§ Mr. John Denham (Southampton, Itchen)I am grateful for this debate and, following the recent Personal Investment Authority statement on the mis-selling of personal pensions and the Office of Fair Trading report on the selling of endowment mortgages, I hope that the debate will provide a timely opportunity to examine the serious problems that still exist in the sale of many personal financial services. I declare an interest, as I receive a modest contribution to my office research costs from the National Union of Insurance Workers. That is not a party political union or one affiliated to the Labour party. In fact, I believe that at the last general election it sponsored a Conservative candidate.
That union's sponsorship brings me no personal pecuniary benefit, but taking an interest in personal financial services since becoming a Member of Parliament has brought me personal financial benefit. As I began to take a closer interest in the operation of the financial services industry, I realised that I had been mis-sold a personal pension some time ago. Four years before I entered the House, I chose to become self-employed and acquired a personal pension. The mis-selling that occurred in my case was not one of the spectacular instances that hit the headlines in the past year, but a mundane, everyday example of mis-selling of the kind that collectively waste the savings of too many people. I was sold a regular premium policy even when I had made it clear to the financial adviser that I was most unlikely to continue in a personal pension scheme for more than a few years. I remember making it clear that I hoped to join within a reasonable period the generous occupational pension scheme offered to Members of Parliament.
In those circumstances, I should have been advised to make single premium payments into my personal pension policy, because, with a regular payment scheme, charges in the early years are much higher. Unless the policy is kept until maturity, it is an expensive way of saving. When I raised that matter with the company concerned, the error was admitted without fuss. The recalculation of my personal pension savings over the four-year period showed that, had I made single premium payments, my pension savings would have increased by no less than 50 per cent.—a significant difference.
When I told that story to a colleague in the Tea Room the other day he said, "If I'd been as daft as that, I certainly wouldn't go around telling people about it." That is part of the problem. Many people who are not unintelligent are unsophisticated when it comes to financial matters but are reluctant to admit to the fact. That makes them over-dependent on advice from people who may have a vested interest, and reluctant to ask hard questions or to complain when they fear that things are going wrong. I suggest that that is true of the majority of the people who bought a variety of personal financial services in recent years.
I shall outline some of the steps that need to be taken to minimise mis-selling, avoid wasting hard-won savings and restore public confidence in an industry of immense importance to the country and the British economy. It is important to set the scene.
The problems of mis-selling that came to light over the past couple of years occurred at precisely the time that the Government were urging ever-greater individual 683 dependence on personal financial services, savings and insurance. The Government have openly and clearly pursued a twin-track strategy. They have provided financial incentives to leave state provision and to take out personal savings and pension policies, and they have progressively reduced the value and benefits of state provisions. The effect of that for many individuals has been to give them a choice between a rock and a hard place.
Over the past 10 years, the Government have encouraged opting out of the state earnings-related pension scheme, and the Pensions Bill now in Committee will take that further. The Government Actuary suggests that Government measures will reduce the national SERPS bill by nearly 50 per cent. over the next 45 years.
The Government have encouraged pensioners to take out health insurance while reducing access by the sick elderly to national health service beds. The Government are now requiring new mortgage takers to provide their own insurance cover because the Government are removing income support on interest payments on mortgages taken out from October.
The really damning indictment of Government policy is not just the shift from public provision to private insurance but the way that the Government made that shift without ensuring that consumers were guaranteed value for money and financial security from the private provision that they are encouraged to make. The scale and range of problems now facing consumers taking out private insurance and making private savings are daunting.
Half a million people will have their opt-outs and transfers from occupational pension schemes individually reviewed. The cost of restoring lost benefits to them is estimated at between £1 billion and £2 billion. The cost of administering the review is expected to run into hundreds of millions of pounds. The ultimate cost of compensating people who were mis-sold and of conducting the review and paying the fees and other charges will have to be met from the pockets of consumers.
According to the Office of Fair Trading, endowment mortgages—which accounted for 84 per cent. of the home loans market in the late 1980s and which are still the choice of an astonishing 60 per cent. of home owners—pose a higher risk and frequently are a more expensive option than repayment mortgages. The OFT strongly suggested that the existence of high commissions on endowment policies biased sales advice and distorted the market towards inappropriate policies for many people.
When the Department of Social Security and the Securities and Investments Board report later this year, they will confirm that people on low incomes—as many as 2 million—were wrongly advised to leave SERPS for personal pensions because their incomes were low, rebates were low and personal contributions over and above the rebate were low or non-existent. Fees and charges are eroding the savings of people who opted out for personal pensions. Some will be left with pensions of a lower value than they would have had under the state earnings-related pension scheme. At the very least, people on low incomes, who can ill afford risky saving strategies, have been exposed to an unacceptable degree of risk in the marketplace.
684 The cost of the opt-out has been enormous. By 1992, the cost of giving incentives to low-income savers—people on less than £10,000 a year—to opt out of the state scheme was £3.6 billion of public money given away, much of it now being absorbed in the fees and charges of insurance companies. By now, that figure is probably around £5 billion. That is an enormous amount of public money to transfer to the private sector to leave people with inadequate pensions which, in most cases, will be no better than they would have received under SERPS, and may be worse.
The extent to which that strategy has failed means that there will not even be a public saving in the long run. Projections made by such organisations as the National Association of Pension Funds in evidence to its income inquiry show that for many people those pensions will be below foreseeable state benefit levels, so people will have to have their pensions topped up through state contributions.
Bacon and Woodrow have recently suggested that many people are being sold private additional voluntary contribution schemes despite the fact that AVC schemes available to them through their occupational pension scheme provide better value at a lower cost.
Huge losses are incurred every year through the early cancellation of schemes. Evidence shows that 30 per cent. of endowment policies, which in most cases bring reasonable value only if they are kept to maturity, are cancelled within five years, and only 20 per cent. are kept to maturity. A couple of years ago, the Office of Fair Trading estimated that the cost of early cancellations to savers was running at £250 million a year. That is more or less a Maxwell scandal every year or so in the life assurance industry.
The cost is much greater than that because those savings were due to be kept over a long period. They were due to mature in 20 or 25 years' time. Therefore, the loss to savers at the time that they might have expected to get some return on their savings will be about £750 million to £1 billion a year.
Other problems are becoming apparent in other financial services that are not regulated under the Financial Services Act 1986 because they do not involve investment. Permanent health insurance policies often turn out to be anything but permanent. People find that their ability to claim on their policy is subject to the arbitrary decisions of company doctors who are subject to less accountability and fewer grounds for appeal than the doctors of the Department of Social Security who, in the general view of my constituents, are not always regarded as the most sympathetic members of the medical profession.
Loss of income policies, which are expensive to operate, in many cases turn out to have severe penalties. People who return briefly to work find that they can no longer renew their policy and end up with little to show for their money. Contracts are revoked arbitrarily when companies become aware that particular groups of employees are likely to be subject to redundancy.
