Speech by Martin Wheatley - Managing Director, FSA - at the ABI conference 'A way ahead for conduct regulation'
Introduction
Good morning, it is a pleasure to be here today.
I am pleased to see the ABI have called today’s conference, ‘A Way Ahead for conduct regulation’ – because that’s exactly how I see it. We must take full advantage of the big opportunity before us to improve regulation in this country.
And so I must congratulate Otto for the thoughtful and constructive paper the ABI publishes today. Reforming conduct regulation is a big job, and your contribution is both timely and welcome. I would also like to thank Maggie Craig who is driving this conduct agenda forward.
I am not going to steal Otto’s thunder, but it is clear from the paper that insurers share some of my optimism about the future, but there are areas where you would like more clarity, debate and discussion. With this in mind, I would like to make sure that you take three key themes away from my speech:
- We appreciate that the environment in which we all operate is changing. As a regulator, we are changing as we prepare to become the FCA. As part of this, our expectations of firms’ are changing.
- We want to continue to work with you as the ABI responds to this change – and in doing so – ensure that customers’ interests are at the heart of your business models.
- Finally, now more than ever, we appreciate the vital role that a stable and trustworthy insurance sector plays as part of a thriving financial services sector.
How we are changing
First and foremost, I encourage you to all read our FCA Approach Document which we are publishing at the end of next month. This paper will set out for you in greater detail how we will do our job. We want to reassure you about how we will use our new powers, and we want to show you what supervision of your firm will feel like.
We have built into this document the feedback from those who attended our FCA presentations during the summer and all that we have heard from you and others over the past year.
But ultimately, we have been true to our core directive: to find the most effective way to ensure that markets work well and deliver a fair deal for customers.
It is vital that we get this right. Financial services is a hugely important industry that touches the lives of most people in this country. Regulation has to strike the right balance between allowing the industry to thrive, and ensuring firms deliver a fair deal to their customers.
Millions of people rely on the firms in this room, whether it’s the insurance you provide to protect a householder, the annuity that provides a pensioner’s income, or the long-term savings plans that help someone prepare for their future. Our economy, too, is hugely reliant on a successful insurance industry run with integrity, and the peace of mind you give and the services you offer.
The case for change has been made well – by the government, which initiated these reforms, and other stakeholders, who see the benefits that more focused regulators will bring.
And so I do not want to dwell on why things are changing. Instead I will talk about our plans for the future and how we will do our job.
This move to a new regulator comes at a time when we have a struggling economy, a debt crisis weighing down most of the developed world, and several regulatory initiatives, domestic and European, that will affect your businesses.
Adding two new regulators on top of all of this is clearly going to be a big test for you. But my message to you today will be that the change ahead will be good for your business, and good for your customers. It’s true, the FCA will challenge you more. We will expect more from you, and from your interactions with your customers. But we will do this to make the whole market work better, to get a fairer deal for people, and to put an end to the negative stories about financial services that have become too common in recent years.
What is clear is that there are also some things we must do differently as a regulator. We need to be better at spotting the risks to consumers, we need to be able to decisively deal with the events that come to a head, and we need to do all of this more quickly and with better results for consumers.
What do we expect from insurance firms?
We need to remember that most people have fairly straightforward needs and expectations. They want insurance to protect them and not discover too far down the line they are ineligible to claim based on some hidden clause that wasn’t made clear at the start.
They want to be able to save and invest in order to deliver on their long-term financial needs and for the products they buy to perform as they have been led to expect. And, when they come to retirement, they want to be able to access their savings so they get income in the best possible way for them.
In short, they want an industry that provides the everyday services and products they need in a straightforward way, and that delivers on the promise to them.
And they want people like me to help make that happen. So that is my focus as I prepare for the FCA next year. My job is simply to help consumers get that fair deal. I understand the importance of firms having viable business models operating in a vibrant market, so I am not here to step in where it is not necessary or to stifle innovation and good ideas.
But what I am here to do is to put the spotlight on conduct, because how people behave has such a huge impact on financial markets.
In particular, we will look at the product lifespan – from the boardroom to the point of sale.
This is a marked contrast to the previous approach – which focused in detail on issues like giving consumers the right disclosure, and highly regulating the sales process – but was poorer at connecting the issues across firms. It didn’t challenge firms’ business decisions sufficiently and didn’t prioritise the right intervention.
