1. "Conducting the debate on the insurance industry's terms"
Before New Labour came to power in 1997, I wondered where they would stand on the consumer - financial industry scale. It was immediately clear that they are practically off the end of the scale on the side of the industry, starting with a take-over of the regulators by the financial industry. The FSA is run by and for the benefit of the industry which finances it.
The government talks about: promoting saving, informed choice, disclosure, awareness, confidence, education. This is claiming the moral high ground and helps the industry sell "products". The Consumers Association said "The Government has allowed the debate on pensions to be conducted on the insurance industry's terms": x
"However, we think the Government is making a massive strategic policy error on pension provision by pinning its hopes on applying a private sector retail market based solution to what is essentially a public policy issue (similar to health care or education). The Government has allowed the debate on pensions to be conducted on the insurance industry's terms. ... even if confidence could be restored by a series of robust and far-sighted measures by government and FSA, it is critical to recognise that there are limits to the capacity of the retail market model to meet the needs of all consumers and the wider national economic interest. Failure to recognise this fundamental economic reality we believe will condemn the UK to recurring financial scandals." (8)
When a major insurance company, Equitable Life, sudden implodes and another, Standard Life, is in difficulties, it follows that the retail market model for long-term savings is too risky.
The report of the Treasury Committee Restoring confidence in long-term savings: Endowment mortgages (2004), x says that the industry is focussed on "short-term sales rather than long-term customer care". But the industry has to be concerned about sales in the first instance because no sales - no industry. This is a question of survival. The industry is concerned in the first instance with its own survival. This is the retail market model.
The stakeholder regulations x do not refer to "stakeholder pensions" only to "stakeholder pension schemes" which have "members". It follows that when financial companies compete for business, stakeholder pension schemes are competing for members. It is wrong in principle for pension schemes to compete for members.
There are alternative models to the retail market model. There needs to be a debate about these alternative models. These involve concepts other than "informed choice" etc such as: security, trustees, accountability, peace-of-mind.
2. A sales orientation
An "objective" of the FSA in the The Financial Services and Markets Act (2000) is "the protection of consumers", x which sounds vague and condescending. The Financial Services and Markets Act says:
"2 The Authority’s general duties
(1) In discharging its general functions the Authority must, so far as is reasonably possible, act in a way—
(a) which is compatible with the regulatory objectives; and
(b) which the Authority considers most appropriate for the purpose of meeting those objectives."
So the FSA only has "so far as is reasonably possible" to "act in a way which is compatible with" "the protection of consumers", and can please itself what this means.
which is a tautology. "The appropriate degree of protection" is not a definition of "protection". The first duty of the regulator should be to protect savings, rather than to "facilitate" "innovation" and "competition":"5 The protection of consumers
(1) The protection of consumers objective is: securing the appropriate degree of protection for consumers."
"2 (3) In discharging its general functions the Authority must have regard to -
(d) the desirability of facilitating innovation ...
(g) the desirability of facilitating competition ... "
Savings and investments need protecting in the first instance rather than "consumers". They need protecting by the regulator, not from stock market fluctuations, but especially from excessive and hidden charges. An "Authority for the Protection of Savings" is proposed in Italy following the Parmalat scandal. An article Italy approves bill to create new regulator in the Financial Times reports:
"Under the bill, a new regulator, provisionally called the Authority for the Protection of Savings, will replace Consob, the stock market watchdog," (4th February, 2004, Companies International, page 33)
"The protection of consumers" has a sales orientation in comparison to "the protection of savings". The Financial Services and Markets Act says in Section 5: x
"(2) In considering what degree of protection may be appropriate, the Authority must have regard to-
(a) the differing degrees of risk involved in different kinds of investment or other transaction;(b) the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity;
(c) the needs that consumers may have for advice and accurate information; and
(d) the general principle that consumers should take responsibility for their decisions."
(a) - (d) relate to sales. "Decisions" means decisions to buy or sell. What other decisions could there be?
The exact meaning of "the protection of consumers" is left to the FSA to determine:
"Firstly .. safeguards to protect consumers from dubious financial practices and ‘cowboy’ providers. Secondly .. ensure consumers receive information that will help them make informed financial choices and manage their finances better recognising that consumers themselves must bear some of the responsibility for the choices that they make." x
Another objective for the FSA in the Act is "market confidence":
3. - (1) The market confidence objective is: maintaining confidence in the financial system.