Insurance on unsecured bank loans is enormously expensive and, in practice, subject to little competition at the point of sale. The Government have refused to regulate the market that they are creating in mortgage insurance. I predict with some confidence that, unless the Government change their mind on that, within months, and certainly within some years, it will become clear that 685 mortgage lenders are selling policies that over-insure when compared with the benefits that the Government are taking away.
The sum total of those problems is pretty disastrous. First and foremost, the waste of the public's money is a scandal. These days, people can ill afford to see their hard-won money frittered away; nor can the country, which faces a growing bill for future pension provision, afford to see money which could be accumulating as savings, as future pensions, absorbed in excessive fees, charges and the waste of early cancellation.
It is a sobering thought that, even when nothing goes wrong in the sales process, the results are far from satisfactory. With many companies selling personal pensions and endowment mortgages, nearly £1 in every £3 invested by the consumer is lost in fees and charges. One third of the potential pension, one third of the potential endowment return, goes to the company for its administrative costs and, in the case of shareholder companies, payment to shareholders. The Government cannot seriously expect to see private savings replace state provision when so much of the potential benefit, so much of the potential investment, is lost in that way.
The second problem is no less important. The current crisis threatens the integrity of a major important British industry which employs hundreds of thousands of people, makes a major contribution to Britain's national wealth and generates savings for investment on a scale unparalleled in most other European countries.
In the past year or so, there has been a sharp fall in the sale of some personal investment products. For example, there was a 10 per cent. fall in the sale of regular premium products between _1993 and 1994, and I am told that the first quarter of 1995 has been the most difficult for the industry for decades.
If that were a sign that individual savers were shifting away from some of the policies towards more prudent forms of investment, that would probably be good, but I suspect that that is not happening. I suspect that the fall in sales, the difficulty of making sales, reflects the drop in public confidence in the industry and is the effect of the highly publicised difficulties of recent years. If that is the case, individuals are simply failing to make any form of investment saving at all and, in the long run, that will bring a significant cost to themselves and the country.
The effect on the industry is also important because there are major opportunities for the United Kingdom insurance industry in Europe. Problems in the funding of state pension schemes in Britain, which most people recognise although they may have different solutions, are writ large in other European countries that have less developed non-state pension provision.
Therefore, there is an enormous potential market in Europe for expertise and direct services for the British insurance industry. However, I suspect that someone coming from most other European countries to look at the British industry and seeing 'the type of problems that I have outlined would be less than impressed with the record of recent years and less certain that under this Government ways of developing effective personal financial services had been developed as well as they could have been.
I did not seek this debate in order to rubbish the insurance industry. It is an important industry and, whatever the differences between the two sides of the 686 House on where exactly the line is to be drawn between public and private provision, there is clearly a need for an active personal financial services industry. As working patterns change, as life-time employment in one company becomes a rarity, as the role of parents change, there will be a growing need for savings that only personal financial services can meet.
For example, most people need and will need a non-state pension in addition to any state pension. It is sometimes said that we cannot afford a state pay-as-you-go pension scheme. Logically, that is not true. The cost of any given pensions bill to the resources of the nation in 30 years' time is the same however it is funded. It is nearer the truth to say that, although we may happily pay the taxes to fund our parents' pension bill, we do not trust our children an inch. We are not certain that, in 30 years' time, they will be willing to vote for a Government willing to levy sufficient levels of taxes to pay our pensions. Demography shows that the demands on those children will be greater than they are on us.
Faced with that political risk—that is what we are talking about—prudence suggests that we should have our eggs in more than one basket and that people should have non-state pensions. If we are to sort out the mess and have a secure form of non-state pension, we will have to address the root causes of the problem. I do not have time to survey all the current regulatory issues, but I want to focus on some that have been given insufficient attention.
The failures of state regulation have been widely discussed in the technical and financial press. The attempt to turn poachers into gamekeepers failed, and all we got was poachers. But the tabloid press has had a different target. The tabloid press has greedy salesmen—sales reps who have eyes only for the commission that they can earn. In the popular mind and the popular media, they have been universally blamed for the mis-selling of recent years.
Some people, obviously, have been driven by greed or straightforward, outright dishonesty; but it offends against common sense to suggest that half a million people could have been induced to opt out of occupational schemes, and 2 million or more low earners could have been enticed from the security of SERPS, simply by the greed of individual financial advisers and sales representatives. Over the past year, I have talked to people who sell pensions and other insurance policies, and the picture that I have seen is rather different from the popular tabloid image.
Those people say—rightly—that much responsibility for the current problems lies with the Government. When the personal pension boom began, the Government spent £1 million on advertising the benefits of personal pensions, giving little or no warning of the problems. One memorable advertisement showed someone tied upside down in chains representing that person's existing pension provision. The advertisement told people about the new personal pensions: "employees will be able to choose their own Personal Pension scheme instead of staying in SERPS or an employer's pension scheme." It is now the received wisdom of the regulators that very few people who have the opportunity to join an occupational scheme should be encouraged not to do so, that very few people who are members of such a scheme should be encouraged to leave it, and that very few people who have deferred pensions from an occupational scheme 687 should do other than leave them in that scheme. In their advertisement back in 1988, however, the Government clearly endorsed the idea that people should opt out of their employers' schemes.
I am not attempting to whitewash the industry, but it makes a fair response when it says that the Government encouraged the idea among the public that opting out was a good idea. None the less, the management of most insurance companies—the very people who were then put in charge of self-regulation—actively encouraged their sales forces and financial advisers to target those who have now been mis-sold policies.
There is still a great deal of foot-dragging in the industry in regard to sorting out problems. It has been dragged kicking and screaming into dealing with the problems of opt-outs and transfers from occupational schemes. It is now two years since the regulators told insurance companies that they needed to re-check the policies of all who had been sold personal pensions to ensure that they had been given good advice. The reasonable expectation—shared by the regulators—is for a substantial number of people on low incomes to have been advised by insurance companies to opt back into SERPS and out of their personal pensions, but as far as I know there is no sign that the industry is taking such action or that such a shift is taking place.
The main conclusion that I have reached, having spoken to people working in the industry, is that most of those who sell at the sharp end of insurance companies suffer employment conditions and practices in which mis-selling is likely to be an inherent danger. Commission on products plays an important role in that, less because of commission-driven greed than because for the majority of financial advisers—tied agents—commission is the source of their income. If they do not sell, they do not eat, pay their own mortgages or clothe their children. Some companies have recently introduced higher basic salaries, but for most employees any reasonable income is entirely dependent on sales performance.
