Consumer Panel priorities for the new Government

As David Cameron’s new government gets its feet under the table, the Panel has been reflecting on what the new administration could do for consumers of financial services.

Financial consumer protection is the job of the Financial Conduct Authority, of course, and it has wide powers to act. It has used these to crack down on unscrupulous debt management companies, make the provision of financial advice more transparent and broker a redress scheme for small businesses who were mis-sold interest rate hedging products.

However, there are some things only the Government can, or is best placed to, do. The first of these is to resist industry pressure for ‘lighter touch’ regulation. We have been there before, and it ended badly. Consumers have not forgotten, even if the industry appears to have done so. The FCA is doing the job Parliament set it up to do. If the industry does not like it, it needs to change its behaviour rather than appealing to Government to make financial services more globally competitive by reducing regulation. Consumer protection and competitiveness are not incompatible.

So, what are the big problems for financial services consumers?

1.      Firms continue to behave badly. Compensation for mis-sold payment protection insurance now stands at £19 billion, while the interest rate hedging products scandal has so far seen firms pay out £2 billion in redress to small businesses. There were 329,509 new complaints to the Financial Ombudsman Service in 2014-2015, while 55% of all resolved complaints were settled in favour of the consumer. The banks say this is all ‘historical’, but complaints about packaged bank accounts – still being sold – have risen by 1300% in two years.

2.      People, and those who advise them, do not know what they are paying for investment. A large chunk of investment savings disappears in, often opaque, costs and charges, eating into retirement income.

3.      Risk is being demutualised both in lending and insurance, leading to people being excluded from financial products and services when they have previously had access.

4.      Pensions freedoms are both an opportunity and risk. Greater freedom and choice should also mean more competition. Annuity providers know consumers now have a choice, and should sharpen up their act accordingly. However, we believe there is a real risk that industry will develop inappropriate products to replace the lost profits from selling annuities, or that people will cash in their pension pots when they have not properly understood the implications.

We believe that some of these issues can best be fixed by legislation:

1.      Introduce a general duty of care on financial services firms carrying out regulated activities through the Financial Services & Markets Act 2000. This would oblige providers of financial services to avoid conflicts of interest and act only with the interests of the customer in mind. It would also allow consumers to claim compensation from firms directly if the latter have acted negligently, but most importantly it would act as a driver to change firm culture to behave more responsibly and put the customer first.

2.      Establish a more nuanced legal definition of “high net worth” consumers, so that people who suddenly acquire a large sum of money (particularly a pension pot) are not treated as being more financially sophisticated than they are. This would, in particular, require an amendment to the Financial Promotion Order 2005.

3.      Extend financial consumer protection rights to a larger proportion of small businesses. Many small businesses behave like individuals in buying financial products and services, yet they are often treated as ‘sophisticated’ consumers in law. Relevant legislation, including the Unfair Contract Terms and Unfair Trading Regulations, should be amended to provide the UK’s smallest businesses with more protection when purchasing financial services and products. The Government should also investigate options to widen access to binding alternative dispute resolution for such businesses.

4.      Allow the FCA to publish more information about misbehaving firms. Section 348 of the Financial Services and Markets Act 2000 (FSMA) prevents the FCA from publishing information received from firms and individuals so, for example, firms which perform badly in mystery shopping cannot be ‘named and shamed’. An amendment to FSMA would allow the FCA to put more information in the public domain to help consumers make informed choices about the firms they choose to deal with.

5.      Enable English and Welsh consumers to claim damages for unfairly refused or delayed insurance pay-outs, in line with Scottish law. The previous Government caved into industry pressure and did not include the Law Commission’s clauses on late payment in the 2014 Insurance Bill.

Other problems cannot be fixed by the law, but the Government still has a role to play:

1.      Financial exclusion remains a problem. As the Financial Inclusion Commission has shown, the pace of technological innovation means it is also taking on different forms. The Panel believes a member of the Treasury’s ministerial team should have explicit responsibility for financial inclusion, and provide leadership across the Government to ensure financial inclusion is incorporated as a matter of priority into policies in all relevant Departments.

2.      The Government was right to establish the ‘Pension Wise’ guidance service to help people make informed choices about their options following the recent pension liberalisation. However, it is crucial that the service is reviewed early on to ensure a consistent and high-quality delivery. We are concerned that the guidance could look very different depending on who the delivery partner is, and – for face to face – where they are based.

3.      EU legislation has a significant impact on the UK’s legislative and regulatory framework in a range of financial services, including retail banking, asset management and pensions, making timely and constructive engagement by the Government in Brussels crucial. We will set out our specific recommendations to the Treasury for its work with the European institutions in the coming weeks.

Pension reforms: Panel urges caution

On 6^th April a revolution begins – a pensions revolution. Retirees aged 55 or over and in Defined Contribution schemes will from that date be given unprecedented freedom in how they access their pension pots.

While these reforms should largely be good for consumers, there are some considerable caveats. The semi-compulsion to buy an annuity was there for a reason. In return for generous tax breaks on pension savings and to avoid a hefty tax charge consumers were (more or less) forced to hedge longevity risk by purchasing an annuity. This was intended to ensure their money would not run out and the taxpayer be left to pick up the bill.

This longevity risk is now being shifted firmly to the consumer, who is ill-equipped to bear it. People consistently underestimate how long they will live; many will be destined for poverty in old age, or a bailout by future taxpayers.

As Consumer Panel research published in December 2013 showed, there was, and still is, a lot wrong with the annuities market. But the alternative may be worse. The pension landscape was always complicated, but new choices and products will add to this complexity. Some will be outright scams; others will eat away at pension savings through high and opaque charges.

