. We are not in the position of inventing direct sales forces to go out there and do what you suggest; that is not the job of a regulator. It is for the industry to decide how best it can reach and satisfy the needs of those customers.
Hector Sants
I think it is worth emphasising the points that Clive has made. We are here as a regulator; we are seeking to work with the industry to help develop solutions to some of the challenges that we all see to produce a more effective and efficient marketplace. However, at the end of the day we are here as a regulator and as a facilitator. The actual activity on the ground has to be taken forward by the industry.
John Tiner
Bearing in mind Callum’s quite right caveat at the beginning, we have tried very hard to try to reach out to people on the margins of society. From the very beginning, we created an innovation fund. We have put a reasonable amount of money into that fund and invited organisations who represent such people to bid for money to explore new ideas, projects and ways of helping these people. If you look at the work we have done with the housing associations and charities that represent former offenders or people recovering from cancer, there are a whole range of different initiatives out there to touch people not in the workplace, not at school, and not in further education but who nonetheless need the sort of help you describe. I think that is the route to reaching many of these sorts of people.
Callum McCarthy
I would also mention our efforts, which have been very successful, to develop Sharia compliant retail products. These were designed in part to ensure that there was not social exclusion based on belief. That was one of the reasons why we are very pleased with the progress we have made on that basis.
I am conscious that we have reached the end of the time for questions. I am grateful to everybody who has raised questions and the way in which it has been done. Thank you very much indeed.