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Speech by Vernon Everitt, Director, Retail Themes, FSA
CML Northern Ireland Annual Lunch
5th June 2007

Good afternoon. Thank you very much Derek for the introduction and for the kind invitation to speak today. We have worked with the CML on a wide range of issues over a long period and we are, as always, grateful for your insights and support.

The UK mortgage market is one of the most dynamic and competitive in the world, with £1.1 trillion of mortgages currently outstanding. Your industry allows millions of us to realise the dream of owning our own home. But while market conditions are currently good and the most likely scenario is for this to continue, there is always a need to be prepared for the downside.

Looking at it from a consumer perspective, favourable economic conditions have enabled people to take on additional debt, much of it secured on property. And recent surveys have provided clear evidence of the bouyancy in the market in Northern Ireland. Halifax's regional house price survey in April found that the top ten fastest rising property hotspots are all in Northern Ireland. Craigavon, Newtownards, Newry and Larne have all experienced annual increases in property values of over 50%.

Although there are signs that the UK housing market is coming off the boil, the question is, to what extent are consumers prepared for the consequences of a weaker economic environment? And what does the answer imply for your industry? With recent base rate rises, the ratio of payments to income is creeping up and many fixed-rate deals are coming to an end, potentially increasing the vulnerability of both borrowers and lenders. So given this climate, all players in this market clearly need to think through their decisions very carefully indeed.

Against that background, I'd like to discuss three things with you today: what we are doing to help improve consumers' capability to handle the much greater personal responsibilities they face in managing big financial decisions and the plans we have to extend the reach of that help in Northern Ireland; the steps that all financial services firms must play in treating customers fairly and in helping consumers make sound decisions; and the priority thematic work we are conducting on mortgage debt and affordability.

Context

But before I delve into the specifics, I want to briefly put this in the context of the FSA's overall agenda in the retail markets and, in particular, on the strategic aim of helping consumers to achieve a fair deal.

In our view, four things need to happen to bring about improvements in the way in which the retail market works:

• consumers need help to become more capable and confident in the decisions they have to make;
• those consumers must receive, and use, clear, simple and understandable information from the industry and have access to clear and impartial information from the FSA;
• firms must be soundly managed and ensure that they treat their customers fairly; and
• we must deliver a proportionate and risk-based regulatory regime.

So the issues we are discussing today form part of a coherent overall strategy designed to bring about long-term and sustainable change to the benefit of consumers and the market more generally.

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Financial Capability

As I've mentioned already, consumers today need to take much greater personal responsibility for a wide range of financial decisions. These include making sensible choices from the very extensive range of mortgage products on offer, making provision for retirement, financing higher education and having access to a plentiful supply of unsecured credit. Doing so requires confidence and an appreciation of the risks and opportunities embedded in the choices made.

So how are we helping consumers become more capable and confident? The National Strategy for Financial Capability, led by the FSA, is based on priorities highlighted by a groundbreaking survey we published last year into the levels of financial capability in the UK. This has helped guide our work and ensure that we target the right groups, with the right information.

This survey confirmed that we are storing up big trouble for the future unless we take urgent steps to put things right. The headlines:

• too few of us plan ahead, either for retirement or for an unexpected expense or drop in income;
• too few of us understand financial products or shop around to find a good deal;
• the under 40's are required to take much greater personal responsibility for their financial decisions but are less capable to do so than their elders; and
• although only a relatively small proportion of people are experiencing problem debt, they are often very seriously affected and many more consumers could be tipped into difficulty in the event of a deterioration in economic conditions.

In Northern Ireland, we found that over 68% of people agreed that they didn’t know enough about pensions and investments. And nearly 80% of equity ISA holders in Northern Ireland did not understand that the performance of their investment depended on the performance of the stock market. All in all, pretty sobering statistics.

