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

15 DECEMBER 2008

  Q60  Sir Peter Viggers: Lord Lipsey was robust in his view of the expression "sales advice". He said that it was "devoid of meaning". What is your view on that?

  Mr Phillips: Absolutely. I concur with that. We have a very similar concern to the practitioners: that advice should still be available to consumers. Our concern is that, if it is advice, it should be clear whether that advice is independent or whether it is biased in some way, and that that should be clearly expressed in the way in which the person describes themselves to the customer.

  Q61  Sir Peter Viggers: Do you think that the RDR framework is sufficiently clear on this point?

  Mr Phillips: At the moment, no, I do not think it is; but we hope that the FSA will continue to listen to the industry and to the consumers, and to get them to somewhere which is better.

  Q62  Sir Peter Viggers: On the very difficult issue of remuneration and bias, commission-based IFAs have pointed out that people do not want to pay a fee upfront. What is your view on this difficult issue?

  Mr Phillips: I think that the IFAs are right in this. I think that some people are prepared to pay a fee and that most people would like to see the charge deferred in some way. There are ways of doing that, however, which do not increase the customers' costs and which give them some control over the service that they are getting from their adviser.

  Q63  Sir Peter Viggers: On a commission basis?

  Mr Phillips: It would not be done as commission; the money has to be recycled in another way. However, the effect would be that, instead of the provider of the product buying the adviser by offering them commission, they would provide funding for the customer to buy the product.

  Q64  Sir Peter Viggers: There would be transparency on this basis?

  Mr Phillips: There should be transparency.

  Q65  Sir Peter Viggers: Would you regard transparency as essential?

  Mr Phillips: I think that transparency is essential. I also think that the regulator has to get involved, to make sure that the fees are reasonable. One of the possible outcomes is that fees could rise, because customers, as has already been pointed out, do not shop around a lot in this market.

  Q66  Sir Peter Viggers: Mr Vicary-Smith, your memorandum refers to some mystery shopping which found that bank staff are not always clear in describing whether their advice is free. How should the RDR address this issue?

  Mr Vicary-Smith: I would first like to say that I think the thrust of the RDR is very good, in the right direction, and we have been very supportive of it. The FSA has done a lot of good work in pushing through the RDR. I think that the adviser remuneration part has perhaps been one of the more useful elements for consumers. Part of the problem is that, in our mystery shopping exercises, people have been told for a long time that the advice is free. It is not; it never has been; nor should it be; nor will it ever be. In fact, it sounds rather like current account provision to me. However, that is what people have been told: that the advice was free. Therefore, we are now having to tell people that they pay for advice. Well, they always have done. The key thing is that, in paying for advice, people are clear what they are paying, what they are paying for, and that they are able to shop around and compare the prices being charged by different people. I think that the RDR will help in that regard, because this has been a very obfuscated area for too long. Could I say one other thing? It is the point about the level of charging, which I think is an absolutely key one. We see some product providers currently allowing advisers to deduct up to 10% of a consumer's lump sum investment in advice fees. We think that is far too high a level. There does need to be some way that guidance can be given—but that is not an appropriate level of deduction.

  Q67  Mr Breed: Mr Vicary-Smith, I was intrigued by the responses about treating customers fairly. Is that what we used to call "integrity"?

  Mr Vicary-Smith: Treating customers fairly? Yes. Certainly it does seem bizarre that you have to tell them. I cannot imagine that if you had Terry Leahy here, he would need to be told to treat his customers fairly in that way. I think that it is the indicator of where we are. We are where we are in terms of the industry and how it is regarded by customers.

  Q68  Mr Breed: Which, on that basis, is not very good.

  Mr Vicary-Smith: The performance of the industry has not been very good, but what is important is that we all ensure that performance improves. I think that the Treating Customers Fairly initiative is one way in which consumers could be helped to have a better level of confidence in the industry with which they have to deal.

  Q69  Mr Breed: It seems to me that the extraordinary growth in financial services regulation over the last few years has been matched only by the number of disasters, failures and scandals, which have cost taxpayers and individual purchasers of products millions, if not billions, of pounds. What does that say about regulation in the industry?

