Public Accounts Committee

Oral evidence: Financial services mis-selling: regulation and redress, HC 847

Wednesday 2 March 2016

Ordered by the House of Commons to be published on 2 March 2016

Watch the meeting: http://www.parliamentlive.tv/Event/Index/825d5866-2783-45e0-aad3-18249c776a14

Members present: Meg Hillier (Chair), Mr Richard Bacon, Deidre Brock, Chris Evans, Caroline Flint, Kevin Foster, Mr Stewart Jackson, Nigel Mills, David Mowat, Stephen Phillips, Karin Smyth, Mrs Anne-Marie Trevelyan

Sir Amyas Morse, Comptroller and Auditor General, Adrian Jenner, Director of Parliamentary Relations, National Audit Office, Joe Perkins, Director, National Audit Office, and Richard Brown, Treasury Officer of Accounts, HM Treasury, were in attendance.

Witnesses: Tracey McDermott, Chief Executive, Financial Conduct Authority, Caroline Wayman, Chief Ombudsman and Chief Executive, Financial Ombudsman Service, Charles Roxburgh, Director General for Financial Services, HM Treasury, and John Kingman, Second Permanent Secretary, HM Treasury, gave evidence.

Q1 Chair: Welcome to the Public Accounts Committee on the afternoon of Wednesday 2 March 2016. We are here this afternoon to look at the issues raised in the National Audit Office’s Report published just over a week ago on “Financial services mis-selling: regulation and redress”. We have a high-level panel in front of us today—I suppose we always have high-level panels, but it is a particularly interesting group—with all the people who are responsible for this area of work, which is obviously a huge issue of concern to our constituents. We have Tracey McDermott, chief executive of the Financial Conduct Authority, Caroline Wayman, chief ombudsman and chief executive of the Financial Ombudsman Service, John Kingman, second permanent secretary at Her Majesty’s Treasury, and Charles Roxburgh, also from the Treasury, where he is director general for financial services.

              We are obviously very interested in this area of work. There have been a lot of changes over the years, and the NAO has done a very thorough Report highlighting some areas where things have gone well but also the future challenges. We are keen to probe you on both the actions that you are taking and planning to take and the work that you are doing with companies themselves on the cultural behaviour of their organisations.

              In the end, it is the taxpayer who has been bailing out some of the biggest scandals that we have seen in this country. We don’t want the taxpayer to be footing the bill for problems in the future. While Treasury sets the policy, the other two of you are delivering the regulatory work on this. We have a Twitter hashtag for today’s sitting: #financeregulation. Our rapporteurs today are David Mowat and Chris Evans.

              Q2 David Mowat: May I start with Mr Kingman? This whole regulatory landscape that we put into place came out of the Financial Services Act 2012, the setting-up of the FCA and all that went with that. In your view, is it working?

              John Kingman: Yes, I think it is working. We have made a lot of progress on a lot of fronts, but it is definitely not finished. In the case of the area that you have for discussion today, what we are dealing with is a set of issues from the past. One of the challenges for the FCA and FOS is that they are, in a sense, dealing with all those issues from the past and working out how to strike the right balance, and we think they are doing a very good job.

              Q3 David Mowat: If it wasn’t working, how would that manifest itself in terms of what you would see? If what you had created was no better than the previous regime, how would we know? What measures are you using?

              John Kingman: There are all sorts of stakeholders who would be quick to tell us, and who are quick to tell us, and ultimately of course the Treasury and Treasury Ministers are accountable to Parliament for the whole financial regulatory system. The task of rebuilding that system and rebuilding confidence in that system is one of the Treasury’s most important priorities and has been ever since the beginning of the crisis.

              Q4 David Mowat: Yes, we agree with that, but I am trying to get you to be a bit more specific on the measures. You were very categorical; you said that it is working and is better than it was. What measures are you using to make that judgment?

              John Kingman: It is a very general question you are asking about a huge range of topics.

              David Mowat: Yes, it is.

              John Kingman: It is hard for me to answer your question without understanding a little more the particular angle you are focused on.

              Q5 David Mowat: Well, let me ask it more specifically then. The FCA came in to replace the FSA with a new regime and, to an extent, new people and different powers. How has that manifested itself in being a better regulatory landscape?

              John Kingman: Ultimately, I think the FCA has to achieve public confidence in the regulatory system. Quite rightly, the public have had a high level of concern about everything that has been revealed through the crisis—aspects of behaviour in the financial system and aspects of financial incentives in the financial system. The FCA has a huge programme of work in all of those areas, and they have all sorts of measures they use, but inevitably, rebuilding confidence in that system is bound to take time, not least because one of the things that comes at us the whole time is stuff from the past, which quite rightly needs to be dealt with and put right. Where appropriate, there needs to be redress and consequences to follow for individuals.

              Q6 David Mowat: Maybe I can turn to Ms McDermott and the FCA itself. What do you regard as your major duties? Is it to reduce mis-selling or to find out where mis-selling has occurred? I am interested in how you see your remit.

              Tracey McDermott: The first thing to say is that we obviously have a set of statutory objectives that go much wider than the question of mis-selling. The two that are most relevant to this are around an overarching objective to make markets work well, which we interpret as meaning that consumers can get the right sort of products at the right sort of price, and then we have a set of operational objectives, one of which is securing an appropriate degree of protection for consumers and, as I have said, that is probably the one that is most relevant to this discussion.

              Our approach to that is really two-pronged, looking at this both from the angle of, “How do we reduce the risk of mis-selling happening in the first place?”, and if there is mis-selling how we deal with making sure that customers get the redress that they are entitled to. It is important to focus on both elements of that approach.

              In relation to the first element—the preventive element—fundamentally there will always be a risk that there will be some mis-selling with any product that involves advice and sales. Mistakes will be made, but what we’re trying to do is to ensure that that is at a level that is minimised. To do that, we’ve tried to tackle various root causes. So, mis-selling can happen because of poor incentives, in terms of sales teams; it can happen because of a lack of competence, in terms of people’s training and ability; it can happen because the types of products that are designed are badly designed, do not have the proper target market and so on; and it can also happen sometimes just because people are basically out to try to rip somebody off.

