MR ADAM PHILLIPS, MR NICK PRETTEJOHN, MR SIMON BOLAM AND MR PETER VICARY-SMITH

15 DECEMBER 2008

  Q40  Mr Brady: Mr Vicary-Smith ... ?

  Mr Vicary-Smith: No. The only information I would have would be of an anecdotal nature. There what we see is—across the whole area of credit agreements, of advice given and so forth—precious little improvement in the overall standard of the industry. However, that is not specific to credit agreements; it is a general tale of woe about the industry and its progress.

  Q41  Mr Brady: Can I suggest that it may be worth a more detailed look at that?

  Mr Vicary-Smith: Certainly.

  Q42  Mr Crabb: Mr Prettejohn, we hear what you are saying about the Treating Customers Fairly initiative being welcome in principle; but would you say that the burden entailed in complying with TCF for small firms is an unwelcome burden at a time of economic downturn?

  Mr Prettejohn: I think that all firms, as you say, thoroughly support the principles of Treating Customers Fairly. I would say that the FSA's definition of the outcomes around Treating Customers Fairly was a very useful contribution to the thinking of the whole industry and has made a big difference to firms, large or small. I will perhaps let Simon comment on the smaller firms, if I may.

  Q43  Mr Crabb: Perhaps you would just respond to my question about the burdens involved with complying with TCF. Is that an unwelcome burden at this time for small firms?

  Mr Prettejohn: In general, our criticism of the Treating Customers Fairly initiative was that it applied a one-size-fits-all approach to the industry, rather than concentrating on the areas of greatest risk. Whether that is actually for a larger firm or a smaller firm, or a particular issue within a large or a small firm, we feel that all firms were treated equally and the same approach and process was applied to each. Almost by definition, therefore, the burden would seem on some firms, large and small, to have been too high.

  Mr Bolam: As far as small firms are concerned, there is a basic concept within them that their very survival is dependent upon treating their customers fairly; that if they did not treat their customers fairly, then their local reputations would soon be damaged and their businesses would contract. The difficulty over the volume of work as far as small businesses are concerned is this. I run a small general insurance-broking business in Edinburgh. This is my TCF policy. It is 16 pages long. This is what a well-run business should have in order to prove compliance. It is the way you have to extract management information to show that you are actually physically treating your customers fairly, even if you think you are. It is the extraction and the documentation of some of that information, or all of that information, that is quite time-consuming—when people in smaller firms are also trying to run the business, be the financial director, do the banking, and all the other responsibilities that you have within a small business. It did seem a bit disproportionate.

  Q44  Mr Crabb: Given that the very survival of these firms would be at the forefront of many of their managers' minds at this particular time, do you think that firms should be given more leeway in how they conduct their business?

  Mr Bolam: I very strongly support the FSA's more principles-based regulation, which gives that flexibility as you move away from rules—whereby a firm can actually sit down and work out, in a more flexible way, the manner in which they should be running their business. That certainly helps smaller firms run their businesses, as long as their brains are focused sufficiently to understand that they still have to prove that they are complying with the regulator's requirements.

  Q45  Mr Crabb: So more leeway in terms of complying with TCF?

  Mr Bolam: I would welcome that in terms of smaller businesses, yes.

  Q46  Mr Crabb: Mr Vicary-Smith, what evidence are you seeing of any deterioration in firms' commitment to the Treating Customers Fairly agenda at this time?

  Mr Vicary-Smith: I think that it is less a question of the deterioration of commitment but rather that, when you measure who is doing it, it is such a small number that it is hard to think of deterioration. I would argue that, if anything, Treating Customers Fairly is even more important for the consumer in harder times, because the financial pressures on firms to cut corners are greater. It is not something that we can select as being only for the good times; it applies all across the board. I would not support the idea of leeway, therefore. I think that there are some important dimensions that the credit crunch raises about TCF, for example on mortgage repossessions, which raise new issues that were not really thought of at the beginning. For example, if the FSA is finding that firms are not treating customers fairly on mortgage repossessions, it will not be good enough if their home has been repossessed and they find out that they should have been given some information before that happened. We therefore need to see a more up-to-date and a more transparent process of regulation through it. It has to work in the bad times as well as in the good times.