The biggest difference is going to see us move from what was essentially a reactive approach – looking back at what had happened – to a more pre-emptive approach. This is about identifying and heading off issues before they turn into big problems for consumers.
This is not about removing all risk – we never want to be in that place. Things will go wrong from time to time, but when they do we will be stronger about seeking redress for consumers.
This is going to be based on us making forward-looking judgements about firms’ business models, product strategies and how they run their business. This will help us to intervene earlier to prevent problems from turning into actual harm.
We will do this based on a better understanding of how the impact of current market practices could play out in the future – through better analysis of parts of the market and business models, and more intelligence gathering. As well as reacting to events, we will work to understand how what’s going on in the economy, the market, and in individual firms’ businesses is linked and can generate risks to consumers. We’ll need to engage much more with you, and your trade bodies, and for you to work with us in an open and collaborative way for us to make this work.
We will combine regular assessments of your firms with a better way of dealing with issues across firms, and a faster way of reacting to events as they occur.
An example of how we’re moving towards this is how we worked after the recent floods in June and July. We contacted insurers to find out how policyholders had been affected and what the insurers were doing to ensure they paid claims quickly and effectively to ensure minimal delays. The old FSA may not have done this, and if they had, they would have focused on how the floods affected the insurers’ reserves. Our conduct focus allows us to concentrate on how you deliver to your customers.
Overall, this is going to mean fewer FCA staff tied to particular firms than now. This will free up more staff to deal with issues across firms, or to react more nimbly to problems as they come up.
We think this new approach – when combined with a new, more confident and challenging culture in our staff – will be better at spotting the risks in firms, and faster at dealing with them.
Culture change to ensure ‘customers at the heart’
We’ll also be expecting some firms to change their culture and the way they view consumers. Firms must balance the way products are developed and sold in the right way against making profits. This must also be balanced against consumers taking more of an interest in the products they purchase – consumers need to understand that poor decisions can ruin lives, although we have to be realistic about how much people can understand about complex products.
We’ll demonstrate some of this in our work to make sure the design and delivery of products is done in a way that leads to fair results for consumers. I would like to stress that I know the ABI and many of the firms you represent have changed the way products are developed and sold to ensure that consumers do get a fair deal. I would also like to acknowledge the work that Otto has personally driven to ensure the FSA’s ‘Treating Customers Fairly’ work has been adopted as part of the way insurance firms operate.
However, as we prepare to become the FCA, we have to learn from the FSA’s experience with many product mis-selling issues, where problems have often occurred when products designed for a specific market were sold widely to other people.
If you look back at some of the FSA’s enforcement cases over the past year you will see what I mean. It is cases like the pensioners who thought they were buying a normal savings product from their bank, only to find out later they had been persuaded to buy a risky structured product that put their money at risk. That product was suitable for someone, but not for them.
If necessary, we will be ready to intervene directly by making product intervention rules to prevent harm to consumers.
When we do this it will not be a tickbox approach, where we’re looking at what you’re doing, armed with clipboards. It will be across the whole process – the structure of the product, the target market, the distribution process and wider sales and marketing, as well as detailed individual product issues.
The approach will cover restricting the use of specified product features or the promotion of particular product types to some or all consumers. We will also be able to make rules to ban products that pose unacceptable risks to consumers, and we will do this without consultation where we need to step in quickly. Another change allows us to make rules ensuring consumers get their money back if they are sold something after a ban.
This is something that has worried a few in the industry, but I don’t believe this should be a concern for any responsible firm. It will make us a more effective regulator – and there are times in the FSA’s past when having this up our sleeve would have got better and faster results.
But those instances are few and far between, and so this isn’t something that is going to be used every day, week or even month. We will be selective and proportionate, but the point is that we will be able to use these powers when needed.
We have already started along this road. You will have seen that last month we proposed to ban the sale of high-risk unauthorised collective investment products to most consumers. What we’re saying is that if you have a large, well-diversified portfolio, you are welcome to invest in these schemes. But what will no longer happen is people being persuaded to cash in their final salary pension and invest it through a self-invested pension in schemes based on off-plan property in eastern Europe or golf courses in Mexico.