              Q7 David Mowat: Do you sign products off in advance?

              Tracey McDermott: We don’t sign products off. If I could just touch on the areas that we have gone through, where we talk about complex products we have imposed restrictions on the sale of certain products to certain types of customer. For instance, we have said that CoCos, which are convertible capital bonds and very complicated instruments, cannot be promoted to retail investors. Unregulated collective investment schemes can only be sold to retail investors in certain circumstances. If you are advising on pension transfers, there are additional qualifications that you need to have.

              So, where there are particular products that we think are complex, we do not approve or ban those products generally, but we can impose restrictions and limitations on the way they are sold. We have a power to ban products if we think it is necessary, but that is actually a bit of a nuclear option. 

              Q8 David Mowat: In paragraph 12 of the Report, the NAO talks about the fact that it is not clear whether there is evidence that actions you have taken have reduced mis-selling. Do you agree with that?

              Tracey McDermott: I think what the Report says is that it is not clear whether the actions have reduced mis-selling, and it also acknowledges that it is a very difficult task to assess whether or not mis-selling has been reduced. However, I think the Report also points out that a number of the firms that have been surveyed by the NAO have pointed to changes they have made in relation to the incentive schemes they use for their staff, in relation to their product governance and in relation to the amount of time the board spends on dealing with issues around conduct.

              That certainly chimes with what we see in our practice. We have seen significant changes to a lot of the things that we think are the drivers of mis-selling, sales incentive and training competence being two of the key ones. Obviously, it will take some time before we can be sure that those have actually worked.

              Q9 David Mowat: But the NAO says that you do not draw together the information that could show whether mis-selling is increasing, decreasing or staying the same. Is it an unreasonable aspiration that you would have that information? I understand there is a timing issue, that it is not that easy to do and all the rest of it. Nevertheless, what the NAO is saying is that you do not really know whether mis-selling—I take that as an example, as the thing we are focusing on now—is getting worse, staying the same or getting better, and that is a criticism that struck me as quite an important one.

              Tracey McDermott: We accept the NAO’s recommendations in the Report and we think that it has been a helpful exercise going through the process of the Report with the NAO. What the NAO also recognises in the Report is that a lot of what it is recommending is building on things we are already starting to do.

              One of the challenges is how to come up with appropriate measures to measure these things, because you are trying to measure what has not happened rather than what has happened. We are working on that; we are developing metrics and we are looking at how we can better use the existing metrics that we have. So I think we accept that we are not yet at the end state in relation to that and we accept the recommendation that we need to do more, but that is something that is in progress.

              Q10 David Mowat: If you were in the end state—I am just trying to get to the point that I had difficulty perhaps getting clarity about with Mr Kingman—how would we know that things had got better again? Would it be that the ombudsman was receiving far less stuff through? I know we are at the back-end of this whole PPI scandal and everything else. How would you begin to sense that we have changed the culture of this industry—people are behaving better, all sorts of good things are now happening? You may be doing yourselves out of a job, some of you, if you were successful.

              Tracey McDermott: Indeed. It is really important to pull out the PPI issue, because the PPI numbers and the PPI process distort all of the numbers, because the volume is so huge. So one of the measures, which might sound a little bit glib but is true, is that we do not have another PPI. So we do not have mis-selling on the scale and for the length of time that we had in relation to PPI, again.

              In terms of other measures, the things we look at are what is happening in relation to complaints—so not necessarily that the number of complaints is going down or up, but actually how are they being dealt with by firms, what are the uphold rates, what are the rates that then go over to the FOS. Different firms have different uphold rates at the FOS, and we look at why that is, and why it is that some firms seem to have a much lower uphold rate with Caroline.

              The other area that we look at is very much around the internal governance within the institution—so what focus is the board paying to issues around customer satisfaction and customer selling? I do not think it is realistic to think we would ever get to a world where there is no mis-selling at all, but we would want to think that we would see a reduction in the sort of mass claims and, where complaints are made, that those are dealt with primarily by the firms themselves.

              Q11 David Mowat: How much attention do you spend on—it is a big word as well—culture? Do you have a sense, if you take different organisations that are out there, that “Those guys have that sort of culture; those guys have a different sort of culture, and we like that better”?  Is that something that you see and are able to evaluate?

              Tracey McDermott: We spend an enormous amount of time focusing on culture. We do not have a view as to what the right culture is, for any particular firm, because culture is inherently dependent on the nature of the firm, its own business, and so on. What we look at culture for is because we think it drives outcomes; so we look at where something has gone wrong. So where something has been mis-sold, what are the drivers that have gone to that, and what does that tell us about the culture of a firm? When you look at that, over a period of time, you can identify—

              Q12 David Mowat: It is one of these things; it may be hard to say what a “right” culture is, but it is probably easier to say when you have got a “wrong” culture, isn’t it?

              Tracey McDermott: It is certainly easy to say that you can identify outcomes which you think have been driven by poor cultures; and if you look at PPI as an example, PPI was driven by a culture within institutions which meant that they had designed a product which effectively was the profit centre to fund loans which were not profitable; and they had then designed a set of sales incentives for their staff which meant that they were incentivised to sell PPI rather than just to sell the loan without it. So that is something which indicates a culture where people were not thinking about the interests of their consumers—the customers, the end users—and therefore that is a negative indicator of culture.

              Q13David Mowat: An area I will touch on is that I think you did plan to do a review of banking culture this year, and that is not now taking place. Could you tell us a little bit about your thinking as to why that wasn’t necessary, or that was taken out of your work plan?

              Tracey McDermott: Yes. The piece of work we were actually intending to do was what we call a thematic review, which is when we look across a number of firms at particular issues. The intention of doing a thematic review is to try and draw out lessons that you can learn across a range of firms; and we typically publish a report at the end of it, with good and bad practice. The intention of that is to provide information to the industry, primarily about how they can improve their practices.