This is why everyone involved in the National Strategy is working so hard to deliver long-term and sustainable change in consumers' financial capability, and why the FSA alone will spend around £100mn on a wide-ranging programme over 5 years to reach at least 10 million people with personal finance education and information. This issue is now also firmly on the agenda of the UK Government which produced its own complementary plans last year. These include analysing how generic financial advice can be made more widely available and what more can be done to embed practical personal finance education in schools.

The current FSA programme already reaches your current and future clients through schools, colleges, universities, young people outside of education, employment and training, adults through their workplaces and at other points when money becomes a particularly big issue e.g. through new parents.

We recognise that, to make a real difference across the UK, it is imperative to work closely with the organisations in Northern Ireland, Scotland, Wales, and England who know their clients best. This means genuine partnership with their administrations, existing voluntary and advisory networks and firms such as yours who know what it is like for consumers at the coal face.

The Consumer Council for Northern Ireland and other partners in Northern Ireland have played a key part from day one. For example, we have been working with Council on the Northern Ireland Strategic Partnership. As part of this, we will be funding a post that will enable them to take their strategic partnership and policy work on financial education in Northern Ireland forward. This post will provide the focus for coordinating the FSA-led strategy with other priorities in Northern Ireland, for example the Lifetime Opportunities Strategy, being led by the Office of the First Minister Deputy First Minister.

We are also funding two posts with the Council for the Curriculum, Assessment and Examinations (CCEA) to work with teachers and schools across Northern Ireland to enable them to confidently deliver lessons that genuinely prepare young people for the financial challenges they face. These posts will help CCEA implement the curriculum changes that from 2007 will give financial capability a higher profile in schools in Northern Ireland.

And looking at our work outside schools:

• 10 employers in Northern Ireland, including BT, the BBC and the Child Support Agency, are offering our "Make the Most of Your Money" materials and seminars to their employees in their workplaces.
• Northern Bank has supported us by seconding one of their managers, Paula Downey, to our workplace team. And as Paula's secondment comes to an end soon, we are looking for a new addition to the team who will work with employers in Northern Ireland - so do stop me later if you think that your firm would be interested in helping us out.
• Belfast Institute and Castlereagh College are taking part in our work to help young people attending Further Education Colleges develop better financial capability.
• Northern Ireland Citizens Advice Bureau are involved in our young adults programme focusing on those who are not in education, employment and training. They have delivered training to voluntary and statutory youth workers in Northern Ireland to equip them with information they can use in their work with young adults, such as dealing with debt, budgeting, credit and banking and where to advise young people to get further help and information.
• On 29th June we will be holding a roadshow at the Jordanstown Campus of the University of Ulster to explain to all higher education institutions in Northern Ireland how our "Money Doctors" programme helps students at university take control of their finances.
• One of the voluntary organisations to be awarded funding in the first round of our FSA Financial Capability Innovation Fund was Omagh Independent Advice Services, who created a ground breaking resource, providing helpful financial information for those dealing with cancer.
• Ulster Bank are participating in a pilot programme to distribute our new consumer information guides via their branch networks, and we are also in discussion with Northern Bank about undertaking a similar initiative with them.

So a huge amount of partnership working in Northern Ireland that is bringing real benefits to your consumers. But we mustn't kid ourselves. Bringing about the degree of change necessary in financial capability will take a generation or more. For our part, we are in this for the long haul and we will be relentless in keeping up the momentum.

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Treating Customers Fairly

But, of course, consumer capability is only part of the story. Just as importantly, we are also seeking to change firms' behaviour to achieve fairer outcomes for their customers. The CML plays an important role here in forming a valuable part of our Consultative Group on Treating Customer Fairly (TCF). This programme forms a key element of our move to a more principles-based approach to regulation.

