§ 4 pm
§ Dr. Vincent Cable (Twickenham)I am grateful for the opportunity to introduce this subject, which is a big one and might have benefited from a longer debate. Given the limited time, I shall try to concentrate on three topical issues. The first is financial advisers and polarisation, the second is the role of financial health checks where the Government have some interesting ideas that may come to fulfilment and the third is the role of simple products for low-income consumers and the role of financial advice in that.
1 have not sought the debate in a party-political spirit. I am increasingly concerned as an ordinary Member about the number of people who come to me with serious financial problems arising from failings in the systems of financial advice. Clearly in a falling market more people find themselves in financial distress, but many of the difficulties that our constituents have arise from deficiencies in the advisory system. I shall quote one or two typical examples.
A gentleman came to me last week. He had an endowment mortgage that he was probably ill advised to take that will not be remotely adequate to redeem his mortgage in a few years' time. He wants restitution. He cannot go back to his financial adviser because he has gone out of business. He cannot therefore go to the financial ombudsman either. There is a special fund to help people like him whose financial advisers have gone bust, but the cut-off point for using that fund was two months earlier than when he took out the policy many years ago. He is completely bereft of any potential recompense and faces a difficult financial situation.
Two weeks ago a lady came to my regular weekly surgery. She is a well-organised, highly intelligent woman but she admitted that she was not terribly clued up on financial services and she therefore entrusted decisions on her financial future to an adviser whom she trusted. He had advised her some time before to put all of her savings into Aberdeen split investment trusts, which she did. Most of it is now completely worthless. She admits that it was not an intelligent thing to have done, but she was unsophisticated and trusted the adviser. The matter is now with the financial ombudsman and may or may not come to realisation.
Like most other Members, I have a clutch of Equitable Life investors. There is a long story there and I do not intend to go into it now. Many of them were people who took out Equitable Life policies in good faith after the House of Lords ruling on the advice of financial advisers who did not point out the implications of that. Again, the financial ombudsman is involved, and there are many similar cases. I am sure that the Minister has many low-income consumers among her constituents who were persuaded to take out private pensions, endowments and other investment products when they would have been much better advised to have cut their consumer or housing debt or simply to have held cash. There is a big issue about the quality of financial advice.
65WH The other aspect is that we do not have a very good forum for discussing and debating these matters in Parliament, despite the fact that they affect many of our constituents. It is partly because many of the policy issues have passed to the Financial Services Authority. Many of the issues that I will raise today are currently subject to consultation papers by the FSA. They rarely come back to us through financial statements by Ministers. Even the Select Committee on the Treasury has not, as far as I can see, got into this subject. The Minister may have some ideas about how we will get some report back from the FSA on these issues that so affect our constituents.
The other general point that I want to make by way of introduction is that we are in a potentially dangerous position in which there is an increasing demand—certainly an increasing need—for financial advice, at a time when the provision of professional financial advice is contracting. The point about need is illustrated well by a recent survey carried out by the Association of British Insurers, the results of which suggested that about 45 per cent. of low-income consumers, and about 23 per cent. of middle-income consumers, would invest only if they had had access to advice from someone who they trusted. If we, as a society, want to address the problem of the savings gap, better provision of financial advice will be needed.
The problem is that the availability of professional financial advice is declining markedly. There are still independent financial advisers, but it is estimated that approximately 11 million people are now out of their reach—people whom financial advisers consider it is not worth their while to service because they are not sufficiently reliable or have too low an income. That figure has increased from 8 million a decade ago. Those 11 million people are out of the range of the financial advice professionals. That is partly because financial advisers' costs are increasing, due to the increased amount of time that they have to spend with individual clients, and the cost of regulation and of necessary training.
Many independent financial advisers are experiencing difficulty in obtaining professional legal immunity, and many have suffered extreme demoralisation by being made the scapegoats—in some cases, justifiably—for some of the mis-selling scandals that have occurred. I occasionally look at their literature and for the past year a quotation has been reverberating round the profession, which has probably been taken completely out of context, but is attributed to Howard Davies. Mr. Davies is alleged to have said:
I am trying to get all the IFAs into a barrel and shoot them one by one.He probably did not say that, but the independent financial advisers seem to believe that he said it and have circulated it widely. That reflects their sense of persecution and demoralisation.Thus there is the problem of increasing demand for financial advice and diminishing supply. The issues that I wish to raise with the Minister all arise from that. My first point concerns polarisation in relation to financial advice. The Financial Services Authority has been running a consultation, which finished yesterday. How do the Government see their role? Do they have a view 66WH and if so, will they express it, perhaps by making a statement? Do the Government see the issue as one that is purely for the financial services regulator?