              The work we intended to do, and actually commenced, was focusing not on culture as a whole concept—it was focusing on two indicators. One was around the way in which middle management within institutions are promoted and rewarded, and the other was around what happens when people speak up and raise concerns. The reason we were looking at those two things is because we think those two issues are indicators of culture; but obviously they give you an insight into it, but are not a complete culture audit.

              We decided not to conclude that piece of work. We did phase 1, which included going to some of the banks and getting some information. We looked at what we were doing, we looked at the work that was being done by a number of other bodies—the FSB, the Banking Standards Board, the G30, and so on—and then we looked at the information we got back in. Our conclusion was that the work we were proposing to do, in the way we had proposed to do it, as a thematic report, was not going to add sufficient value for it to be worth us doing it. It was a decision that this was not the most effective way of trying to achieve the outcomes we wanted. A better way for us to do that was to continue to engage with individual firms about their own cultural change programmes and to work with other bodies that were also doing work in this area. The intention was very much not to say that we are not interested in culture, but to say that producing a report that was likely to end up being motherhood and apple pie, because it would be so generic, was not going to be a useful use of our resources for the next 12 months—

              Q14 David Mowat: All right, but what you implied is that you are still looking at culture, but you are just doing it in a different way, and the way that you were going to be doing it was, to use your words, motherhood and apple pie.

              Tracey McDermott: We are still looking at culture in a different way; that is absolutely what we are doing. The issue, as I said, was that when we had done phase 1 of the work, we thought that if you actually try to draw generalities, bearing in mind that that is the normal output of a thematic report, those are going to be so general that they are not really going to be useful.

              Q15 David Mowat: So in fact what you are sort of telling us is that when you did phase 1, you thought about it and you thought that the value added from the previously planned subsequent phases was not high enough, so you stopped it, and it was your decision and it was internal to you.

              Tracey McDermott: It was indeed my decision, personally.

              Chair: We have to say that we like people to take responsibility for decisions in this Committee.

              Q16 Mr Bacon: You mentioned other bodies. You said that you were going to talk to other bodies and to individual firms one by one because they are all different. Who are the other bodies that you are talking to?

              Tracey McDermott: The other bodies include, as I have already mentioned, the Banking Standards Board, which was set up following the recommendations of the Parliamentary Commission on Banking Standards and which is very focused on looking at cultural indicators in banks and has been doing some work looking at exactly the same issues we were looking at. They are not a regulator, but they are an industry standards body. The other bodies include the FICC Market Standards Board, which was set up following the “Fair and Effective Markets Review” and is a wholesale markets-focused body. There is also work being done with the Financial Stability Board, which is looking at governance and culture.

              There is also a whole range of accountants, consultants and law firms and so on doing work on culture. There are also quite a lot of people doing academic work on culture, including Roger Steare. We have contact with a large number of those people, and we work with them to try to ensure that we know what is happening in the academic world and the practical world around culture, and we use that as part of what informs our discussions with firms.

              Q17 Mr Bacon: Right, but you’re not going to have a piece of work that draws it all together and says, “Here is what we have learned from all these different bodies. We are the main regulator and here are our conclusions about what is wrong with culture and what needs to change.” You are not going to do that.

              Tracey McDermott: If we believe that that sort of report could add value based on those discussions, we may well produce that. That is not part of our current work plan.

              Q18 Mr Bacon: It was until you cancelled it.

              Tracey McDermott: No. That was not the sort of thing that was part of our work plan. What was part of our work plan was a thematic review that looked at those two specific indicators across a number of banks. It was not something drawing together all those pieces of work. If you look, certainly at the course of the past 12 months, but probably the past three or four years, there have been many reports published on culture by a whole range of different bodies. One thing we said is that we want to use our convening power as the regulator to ensure that the debate and dialogue continue.

              If we think that there are useful things that we can publish, we will obviously do that, but we did not think it was useful for us to publish things saying, “We have been to see x number of banks, and we have discovered that good culture change programmes are ones that are consistent with the values and the business model of the firm, and bad culture change programmes are ones that are done off the side of the desk.” We thought that that does not add significant value to what is already out there—

              Q19 Mr Bacon: No, well, if you are determined to come up with motherhood and apple pie, I suppose it is always possible to do so. Do you think that there is any other body that is better placed than the FCA to do a thematic study that draws together the work of all the different bodies that you referred to?

              Tracey McDermott: As I said, the thematic study that we had planned was not going to be a—

              Q20 Mr Bacon: I am sorry, no. I am asking a different question. Just answer the question I am asking. Do you think that there is another body that is better placed than the FCA to do a study of the kind I was describing, drawing together all the learnings from these different bodies?

              Tracey McDermott: I must admit that I have not thought of it in that way.

              Q21 Mr Bacon: That is why I am asking the question. I would like you to think of it in that way, not in a different way.

              Chair: Give Ms McDermott a moment to think, and then she can answer.

              Tracey McDermott: The FCA has a role, but we are not an academic organisation. A lot of work has been done by a number of academics and groups and, in many ways—

              Q22 Mr Bacon: You are describing the landscape. I am not asking you to describe the landscape; I am asking you to say whether you think there is another body that is better placed than you, the FCA, to draw together all this different work.

              Tracey McDermott: And I am saying that there probably are bodies that are better placed; there are academics who would be better placed, and there are groups like the G30 who are better placed to pull together these pieces of work. Our primary role as the regulator is to try and deliver on our statutory objectives through working across the industry and with individual firms. The project you described was a very interesting and very worthwhile project, but I am not sure that it is the best use of the regulator’s—

              Q23 Mr Bacon: So if you were to summarise your main role as a regulator in a 30-second conversation in a lift, what would you say?

              Tracey McDermott: Our main role as a regulator is to try and make financial services work better for the people who use them.

              Q24 Mr Bacon: To make financial services work better for the people who use them. Including protection? There is nothing in there about protection.

              Tracey McDermott: That was the 30-second version—I can give you a much longer version.

              Q25 Mr Bacon: Isn’t protecting the consumers the first thing that one ought to be looking to the FCA to do?

              Tracey McDermott: Part of making markets work well for their users is ensuring that they get appropriate degrees of protection, innovative products and good value for money—all of those things, in my view, are incorporated in making the market work well.