That is not the only pressure on financial advisers, however; others are equally insidious. Many sales managers depend on override for their income. The managers obtain their own income from the commission generated by financial advisers working under them, which creates permanent pressure to sell throughout the management hierarchy. Companies use sales targets, often set at unrealistically high levels, to keep the financial advisers in a state of permanent job insecurity: anyone who does not meet the sales targets that cannot be achieved is constantly liable to dismissal for poor performance.
Financial advisers are vulnerable to the peculiar contracts in force in the industry. Sales representatives are held personally responsible for lost commission on policies that are cancelled early—which means that they can run up debts of thousands of pounds on policies that they sold in accordance with their companies' instructions and the regulators' own good practice guides. Indeed, in some cases people who move from one company to another see their own clients "churned"—sold new policies—and the resulting bills for the early cancellation follow them.
People with personal debts are not allowed to work in the insurance industry, so the consequence of such action is the denial of employment. More worryingly, people are tied into an insecure position in which pressure is on them to 688 sell. Other companies push the legal interpretation of self-employment to the nth degree: companies in which people are clearly working permanently and receiving free training, software and support systems and are nevertheless encouraged—or forced—to work as self-employed.
It has been common practice for new entrants to the industry to be lent commission in advance of sales. It looks like a salary and feels like a salary—until the sales do not materialise, when it becomes a personal debt that those employees are liable to repay. Despite recent improvements in the regulatory requirements, it is clear that training standards and professional support for financial advisers vary widely. I was given more than one example of sales advisers' being assisted, quite improperly, to pass basic competence tests that are now required.
At the same time, the real burden of higher compliance standards is often felt by the front-line financial advisers. They are liable to lose their jobs if they make mistakes, at a time when they are under greater pressure to sell. Frequently, those responsible for disciplining financial advisers for making compliance mistakes are the same people—or part of the same management structure—as those who are setting unrealistic and demanding sales targets.
That puts the problem of commission in a different light from that generally shown by the tabloid press. Commission is a problem for three reasons. First, it is part of a complex set of pressures leading to job and financial insecurity for financial advisers. Highlighting commission alone will solve nothing unless the other pressures are tackled. Secondly, the effect of commission on the consumer is not so much salesman's greed as the distortion that it creates between products that offer different levels of commission. The Office of Fair Trading has highlighted the distortion between endowment mortgages, which carry high commissions, and products such as repayment mortgages, which carry little or no commission.
The most fundamental problem affecting employment in the financial services industry, however, is the fact that employment pressures run directly counter to the requirements of good regulation and the legal requirements of the Financial Services Act 1986 for the giving of best advice. It is a widely understood principle of any effective regulation of markets that financial incentives should reinforce the aim of the regulation. For the financial adviser—the tied agent, the sales representative—that means that giving best advice, which may be not to buy anything or to buy a product that carries little commission, should involve the same financial reward as selling a product attracting a high commission. That is not the position today. Until the problem is tackled and financial advisers are rewarded for their advice as much as for what they sell, mis-selling is bound to continue.
Over the past year or so, the number of people selling insurance has halved, but we have not yet created the network of financial advisers and tied agents that would provide the highly qualified, totally objective and well-rewarded individuals whom the industry and the consumer need. It is a sad fact that the regulators, whether SIB or LAUTRO—the Life Assurance and Unit Trust Regulatory Organisation—in the past or the Personal Investment Authority, have had almost nothing to say about employment practices in the industry; when they have, it has all been at arm's length. It is hoped that increasing training standards and costs will improve staff retention, 689 and that commission disclosure will change the reward structure. But it is all too little, too indirect and too ineffective.
In other areas of financial services product not covered by the Financial Services Act, the Government have relied overmuch on industry codes of practices rather than on direct regulation. As Which? revealed this month, poor financial advice is still widely available in the high street from insurance companies, building societies, bank assurance companies and independent financial advisers. Until employment practices in the industry are tackled, mis-selling will continue.
I accept that it is difficult for regulators to prescribe exact employment terms, but a number of things could be done. The regulators could study and issue good practice guidance on contracts, remuneration, discipline procedures and the setting and management of sales targets. That should emphasise the need for a substantial element of basic salary and for performance-related pay that reflects the quality of advice given, and not just the volume or value of sales achieved. Such guidance would provide a focal point for unions in the industry and for consumers to judge the company from which they were buying.
The regulators could and should introduce direct registration of all those selling insurance in the industry, making the contractual obligation of individual financial advisers to meet compliance standards one between the adviser and the regulator, not between the adviser and his own manager. Creating a directly regulated sales force would be a major step towards the genuine professionalisation of the industry and raising the status of financial advisers, and it would give some protection against the arbitrary use of discipline by managers and companies in the industry.
The Government could, of course, bring financial advisers' representatives into regulators' governing bodies or, more to the point, perhaps draw on the experience of financial advisers' representatives in establishing a system of statutory regulation. It is a real indictment of self-regulation that self-regulatory structures have never seriously tried to draw on the experience of people who actually sell personal financial services to try to improve regulation. I hope that that matter will be dealt with.
Another aspect of regulation has had too little attention. The whole emphasis of the regulatory effort has been on the sales process, not on the quality of product. It is hoped that improved disclosure will improve the quality of products. Indeed, the Minister of State, Treasury said:
the new regime for disclosure will—we hope and intend—substantially improve the avoidance of problems of mis-selling."—[Official Report, 28 April 1995; Vol. 258, c. 1124.]That is over-optimistic.Certainly, league tables showing the dramatic effects of fees and charges are becoming available. They show, for example, that on a £50,000 endowment mortgage, an individual's choice of company can influence the final value of his investment by as much as £9,000. I doubt, however, whether disclosure will have much effect. Few signs exist that most tied agents are being trained to deal with increasing competition in the marketplace. In general, people still remain dependent on the building society, the bank assurer whom they first contact, or the tied adviser who first contacts them. Under the present 690 regime, it will be many years, if ever, before disclosure really creates genuine competitive pressures that work in consumers' interests.
We need to consider ways of improving not only the quality of products in the market but the sales process. The Office of Fair Trading and consumer organisations have done far more to highlight the failure of different types of products than the regulators. That must change. A number of key areas for action exist.
First, when sales are made, customers should be told how their potential insurer compares with the industry as a whole in relation to key measures, such as the impact of fees and charges on the effective rate of return. Choice of company can influence the return on a personal pension of £50 a month by as much as £70,000, on total savings of, say, £250,000. That is the effect of the different charges levied by a company on the same assumed rate of investment return. It is in the consumer's interests to know how his potential insurer compares with others.
The shilly-shallying over disclosure of persistency rates should end. I have already the highlighted the waste through poor persistency rates. It is unacceptable that people do not receive information about how effective their company is at retaining its clients in any consistent form. If agreement cannot be reached with the industry—that seems to be the big problem—the Securities and Investments Board or the Personal Investment Authority should impose a standard definition of persistency rates to be used by all. Once again, that information should be available on a comparative basis to potential customers as well as on an individual company basis.