(2) "The financial system" means the financial system operating in the United Kingdom and includes-
(a) financial markets and exchanges;
(b) regulated activities; and
(c) other activities connected with financial markets and exchanges.
"Regulated activity" is largely a euphemism for "products". The FSA says: "The definition of a regulated product falls within the scope of the authorised activity." How do you measure the extent of market confidence except by the volume of sales?
A further objective is "public awareness":
"(2) It includes, in particular-
(a) promoting awareness of the benefits and risks associated with different kinds of investment or other financial dealing; and
(b) the provision of appropriate information and advice."
This again relates to sales. The Act seems to have a focus on "short-term sales rather than long-term customer care". x
3. An industry orientation
The FSA has a Practitioner Panel. Hector Sants is, or at least was, a member. x He is now Managing Director. x
It has various further industry panels, groups and committees: the Small Business Panel, Advisory Group (members x), External Advisory Group, x Consultative Committee (members x). The latter are industry committees judging from the membership. The FSA has only one Consumer Panel in contrast to all these industry panels. The members of this panel are appointed by the FSA.
The FSA has published over 200 Consultation Papers, which have further mainly Policy Reports giving the results of these consultations. They say "most respondents said ... ". The responses are overwhemingly from the industry. So that in carrying out the wishes of the majority the FSA is acting for the industry. (e.g. x x )
It is not possible to regulate the retail market model for long-term savings effectively, because it is too costly and it imposes an excessive accountability problem. The regulations for financial services have become so numerous that we now seem to have practically an industry concerned with "compliance". x The Treasury Committee says: x
"The need to place increasingly tight regulatory constraints on the financial services industry to impose satisfactory behaviour on the part of companies is imposing significant costs that risk pricing the less affluent out of the long-term savings market." (28)
Accountability means everything does not go on behind closed doors. There is proper disclosure and public discussion. Perhaps the main reason for the Equitable Life debacle was not reserving for terminal bonuses. Barry Gardiner MP said in the House of Commons debate on 24th March 2004:
"The Government of the day lobbied against a Brussels directive that would have placed a statutory responsibility on companies to set aside reserves for terminal bonuses." (col 1014, 8.16 pm) x
This seems to be an example of lobbying behind closed doors without public discussion and with disastrous consequences. The government says it is an "intelligent sponsor of the industry". x
"Intelligent sponsoring means acting as advocate for the industry, arguing its corner in Whitehall, in Brussels and other international platforms;" (20)
4. Savers, investors and consumers
"The Government is committed to encouraging more people to save for their retirement." x
According to the Oxford English Dictionary "saving" means "keep for future use", and "investing" means "apply for profit". Investing is a more long-term activity than saving. Over the long-term the value of savings is likely to be eaten away by inflation unless invested wisely. The government encourages people to save. They then find themselves described as "investors", although: "They are not investors at all, but passive pension savers". x
A Google search on the FSA's website on "save-for-retirement" x produces 144 references (at the time of writing, March 2005). Hyphens need to be added so that the search is on consecutive words.
| search on | number
found |
|---|---|
| save for retirement | 144 |
| invest for retirement | 7 |
| consume for retirement | 0 |
The FSA website refers frequently to "consumer" meaning a "saver" or "investor", rather than a consumer of financial services. On this website "investors" "invest", but "consumers" do not "consume". They "buy" and "shop around". "Save", "saver", "saving" for example all return the same number 2419.
| search | found | search | found | search | found |
|---|---|---|---|---|---|
| save | 2419 | invest | 1357 | consume | 5702 |
| buy | 1771 | customer | 2131 | customers | 2131 |
| shop | 764 | shop around | 575 | shopping | 252 |
| information | 6607 | information overload | 24 | caveat emptor | 42 |
| awareness | 1809 | choice | 1015 | education | 569 |
| business | 5765 | pension | 2935 | profit | 1417 |
An objective of Child Trust Funds is to "encourage parents and children to develop the saving habit and engage with financial institutions". x They will then have to pay various charges, costs, fees etc:
| search | found | search | found | search | found | search | found |
|---|---|---|---|---|---|---|---|
| adjustment | 448 | charge | 2175 | annual charge | 109 | capital charge | 91 |
| exit charge | 66 | hidden charge | 4 | initial charge | 38 | investment charge | 26 |
| management charge | 125 | periodic charge | 27 | preliminary charge | 42 | service charge | 40 |
| surrender charge | 10 | transfer charge | 8 | withdrawal charge | .16 | commission | 1681 |
| cost | 2628 | hidden cost | 11 | deduction | 414 | dilution levy | 100 |
| expense | 974 | fee | 1642 | levy | 582 | reduction | 855 |
This table is not at all comprehensive. There are for example: "administrative charges" (30), "soft commissions" (172), and various "fees": "custodians' fees" (6), "policy fees" (28), "trustee fees" (21), "audit fees" (57), "regulators' fees" (15).