              Q26 Mr Bacon: Part of it surely must be setting down the standards to which you expect people to adhere.

              Tracey McDermott: Yes.

              Q27 Mr Bacon: What is it that causes people to adhere to those standards?

              Tracey McDermott: If you are going back to the question about culture, there are two issues here, aren’t there? There are regulations, which we set, and they set the requirements that people have to comply with; there are also the things that drive people’s behaviour—the incentives they have—and those are driven by the culture within the institution. We cannot, as a regulator, prescribe the culture, because culture is intangible; it is something that makes you behave in—

              Q28 Mr Bacon: You are answering a question that I did not ask. I did not say, “Can you prescribe the culture?”, to which the answer would have been the one that you gave: “No, we as a regulator cannot prescribe the culture”, but I did not ask that question. I asked what it is that causes people to adhere to the standards that you set.

              Tracey McDermott: There is a range of things that causes people to adhere to the standards. The standards are set out in rules and requirements, which are applicable to firms and individuals—

              Q29 Mr Bacon: Now you are describing the landscape again, where the rules can be found. I am asking you, what is it that causes people who work in these financial firms to adhere to the standards that you set?

              Tracey McDermott: And as I was going to go on to say, part of the reason people adhere to those standards is that they are required to do that by their employers, and part of it is that we can take action against individuals and firms if we feel that they are not adhering to those standards, and we do take action against individuals and firms. I am sorry, I may be misunderstanding the question.

              Q30 Mr Bacon: It seems to me very obvious: they adhere to the standards, or don’t, because of the culture of the firm that they are working in. And yet you have washed your hands of that issue.

              Tracey McDermott: We have not washed our hands of that issue. As I explained in response to your colleague’s question, we are still doing a large amount of work on culture, but we have decided to do that work in a different way. We have absolutely not washed our hands of it. As I said earlier, culture is a really important driver of the way in which people behave. It is about far more than whether or not they comply with our standards; our standards are a minimum requirement, not the maximum.

              Q31 David Mowat: I think we have probably got as far as we are going to get on culture. Before I hand over to Mr Evans, may I ask a couple of questions on FCA operational matters? You mentioned, and I think rightly, the difference between after-the-fact and before-the-fact work on problems. Approximately, how does that resourcing model work, in terms of the people you have? How many of them are working, as it were, trying to prevent things from happening in advance, versus fixing stuff that has happened?

              Tracey McDermott: The majority of people will be working on preventive—trying to prevent things from happening. Those will be people who are working in our supervision team, so they are interacting with firms, both on an individual and an across-the-industry basis, and in our authorisations teams.

              Q32 David Mowat: So 80:20, or something like that, is it?

              Tracey McDermott: It is probably closer to 60:40 at the moment, I would have thought.

              Q33 David Mowat: One of the things the NAO talk about in the Report is that it is hard to get clarity about value for money in your organisation. How many people do you have in your organisation?

              Tracey McDermott: Three and a half thousand.

              Q34 David Mowat: There are three possibilities. One is that 3,500 is about right. Another is that you should have more people—that you could do a better job and prevent the next thing from happening if you had more. The other is that you should have less and remove the burden, which somebody is paying for—eventually consumers, presumably. How do you know where you are on that?

              Tracey McDermott: You won’t be surprised to hear that we think we are currently in about the right place with the number of people we have. Every year we set out a business plan that lays out what we intend to deliver over the course of the year. A large proportion of our staff are working on things such as the implementation of new regulation and EU directives. We then look at how we get the most effective use out of the people we have—what are the outcomes we are trying to deliver and what resources do we think are required to deliver them?—and focus our resources accordingly. In December 2014, we set out a revised strategy that was very much focused on how we can get better at prioritisation and effective targeting.

              Q35 David Mowat: Who do you agree your numbers with—the Treasury? Is there a dialogue? How does it work? Do you say, “We need 4,000”, and they say, “Well, 3,500 is fine”? Or is it something that evolves? How do you get to 3,500?

              Tracey McDermott: The FCA board is responsible for the FCA’s budget. We consult the industry on it, but only to say, “These are what the fees are going to be, which we are intending to spend,” but the Treasury does not have a say in what the numbers are.

              Q36 David Mowat: But when the NAO say in paragraph 9 that you don’t have a good grip on the relative costs of regulatory responses—that is, what is very cost-effective and what is not, which might play into whether 3,500 is too many, too little, or about right—are they right? It seems to me to imply that there might be a bit of softness in your numbers.

              Tracey McDermott: I think the issue that the NAO rightly pull out is that we need to get better at systematically assessing value for money across the board. Since 2013, when we came into existence, we have done an awful lot in terms of trying new things and doing things differently. There have been various initiatives, such as Project Innovate, which we set up to encourage new entrants, and we have been doing different things with behavioural economics to look at how consumers actually interact. We test all those things individually and look at what happens. So, there has been a degree of experimentation. The point that the NAO rightly make is that we need to systematically bring together our learnings from all those things and start to measure them against each other.

              Q37 David Mowat: So you accept that the NAO are right, but you’re sort of doing it.

              Tracey McDermott: We accept that they are right that we need to do more of it, but it is important to recognise—I think the NAO will accept this as well—that there will never be a one size fits all, because the circumstances of any particular mis-selling incident will always be different. The types of customer affected will be different, as will the type of product and so on. Nevertheless, what we can do and what we are working on is how we establish some base principles about what we will always want—

              Q38 David Mowat: It strikes me that one risk in this area is that you have different objectives: a competition objective and the regulatory compliance objective and all that. The costs that you incur could be so high that new entrants will have to bear them, as well as the older players. That makes it harder to be a new entrant. There is a sort of conflict between your two roles. Do you have an issue with that?

              Tracey McDermott: I don’t think we think there is a conflict between our roles. We do have an objective to promote competition in the interests of consumers and we also have a duty to ensure that we choose the most pro-competitive way of doing things, if we have a choice. We are very conscious that the requirement to be authorised and the costs of being authorised and regulated are inevitably a barrier to entry. That is an inevitable consequence of having a regulatory system. We are very focused on trying to ensure that that is not an unnecessary barrier.