As I understand it, the current system divides financial advisers essentially into two groups: those who are tied to a particular product, and those who are completely independent. That model was found to be defective by the competition authorities and, as a result, the FSA has had to devise another model, which will require companies to become multi-tied: they will sell multiple products, but will be tied to a group of particular suppliers.
It has become clear from the consultation feedback that many of the consumer groups, which have the wider public interest at heart, are alarmed by the implications of what the FSA has proposed. One of their concerns is that there will be severe conflicts of interest, in which so-called independent financial advisers will be owned by a bank which will, in turn, be selling the tied products of that bank and of other suppliers, and that the consumer—the purchaser of financial advice—will not be aware of where the linkages are. There will be a great deal of confusion.
Moreover, the consumer groups make the point that financial products are not like baked beans, sold as competing items in supermarkets, but are sophisticated, complex products that do not lend themselves to that sort of competition. They also fear that the number of independent financial advisers may contract considerably, and that we will be left with a small elite that will earn their living not, as now, from commission, but from fees to high-income consumers.
The debate is somewhat technical, but its implications are important, because we could face a situation in which the supply of professional financial advice is even more restricted than it is now and is virtually unavailable for low and lower-middle-income consumers.
That leads me to my second point, which concerns the Government more directly and is about the idea that there should be a system of providing generic advice to individuals. In other words, if a member of the public wants advice not on the question "Should I buy insurance product A or B?" but on basic questions such as "Should I be saving, paying my debts or putting the cash under my mattress?", to whom can they go for advice? I know that the Government have toyed with the idea of encouraging community-based systems of advice to help, in particular, low-income consumers with those questions and managing their affairs better.
In July last year, the Financial Secretary to the Treasury made a statement on the Sandler review, which encouraged that idea. She said:
Those on lower incomes also have a need for financial advice. Citizens advice bureaux and other money advice centres…offer good-quality, impartial advice to many people in financial difficulty. I am pleased to say that the FSA has offered to fund research into extending the role that those organisations might be able to play. I welcome that, and look forward to seeing the results."—[Official Report, 9 July 2002; Vol. 388, c. 746.]Shortly after that, the Green Paper on pensions was introduced by the Secretary of State for Work and Pensions. Somewhat to my alarm, and the alarm of 67WH many in the consumer sector, he seemed to rationalise the problem differently. He said:To broaden access to advice, we will work with the Financial Services Industry to develop mass-market financial advice in high street banks".—[Official Report, 17 December 2002; Vol. 396, c. 695.]It does not require a great deal of imagination to see that banks have a potential conflict of interest and that any advice that they offer is unlikely to be disinterested. I am not being paranoid and suspicious; the National Consumer Council, which is a great deal more professional than I am on such matters, expressed a warning, to which I hope the Minister will respond specifically. It said:We are concerned that the Treasury may assume the financial health check will be delivered by banks and lead seamlessly to the purchase of stakeholder products. We do not think that this is a good starting point for developing an advice service to meet the needs of low-income consumers.I want to pose a series of questions to the Minister. I know that research is being conducted and that the FSA will present its thoughts, but it would be useful to have some indication of the Government's position. I should point out that the Financial Secretary wrote to me on Monday, so I have some of this in print. Do the Government see a major role for the voluntary services, including the citizens advice bureaux of this world, in performing the services, or are they leaning more in the direction of encouraging the commercial provision of generic advice? There is clearly a role for both, but where will the emphasis be?If the future lies with organisations such as the National Association of Citizens Advice Bureaux, who will fund them? I would have thought that, given the damage that has been inflicted on their reputation recently, the banking and insurance industries would be interested in building up generic advice to sell more products, even if they were not necessarily their own. It should not be too difficult to secure their agreement to a small levy to fund such a service, so have the Government tried that and what feedback have they had? Have they considered the post office network as a possible outlet for such a financial advisory service? I know that they have toyed with the idea of a sort of general practitioner information service but they have not pursued it, and that could be one possible outlet. Will the Minister give some indication of the Government's current thinking? Do they have serious ambitions for the development of a generic system of financial advice, and what form would it take?