Commissions, costs, and expenses are generally not explicit charges in the sense that they are either hidden or in the small print in the accounts. Unit trusts have "expenses" which generally appear as "fees" in the accounts.
"Consumer" is quite often followed by a noun such as "consumer awareness".
| - awareness | - confidence | - education | - information | |
|---|---|---|---|---|
| saver | 0 | 0 | 0 | 0 |
| investor | 5 | 59 | 10 | 6 |
| consumer | 152 | 185 | 542 | 2000 |
The FSA's website seeks to "help retail consumers achieve a fair deal".
| help retail - achieve a fair deal | making the market work for - | help - shop around | informed - | protection of -||
|---|---|---|---|---|---|
| savers | 0 | 0 | 0 | 0 | 0 |
| investors | 0 | 0 | 0 | 3 | 62 |
| consumers | 656 | 39 | 9 | 74 | 788 |
According to the FSA "products" are consumed in addition to services. The following table gives the result of some Google searches on the FSA's website.
| What is being consumed? Google search of FSA website for: |
entries found |
|---|---|
| consumers of | 309 |
| consumers of financial services | 97 |
| consumers of financial products | 10 |
| consumers of long-term care insurance | 2 |
| consumers of packaged products | 2 |
| consumers of precipice bonds | 3 |
| consumers of specific products | 6 |
5. "A fair deal for consumers"
The Minister, Ruth Kelly, said to the Treasury Committee:
"Really it is a question for the FSA as to whether their customers are being treated fairly, but I think generally an informed choice strategy where the information is provided is a good route to pursue." (Q2124) x
The Treasury has offloaded responsibility for whether or not customers of the financial industry are being treated fairly onto the FSA.
Informed choice is a cornerstone of the FSA's approach to regulation, in accordance with the "public awareness" objective. For example in the case of with-profits funds the chairman Callum McCarthy says: x
"In future, we expect information to be made available comprehensibly on how a firm manages its with-profits funds, its approach to payouts (on maturity and on surrender), its smoothing policy, its investment strategy and any changes to asset share. This is the information needed if a customer is to make an informed choice between competing companies and, for that matter, between competing investment opportunities."
But this is complicated information, and refers to the point of sale. Smoothing policy, investment strategy and so on can and do change, perhaps as a result of a change in the regulations, such as solvency requirements mentioned above.
Another cornerstone of the FSA's approach to regulation is caveat emptor in accordance with "the general principle that consumers should take responsibility for their decisions" in the Act. For example Ann Bradley the Consumer Director of the FSA said: x
"Once consumers have the necessary information in appropriately clear and accessible form, we expect them to use it thoughtfully and to take responsibility for their own decisions."
If for example, you choose company A and it is taken over by company B, this negates your choice. If you chose a mutual company because you like mutual companies and it demutualises this again negates you choice. Clear information is not provided about charges because of hidden charges. Charges can increase after you have bought a policy. One contributor to a discussion board called Therm said:
"If people are stupid enough to place money with sippdeal or any other firm unaware of the fact that charges can be increased in future, more fool them." x
The FSA says:
"Underpinning the FSA’s whole regulatory approach is our desire to secure a fair deal for consumers." x
There is no mention of "a fair deal" in the Act. Getting a fair deal surely means getting fair benefits in return for the contributions made. But this is not mentioned for example in the FSA's report A fair deal for consumers x Instead "a fair deal for consumers" seems to cover everything the FSA does. The FSA has an emphasis on "shopping around" and "deals" rather than the resulting benefits: "whatever you are buying, you look for a good deal by comparing products and prices". x
"Helping consumers achieve a fair deal" may be encouraging them to achieve the impossible. For example the FSA says:
"The following example illustrates how an endowment holder could be better off with a unit linked endowment than with a repayment mortgage." x
But:
"Not a single unit-linked endowment would have made you money over the past ten years and very few pensions break even. ... The fundamental reason for their dire performance is the high charges used to fund the immense upfront commission payments made to salesmen." x
Christine Farnish the former Director of Consumer Relations is guarded about a "fair deal for consumers". This has to be "sensible and balanced": x
"Our approach does demonstrate that we take a sensible and balanced line between achieving a fair deal for consumers, and placing disproportionate burdens on the industry, whose costs in turn will be passed on to other customers."