  Q47  Mr Crabb: Mr Phillips, would you like to comment on the implications of the current economic downturn on TCF?

  Mr Phillips: There is a real risk that firms will abandon the efforts that they have been making to treat customers fairly, because they will inevitably be forced to focus on prudential issues, and that things could get worse. We have no evidence of that yet. We have asked the FSA to provide us with evidence of what they observe going forwards, but there is a real risk that things could get worse—yes.

  Q48  Mr Crabb: Coming back to Mr Bolam, if I may, the FSA's December deadline requires firms to be able to demonstrate that they are consistently treating their customers fairly. Perhaps you could describe for us what this will entail for a typical small firm?

  Mr Bolam: First of all, a small firm should have its policy in place, similar to the example I showed you from my own business. It means that you need to collate information that is seen as relevant, such as how many complaints you have had; how many cancellations you have had; checking files to make sure that the process within the office in terms of giving advice to consumers is good and robust; making sure that your staff, in terms of competence and training, are up to scratch. There are a large number of measures that need to be down in writing so that, if the FSA walks through your front door, they can actually see that you have done it. It is that documentation area that takes up a lot of time.

  Q49  Mr Crabb: What if firms do not bother about complying with this by December? What will be the consequences for firms of just not doing it at this time?

  Mr Bolam: We accept that that may happen. As a Panel, we obviously would be very against it; but the FSA are doing their best, with the resources they have, to try and see 11,500 smaller firms over a period of three years. It would be great if that could be accelerated, but there are cost implications.

  Q50  Mr Crabb: Mr Prettejohn, your Annual Report expressed disappointment at the FSA's progress on the issue of consumer responsibility and looked forward to the publication of a discussion paper from the FSA in late 2008. Can you update the Committee on what progress has been made on this issue since then?

  Mr Prettejohn: We have seen a draft discussion paper from the FSA at a recent Panel meeting. We think that the notion of consumer responsibility is extremely important. Efficient and effective markets work best when you have empowered and well-informed consumers, and the notion of consumer responsibility actually equips consumers better in their interactions with firms and also, if the worst comes to the worst, if they have complaints or they have to go through a process of law. Having empowered consumers who are conscious of their responsibilities, therefore, seems to us to be a very good defence and protection for the consumer, as well as also making sense for firms.

  Q51  Mr Crabb: Mr Vicary-Smith, given the level of financial capability held by the public, what do you believe is the appropriate level of consumer responsibility?

  Mr Vicary-Smith: Clearly consumers have a responsibility to act honestly, to declare information openly, to provide information that is asked for by advisers, and to deal in an honest way. What is not rational, I think, is to expect a consumer to be given a lengthy and complex document, drafted by lawyers and teams of investment experts and then to say, "As you have had your document, it is clearly your responsibility". I think that the key thing here is what is going to persuade consumers to engage in this marketplace. What is going to get people to invest, to save, to take out protection, and so forth? That will be when they feel that they are being treated fairly and they are being looked after and looked out for. Telling people "It's your responsibility. You had the document. It's your fault" will not get them to play in this marketplace—and that is what society desperately needs. I would say that pushing too far on a caveat emptor principle beyond "You must deal truthfully" raises real risks that consumers will simply disengage from the industry and will go further back to where we were.

  Q52  Mr Crabb: Are you satisfied so far with the progress and the tone that the FSA has adopted on this?

  Mr Vicary-Smith: I have not seen things yet with which I am dissatisfied. I am sorry if that sounds rather cautious and negative. This debate has raged on, and I have had conversations with too many in the industry who have wanted to pass so much responsibility onto a consumer that it looked like an abdication of responsibility from the firm, and so I am nervous about this debate and where its implications could lead consumers. Consumers need to be absolutely engaged and we want to make consumers more empowered. We tell people to shop around; we tell them to negotiate; we give them as much advice as we can; but there is a limit to what you can really expect an individual consumer to do, in all the other things they have to do in their lives.