I want to raise a particularly topical issue in my final two minutes. The Government have promoted the idea of simpler investment products for low-income consumers. The basic thinking is that by fixing a cap on charges and having products with less investment risk, it will no longer be necessary for them to be so tightly regulated—the Government have used the phrase "light-touch regulation". The concept emerged from the Sandler review. As a result of the FSA consultation some serious worries are beginning to return about what the new approach could lead to for low-income consumers. Although the Government-promoted, low-risk, simple products could be less risky in some respects, they could be highly risky in others. The jargon 68WH is "suitability risk", which goes back to the question whether it is desirable for many consumers to buy investment products or whether they would be better using their money in other ways, as cash or for debt reduction, for example, and who will provide that advice. Linked to that is the worry about potential mis-selling. If the products will be lightly regulated, particularly if they will be taken out of the FSA framework, consumers will no longer have recourse to the financial ombudsman and they will not enjoy even the current relatively limited consumer protection. What is a very good idea could be undermined because of lack of attention to the serious problem of financial advice.
Financial advice, as opposed to products, is a big subject and I want to raise with the Minister how we might progress the debate in Parliament and how the specific concerns might be addressed.
§ The Paymaster General (Dawn Primarolo)I congratulate the hon. Member for Twickenham (Dr. Cable) on securing the debate. As a Member of the House, he closely follows what are important issues for our constituents.
The Government, the Financial Services Authority and the Financial Ombudsman Service all recognise that what we are discussing is a serious problem for many people. I note the hon. Gentleman's opening remarks about the ability of the House, given the regulatory framework, to be kept informed and to have the opportunity to consider these matters. I hope that he will forgive me if I say that I want to reflect on the points that he raised and that I or my hon. Friend the Financial Secretary will write to him about them.
The Financial Services Authority is taking proportionate and well-directed action to protect the interests of people whose endowments may deliver disappointing returns. The FSA is also ensuring that people are told if their endowment is unlikely to deliver the cash sum originally expected, a point highlighted by the hon. Gentleman in his opening remarks. It is a matter of great concern for many of our constituents and by taking action now the FSA is helping people to plan alternative means to meet their financial objectives. When firms have been at fault and policy holders have lost out, the FSA, with the industry and the Financial Ombudsman Service, is taking action to help to put it right.
The hon. Gentleman raised several specific issues with regard to new developments in the industry, to which I shall refer briefly now. He referred to the many different consultations taking place showing the diversity of the financial industries and the ever-increasing importance of financial products in our constituents' lives. They need to know how to gain access to appropriate advice from an adviser who clearly understands what the individual is looking for, the product that they want and the basis of risk.
The hon. Gentleman also raised some specific questions about what is known as the health check and the polarisation rules, and I shall deal with each in turn. On polarisation, the hon. Gentleman knows—this was reflected in his contribution today and in many other of his contributions—that the financial services market is 69WH experiencing change and innovation. One area in which change is taking place is the polarisation rules, which have hitherto restricted the ways in which investments can be sold, limiting business innovation and choice to just two business models. After a long—I stress the word "long"—consultation exercise, the regulator has made it clear that it will proceed with reform by liberalising the market and making it possible for the vast majority of consumers to have access to a greater range of products. That should be good for consumer choice.
The hon. Gentleman referred briefly to the split between independent financial advisers and tied advisers. I can let him have my figures on this. When we look at the representation of such advisers through the years from 1998, when the consultation was announced, we see a decline in tied advisers and an increase in independent financial advisers. There had been a clear concern that somehow independent advisers would be undermined, or that tied advisers would be given an unnecessary advantage in the market, but that does not appear to have been the case. That said, the hon. Gentleman was right to flag up those concerns.