In its report The regulation of closed with-profits funds (2004) x the FSA says: "Every year we carry out a private survey of maturity payouts and surrender values of with-profits policies." (2.15) It quotes from this survey in its report. The reason this survey is confidential is perhaps because of the poor maturity payouts and surrender values.
"Achieving a fair deal for consumers" does not apparently mean providing information about whether consumers are getting fair deals or not. Savers are interested in getting a good or fair return on their savings. If the FSA were really seeking to achieve a fair deal for consumers, it would systematically study and monitor the investment performance of different investment products.
The FSA says that investors should not interest themselves in performance because "past performance is no guide to future performance". x If the FSA were really seeking "a fair deal for consumers" it would be interested in the efficiency of the industry and levels of charges beyond the disclosure of management charges. Ron Sandler said:
".. the FSA, whose remit as regards consumer protection does not, in practice, extend to a concern about industry efficiency considerations and levels of charges. Indeed, the FSA has taken an explicit stance that it is not an economic regulator. Solutions will therefore need to rely upon a long-term strategy of promoting consumer empowerment." x
"A fair deal" is interpreted by the FSA especially to mean helping people choose products to suit individual requirements. Financial advisers must consider "suitability" x especially "attitude to risk". Sir Howard Davies said:
What about savers? To say that "savers must take greater responsibility for their financial decisions" sounds less reasonable. The Government Actuary, Chris Daykin, also believes in choice and people taking responsibility for their own decisions. In a recent article he wrote:"The whole learning experience of the last few years has taught us I think, that suitability is at the core of the problem which investors face, whether this is a suitable product for you." (184) x
"We are required to protect consumers bearing in mind the responsibility they have for their own decisions - that's the caveat emptor - beware of the dog - clause." x
"Investors and consumers must take greater responsibility for their financial decisions. ... We cannot hope to cover everything. This requires smart and educated consumers." x
".. likely to lead to a restriction in product availability and hence a reduction in choice, as well as to the erosion of any willingness for customers to take responsibility for their own decisions. ... undermines acceptance of personal responsibility for investment choices." x
The green paper on pensions Simplicity, security choice: Working and saving for retirement (2002) x has much to say about informed choice especially Chapter 3: Informed choice in pensions - choices for individuals, but it apparently makes no mention of caveat emptor or people taking responsibility for their own decisions.
Of course taking responsibility for decisions is incompatible with getting a fair deal. In particular individual consumers are in no position to negotiate charges - even explicit charges and especially not hidden charges. The Consumer Panel of the FSA and National Consumer Council dislike the caveat emptor principle in the Act:
"It introduces a principle that is absent from all consumer protection legislation." x
"We would like caveat emptor to go in relation to retail consumers." x
The government itself does not want to take responsibility for making decisions in a range of areas preferring instead to do nothing. In the area of pensions for example, it should decide whether people opt in or out of the State Second Pension. Instead as Ned Cazalet said to the Treasury Select Committee on 11th November 2003:
"We have had a ludicrous debate in the industry recently about opting in or out of SERPS: it has occupied many newspaper column and taken up a great amount of brain power trying to work this out." x
"Responsibility for financial decisions" contrasts for example with an article in The Guardian discussing the Treasury Committee's report on endowment mortgages:
"At the end of the day, when purchasing a financial product most people find they have to place their trust in the salesman. And when the sales spiel turns out to be total bunkum the customer feels deeply betrayed and thoroughly stupid." (11th March 2004, page 19)
5. Mis-buying
Doing a search on www.Google.com on "mis-buying" x there are 201 websites listed, which seem to relate (perhaps almost) entirely to the financial industry and only in the UK. This implies that a) mis-buying is only a concern when it refers to customers of the financial industry, or b) the term "mis-buying" is used only by or in connection with the UK financial industry.