  Mr Phillips: I would just like to add to what Mr Vicary-Smith has said. The law is fairly clear that people cannot be required to understand what they read. I think our concern is that the FSA may try to circumscribe that in some way, in order to provide the industry with more certainty about redress claims. I think it would be a great pity if they tried to do that and it would work against, as Peter says, the interests of the consumer and, ultimately, the interests of the industry.

  Q53  Chairman: Mr Bolam, this may not be for the record, but you did say that the FSA ensure that you "physically" treat your customers fairly. You would not think of bashing them on the head, would you?

  Mr Bolam: No!

  Q54  Chairman: Just in case! Eleven and a half thousand firms over a three-year period—is that not a tall order? Are you not afraid of that figure?

  Mr Bolam: It seems like a tall order but I have heard nothing from the FSA to indicate that that target will not be met.

  Q55  Sir Peter Viggers: Is the FSA deadline for full implementation of the Retail Distribution Review by 2012 realistic and achievable, and what are the problems that they face?

  Mr Bolam: We have two IFA representatives on our Panel. They have been working very closely with the FSA in terms of developing the RDR up to this particular moment in time. They are reasonably optimistic that this deadline can be reached. There are obviously certain things that are cropping up, which might cause certain delays, such as IFAs struggling at the moment in terms of getting business as the economy slows down. As far as our Panel is concerned, we are absolutely behind the RDR. We feel that, as the thing develops, we should make sure that such things as professional standards are realistic; that we are not, in the process, going to bring another layer of costs on top of what we have already; that the professional standards are achievable. The one thing at the end of the day that we do not want to see is a meaningful contraction of advice to consumers, good-quality advice, in the small towns of the country where the people need that type of advice. Hopefully it will be achievable, but there are certain things there which could slow the process.

  Q56  Sir Peter Viggers: Mr Phillips, the Consumer Panel has been concerned, among other things, about complexity. Would you like to expand on that?

  Mr Phillips: We have been encouraging the FSA to make sure that it has the details sorted out. We have been pleased by the general direction of movement, although we found that the latest statement issued by the FSA was a bit of a step backwards; but nevertheless they are moving forwards. The particular issue that concerns us is to make absolutely clear to the consumer whether or not they are receiving independent advice and whether the person talking to them is actually working in their interests or in the interests of their employer. We think that the current approach of the FSA to call this "sales advice" is not a very helpful approach. We hope that the research they are doing will lead them to something better. We would like sales to be called "sales".

  Q57  Sir Peter Viggers: And from the point of view of the Practitioners Panel, Mr Prettejohn ... ?

  Mr Prettejohn: I think that it will be a difficult transition. It is challenging in terms of its timescale, as Simon described. There is a risk in the short run that there will actually be less advice available to UK consumers through the transitional period, and I think that is a very considerable concern. It is already the case that the regime around advice at the moment means that only the better-off and the best-off can really afford the financial advice that many people need; because, whatever your income and your financial position, life is becoming more complicated and the financial issues are becoming more difficult to disentangle. More people need advice, therefore. Unfortunately, there may well be less, because a number of the advisers who are advising at the moment may choose not to apply for the professional qualifications that will be required and therefore may leave the market. In the short run, therefore, there may be less advice.

  Q58  Sir Peter Viggers: Do you perceive that practitioners are being sufficiently alive and alert to the need for change?

  Mr Prettejohn: I think that most practitioners, the overwhelming majority of practitioners in fact, would say that they welcomed the change and, in particular, the raising of professional standards.

  Q59  Sir Peter Viggers: What about the employment prospects of the IFAs throughout the United Kingdom?

  Mr Phillips: We are concerned that there should continue to be an independent sector in advice which is thriving. The issue for us is that the people who are doing it have to be giving good advice and to be well trained.