              A moment ago I mentioned Project Innovate, which we established last year to help to support and guide new people, who are coming to financial services with interesting and innovative products that will benefit consumers, to get through the authorisation process and understand the requirements. I am delighted to say that we have a conversion rate of around 30% of people who came to ask for support from the innovation hub, and they are now actually being authorised.

              As part of our competition work, we have also been using that objective and duty to do things such as review our handbook. We published a consultation paper last year on smarter consumer communications, looking at how firms communicate. We have deregulated in a number of areas in which we have found that communications are not delivering for consumers. We are conscious of the need to try to keep costs—

              Q39 David Mowat: A final question from me before I pass on to Mr Evans. You have been going for three years and you have 3,500 people. You are living through the residue of the PPI stuff and all the rest of it. How many people will the organisation need in five years from now? As you have put in place stuff that should stop that happening, will you need more people, the same or fewer?

              Tracey McDermott: Can I just make one general point? Mis-selling is not the only thing we do at the FCA. We are also responsible for a wide range of other regulation of wholesale markets and so on. I do not have an answer for what I think the right number would be in five years’ time but I would expect it to be no higher than it is now.

              Q40 David Mowat: Has your board asked you for a five-year plan?

              Tracey McDermott: We look at a three-year plan.

              Q41 David Mowat: What does your three-year plan say?

              Tracey McDermott: The three-year plan shows a small reduction in head count.

              Q42 Chris Evans: I declare an interest. I worked as a bank seller many years ago, long before the FCA was ever even thought about. I find it a bit difficult, Ms McDermott, that you struggled to define culture. To me, it seems quite straightforward based on my experience and the experience of others I know who still work in the industry. If everybody manged their account properly—when I say properly, I mean that they remain in the black, just pay their wages in every month and don’t overspend—retail banks would find it extremely difficult to make money. The model for making money for a retail bank is difficult. Banks have to mind their bank accounts, look at people who are living on an overdraft and look at moving them on to personal loans, life changes, and mortgages and so on. Therefore, there has to be a level of tension with bank sellers in reaching sales targets and so on. Do you accept that one of the main reasons for mis-selling is this sales culture, which I feel—I am talking anecdotally—has not really changed since I worked in banking between 2000 and 2003?

              Tracey McDermott: You raise a number of points around the business model in banking. Obviously, the Competition and Markets Authority has done a significant study into current accounts and personal banking. They are currently consulting on remedies in relation to that.

              On your general point, the sales culture and the push for people to sell rather than to advise or give people the right products was undoubtedly part of the cause of past problems in PPI and in a number of other areas. From our perspective, we have seen positive changes to that culture—changes in the way that staff are trained and, more importantly, in the way that staff are incentivised and remunerated. We have looked closely, particularly because of issues that have been raised with us by bank staff, at whether sales targets are being removed and replaced with some other form of performance management technique that is equally invidious. We have done some work on that. We have not seen that as a widespread consistent issue. We have followed up on all those whistleblowers who have come to us with that sort of issue but we have not found that that is a widespread problem in the market.

              Q43 Chris Evans: How many whistleblowers have come forward without threat, without fear or favour?

              Tracey McDermott: I’m afraid I don’t know the specific number on the mis-selling issue. Last year, about 1,300 or 1,400 whistleblowers came to us across the entirety of financial services. I can probably write to you with a specific number on mis-selling, but I do not have it with me now.

              Q44 Chris Evans: I refer to point 10 of the Report. I accept that the FCA has done some valuable work—it feels different from what I was used to when I worked in that industry—but what I would like to pick up on is that the Report says, “it does not yet have an integrated picture of whether firms, and people working within them, could benefit financially from carrying out mis-selling activities”. I felt that there was a lot of pressure to make a sale, regardless of whether that was met the customer need or not. Each and every day, there was a push to do that.

              The point I want to put to you is that I honestly think there is nothing you can do from a regulatory standpoint to stop mis-selling. The only way you can do that is if you are in the room, between the seller and the customer, finding out what is being said. I remember some of the intimidatory tactics that I was told to use with customers to sell. For example, if a husband and wife were there, I would say to the husband, “You’re dead,” and then I’d say to the wife, “Now what are you going to do?” That was intimidating. I would say things like, “If there was a money-making machine in your house, would you insure it?” and they would inevitably say yes. That was a way of selling life insurance. These were intimidatory tactics. Can you give a cast-iron guarantee to this Committee that those practices are not going on? I don’t think you can, unless there is CCTV in that room.

              Tracey McDermott: Absolutely, the regulator cannot sit on the shoulder of every sales adviser in every bank, nor can a compliance officer sit on the shoulder of everybody in every bank. What I think we can do as a regulator and what we have done as a regulator, as I have already said, is focus on the drivers. What is it that makes people use those sorts of techniques? They use them because they are rewarded based purely on sales tactics. They do it because the incentives are skewed. We took disciplinary action against Lloyds bank last year or the year before because they had a scheme which meant that if you sold one more product, you would end up £1,000 better off or vice versa, which we thought completely skewed the incentives.

              We also introduced the retail distribution review in relation to investment advice, which requires compulsory training, because sometimes people are giving poor advice because they don’t understand what they are selling. We can do things that focus on the structure of the market. We can then monitor, and we do monitor, how it works in practice, but I absolutely accept that we cannot guarantee that somebody in any regulated firm will not behave in an unacceptable manner. That is not what the regulator could ever do.

              Q45 Chris Evans: The point I want to pick out there is training. The perception that I used to have is that if you put someone in front of a financial adviser, they felt, because of the title “financial adviser”, that they were in front of someone who had qualifications and training on the level of a lawyer or a doctor. They felt like they were dealing with a professional. I remember the financial planning certificates from back in the day; I could have passed the first two certificates without doing any reading whatsoever. One of the questions still sticks in my mind: “Mr and Mrs Jones come in. They’ve just had a baby. They are looking for insurance to ensure that the baby is looked after if anything happens to either one of them. Do you sell them an income protection plan? Do you sell them general insurance or do you sell them life insurance?” Common sense says life insurance—that is how easy that exam was. Do you think the training framework for an average financial adviser or bank seller is strong enough to avoid mis-selling? At this point, I am thinking of banking institute exams falling into the long grass—they don’t mean anything anymore. Have you looked at revisiting the training framework?