  Mr Vicary-Smith: One of the things it does say is that the notion that provision of information is a substitute for good advice, for treating people fairly and for good regulation, has been disproved. Too much regulation has focused on firms having to tick a box and say, "We provided this piece of information". You get your statement of key facts on your mortgage and you have to confirm that you have read it—which of course very few people ever do. You just tick the box at the bottom and say that you have. Moving to a Treating Customers Fairly initiative has the potential to reverse that, but only if firms treat it seriously and if the FSA continues to devote the resources necessary to make it work.

  Q70  Mr Breed: From what you have already said, I think that you agree with the FSA that this Retail Distribution Review is, as they say, a "golden opportunity" for the industry. You all subscribe to that view, do you, that it is a golden opportunity?

  Mr Phillips: Yes.

  Mr Prettejohn: Yes.

  Mr Bolam: Yes.

  Mr Vicary-Smith: Yes.

  Q71  Mr Breed: On that basis, Mr Prettejohn, you will be aware of the survey done by Standard Life, which indicated that if these proposals went through, 16% would basically give up and not be prepared to go ahead. A vast majority of those are likely to be in places like Cornwall, which I represent—a lot of rural areas and small places. Therefore, while it may be only 16%, it may be specific to certain areas. How realistic is 16% and how worried are you that we would see an absolute flight out of this by the smaller firms?

  Mr Prettejohn: I am extremely worried about the level of advice that will be available to the UK consumer. I think that financial advice is in danger of becoming ghettoized amongst higher net worth individuals, and I think that presents us with a major problem. I think that there are a number of IFAs who will withdraw from the industry rather than go through the process of getting professional qualifications. We all applaud the raising of professional standards. It is a necessary step but does carry with it a risk, through that transitional phase. The answer for many people will be if we can come up with a model, with the FSA, for guided sales, which enables consumers to get some more information. When you call it "advice" you start to get into a difficult area, and hence the problem in coming up with a model. It is really important, however, given the complexity of people's lives and the financial decisions they face, that they can get something more than execution-only sales but do not necessarily have to go through the full advice process that higher net worth people can afford.

  Q72  Mr Breed: Mr Bolam, some IFAs believe that this is just a means by which the FSA, which is very friendly with the banks, can basically get rid of all the competition, confine it to the big banks, and reduce the numbers of firms they have to regulate. It will therefore be a nice, cosy arrangement between the FSA and the banks to get rid of these wretched small IFAs that they have to keep looking at, and hand something to the banks. Do you believe that?

  Mr Bolam: I can assure you that we are fighting on behalf of the smaller businesses to ensure that there are IFAs in Cornwall and the various other parts of the UK. The outcome of this has to be proportionate. There still has to be a supply of good advice to people. The way in which we seek to achieve this has to have an examination system that, yes, works, but which has to be proportionate in such a way that the people in your constituency do get access to advice. The one thing that we have perhaps omitted to highlight in this process is that there is also work in parallel to this. It is a stream of work that is looking at the prudential requirements of the IFAs and what capital adequacy they should have. That also represents a potential threat to the supply of firms throughout the country.

  Q73  Chairman: Mr Prettejohn, you have mentioned people leaving the industry. That is perhaps a bit unfortunate. However, I have chaired quite a number of sessions on confidence in the retail industry and I well remember examples, such as the split capital investment trusts, the precipice bonds, the endowment mortgages—which were pretty scandalous situations. Surely we cannot focus on people leaving the industry? It is restoring the confidence in and the integrity of the industry that is of the utmost importance. There is therefore only one way to go here.

  Mr Prettejohn: I think that you are absolutely right. We would support very strongly the implementation of higher professional standards. Implementation of those standards may, in the short run, result in some people who do offer good-quality advice leaving the industry because they do not want to go through the process of getting the qualifications, because they are at the end of their career. However, I would fully accept your argument that we need higher professional standards.