If companies choose to bump up their assumed investment returns or to reduce their premiums by assuming abnormally high rates of return, something needs to be done about that. The industry average assumed rate of return on investment is less than 8 per cent. Some companies, however, have produced projections assuming rates of return of 9.25 per cent. It enables them to produce large presumed bonuses or to reduce their premium rates substantially. A case exists for underlining that for consumers. They should be informed about what the current average industry assumption is so that they will be aware that they are being sold a policy that has an abnormally high assumed rate of return.
None of the measures that I have outlined would be expensive to enforce. Information could be regularly collected by regulators and supplied centrally on, say, a quarterly basis to companies to pass to customers. It would bring some genuine consumer choice and competition. Even if that were done, more would need to be done. Regulators should take on the responsibility of applying direct pressure on costs. The spread of fees and charges levied is far too wide. As I said, it is unacceptable that such a large proportion of people's savings—£1 in £3 in many cases—is absorbed in fees and charges. Nationally, that is an expense that we cannot afford. Consideration should be given to introducing over time a minimum acceptable level of charges, and companies exceeding that limit should be highlighted.
Action should be taken to prevent mis-selling to low-income individuals who would be better off in a state earnings-related pension scheme. One possibility would be to set a floor below which no transfer could take place. It might be more in tune with the market to introduce a requirement that any personal pension sold to someone below a given income level—perhaps £12,000 per 691 annum—should be guaranteed by the company to perform no worse than the SERPS equivalent. That would soon sort out companies that had genuine confidence in their investment performance from those that did not.
We should be aware, as the regulator should be, of companies that, according to the Office of Fair Trading, use the money they make on early cancellations to bump up published maturity values of policies that are kept to term. The regulator should be prepared to tackle that abuse if necessary.
The Government should be boosting the industry by introducing more helpful and responsible measures than they have introduced to date. An underlying problem exists in that many people are under-insured and under-provided for in their retirement. The Government have simply said, "Take this private sector step," without underlining to people the fact of their under-insurance and under-provision.
The Government should undertake a regular survey of the real pension position of a large sample of the population at different ages and earning levels, and they should project forward the type of pension entitlement that is being developed. In many cases, that would highlight the degree of under-insurance and the need to make provision. Such a move would help to make the transition from a society where insurance products have to be sold to one in which informed consumers would choose to buy.
I have gone on longer than I intended, but I should like to make one final point. The Government also have a responsibility to set the framework in which people can take long-term decisions about personal financial services and personal savings. One of the things that has tipped the balance from endowment mortgages to repayment mortgages is the reduction of tax relief on mortgage interest payment. When the Government embarked a few years ago on their strategy of reducing and probably phasing out MIRAS, they gave no consideration to the impact on people's decisions to take out endowment mortgages. If the Government want to claim that they are encouraging greater dependence on personal financial services, they have a responsibility not to make decisions that change the. ground rules after people have become locked into an investment decision.
For most people who have taken out an endowment mortgage, there is now no way out. It may have been a bad decision at the time, but trying to get out of it now would leave them even worse off, taking into account the costs of early cancellation. Of course, there is also the saga of the tax that never was, or the tax that may be—we are not sure which. That recent episode has highlighted the dangers of encouraging people to make personal provision and then threatening them with the possibility that they will be taxed on the money that they have put aside. What needs to go hand in hand with the Government's strategy of privatising social provision is long-term stability in Government policy, which the Government have been reluctant to provide.
We need an effective personal financial services industry and people need to be able to buy its products with confidence and security. So far, the Government's record has been marked by a mixture of irresponsibility and complacency. The regulatory system is by no means at the level required to ensure that the industry can offer 692 consumers what they need. It also does not offer those who work in the industry the employment conditions that would enable them to act as truly objective and professional advisers. The quality of products on sale is much lower than it should be or needs to be. It is important that the Government deal with those problems in the very near future.
§ Mr. Alistair Darling (Edinburgh, Central)I congratulate my hon. Friend the Member for Southampton, Itchen (Mr. Denham) on securing this debate. During his time in the House, he has acquired a formidable reputation in the financial services area. It is to his credit that he has not only secured the debate but has made a number of constructive suggestions with the aim of improving the current unsatisfactory position.
The financial services industry is of immense importance to this country. Although, to a certain extent, my hon. Friend and I have a number of criticisms—in the proper sense of that word—to offer, no one should be in any doubt that we fully support the industry. Edinburgh—part of which I represent—is the fourth biggest financial centre in Europe, so I well understand that the industry is of immense importance. No one can level a charge against me that I do not have its best interests at heart when I make some suggestions to improve the present position. My hon. Friend shares my view.
The industry employs 2.5 million people, and many towns and cities depend on it for employment. Indeed, the industry as a whole, broadly defined, produces about 18 per cent. of this country's gross domestic product. As my hon. Friend said, it is of crucial and growing importance as a service provider, so it is important to have a regulatory system that commands confidence. It is also important that if there are problems—and undoubtedly there are—they should be dealt with in the spirit of trying to persuade more people to make provision for themselves, both for their benefit and for the benefit of the industry as a whole.
As my hon. Friend said, more and more people will want to make provision for themselves through savings, both long term and short term. The Government should encourage that as a matter of principle. Saving has worth for the individual as well as value for society as a whole because saving makes money available for investment—and long-term investment is something that this country needs.
Pensions are of growing importance, so it is crucial that we get the right regulatory regime. If an individual makes a mistake when he takes out a pension, it could be 20 or 30 years before he realises that the mistake has been made, by which time he can do nothing about it. We must remember the changing working patterns in this country, which make it unlikely that people will work for 30 to 40 years for the same employer before retiring with a gold watch. Instead, people will have many jobs and will go in and out of employment. It is important that they make the appropriate choice of pension. My hon. Friend was fortunate to discover his mistake at an early stage, so he had an opportunity to put matters right.
The problem we face—I use the word "we" advisedly—is that a mistake made at an early stage may not be discovered for many years, so nothing can be done 693 about it. It is a catastrophe not only for the individual but for us collectively because in the end the state has to put the matter right, inasmuch as it can do so.
People will want to buy other protections from the industry, and my hon. Friend mentioned endowment mortgages. I want to say a word about the concept of caveat emptor, which is important to the law of contract. I do not believe that the regulatory system or the Government can ever substitute their judgment for that of individuals and they cannot protect people against foolishness, stupidity or, in some cases, dishonesty. No one should try to get away from the fact that caveat emptor—buyer beware—is an important concept.
However, when dealing with public policy and matters as important as, for example, the sale of a pension, the doctrine of caveat emptor should be qualified by the recognition that there must be a regulatory system that at least tries to minimise the risk that people will be sold inappropriate products. In other words, there is a public interest in proper regulation. That is something that the Opposition have long recognised, but I am not sure that it is universally recognised by the Government.