              Tracey McDermott: I did the FPC as well when I first became a regulator.

              Chris Evans: You know what I’m talking about then.

              Tracey McDermott: I do know what you’re talking about. The retail distribution review, which was actually introduced back in 2012 and implemented in the life of the FSA, actually requires QCF level 4, which is equivalent to first-year degree level, as the standard qualification. What we have seen since that came in is that a large number of advisers actually have higher levels of qualification, such as QCF level 6, which is effectively a degree-level qualification. However, those advisers are typically independent financial advisers.

              The tied advisers that used to be within banks have tended—the salesforces have shrunk massively. A lot of them were closed down, partly as a result of the RDR and partly because the banks realised that they actually were not able to control the salesforces properly with the controls and systems that they had in place. We are starting to see those salesforces reintroduced. Charles and I co-chair the financial advice markets review, because one of downsides of those people being taken off is that if you are not affluent, getting access to some sort of support and guidance is much harder. We are starting to see them being reintroduced. We would like them to be reintroduced, but we would like them to be reintroduced in a way where it is clear whether they are giving advice or selling. We want to ensure that there are appropriate controls around the way that the products are sold and how the advisers are remunerated. It needs to be done cautiously and carefully.

              Q46 Chris Evans: Remuneration is the No. 1 reason why we had the PPI scandal. The reason I use this example is that we had a points system. It was nine points per £1,000 lent, but it was 90 points per £1,000 that you were lending in PPI. We were also informed, I think fraudulently, that you always quoted “with”, so when somebody came in for a loan, we would quote them with the PPI on top. This question goes to Mr Kingman as well. Can you give us a guarantee today that there are not some senior executives sitting in a banking tower somewhere thinking about another product like this and a way of incentivising their staff to sell it?

              Tracey McDermott: Right now, the banks have paid out £22 billion in redress for PPI. They have seen this going on for a large number of years and they have seen rightly their reputations incredibly damaged as a result of PPI. So I think if you look at the senior management of banks right now, I do not think any of them are thinking that the ideal thing for them to do would be to have the next PPI. I think the challenge for all of us—for us as regulators and for parliamentarians—is to ensure that we do not lose and forget those lessons as times start to improve and PPI becomes a thing of the past.

              Q47 Chris Evans: The other issue I want to raise is on page 8, point 11—it is in the executive summary. In these hearings—the Treasury Committee does this as well—we tend to talk about the big banks and the big institutions. I was concerned that at the end it says, “Although the FCA undertakes several activities aimed at reaching smaller regulated firms, some smaller firms told us that they sometimes found it difficult to know how to comply with mis-selling regulations, as they had little interaction with the FCA.” That to me is very worrying, because I find most IFAs I have dealt with in recent times are very good: they put their customer first and they are very diligent as obviously they want to grow their business. Why is that not happening? What hasn’t the FCA reached out to those smaller firms and given them guidance and advice?

              Tracey McDermott: The FCA does reach out to smaller firms. I think it is important to note that, as we talked about earlier, we have 3,500 staff and we currently regulate well over 50,000 firms, so the interaction we have with those firms is obviously not individual, one-to-one interaction with each and every one of them. We have a range of ways in which we communicate with smaller firms and we have talked quite a lot to smaller firms and to our Smaller Business Practitioner Panel over the course of the last couple of years about how we can get more effective at targeting that.

              We produce something called “Regulation round-up” that gets emailed around to all smaller firms, which has short guides to important initiatives. We also do a programme of seminars around the country where we go to a particular area and we will do a series of drop-in sessions, lectures, discussion groups and round tables, and we have just kicked off the latest version of that starting here. So we are very much emphasising that. One of the things is, as I mentioned earlier, we changed our approach in December 2014 and part of that was saying, “We need to be looking at things more across sectors and focusing our communications more across sectors.”

              For smaller firms a really important part is recognising that the vast majority of firms do actually want to comply and our job is to try to help them comply if we can, but we need to do that in a way that is cost-effective and delivers across a large number of people. So one of the things we decided to stop doing in relation to that was a routine visit once every four years for half a day, which is quite cost-intensive from our perspective and does not really help those firms or us that much. Actually, we can use that resource more effectively to, say, have a series of workshops in the south-west of England, where we will touch 250 or 350 firms in the course of a week in a way which is most useful to both them and us.

              Q48 Chris Evans: Moving on to point 12, a major problem seems to be that you are dealing with historical data. Much of this mis-selling went on years before and it seems to be that mis-sales today will not come into the system for two years. Would some sort of real-time data sharing among the financial institutions close down that sort of mis-selling?

              Tracey McDermott: I think the complaints data is always going to be a lagging indicator by definition. Actually, you say a couple of years, but a lot of financial services products, as you know, have very very long lives, so if you are mis-sold a pension you might not know about that for tens of years. What we have been doing—the Report refers to this and encourages us to do more of it—is looking at how we can use different forms of data in order to inform issues. An example cited in the Report is where we looked at self-invested personal pensions: we had seen a spike in advertising spending in relation to those, so we used that to target which firms were actually spending a lot on advertising and looked at what they were doing in terms of the suitability of the products they were recommending to their customers. We are very much trying to say, “Are there ways we can nip these things in the bud more quickly?” Another example, as I touched on before, was the decision to prevent certain products being sold to customers, because we think they are too complex for retail investors.

              Real-time data sharing is much more of a live question in the consumer credit space, where it is an issue around how you stop people taking out loans that are unaffordable and ensure that when you are going along to one lender, they have access to information. We have been working very closely with the industry on this. The Chair has written to me recently on this question, which we will respond to.

