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

15 DECEMBER 2008

  Q80  Sir Peter Viggers: Mr Phillips, has the Consumer Panel addressed this?

  Mr Phillips: Yes, and we have been pressing for some considerable time for the FSA to switch on the principles and to take control of banking regulation. We think that that would be more straightforward; it would have a consistent definition of Treating Customers Fairly; and there would be more chance that the introduction of Treating Customers Fairly would be properly supervised within large organisations. I would also like to pick up on a further point, which is the Payment Services Directive. Where the OFT overlaps with the FSA in regulation, we would like to see that much more joined up. We see an opportunity here for the FSA to extend its reach and to provide genuine protection for the consumer and also a more straightforward working environment for the industry.

  Q81  Chairman: The FSA deadline for the implementation of the Retail Distribution Review by 2012—is that realistic and achievable? What are the major roadblocks to that?

  Mr Phillips: I think that is more of a question for the industry than it is for the consumers. We would certainly like to see it in place.

  Q82  Chairman: Is it achievable, Mr Prettejohn?

  Mr Prettejohn: I think that it is achievable, yes.

  Mr Bolam: Our Panel believe that it is achievable.

  Q83  Chairman: Will firms be able to make a smooth transition from their current business models to the new requirements, and how many firms have started to make that? Has yours, for example, started to make that, Simon?

  Mr Bolam: My own firm is involved with general insurance, and so we do not actually get involved in that area. However, I would suspect that most firms will wait until these proposals are set more in stone before they start seriously getting involved.

  Q84  Chairman: What is the best way to remove bias and the perception of bias from the remuneration of financial advisers?

  Mr Phillips: I think that there are two issues here. The first is the obvious one of commission: where, if the adviser is acting as the agent of the customer rather than the agent of whoever is providing the product, there is a lot more chance that there will be no bias and that there will be a better relationship. Coming back to the point that Mr Prettejohn made earlier about the middle of the market, people in that part of the market are probably unlikely to be able to pay, or be willing to pay, significant amounts of money for advice. There we are looking to the industry to come up with constructive solutions which can deliver unbiased advice. One of the areas that the FSA has explored, but so far with little success, is the area of guided sales—which we think is a real opportunity to provide products that are affordable, hard to mis-sell, and which will be attractive to the middle part of the market.

  Q85  Chairman: Mr Vicary-Smith, I remember being at a conference in Gleneagles when the then chairman of the FSA, Callum McCarthy, made a big declaration about the business model and industry being bust, and that they would have to start on it from scratch. Has that road been travelled?

  Mr Vicary-Smith: I think there are some indications that, shall we say, the first, early steps have been taken: things like addressing the issue of paying for advice; addressing the issues of professionalism of the industry—or, rather, the professionalism of the advice given. However, there are two really important steps that the FSA can take if this industry is to be brought up to scratch. One is the issue of naming and shaming, where we feel that the FSA has not taken the steps it could take. All our history at Which? is that the glare of publicity and saying who is doing things well and who is doing things badly is an enormous prompt to change. We believe that FiSMA gives more opportunity than the FSA actually takes for that to happen. The second thing is on the level of fines. Where steps are not being taken, then the consequences need to be much more severe. For example, I think that Alliance & Leicester's record fine represented 3% of the revenue gained over that period of mis-selling. At that level there is a danger that fines are seen as a regulatory cost of doing business, and that is not what they should be doing. If we are to see this industry transformed in the way we all have said we want, then the FSA has a role to play both in exposing bad behaviour, accrediting good behaviour and also, where it does need to intervene and fine, to ensure that is at a level that really discourages bad behaviour.

  Q86  Chairman: This Committee has been taken away from the consumer and the retail element for the last year or so with understandable problems elsewhere in the economy. Should this be an area we focus on more over the coming months or will the self-regulation and the good relations between industry practitioners and regulators sort it out itself?

  Mr Vicary-Smith: I would argue that this would really benefit from more attention because there are two sides to this equation: there is the provision of the product but there is also what happens to the consumer and, in all the sorting out of the problems that exist, we do not want to see the consumer forgotten as everyone focuses on the wholesale side.

  Q87  Chairman: Simon, what element of the package of proposals contained in the Retail Distribution Review will be the most significant in driving existing practitioners away from the industry, in your opinion?

  Mr Bolam: Too high professional standards.

  Q88  Chairman: Too high?

  Mr Bolam: If the professional standards are too high, that would drive practitioners away.

  Q89  Chairman: Let us get a handle on that. Too high? They should not be at degree level, should they?

  Mr Bolam: No.

  Q90  Chairman: At what level should they be? First year university level? A-level?

  Mr Bolam: At the level 4 for advisers, as is currently recommended

  Q91  Chairman: That is first year university-type level?

  Mr Bolam: Yes. Again, we are down to what the final model is going to produce in terms of the number of firms that there are likely to be at the end of the day. If the level is too high, or if people find it just too difficult to get there, we will have to monitor the effect on the contraction of the market.

  Q92  Chairman: One of the aims of the Government is to get 50% of people into higher education and to become graduates. Their ambitions are a bit low if we are talking about first year university level for people giving advice which is very sensitive to many people and could involve their life savings and their investments. Should we not be aiming a little bit higher? There is a paucity of ambition here, I would suggest to you.

  Mr Prettejohn: I think it is a reasonable place to start but in the long run we should probably be expecting higher standards than that.

  Q93  Mr Breed: How many people in the FSA have such qualifications?

  Mr Prettejohn: I am afraid I cannot answer that.

  Mr Breed: We will ask Mr Sants.

  Q94  Chairman: That is a good question, so the advance question to Mr Sants is, what percentage of your workforce is at graduate level? I think we have covered almost everything here. Mr Phillips, if I could just review a couple of things you have said because they have been very important and very helpful to us, we agree that there is a potential profound conflict of interest at the FSA between prudential regulation and treating customers fairly. Presently the FSA is full of people with industry experience, and even at the Strategic Board level the FSA is dominated by industry people, so there is a stronger case, a greater case for consumer representation on that Board.

  Mr Phillips: Agreed.

  Q95  Chairman: The Consumer Panel, having two policy staff, really need to lift their ambitions on that. Agreed?

  Mr Phillips: I accept that point.

  Q96  Chairman: On the credit crunch, the firms at present have an incentive to cut corners so it is even more important to have consumer representation and consumer interests safeguarded.

  Mr Phillips: Absolutely, but the issue there is that the FSA should be tracking the performance of the industry.

  Q97  Chairman: If I can say to you that your evidence has been very helpful. I would suggest that there is not a cigarette paper of difference between the views of your predecessor, Lord Lipsey, and your views. Is that unfair?

  Mr Phillips: You would have to ask him.

  Chairman: He is not in the room as far as parliamentary convention is concerned. However, can I thank you very much for your evidence today. It has been very helpful to us.