  Q74  Chairman: Mr Phillips, your Annual Report labelled the FSA's work on with-profits as "weak". Our Committee went further, in calling for a "reopening of the debate about the overall regulatory system for with-profits funds" in our Inherited Estates report. What progress has the FSA made in the last six months?

  Mr Phillips: We were very pleased when this Committee took this up and we were somewhat disappointed by the FSA's response. We continue to be very concerned about the governance of closed and quasi-closed with-profits funds. We would like to see an objective and independent test of the fairness of the principles and practices of financial management that these firms are using and not just, as the FSA put it, better communication with policyholders.

  Q75  Chairman: Mr Vicary-Smith, you have also made comments on that.

  Mr Vicary-Smith: I would go further than Adam. I think that the FSA's response to the report, which I thought was an excellent report, was woeful. At a time when bonuses are being slashed and swingeing exit costs are being imposed, with-profits policyholders who speak to us are dismayed by the FSA's failure to stand up for their interests. We are very sceptical of the value of the systematic information-gathering exercise the FSA has undertaken. Sarah Wilson, the director responsible, said, "Our starting point in conducting the review is not that significant changes are needed to the regime". I do not think that was the view of this Committee when it produced its report. It certainly is not our view that significant changes are not required to the regime. This is a very clear issue, where we believe policyholders' interests are not being dealt with fairly; in fact, I think that the FSA needs to get a grip on it.

  Q76  Chairman: If the FSA is unwilling to conduct a root-and-branch review of with-profits regulation, what are the most important aspects of their work which we should focus on as a Committee?

  Mr Vicary-Smith: Within the with-profits area?

  Q77  Chairman: Yes.

  Mr Vicary-Smith: Stopping companies charging shareholder tax boosts in inherited estate; stopping firms taking further money out of the inherited estate to pay mis-selling claims—which of course is being looked at at the moment; the issue of Norwich Union's phasing of its special bonuses—which I think is an appalling example of a large firm not treating its customers fairly; and also, crucially, ensuring that the with-profits committees stand up for policyholders, rather than simply rubber-stamp the decisions of companies. We have said for a long time that the with-profits committees should not be appointed by the firms concerned but should be appointed by the FSA, because if you appoint a committee from the firm that removes the incentive of that committee to stand up to the firm.

  Q78  Sir Peter Viggers: I was going to ask about the "regulatory black holes" that you refer to in your submission, Mr Vicary-Smith. I see in the memorandum that the FSA submitted to us they say, "Historically we have not made comprehensive rules governing the conduct of retail deposit-taking business because they have been covered by the Banking Code Standards Board". Some people may have been rather surprised that the FSA had not been more closely involved in this area before. Do you recommend that the FSA should take control of retail banking regulation?

  Mr Vicary-Smith: I would say that regulatory black holes need to be closed. Purely closing regulatory black holes will not remove the risk of detriment to consumers. To my mind, the point is this. If the FSA take over this area, will the outcome for consumers be better or not? I do not mean that to sound evasive, but there are some things within the Banking Code where there is a good degree of protection given to consumers. For example, on issues of online fraud and card usage, there are some good restrictions in there. We would like to ensure that the taking-over of regulation of this area ensures that the positive elements of protection are carried through, and that any rules drawn up are done so in conjunction with consumer groups and others, to ensure that they genuinely serve the consumer interest.

  Q79  Sir Peter Viggers: Mr Prettejohn, what benefits does the self-regulatory nature of the Banking Code bring? Do you think that these are outweighed by the obvious disadvantages—their lack of teeth?

  Mr Prettejohn: In general, self-regulation can sometimes mean that changes in regulation can move faster and that regulatory changes can have a greater immediate buy-in from the regulated. However, my overall view is that, particularly where there are issues of confidence involved, probably self-regulation has to give way to statutory regulation. We have yet to discuss this in great detail at the Panel, so I must stress that these are probably more personal views. I think that, with the advent of the Payment Services Directive and the number of, if you like, competing regulatory bodies that there are around the banking industry—OFT, the FSA and the Standards Board—some rationalisation of that and a clearer division and assumption of responsibility is probably required to ensure that consumer confidence in the regime as it applies across banking is improved and maintained.