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Will the new financial regulator really use his teeth?
Martin Wheatley will head up the new City regulator from 5 April. He'll have no shortage of things on his 'to do' list, says Lorna Bourke.
by Lorna Bourke on Nov 13, 2012 at 09:24
Consumers have every right to feel let down by the Financial Services Authority (FSA). Over its 24-year existence, it is difficult to think of a single scandal that the regulator prevented or mitigated.
Mis-selling has been rampant, with payment protection insurance (PPI), interest-rate swaps and endowments just three recent disasters for consumers that the regulator failed to spot until very late in the day.
The new regime
So Martin Wheatley (pictured above), chief-executive designate of the new Financial Conduct Authority (FCA), which officially comes into being on 5 April next year, should be able to make some dramatic improvements.
Last month he set out his vision for how the new regulatory regime would work which, significantly, included setting up a new ‘early warning’ department of some 250 individuals called the Policy, Risk and Research Division. This will be dedicated to combining better research into the market and analysis of the risks to consumers with a view to heading off potential disasters.
Crucially, Wheatley wants to understand why consumers behave in the way they do.
Cynics might ask why it will take a special department of 250 risk assessors to analyse consumers’ behaviour and the risks to which they are exposed. You don’t have to be a psychologist to work out that the reason the banks and mortgage lenders were so effective in mis-selling some £12 billion worth of massively overpriced PPI cover was because borrowers felt they wouldn’t get the loan or mortgage they wanted if they didn’t take out the insurance – otherwise known as conditional lending.
If Wheatley’s predecessors had simply read the personal finance columns of newspapers and websites it would be blindingly obvious where consumers were vulnerable. Hopefully, Wheatley will be more alert and responsive to warnings in the media – though whether it needs 250 individuals to do this is highly questionable.
Scams still widespread
The list of current ‘scams’ – many of which have been around for years and are regularly criticised by consumers and journalists – is long.
For instance, why are self-invested pension (Sipp) providers, private client stockbrokers, individual savings account (ISA) providers and others who hold client funds allowed to continue negotiating interest on pooled cash deposits that is not passed on to clients? This is simply one of many hidden charges.
Why do many pension policies have crippling penalties written into their contracts for those who want to switch to a better provider? This could have been challenged decades ago under the Unfair Terms in Consumer Contracts legislation – but wasn’t.
No doubt too there are still thousands of old pension policies around which on ‘death before retirement’ simply return savers’ contributions – in some cases without even paying interest on money held for anything up to 40 years. What is this if it isn’t 'consumer detriment'?
Late in the day the Association of British Insurers has just launched a review of the annuity sales process. The 'open market option' was introduced as long ago as 1978, and since 2001 it has been mandatory for a pension provider to disclose a pensioner’s options at retirement.
Clearly, they have been doing this so badly, or in such an incomprehensible way, that still only four out of 10 retirees shop around for an annuity. It has also been a requirement of the current regulatory regime, actively pursued since 2006, that institutions ‘treat customers fairly.’
Yet financial institutions have been happy to rely on apathy and consumer ignorance to allow them to get away with offering poor value for money products. The difference in income between the top and bottom annuity providers is often as much as 30%. Why are we still waiting for the regulator to act?
Annuities are an enormous area of consumer detriment, and crucially important because annuities are one product which we are required by law to purchase if we reach age 75 and do not have sufficient alternative pension. Recent ABI figures showed that independent financial adviser (IFA) sales made up 92% of total open market sales and 98% of enhanced annuity sales.
But most annuity advisers have a minimum level of £50,000, below which they believe it is not worth their while to give advice. Since the average annuity size is £23,000, the vast majority of individuals will be unadvised and the life companies have played on this ignorance.
And it gets worse. As pension expert Dr. Ros Altmann, director general of Saga, points out, ‘People are currently paying for advice, even though they may not get it. Insurance companies deduct 1% to 1.4% of the pension pot for "commission" even if there is no adviser to pay it to.’ Wheatley needs to ensure that this practice is stamped out along with all other hidden product charges.
Institutional rip-off culture
One of the biggest hurdles facing Wheatley is the financial institutions’ rip-off culture, which to date has shown no sign of changing. Current accounts are a typical example. To wean customers off ‘free banking if in credit’, banks have introduced a range of monthly fee-charging current accounts with additional benefits such as ‘free’ purchase protection insurance, travel insurance, mobile phone and credit card protection policies.
But even a cursory analysis shows that many of these add-ons could be purchased more cheaply elsewhere, while others will never be used. Some, like mobile phone insurance and credit card and identity protection – the latter often offered as an add-on to a credit card – are virtually worthless anyway since the claims rate is negligible. Will the banks ever learn? Probably not, unless Wheatley really does become the attack dog for consumer rights which he claims he will be.
The task is daunting. New unacceptable practices emerge on an almost weekly basis, the latest being upfront fees charged by claims management firms. Many existing scams such as ‘churning’ of financial products such as pensions, investment bonds, mutual funds and private client portfolios; excessive ‘administration fees’ and penalties; hidden charges; and overpriced products are still widespread.
Will Wheatley get stuck in?
‘The FCA offers a huge opportunity for the regulator and firms to start afresh, and work in partnership to reset how we deal with conduct in financial services,’ Wheatley said recently.
‘We see it as the role of the regulator to not only make the relevant markets work well but also to help firms get back to putting their customers at the heart of how they do business.’
Ironically, that’s precisely what they have done – by exploiting their ignorance and apathy or by being deliberately misleading.
The FSA is asking for comments about the plans for the FCA and the consultation period runs until 14 December 2012. This is everyone’s chance – both consumers and practitioners – to tell Wheatley in which cupboard the skeletons have been hidden. Don’t waste the opportunity.
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