We need a regulatory system that commands the confidence of the industry and the public: both are important. Currently, the problem is that the regulatory system commands neither the confidence of the industry—where more and more people are saying publicly as well as privately that the system simply is not working—nor the confidence of the general public. There is a need for that confidence, for the benefit both of individuals and of us collectively as members of society. It is not in our interests that people should be scared off or discouraged from making provision for themselves.
My hon. Friend referred to the pension transfer problem, which has been raised in the House on many occasions. The problem continues. I am disappointed to note that the industry—or at least certain parts of it—are determined to challenge, through the courts or by other means, the determination of the Personal Investment Authority to resolve the problem and examine cases where mistakes may have been made. The industry must understand that if the public sees it trying to avoid putting right mistakes made in the past, they will understandably say, "I will not trust the industry in the future." The selling of financial services, in particular pensions, demands trust more than anything else. If a mistake has been made—and it is common ground that mistakes may have been made—it is far better for the industry to put up its hands and say, "It's a fair cop," and try to put things right.
I understand the legal constraints on the trustees of funds and their duty towards those funds, but the industry must understand that if it prevaricates, delays and gives the impression that it is not willing to put things right for the people to whom it has sold its policies, the industry itself will suffer. That would be in nobody's interest.
My hon. Friend referred to the SERPS problem, where there may have been substantial mis-selling. That problem is only just beginning to come to light. It will haunt the Government for the rest of their time in office, and it will also haunt future Governments. That is why it is important to deal with problems when they come to light, rather than shovelling them into a dark corner, hoping that they do not return.
694 Significantly, figures show that since the pension transfer problem came to light sales are down by about 10 per cent., and even more in some cases. That is largely because the public have lost trust, which now needs to be restored. A number of steps should be taken to achieve that.
First, the regulatory system needs to be reformed. As I have said, I believe that self-regulation, in particular, has been discredited. Few people are now prepared to stand up and defend self-regulation. Unfortunately, those few are in the Chamber. The Government simply will not accept that a mistake was made in the mid-1980s when self-regulation was thought to be an appropriate way of dealing with these sales. If the Government accepted that, they would propose fresh legislation to correct the fundamental flaw in the Financial Services Act 1986.
Self-regulation is a fiction anyway, because the present system is rooted in statute. A tennis club is self-regulated, as are voluntary organisations. When the Personal Investment Authority was set up, we had the fiction of it bidding for recognition by the Securities and Investments Board, when the PIA knew that it would not be recognised unless it complied with every last dot and comma required by the SIB. The legal fact is the PIA's obligation to its members.
That fiction is cumbersome, expensive and results in duplication, as we have seen in the sale of personal pensions. Both the SIB and the PIA are prescribing rules and regulations and are making pronouncements. Significantly, when the problem with pension transfers first came to light, some within the Financial Intermediaries, Managers and Brokers Regulatory Organisation, which has been subsumed within the PIA, stated that the problem was being greatly exaggerated. That may have been so, but it does not help public confidence when the regulator appears to be acting as if it were a trade association.
I do not believe that it is possible to serve two masters—the trade interest and the public interest—at the same time. Our proposed reforms should leave no one in any doubt that the ultimate master of the regulators must be the public interest, not the trade interest. I do not suggest that it is not in the industry's interests to have a regulatory system that commands confidence, but I do not think that self-regulation can command confidence in the 1990s. It may have had its day in the 1980s, but the Government must accept that that day has gone.
Different regulation is required for different ends of the market. The problems at Barings—I shall not go into those, as we are not discussing them today—were of prudential supervision. At the other end of the market—the market we are discussing today—we are dealing with the need for proper customer protection and rules of conduct.
Any reform of the system must recognise that there are two distinct needs and that they must be dealt with appropriately. In that connection, I wish to consider briefly the nature of regulation required. It is necessary to tread a fine line between sufficient regulation to maintain public interest and over-regulation, whereby we may lose sight of what we are trying to achieve.
I suggested that it was not possible to exclude stupidity, greed and foolishness, but one can try to reduce the likelihood of their occurring. That is why I believe that the time has come to look at the nature of regulation. Many people say that the industry is being strangled by 695 regulation. Independent financial advisers are important if we are to provide a facility for proper impartial advice, and many of them believe that they are being squeezed out by the new rules.
We must get away from the box-ticking approach to regulation, whereby advisers are told to tick boxes to show what they have done. That does not prove anything. If Robert Maxwell had been alive today, he would have ticked every box that was ever shoved in front of him. I never ticked a box when I was in practice as an advocate, and people who consulted me relied on the trust that they had in their professional adviser. My hon. Friend said that the regulatory system should be geared towards promoting a long-term commitment to the industry and professional integrity.
I have some sympathy for those who believe that all the rules and regulations have been put in place to protect the regulator, so that if anything goes wrong it can say that it has a rule to deal with the problem. It is necessary to look at the regulations, to streamline them and to put them in broad terms. We should have four rules and regulations which work, rather than 400 or 4,000 which do not. The PIA should undertake the fundamental review that is necessary now, rather than going further down its present road of having so many rules and regulations that we lose sight of what we are trying to achieve.
We must also look at the way in which products are sold, and my hon. Friend spoke on this matter with a great deal of force. He mentioned the role of the Government, but I do not want to say very much about that as I have made these comments before. It is worthy of note, however, that the Government created the culture in which mis-selling can take place.
My hon. Friend drew attention to the advertisement that has been shown again and again as a public information advert, although it seems to me to be stretching public information almost to the point where credulity is broken. The advertisement refers to the mis-selling of pensions. In the late 1980s, the Government led people to believe that the very act of going private was enriching in itself. It did not matter how much money one had, or what one's prospects were: if one got a private pension, one must be better off.
That allowed a climate in which unscrupulous salesmen, as well as people who thought that they should do what the Government wanted, could sell policies that were manifestly unsuitable for the people to whom they were sold. It is no wonder that the Government promoted self-regulation at that time, because self-regulation, which became increasingly equated with self-interest, went hand in hand with the culture that so dominated our lives in the late 1980s—a culture which, I am happy to say, is being increasingly discredited, and not just in the area of financial services.
My hon. Friend stated that many commentators tended to blame what are called unscrupulous salesmen, but they have not concentrated on the role of the employer, who usually sends salesmen out into the market. Those in the industry who complain about its image and who say that the industry is not held in high esteem should grasp the fact that the problem is substantially of their own making. If there is no trust between someone who is buying a product and the person selling it, it is inevitable that 696 mistakes will be made and that people will not trust each other. That is why I fully support the independent sector, which is very important if it is genuinely independent.
People in the industry have been content to send salesmen out to areas devastated by pit closures, for example. Firms recruited people who had perhaps been in the NUM and were well known in the community to go through the area selling policies that should never have been sold. People were persuaded to opt out of the coal board pension. The management of those firms knew full well what was going on.