Last July we articulated the outcomes we wish to see delivered from the TCF programme:

• Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. Responsibility for TCF rests with the senior management of firms. It is their responsibility to ensure that TCF is delivered throughout the organisation, from board room to branch or call centre.
• Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. There are, for example, a number of mortgage products that may be suitable for only a limited number of consumers, such as high income ratio and high loan to value products, equity release products and sub-prime mortgages. So, when designing a new product, lenders should, of course, consider which types of consumer the product is likely to be suitable for.
• Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. Customers need to understand the characteristics of the product they are buying through a combination of improved consumer understanding of financial services and firms ensuring that their materials are clear and jargon free.
• Where consumers receive advice, that advice is suitable and takes account of their circumstances. Going back to sub-prime, since there are higher levels of commission for those products, we would expect firms to take sufficient steps to mitigate the risks that advisers highlight these products for customers whose needs can in fact be met by a prime product.
• Consumers are provided with products that perform as firms have led them to expect and the associated service is both of an acceptable standard and as they have been led to expect. Of course, firms cannot be blamed for movements in the market which affect the return on investment products but they are responsible for the expectations which customers are given. One area of recent concern for us was the imposition of mortgage exit administration fees which were charged at a level which the customer could not have expected when they took out the product. We are grateful to the CML for the part it played in helping to achieve an industry-wide solution to this problem.
• Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint. The National Consumer Council found that switching mortgage products rose by 158% between 2000 and 2005 so there is little to suggest that there are significant barriers to switching in this market. However, it must be noted that this is against the backdrop of a booming property market. We will watch with interest as the market deals with any falling demand as a result of higher interest rates.

As part of the Treating Customers Fairly initiative, we have also looked at the relationship between product producers and distributors and their respective responsibilities for TCF.

This work will be of interest to mortgage lenders and their intermediaries. Our starting point is that customers are entitled to the same standards of fairness whether they have bought their product from the provider or via an intermediary.

We set out our view in a Discussion Paper we published last September and we will be feeding back to the industry very shortly.

In line with our principles-based approach, we want to avoid being overly prescriptive. We also want to allow for a wide and evolving range of existing market structures without creating pages of detail to cover all eventualities. So our approach is to articulate desirable outcomes without detailed instructions about how to achieve them. We see a role here for trade bodies to develop industry specific guidance about where responsibilities are divided between the different firms in the distribution chain.

I would like to take this opportunity to reassure mortgage lenders that we do not expect you to police your distributors. We do not intend that a firm should take on the regulatory responsibilities of other firms in the distribution chain. We expect that all firms in the supply chain should consider the impact of their actions, or inactions, on the end retail customer. This might affect how firms manage their relationships with each other, but this is a world away from policing their compliance with regulation.

So what progress has been made in bringing TCF to life? We recently completed a general assessment of progress by the industry against our end-March deadline for all firms to be at least "implementing" TCF in a substantial part of their business. We were pleased that an encouraging number of firms met the deadline. However, it is important to note that to meet this deadline firms needed to show they had allocated appropriate resources and responsibilities, developed plans and processes, and created capability to meet the TCF principle. This does not necessarily equate to the delivery of the fair treatment of customers.

It is therefore essential that senior management in firms make embedding TCF throughout their business a top priority. To sustain momentum we have set further deadlines. By the end of December 2008 all firms are expected to be able to demonstrate to themselves and to us that they are consistently treating their customers fairly. In order to be able to satisfy this deadline, firms will need to have appropriate management information in place in order to provide objective evidence of this happening on the ground in practice. We expect that by the end of March 2008 firms will have the appropriate management information or measures in place, and we will be publishing further material to help firms in this area in July in our publication on Culture, and in the Autumn when we will be reporting on the progress of firms against TCF outcomes. But the major point to stress here is that rubber is beginning to hit the road on TCF. It must be made a practical reality by the deadline and it will remain a top priority for the period ahead.

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Debt and Affordability

TCF is also the overarching theme that connects our ongoing thematic work on debt and affordability.

With consumers taking on larger credit commitments, affordability has become a growing issue in Northern Ireland and, of course, more widely. In particular, the amount people are prepared to borrow, and providers are willing to lend to them, has increased as house prices continue to rise.