The FCA will need to be vigilant, scanning the market for dubious products, and taking action quickly when necessary to prevent serious detriment.

The Government’s flagship guidance service, ‘Pension Wise’, has a big task ahead of it. It must deliver good, holistic, outcomes for consumers and be flexible enough to deal with changing circumstances. Consumers need to understand the risks and opportunities of taking charge of their pensions savings, and the tax and benefits consequences. The guidance service must be equipped with the right people, with the correct qualities, experience and training to deliver a good service.

Their circumstances will vary widely. Many will have a home worth a lot more than their savings. Others may not have net assets at all. Retirement is becoming less of a ‘cliff edge’ – many will want to carry on working part-time, or in a less pressured job. Pension Wise will need to deliver good outcomes for all these consumers, wherever they live and however they choose to access the service.

The FCA has been charged with monitoring the standards of the Guidance Service.  This may seem to be classic FCA territory, but it is not.

Pension Wise delivery partners are not regulated: the FCA cannot take enforcement action to improve standards, only ‘recommend’ changes. Enforcement is the Treasury’s job, but it is also responsible for delivery, so it may be reluctant to shut down poor providers.

The Panel will be watching how the new freedoms work in practice. Later in the year we will bring together consumer organisations to exchange views, feedback and intelligence on what the first few months of pension freedom has delivered.

In the meantime, it’s vital the messages coming from all stakeholders involved in this market must be clear and consistent. “Take your time, think things through and get help when you need it”.

Resources for Consumers

Pension Wise: https://www.pensionwise.gov.uk

ScamSmart:
http://scamsmart.fca.org.uk/

Money Advice Service https://moneyadviceservice.org.uk

Financial Inclusion Commission report

The Financial Inclusion Commission has this week made recommendations on widening access to financial services for disadvantaged consumers. We have been a strong supporter of this work, and gave oral and written evidence to the Commission.

The Panel has had concerns about access since our mystery shopping of basic bank accounts in 2002.  Just having a financial product or being able to get one is not enough: the product must deliver real benefits.

Over the years, more people have had access to basic bank accounts, but been treated badly. These accounts have often contained ‘nasty surprises’ in the form of massive charges for returned payments, or had limited functionality. There were nearly 20,000 complaints to the Financial Ombudsman in 2013-2014 about current accounts, of which over a third related to bank charges.  This is the third year in a row the number of complaints about bank accounts has risen.

The forms of credit available to those excluded from the mainstream rarely deliver any benefits at all. Initiatives like the Child Trust Fund and Saving Gateway, which demonstrably helped those on low incomes to build assets, have been abandoned.

The Commission’s report therefore serves as a timely reminder that financial exclusion is persistent and that the problems have become more deeply entrenched. Leadership is vital.

The Financial Conduct Authority (FCA) can play its part. Its recent work on vulnerable consumers showed how badly they are treated by the financial services industry; and its thematic review on mobile payments highlighted the risk of digital exclusion. It also acted quickly to eliminate the worst practices of the ‘payday’ lending sector, and it can use ‘Project Innovate’ to encourage the industry to come up with new solutions to old problems.

While all these initiatives help, the FCA also needs to assess systematically the impact of its regulation for all consumers, including those who aren’t currently in the market.

Regulation cannot solve the problem of people borrowing money in order to feed their families, as many do. This is for Government.
We hope that the next Government will give serious consideration to the Commission’s recommendations. After 17 years of financial inclusion policy-making by successive Governments, it is scandalous that we still do not have universal access to transactional banking services, and that this is only in prospect now because of European legislation.   We hope, also, that the lessons of those 17 years will be learned, and mistakes not repeated.

Welcome to the blog of the Financial Services Consumer Panel

Welcome to the first Financial Services Consumer Panel blog. You will be able to see our press releases and publications and hear our views on issues of the day here. I hope you will find it a thought-provoking addition to the debate about what matters to financial services consumers.

We are a statutory panel of experts, advising and challenging the UK’s Financial Conduct Authority (FCA) on how financial services can better meet the needs of consumers.

We want to see an open, competitive financial services marketplace, where people can get access to the products and services they need at a fair price, and trust providers to have their interests at heart. It doesn’t sound too much to ask for, but we still have an industry characterised in many cases by the ‘wrong’ sort of competition, lack of transparency, and mis-selling.

Most of our work involves advising the FCA privately, although we also respond to the regulator’s public consultations. We also challenge Government, industry and EU institutions in the interests of consumers. Much of our financial services regulation now comes from the EU (and beyond), and few consumer groups have the resources to counterbalance the weight of industry lobbying in Brussels.

We commission research and develop position papers. Most recently, we’ve put out papers on cross-subsidies in personal current accounts and the hidden costs of asset management. Our aim is to shed some light on issues which have a big impact on consumers, and generate debate. More than that, we want our work to lead to positive change, to enhance regulation where necessary or to improve the way industry does things.

In 2015, we will continue to push for greater transparency of investment costs, and better fund governance. Millions of people are being auto-enrolled into workplace pensions; a small change in costs can mean a big difference to individuals’ standards of living in retirement.

The FCA’s regulation of the consumer credit industry is also high on our agenda, as is the Chancellor’s pension reforms. While the new freedoms will be good for many people, they are not without risk. We are also looking at how people decide which firm to buy products from, and whether firms’ bad behaviour influences their decision.

With a busy schedule for the year, we are pleased to welcome two new members to the Consumer Panel. Mark Chidley will focus on issues affecting small businesses as consumers of financial services, and Kitty Ussher on advice, consumer research and pension reforms.

 

Sue Lewis

Chair, Financial Services Consumer Panel