The industry must recognise that it is not in its long-term interests to sell inappropriate policies or policies that may be surrendered. My hon. Friend made a very good point about that, and the sooner some light is shone in some dark corners of the industry, the better for everyone.
I have never understood why, when something goes wrong in a mutual company, the regulators should impose a fine on the company and not on its directors and management. The fine imposed on a mutual company is paid by policyholders, who lose twice. They buy a policy, and then discover that the fund has been diminished by the extent of the fine. That is entirely inappropriate.
My hon. Friend drew attention to the role of commission and its influence on sales. I visited a prominent national life company—I shall not name it, as I do not think that it is unique in this respect—where I was shown its great training course. I was told that it had complied with every rule and regulation in the book. I had an opportunity to speak to some of the people on the course, and one of them told me that the salesmen had to make 10 contacts—a contact is reported back to management—and three sales every week, or they would lose their jobs. What happens on a Friday afternoon when the salesman has made only six contacts and one sale? I suspect that the conditions are then right for mis-selling to take place.
As my hon. Friend has said the problem that many sales people face is that they need to sell to make ends meet and to keep their jobs. In that climate, it is not surprising that mistakes are made. My hon. Friend and others have drawn attention to what has happened with pensions transfers and endowment mortgages. It cannot be right that people are put under pressure to buy something, simply because an individual needs that sale or commission to keep his job. If that is allowed to continue, it will be bad for industry and for society as a whole. That is why it must be stopped.
I do not believe that one can abolish rewards or incentives and I would not seek to do so, but the industry needs to look at how commission influences sales. Individuals can be rewarded for effort in other ways, and people should be rewarded for increased effort. The industry should remember that opposing disclosure, as it did for many years, does it no good whatever. It now opposes moves to do something about commission. It is high time that it grasped that difficult nettle and did something about it.
The Government's policy towards the pensions market is misplaced. We believe that state and private provision are complementary. It is appropriate for many people to have private pensions—I have had some in my time—but it is important for others to have occupational pensions. It is wrong to suggest that private personal pensions are 697 always best, and it was wrong of the Government to act as a recruiting sergeant for the sale of personal private pensions, as they did as a matter of policy in the 1980s.
It was a triumph of Conservative party ideology over common sense and public interest. It is the Government's job to promote the idea of having pensions and savings and then set appropriate standards and an appropriate framework so that individuals can make a choice that suits their personal circumstances. It is not for the Government to tell people that they must do one thing or the other.
It is important for the long-term interests of the industry and the country as a whole that people make proper pensions provision for themselves. Many thousands of people do not have adequate cover and some have no cover at all. The regulatory system should therefore be geared towards promoting the holding of pensions and savings.
The situation with regard to pensions in this country is bleak. By 2015, there will be 15.5 million pensioners. Although the present pension is worth about 15 per cent. of average male earnings, by 2030, on present policy, it will be worth 7 or 8 per cent. People will therefore want to provide for themselves and increase what they can expect from the state, and should be encouraged to do so.
It is the Government's role to educate people in the broadest sense and to create a regulatory system that gives them the confidence to deal with the industry on a basis of trust and assurance, knowing that they will be sold policies that are appropriate for them.
The regulatory system should be used far more to promote competition. We hear much rhetoric about competition—I dare say that we shall hear some this morning—but that rhetoric differs from actual competition. It is perfectly true to say that there are hundreds of different providers, but there is less apparent difference among the products available.
We need more openness. Fees, commission and administrative costs must be exposed, as knowledge of those will make for a better and more informed choice. I am glad that the Government accepted last year the need for disclosure. It is too early to say how successful disclosure will be. Ultimately, the best compliance will come from the public if they are in a position to make an informed choice and judgment.
The regulatory system should be used far more, acting in the public interest to look at problems with a view to opening up the market so that people can make an informed choice. The regulator should be not a passive but an active organisation, looking into matters such as persistency rates and other problems that come to light, so that consumers can make an informed choice. The regulatory system cannot substitute its judgment for that of individuals but it can create the right environment, and we want to promote that fact.
I mentioned disclosure and the need for openness because, as my hon. Friend said, there is something wrong when people buy a product—he mentioned endowment mortgages—simply because it is better for the building society or whoever sells it. It is curious that building societies, which are mutual bodies that exist for the benefit of their members, should conspire to sell inappropriate products to their members. Building societies might wish to reflect on that. The sums that building societies receive by way of insurances generally need to be looked into more.
698 My hon. Friend the Member for Itchen mentioned comparisons and league tables, and he was right to say that those are not the complete answer.
§ Mr. Mike O'Brien (Warwickshire, North)My hon. Friend is right to say that the industry needs regulation to restore confidence in it. All the evidence that the Treasury and Civil Service Select Committee has taken from the industry and elsewhere suggests that confidence needs to be restored and that effective regulation can ensure that confidence exists. Whatever the costs, the cost of not having regulation will be far greater for the industry in the long term than the cost of ensuring that regulation is proper and effective.
§ Mr. DarlingI agree with my hon. Friend. First, we should all be alarmed at the compliance cost of regulation because, ultimately, money spent on compliance will not be available to pay out when policies mature. That is one reason why we should look at how the regulatory system works. All those rules and regulations cost a great deal of money and it is ironic that, because of the nature of self regulation, the Government, who say that they want to get rid of red tape, are conspiring to create more red tape. Self-regulators, more than regulators set up on a proper footing, tend to take the belt-and-braces approach to protect themselves against criticism, and that needs to end.
Secondly, I have said time and again that good regulation will pay for itself, which is why we want to put it on a proper footing. There should be unanimity for putting it on a proper footing, not just between the industry and the public but on both sides of the House, but that unanimity does not yet exist.
I wish to make an important point about comparisons. Put simply, the regulatory system should put individuals in exactly the same position as chief executives or chairmen of life assurance companies. A couple of years ago, I attended a seminar at which the chief executive of a respectable life assurance company showed the audience a graph of the performance of three different policies with a term of 30 years. The first steadily increased in value so that, if it were cashed in at any time, its value would have steadily increased. The second policy gained nothing for the first 10 years but, if it were cashed in thereafter, the gains would not have been too bad. The third policy would have yielded absolutely nothing unless it was kept for at least 29 years, after which its value rocketed and its performance was good.
The public would like to have such information. That chief executive had it because he worked inside the industry. At the end of the seminar, I was staggered to see all the other chief executives approach him and ask which companies he had quoted from, which makes me wonder whether we could do something better with the regulatory system. That example makes the case for publishing comparisons so that members of the public are in the same position as that chief executive. It is important that we ensure that people make the provision that best suits them and do not simply accept an option that is most profitable for the salesman.