              Q49 Chair: Before we move on, it is important to bring in the Treasury on that point on real-time data sharing, because it would potentially be a policy issue as well. Could Mr Kingman or Mr Roxburgh—whoever is best to answer—say what level discussions have got to and the likelihood of this becoming a reality?

              Charles Roxburgh: Real-time data sharing on complaints?

              Q50 Chair: No, sorry, this is particularly about people taking out consumer products. At the moment, there is a lag in when your information appears on your credit record. In my constituency, it happens that people will shop around for payday loans and can get one after the other all in the same half hour because the information that they have just got one can take some weeks sometimes to get on to their credit record. Real-time data sharing would prevent some of the mis-selling. It is another aspect of mis-selling, but it is an important part and something that Mr Evans has raised as well.

              Charles Roxburgh: We are very happy to look at it. We are not looking at it right now, but if you think that it is something that is important, we can certainly look at it and come back to you on that.[1]

              Q51 Chair: Okay. I am surprised you are not aware of it. Mr Evans, carry on.

              Q52 Chris Evans: The big issue I always noticed—again, I’m using my life history—about mis-selling was that the first person who would know that mis-selling was going on was the adviser. Perhaps you can clear something up for me. The big issue that we always had when I was in the industry was that several advisers would move around; as soon as they knew that the proverbial was going to hit the fan, they would move to a different company before that particular company bought it up. Many times, the red light would go off for somebody who had worked for seven or eight different financial services firms. Has that practice now been stopped and could you also tell us how many people have had their loans stopped because of mis-selling?

              Tracey McDermott: In relation to the first point, which takes two forms, there is a sort of phoenix thing, where effectively the entire firm turns up again but with a different name; then there is the question of whether you move individuals or salesforces around. I am sure it still happens to some extent, but I think it happens to a lesser extent. Certainly, one of the flags we look at as we are going through the authorisation process is: has there been a problem with the previous firm? We would then look at whether or not that adviser was involved in it.

              Another aspect of that which will be important in the future is the senior managers’ regime, which has been introduced for banks currently and which is proposed to be extended across the sector by 2018, subject to that going through Parliament. That puts a very clear onus on the firms to certify that individuals are fit and proper to be doing the jobs that they are doing and they do that on an annual basis to assess them. It also imposes new requirements in relation to regulatory references, which should help to tackle some of those issues around advisers moving around freely.

              Q53 Chair: Can I ask how you will measure success if that goes through Parliament, as I think is expected? In a year or two years’ time, what would you expect to be the outcomes of that if it is working?

              Tracey McDermott: In relation to the extension across the sector, that won’t happen until 2018. In relation to banks, where it comes into force on Monday, the measures of success we will be looking at are, first of all, a key part of that is around clarity of lines of accountability and responsibility. We have already seen that happening, which is that basically people are being required to identify their responsibility lines and to specify which senior manager is responsible for certain issues, one of which, for instance, is the incentive schemes that are used for your sales force. A senior manager at executive level or above has to be responsible for those schemes.

              We will be monitoring over the course of the next couple of years how the certification process works. What factors are taken into account? To what extent do people decide that they are not fit and proper because of problems with consumer complaints, and so on? We will also be looking to make sure that the changes in terms of mistakes and responsibility are embedded over time. So there will be a range of measures and I would be happy to write in more detail if you want subsequently. It starts with the banks, but it will be extended more widely subsequently.

              Q54 Chair: So basically, you would catch someone if they did something wrong and you would be able to find very quickly who had authorised the behaviour?

              Tracey McDermott: You would hope that people would be captured much more quickly. The aim is that people have a much greater sense of personal responsibility for the advice they are giving; and not only that, but people at the top of the organisation will know that if there is an incentive scheme that is poorly designed and encourages the sort of behaviour your colleague was talking about, the responsibility for that is not on the individual sales adviser, who is just trying to keep his job, but on a person at the top who has responsibility for the design of that.

              Q55 Chris Evans: I have one more question. Are you confident that middle management can tackle any problems with mis-selling effectively? I base that on the idea that most middle managers who have been salespeople have been promoted because they are very good at sales, rather than being very good managers. Going back to the original question about culture, is there a worry that this will take a number of years to feed itself out of the system?

              Tracey McDermott: That is a real concern. There is a focus among the regulators and, indeed, among institutions on the middle layer. The reality is that we talk a lot about tone from the top, but for most people the top is not the chief executive; it is the person who is one or two layers above you. Unless they are behaving in a way that is consistent with the values espoused, nothing will change.

              It comes back to incentives. If sales managers or branch managers are incentivised based on the sales made in their branch, it is very unlikely they are going to change the behaviour to try to reduce those sales. I was talking to a bank chairman this morning: one of the things they have done is that they do not even allow branch managers to have any access to the sales data in relation to their staff, as a way of trying to drive that change in behaviour.

              There is a real issue: management was a lot easier if all you had to do was say, “You have to make x sales. If you’ve not made x sales, you’ve failed. If you’ve made more than x sales, you’ve done very well.” If you have to incentivise people through different methods and encourage them in different ways, it requires a different set of management skills. I know the institutions are very much alive to that and focusing on it in training. There will no doubt be some people in the middle management layer who decide that that is not for them, because it is not what they want to do, but one would expect that the majority will adapt to the new world.

              Q56 Caroline Flint: I suppose I have a bit more experience of what has gone in the energy sector between the regulator, the ombudsman and the industry itself. As was mentioned earlier, your costs are paid by the sector. One of the themes running through the NAO Report is how difficult it is to pin down just how efficient you are, because a certain amount of information cannot be disclosed to the NAO to take forward its analysis. I will come back to that with the Treasury colleagues here. If the FCA and the Financial Ombudsman Service were funded by taxpayers’ money, you might find that you were more under the cosh to define how you are spending money and what you are spending money on.

              One of the weaknesses between Ofgem and the energy ombudsman—many people had not even heard of the energy ombudsman—was that there was very little co-working on some of the issues that affected people who were victims of this form of mis-selling. I would like to ask, perhaps starting with Caroline Wayman: just how closely are you working with the FCA? How much of the data that you get about complaints you receive, the way they have been handled and the different organisations that bring them to you—it is not just individuals; it could be claims management brokers as well—are you sharing with the FCA? There is an important point of learning about how this could be done better. I then want to ask Tracey McDermott how it is working the other way and whether some efficiencies could be achieved in your analysis or your spend on analysis.