The first four websites listed (on 31st March 2004) are respectively:
www.fsa.gov.uk: "Regulations cannot prevent mis-buying though consumer education can reduce it."
www.rosaltmann.com: "SANDLER PRODUCTS INDEPENDENT ADVICE IS ESSENTIAL TO AVOID ‘MIS-BUYING’"
www.sofa.org: "Simple products and simple sales must not lead to ‘mis-buying’. In response to the Sandler Report ... "
www.selestia.co.uk: "MIS-BUYING OF THE NEW SANDLER STYLE 'WITH PROFITS' COULD BECOME THE NEXT SCANDAL TO ROCK THE IFA INDUSTRY."
It can be seen that three of these four sites relate to the Sandler Review. About half of the 201 sites listed relate to the Sandler Review. A search on "mis-buying Sandler" x brings up 90 websites. This is rather suprising since I could not find the term "mis-buying" anywhere in the Sandler Review! The FSA seems to like the term since a search on "mis-buying" on Google on the FSA's website brings up 37 references to mis-buying on its website.
A search on "mis-selling" on www.Google.co.uk "pages from the UK" x brings up 28,600 websites, a large proportion of which relate to the financial industry - though not almost all as in the case of "mis-buying". Whereas mis-selling happens in other industries, mis-buying seems to occur only in the financial industry.
6. The decline of occupational pension schemes
According to the Employers' Pension Provision Survey 2003 of the DWP: x
"There is also evidence to suggest that closures of occupational pension schemes, coincided not with the setting up of new occupational schemes, but with the provision of stakeholder schemes, which so far have succeeded in attracting little active membership." (9.3)
This suggests that the closure of defined benefit occupational pension schemes is to a large extent not being replaced by another pension scheme. Over the last few years the membership of occupational pension schemes has been declining ( at least for men x ). Stakeholder pensions have not been a success. Although the Survey says:
"The introduction of the stakeholder pension might have helped to maintain overall levels of active membership of pension schemes as membership of other schemes declined." (9.1)
Stakeholder and personal pension schemes are managed by the industry. Stakeholder schemes have industry "managers". It seems that the financial industry is gradually taking over the management of pension schemes - as opposed to schemes being self-administered.
Stakeholder and personal pension schemes are not occupational pension schemes. They are in general set up by financial companies and then "designated" x by employers, whereas occupational schemes are set up by employers. (However stakeholder schemes can be "constituted as occupational pension schemes" in which case they can be set up by employers and have trustees. I understand that they are still not occupational pension schemes. Apart from coming under different legislation, I find this distinction quite confusing.)
7. Hidden charges
The industry is in the first instance interested in sales, because no sales - no industry. Secondly it is interested in charges because no charges - no money to finance sales and no profits. Charges divide into disclosed and hidden. New Labour has helped the industry conceal charges as discussed on my website especially "The Disclosure of Dealing Costs".
New Labour has been helping the industry by introducing new "products" - most recently Child Trust Funds. These have a cap on management charges. But dealing charges are outside this cap. According to the Sandler Review. It is proposed that dealing charges should be outside the cap on charges for the new "Sandler products". The Sandler Review states:
"There would be clear regulatory prescription on the treatment of costs, to ensure consistency across providers and products. In principle, this should say that all costs should be shown, rather than being netted off investment return. However it will be important to ensure consistency with unit trusts/oeics, which have certain costs which can be treated in this way." (10.137)
8. "More choice"
"Choice" is being promoted by the government in other areas in addition to pensions. There are several white papers which seem to be largely concerned with promoting more choice, such as:
"the White Paper will give more choice when using registration services - more choice of where and how to register a birth or death, more choice of place for marriage and the choice of new services." x
"Better access to pharmacies and more choice for patients" x
Choosing Health: a consultation on improving the nations health (2004), x
"Giving patients more choice will make them more involved in decisions about their treatment." x
"Quality and choice: a decent home for all" x
Choice is expected to be a feature of forthcoming Party manifestos. For example:
"One hundred thousand more parents will be able to send their children to their first choice of school if the Conservatives win the next general election." x
"Choice" has the advantage for politicians that it is one of those words on the moral high ground like: "sustainable", "fair", "simple", "information", which can be applied to everything from health to housing and indeed pensions:
"Andrew Smith, Secretary of State for Work and Pensions, said the 'key' was that people should be able to make 'informed choices'." x
Some people disagree:
"Plaid Cymru will fight the General Election on opposition to the choice agenda promoted by 'both Conservative parties'." x
In the first instance there is a need for a good local hospital and school and membership of a good pension scheme rather than a choice between a bewildering number of health, education and pension "products".
28th March 2004