We should all reflect on the fact that many people have inadequate pension provision. Many more people honestly believe that they have provided for themselves but are in for a rude shock when they reach 60 or 65 and discover that the pot contains not nearly as much as they had been led to believe. It is extremely important that this Government and future Governments educate the public 699 so that people understand that, to maintain the standard of life that they have come to expect or would like to have, the decisions that they make, particularly on pensions, are absolutely crucial. It is the job of the regulatory system, acting in the public interest, to ensure that that happens. Our view that self-regulation does not work is finding growing support throughout the country and inside and outside the industry.
The Minister may pray in aid the familiar refrain for all those sensible reforms: a lack of parliamentary time. In the past few weeks, we have all been struck by the fact that the Government seem to be stuck for matters to put before Parliament. We have plenty of parliamentary time to deal with this problem. We shall deal with it, but it would be nice to think that, in the remaining time allotted to them, the Government might start to accept the problem.
The financial services industry is immensely important, not just to those who work in it or to the country for the wealth that it creates but because of its crucial role in enabling people to make provision for themselves. We need to support that, and it is important that people make the right choices.
Unfortunately, the present system is not working. Consequently, many people continue to receive inappropriate advice and make the wrong choices, with the result that, in 20 or 30 years, those who follow us will have to pick up the pieces. That thought, more than any other, should motivate the Government to act, and to act now.
§ The Minister of State, Treasury (Mr. Anthony Nelson)I hope that everything that I say today will reassure the House that the Government take investment matters very seriously, and that we have supported several measures to try to crack down on mis-selling.
I congratulate the hon. Member for Southampton, Itchen (Mr. Denham) on being chosen for the debate and on selecting a subject which is of great importance to millions of people outside the House and which, as he acknowledged, also has economic implications.
The Government have sought in several ways to improve investor protection, not only in the Financial Services Act 1986. Increasingly, in recent years, following some unhappy incidents of mis-selling and the collapse of certain firms, we have revisited the regulations under the legislation and also the personalities and the mechanisms for giving effect to the regulations.
We have increasingly created a system of law and a structure of regulation which can provide greater investor confidence. However, it is not a sector in which absolutes, certainties or guarantees can be provided. Self-regulation lies best with the investors themselves. There is a responsibility on individuals to seek good advice, to spread their investments, to ensure that they rely to some extent on their education and common sense, and not to confuse authorisation with a guarantee. Those are essential components in sharing the responsibility for safe and secure investment in the United Kingdom.
The hon. Member for Itchen was honest enough to admit that part of his interest in the subject was aroused by the fact that he had been mis-sold a personal pension. 700 I think that anyone should be careful about approaching the hon. Gentleman in future in that regard as he has demonstrated a considerable grasp of the subject and it would now be difficult to mis-sell him anything. However, I welcome his honest admission that it is an extremely complicated subject even for intelligent people, let alone those who are more vulnerable to mis-selling. It therefore behoves all of us, in trying to build systems of investor protection, to remember the simplicity alongside the accustomed complexity that is sometimes necessary to deliver that protection.
§ Mr. DenhamIt is not correct that I became interested in the subject because I was mis-sold a pension. It was only when I became interested in the subject that I realised that I had been mis-sold a pension. I should hate to think of all the consumers out there having to spend as long as I did trying to understand the industry before realising that they have been sold a pup.
§ Mr. NelsonA little knowledge has proved to be a valuable thing for the hon. Gentleman, and I am delighted about that.
The hon. Gentleman demanded many changes. I wish to reflect carefully on several of his arguments. I shall also make it my business to ensure that the positive suggestions that he made are considered carefully by the regulators outside the House—the Securities and Investments Board and the Personal Investment Authority. Indeed, I believe that they are already considering several of his suggestions.
If I may say so without causing embarrassment, the contents of the hon. Gentleman's speech were far more specific, relevant and constructive than those of the speech of the hon. Member for Dunfermline, East (Mr. Brown) who, when speaking to the Labour finance and industry group on 1 May 1995, heralded a great package of new Labour plans for investor protection. In fact, it was nothing of the kind, and the thin coverage subsequently given by the media to the paucity of his proposals shows what a vacuum it was. Today, however, we heard a speech of substance. I give credit where it is due, and it is due to the hon. Member for Itchen.
The hon. Gentleman suggested that there should be direct regulation of salesmen. I know that the PIA is considering that, but I would say to the hon. Gentleman and to the hon. Member for Edinburgh, Central (Mr. Darling), who came close to recognising it towards the end of his speech, that there must always be a balance between the imposition of regulation and the cost of compliance. The costs are already the source of great complaint from the industry and, as was recognised in the debate, they are passed on to the customer—no one else pays them—so there must be a limit to the extent to which we can bind the Leviathan of that industry with the tape of regulations and requirements which impose impossible costs on the viability of those who offer those services, as well as the people who invest through that medium.
§ Mr. DarlingDoes the Minister not grasp my argument that many of the costs are being incurred in a futile manner because they achieve nothing? If we are to spend any money on regulation, we should try to do so effectively, so that it bears fruit. At present, we have plenty of regulation, but it is not clear that it achieves the ends that we want.
§ Mr. NelsonThat is simply not true.
701 Let us consider the important issue of personal pension mis-selling, which was mentioned by the hon. Member for Itchen. That problem came to light initially partly because the Life Assurance and Unit Trust Regulatory Organisation identified certain problems. It was then the subject of scrutiny by the SIB, which in December 1993 identified the problem and said that it would undertake a survey to identify the extent of it.
In March 1994, the SIB introduced revised rules for selling to prevent such mis-selling occurring in future. In October 1994, the SIB made proposals for the reviewing of the cases of all those people who had been mis-sold personal pensions. I am amazed that the hon. Member for Edinburgh, Central has not got the message. That is not a deficiency but a success of the regulatory system. It may be uncomfortable. It may be costly for people to identify and seek redress—at the cost of the industry—for the cases in which mis-selling has occurred, but a responsible and effective regulatory system should aim to do exactly that.
Let us consider the report about endowment mortgages which was recently published by the Office of Fair Trading. It may be uncomfortable for the industry and for people who feel that they should perhaps have chosen a repayment rather than an endowment mortgage, but it would have been even more uncomfortable if that situation had persisted without being identified and some redress suggested. That is another success of the system.
Success is not always welcomed as a beneficial move from which everyone gains. We sometimes have to recognise that a part of success lies in identifying where problems have occurred, however difficult it may be to face up to those—and, my goodness, the costs and problems of facing up to personal pensions mis-selling are considerable; nevertheless, the Government and the regulatory system set up by the Government's legislation have identified those problems and made proposals to redress them.
It is not a perfect system. It is not a perfect world. We shall not always uncover every instance of mis-selling. However, considering the changes that have taken place—especially, with the establishment of the PIA, the re-vetting of more than 5,000 firms which are being admitted into the PIA—the hon. Member for Edinburgh, Central, should be more generous in recognising that the Government are, through our system, seeking seriously and substantially to identify the ways in which things have gone wrong and to make redress where appropriate.