This illustrates that, when we do step in, it will be where it’s clear we need to put a stop to something. In the example I’ve just given, we found that three-quarters of the sales made on these unauthorised schemes by financial advisers were unsuitable. This is a shocking proportion and, when there is that level of poor practice out there, we will not stand by and let it continue.
Related to this is the idea some have of the FCA giving the stamp of approval to products before they are launched. We have looked at whether we should have a wider product pre-approval scheme and have ruled it out for now. We don’t believe it would work for two reasons. Firstly, it would take up far too much of our resource, and secondly, it would lead consumers to assume that all products endorsed by the regulator were therefore ‘safe’.
An example of our focus on products is low value in general insurance products, which you may have seen us raise in our Retail Conduct Risk Outlook, where we set out our concerns that some products offer limited value to customers. We have found almost every type of poor practice here, ranging from unfair terms at the product design stage, through to mis-selling in distribution, and then, after the sale, poor claims and complaints handling. A specific example is misleading marketing material where consumers can be drawn to a product due to the levels of cover and service offered but we have seen cases where, despite the sales literature, often the firm has never paid claims any where near the sums insured. We have also seen pressure-selling that only stopped only after a change to a sales script – which resulted in a significant drop in sales.
Using our existing powers, we have already taken action to put a stop to such practices – stopping sales of products altogether, conducting customer redress exercises, changes in senior executive and board appointments – and our enforcement team are still investigating a number of firms. We’re not going to tolerate ongoing poor practice here and will carry out further work to check improvements have been made.
We often find that when products like these have been mis-sold, it is because salespeople have been encouraged to push as many as possible because of poorly designed reward schemes.
This is something I want the FCA to look at more widely, and you may have seen the comments I made a couple of weeks ago, after we found an unacceptable level of risk of mis-selling from firms’ reward and incentive schemes.
As I said then, we need to deal with this once and for all because it is an issue that has been allowed to carry on for too long, but one I aim to personally stop.
This will be one of the ways we will demonstrate our new approach. We will look to the root causes of problems, and get behind what is really creating problems in the market.
One of the issues we will look for is where markets are not working properly, as we will have a new objective to promote effective competition in the interests of consumers.
Some have asked me what our role will be. This is something that we are thinking through at the moment, but I believe it broadly comes down to four areas:
- firms competing for business by offering better services, better value and the types of products their clients want and need;.
- no firms sustaining excess profits;
- firms innovating and developing new products, or providing services in different ways; and
- a market where the successful firms are the ones that respond most effectively to consumers’ genuine needs.
The government has given us this objective because they believe there are areas where poor competition needs improving.
Whatever the causes of poor competition, they are often complex, and arise from a combination of problems rather than one area.
For example, one of the problems with many sales of payment protection insurance was not just that consumers lacked information, but also there was very weak competition at the point of sale. It was easy for firms to take advantage of the way people behave at the point of sale and persuade them that buying PPI alongside their credit was a good idea, or indeed obligatory.
This will make it important that we do a sound and thorough study of the market and that we think about solutions that cover more than one aspect of the problem.
We are very clear that promoting effective competition does not mean simply having more firms in the market. Sometimes we will need to protect consumers by restricting the activities of firms designed to give them a competitive advantage but which do not promote effective competition. For example, the Retail Distribution Review will prevent firms from competing for business by offering more commission to financial advisers than rival firms. The RDR also aims to help one of the causes of poor competition by helping consumers understand what they are paying for. As the implementation date of 31 December is fast-approaching, firms’ response to and readiness for the RDR is a big focus for us and we will ensure that ongoing policy interests are achieved. We want to make sure that firms do not just implement the detailed requirements of the RDR, but take into account its spirit and the central aims it is designed to achieve.
Conclusion
I know I have provided you with a lot of information today on how we will be changing and what we expect from you and the insurance industry. I would like to stress that we do appreciate the productive relationship that we have with Otto and the ABI. On that note I would like to reiterate:
- We appreciate that the environment in which we all operate is changing. As a regulator we are changing as we prepare to become the FCA and, as part of this, our expectations of firms’ are changing.
- We want to continue to work with you as the ABI responds to this change – and in doing so –- ensure that customers’ interests are at the heart of your business models.
- Finally, now more than ever, we appreciate the vital role that a stable and trustworthy insurance sector plays as part of a thriving financial services sector.
No comments:
Post a Comment