We are, as you would expect, taking these issues seriously and have made debt and affordability one of our priorities. We have planned a programme of what we call "thematic work" in this area which concentrates on ensuring that firms are considering affordability and responsible lending properly. Initially we are looking at this in respect of more vulnerable groups: the sub-prime market, interest-only mortgages and those taking a mortgage into retirement.

The outcomes we want to achieve here are:

• an industry that applies appropriate lending criteria including taking account of affordability;
• consumers having a better understanding of the risks to which they may be exposed when they buy debt products; and
• when advice is offered, it is appropriate to the consumer's needs.

As the cost of homes increases, some consumers are opting for longer mortgage terms in order to reduce their monthly payments and in some cases their mortgage may extend into retirement. There is nothing inherently wrong with any of that. But we are interested to see whether firms consider affordability throughout the term of the mortgage, taking into account any reasonably anticipated changes.

The rapidly growing sub-prime sector currently represents around 8% of total mortgage lending. As I mentioned earlier, margins on this type of business are higher than on prime business, so we want to make sure that consumers are not being offered sub-prime rates when they could be eligible for much better prime rates.

We will communicate our overall findings from this programme around the end of June. This will tie in with further targeted messages to consumers following our "mortgageslaidbare" campaign last year. There will be a mortgage focus to our Moneymadeclear consumer website during June and July. This will promote our information and guides that help consumers get a head start when getting a mortgage, and which empowers them to ask the right questions, compare mortgages through our product tables and thus get what's right for them. We also have online interactive tools, such as a mortgage and budget calculator, to help people work out what they can afford. Our site receives around 2.5 million visits a year and we know that it helps consumers make more informed decisions. We are very happy for you to link to it from your own websites or even for you to host our tools.

Debt and affordability will continue to be a focus of our thematic work into the second half of the year. We will be expanding the scope to look at all types of people taking out mortgages, not just vulnerable groups. We aim to publish our findings on this second stage at the end of the year.

Mortgage Effectiveness Review

In addition to our thematic work to look at whether the standards we expect are being achieved, I should also mention that we are taking an overview and considering whether the mortgage regime is delivering the intended outcomes for consumers.

In the first stage of the Mortgage Effectiveness Review, we focused on the mortgage process up to the point of sale, looking particularly at disclosure and advice. Our findings led us to conclude that the market is moving in the right direction, which is good news. The prime mortgage market remains competitive; and consumers find our disclosure documents helpful for shopping around and identifying the risks and features of particular mortgage products.

In the second stage, we will focus on areas where the potential for consumer detriment is higher, such as the sub-prime market as well as in lifetime mortgages and how lenders treat borrowers in arrears.

This work will include consumer research to find out more about consumers' experience in these areas, and will be supported by analyses of market data and results from our other thematic work. Our findings here will help inform our thinking about how we might apply a more principles-based approach to our mortgage rules, which will also take account of the European Commission's forthcoming White Paper on mortgage credit.

The results of Stage 2 of the Mortgage Effectiveness Review are due to be published in the first quarter of 2008.

Summary

As I mentioned at the outset, there are more challenging times ahead and so I hope that you have found this a useful summary what we see as the priorities for you and us in the period ahead. Can I leave you then with four final thoughts:

• what will you do next to ensure that "treating your customers fairly" is effectively embedded in your organisations, and what management information will you use to test whether this is actually happening on the ground?
• how are you going to ensure that TCF continues to be applied effectively against a background of rising debt and challenges to affordability?
• how can you help your customers to gain access to the straightforward and jargon-free information they need to make their financial decisions?
• are there elements of the financial capability programme that you would like to work with us on? If so, please contact me via haley.couzens@fsa.gov.uk I would be delighted to hear from you.

Close

Thanks again for the chance to discuss these issues with you today. We value hugely our relationship with the CML and the many voluntary organisations, financial services firms and consumer bodies in Northern Ireland that are so important to the everyday lives of people here. We look forward to building on those relationships, and creating new ones in the years ahead.

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