§ Mr. DenhamDoes the Minister accept that the pace of change is far too slow? It is nine years since the passage of the Financial Services Act 1986, and we still do not have a satisfactory regulatory system. Does the Minister accept that there is a complete lack of evidence that the regulatory system can respond quickly enough and develop quickly enough as new problems become apparent?
§ Mr. NelsonNo, not really. It is true that I have my frustrations with the existing system, but such frustrations would be felt about any system. Putting a statutory label on either an existing or partially revised system is not a panacea. The answer does not always lie in structures or the people within them, but it certainly lies in the decisions made by people within whatever structure exists.
702 The Labour party is hung up, as it always has been, by legislation. A week ago, the first words of the hon. Member for Dunfermline, East were, "We will regulate. We will legislate." That was his clarion call and that is the starting point for the Labour party. I do not want to introduce a partisan note, because the hon. Member for Itchen did not make a partisan speech, but passing simple legislation designed just to shake up the system does not mean that people will not be mis-sold inappropriate products. The answer is much more complicated. We must consider some of the genuine suggestions made by the hon. Member for Itchen to see whether we can improve the system.
The hon. Gentleman referred to personal pensions and the state earnings-related pension scheme. It is right that the SIB should give priority to redressing the mis-selling of personal pensions because, although we shall not know the extent of that mis-selling until we have the results of the review that is being conducted at an individual level, the problem associated with SERPS appears to be a smaller one than that of personal pensions.
The hon. Gentleman suggested that the Government were responsible for all the problems of mis-selling because we promoted personal pensions. It is true that, when my right hon. Friend the Prime Minister was a junior Minister at the Department of Social Security, he was instrumental in bringing the programme forward. I say that with acclaim, not recrimination, because personal pensions were, have been and remain appropriate for many people. They are a flexible means of providing for retirement and many people should continue to hold one or to take one out in the future.
The Department of Social Security has, however, made it clear in the leaflets that it has published and in other publicity that people should think carefully before entering into personal pension arrangements. It is a fact, however, discovered and redressed within our existing system, that mis-selling has happened. That is being put right in order to re-create and redress the confidence that the industry should rightly deserve.
As I said when the Office of Fair Trading report on endowment mortgages was published, and which I have now read, I shall wish to consider its contents carefully. We hope and intend that the system of disclosure which came into effect at the beginning of this year will go a long way towards redressing some of the mis-selling problems and those caused by inappropriately taking out endowment mortgages. I place rather more reliance on that transparency than do the hon. Members for Itchen and for Edinburgh, Central, who seemed to suggest that disclosure would not do the trick and was not sufficient in itself. I agree that it is not sufficient in itself, but I place rather more reliance on it than I perceive that they do.
I welcome the fact that the Council of Mortgage Lenders is working on a code of practice for the selling of mortgages. The building societies ombudsman now has a pre-contractual remit—admittedly, not retrospectively dated—which essentially means that he will be able to investigate individual cases when people complain that they have been mis-sold a mortgage. He may be able to make recommendations in such cases. Endowment mortgages come, of course, under the Financial Services Act 1986 to the extent that the endowment or investment aspect is covered by it.
703 The hon. Member for Itchen made an important point about the relationship between the problem of mis-selling, changes in the industry and opportunities within the European Union. He rightly said that we are ahead of other countries, if that is the right description, in having funded pension schemes and long-term savings schemes. I agree with him that there is a tremendous opportunity for our investment services industry to be the haven and trustee for long-term savings within the European Union. I also agree that part of the prospect of obtaining that business will be delivered only if confidence in the industry and its reputation are recreated and adequate arrangements, both fiscal and regulatory, are introduced in the European Union to deliver that. Hon. Members will know that some of the changes that we have introduced in this year's Finance Bill are determined to exactly that end.
About a week ago, I announced proposals for open-ended investment companies. I predict that they will be one of the most exciting vehicles for long-term savings in this country. Over a number of years they will transform the landscape of savings in this country. As unit trusts convert into open-ended companies, we will also be on a par with many of the savings products and savings vehicles sold out of Luxembourg and Dublin docks. We should all have a party when some of the firms come home from those locations and attract the funds, employment, liquidity and benefits to the United Kingdom economy. That will happen as a result of some of the Government's proposals in conjunction with the industry. That is a positive development.
The hon. Member for Itchen referred to commission. He was concerned that the commission-led system, as he saw it, led to some bias in the selling of investment products. He would prefer a system that rewarded best advice. I share and understand those sentiments, but I have some difficulty in endorsing proposals either to put an end to commission, which he is not suggesting, or to introduce some rapid change to create alternative systems, as yet unspecified, which reward only best advice. As the hon. Gentleman said, sometimes the best advice may be to do nothing or not to buy any product.
People can pay an independent financial adviser to give them advice, which may be to do nothing. That is the benefit of such a person and that is what those advisers proclaim to be their unique role. Commission is an 704 interesting but complex issue. In its absence, will people pay others to receive objective advice? I am afraid that all experience tells us that people simply will not do that. People are not prepared to go to another person and write out a cheque to him in order to get independent financial advice. They will get that advice if it appears to be free, and then subsequently a commission payment is involved.
My fear is that by arbitrarily getting rid of the commission system, if one were to be so radical, one would end up with much lower standards of investment advice and much more inappropriate selling of investment products. I do not think that the answer lies in such a radical move, but I understand the sentiment which led the hon. Gentleman to suggest that we should reward best advice rather than allow it to be market-driven by those who could offer and provide the greatest commission.
The hon. Gentleman made an important point about training and competence in the industry. I hope that he, like me, welcomes the fact that the PIA recently issued proposals and rules for training and competence, which will require all investment advisers to obtain a financial planning certificate. There will be no grandfathering into the scheme, because all those advisers will have to take the new exams to varying levels. Various organisations, such as the Securities Institute, have a keen desire to improve professional competence through more adequate training. I believe that in the future we shall see a sea change in the quality of people on the doorstep and on the telephone selling of investment products.
The hon. Gentleman expressed doubt that disclosure would do the trick and called instead for some product control. Some of his proposals would not so much control the product as attach a few bells and whistles to the proposed system. He called in particular for comparative company charges, persistency rates disclosure and current average industry consumption, but the PIA is already proposing to publish lapse rates. Proposals relating to key fact documents will also be implemented. The Securities and Investments Board will review the system of disclosure once it settles down.
In these and other ways the Government, the SIB and the PIA are taking the issue of investor protection very seriously. We hope that the future will be better than the past and that many of the problems that the hon. Member for Itchen and others have identified will be solved. I thank the hon. Gentleman for the positive suggestions that he has made, and I hope that my answer has reassured the House.