The reforms will allow a greater choice of investment products to be offered to the overwhelming majority of consumers, who hitherto have been offered products by only one group. For instance, 80 per cent. of consumers use a tied distribution channel. The reforms should make the basis of remuneration clearer, encouraging advisers to be more transparent and competitive about the price of their advisory services. The reforms are the result of an exemplary consultation process. The regulator listened to criticism and amended the proposals accordingly. It is important to recognise all that.
The hon. Gentleman touched on the complexities of this issue, the problems of mis-selling and how consumers should gain access to advice. He knows from the work already undertaken by the FSA and the financial ombudsman that great strides have been made. The hon. Gentleman goes to the heart of the issue with the interaction between specific and generic financial advice, particularly in relation to those who for one reason or another are excluded from obtaining specific advice. They may not know that such access is available or, in some circumstances, they may not be able to afford it. The routes through which they seek financial advice and the reasons why they do so in the first place are also relevant. For instance, the hon. Gentleman referred to citizens advice bureaux.
Clearly, there are now a wide range of advice activities, supported by central and local government and the regulator. Community and voluntary groups are also leading participants in delivering trusted and effective advice. The Government have been working to see how the work of community groups might be supported, allowing them to enhance the services that they offer. For example, citizens advice bureaux have an excellent reputation for offering debt advice. The hon. Gentleman rightly raised how that might help consumers to avoid problems associated with over-indebtedness and how that might be built on to extend access to financial advice generally.
70WH The hon. Gentleman touched on the financial health check, which has interesting potential for the coexistence of the different types of advice to which people need access. Since the financial health check was set up, the FSA has developed successful consumer information through its comprehensive range of publications and websites. That includes the comparative tables, which give detailed factual data on key financial products, and the firm check service, which allows people to verify a firm's authorisation status. As the hon. Gentleman said, however, the FSA is keen to see how its service to consumers could be developed further to help people to plan their finances, and it is working on an interactive programme for the web or a CD-ROM that would provide people with a financial health check.
The idea of a health check is that people would input specific information about their circumstances in response to questions. The programme will generate suggestions for priorities and where action might be taken in the short or long term. The health check will provide generic advice, not specific financial advice. I believe that that is what the hon. Gentleman is trying to get at: where is the missing piece, or rather, where can the service be extended? Specific financial advice would fall within the regulations. However, it will include directions on where to go for further help, and could include seeking professional advice where appropriate.
The health check could be used in several ways. It could be used by individuals in their own homes or by general money advisers. Firms might want to offer it as an additional service, which relates to the hon. Gentleman's point about whether there is a false divide between the "commercial sector" and the generic sector, and whether there could be a tool that all could use.
It is important that the health check concept is developed in consultation with those who might use it. Her Majesty's Treasury recently hosted a useful seminar where representatives of consumer groups, the voluntary sector and firms could view a prototype. Feedback was generally very positive, although, as always, there are many practical and technical issues that need to be resolved. With the benefit of this and continuing consultation, the FSA has now taken those ideas forward with potential users, with a view to having a fully developed health check available early next year.
I am sure that the hon. Gentleman can now see that with that sort of access and product, the role of generic advice, whether it be through debt advice services, CABs or local authority-run benefit services, can begin to take on a different dimension. However, we must still balance it with regulation where necessary and direct the consumer to the right, basic advice. Such advice does not need to be regulated, but is sound because it has come through the FSA.
I will give the hon. Gentleman an example of the potential of such a service. A financial inclusion project in Newcastle brings together local credit unions, CAB money advice, individuals who give advice on debt cases that the CAB has referred to them, and financial support and education, and offers all that to the local community. Added to that is the financial health check. So there is interaction between regulation, where appropriate, when a product is being sold, and proper advice, which is available on a generic basis.
71WH I do not have time to answer the hon. Gentleman's other detailed questions now, but I promise that I will respond to him at some point. However, I must tell him that there is no false divide between what the Secretary of State for Work and Pensions said and what the Financial Secretary said. They go together. The question is what must be regulated and what machinery 72WH is useable for people who want access to generic advice. That is how the Government are trying to make progress, and I again congratulate the hon. Gentleman on securing the debate. I know that he will secure many more, as he is an assiduous pursuer of issues that are very important to our constituents.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-nine minutes past Four o'clock.