              Caroline Wayman: We share an enormous amount of information with the FCA. We also share an enormous amount publicly. We share a lot with the FCA in terms of our uphold rates and how many cases we are seeing, and most of that is publicly available as well. I think we probably share more information than any other ombudsman scheme.

              Q57 Caroline Flint: But could you give me an example of where information that you have brought together has influenced the FCA, and maybe led to some better way of pursuing complaints or stopping them happening in the first place?

              Caroline Wayman: Sure. There is a very everyday thing, which is that we constantly provide data about uphold rates and volumes of complaints. That informs supervisory action at the FCA’s end. Perhaps I can try to think of a more tangible, recent example. We recently had a spate of inquiries, rather than full-blown cases, about credit broking. Customers were phoning us up and saying that they had applied for a payday loan, usually online, and had not actually received the loan but had been charged a fee as a result of applying, and that was the last money in their account. That is pretty sharp practice, and we saw a number of examples of it. We fed that back to the FCA.

              We feed back in general, seeing a potential systemic issue, but we have also fed back the specific firms and the action, and the FCA has taken action in that market to improve things. That is off the top of my head, but it is not an uncommon occurrence. One of the things that FCA colleagues have sometimes said is that the ombudsman is where the rubber hits the road. We are seeing real-life examples of consumers getting in contact to say, “This hasn’t worked, and this is what we’re worried about.”

              What we try to do is provide a lot of data. We provide information as much as we can, but we also try to make sure we have good relationships—I think we do—with Tracey’s team, so that we can say, “I’ve seen this, and I don’t know whether it’s a big thing or not.” Obviously, we only see what we see; we see the complaints that make it to us. “Here’s something you might want to go have a look at.”

              Q58 Caroline Flint: So you as the financial ombudsman are fully satisfied, in terms of dealing with this volume of individual cases, that you are taking learning from that to prevent them from happening or to do them more effectively in future? I noticed in figure 6 on page 26 that your costs have doubled in the last five years. Obviously, that is from a huge amount of payment protection insurance cases, where you have a massive backlog to clear. In terms of your learning about how you do things and handle complaints, how are you going to clear that backlog? Also, given that your costs have doubled, which people might say is fair given the nature of that particular area, are we going to see your costs come down?

              Caroline Wayman: I absolutely think you will see our costs come down.

              Q59 Caroline Flint: By when and by how much?

              Caroline Wayman: Much depends on the current consultation that Tracey’s team are doing in relation to a time limit within which people can bring cases to the ombudsman. Obviously, that has been out for consultation, and the FCA will make a decision on it in due course. Assuming that it comes into effect, we will then need to be able to plan for that time horizon. One of the great uncertainties about PPI has been “Surely it will be over soon.” That is what people have been saying for quite a while.

              I think some of the figures are in the Report, but in its entirety, we have had about 1.5 million cases involving PPI, and we have done about 1.3 million cases. That is not just people phoning us up; that is cases. We think we have made really strong progress. As the Report reflects, we have had to deal with an unprecedented volume of cases, beyond the scale that any other scheme like us has encountered. We are very proud of what we have achieved so far, but we put firmly at the top of our list getting people fair answers as quickly as we can. We were also particularly pleased that the Report reflected that the quality of our decision making has been maintained. After all, Parliament has charged us with giving fair answers. Unfortunately, too many people were not getting fair answers when they complained in the first instance, meaning we have had to do cases—

              Q60 David Mowat: The Report was complimentary about quality of decisions, but possibly not quite so complimentary on the time scales sometimes involved. Figure 13 talks about cases taking 400 days, and numbers like that. I presume that is not a continuance. I am quite interested to know what happened in that 400 days. Did you need information you did not have? That cannot just be a backlog issue.

Caroline Wayman: The figures quoted in the Report are the entirety of the stock. That’s a horrible phrase, because they are people. I hate phrases like “stock”, but we have to have some terminology, don’t we? For example, I agree that the 40,000 who are mentioned have been waiting too long. We want people to get answers as quickly as possible. Well over half of them have had first answers but have said, “I’m not sure I agree with that. I’d like the ombudsman to decide.”

              We basically have a two-stage process. Our adjudicators take a first look and give their view. If one of the parties—that is a mixture of the financial business saying, “I don’t agree; I want an ombudsman to decide,” the claims management company, and the consumers who come directly—says, “I don’t agree,” then we need to take it to the next stage of our process. It’s not that people are not hearing anything. We’ve done an awful lot of trying to keep in touch with people to make sure they know what’s happening. We’ve even invited people for backstage tours to come and see the operation.

              Q61 David Mowat: I suppose I would have thought that you have a lot of quite simple cases. We will come back to claims management companies and things being batched up and sent in, but the 448 days is a median number. Presumably some are more than that, because you’ve got a lot of simple ones. I understand that you’ve been hit by this tsunami of claims—the numbers are huge, and I understand that you’ve had to staff up for that—but it seems very, very time consuming. It’s extraordinary, really.

              Caroline Wayman: It has been extraordinary. There’s no doubt about that. A number of factors go into how long it takes to finally resolve a case and take it to its conclusion. A significant factor is the time it takes for the parties to respond to us and how quickly we can get information out of people.

              Q62 David Mowat: Why is it getting worse, then? When I first saw this, I assumed that it’s getting worse because you’ve left the difficult stuff to last or something. Is that the issue? But then it says, “The ones that are coming in this year.”

              Caroline Wayman: It’s more that the explosion of cases happened after the judicial review. We had to then respond to that, staff up, hire people and train them. In two consecutive years, we hired 1,000 people.

              Q63 David Mowat: Yes, but if 448 days is your median time for looking at one of these cases, and, as you said, a lot of them are quite straightforward—maybe you can do them in a relatively small number of days—does that mean that there is a whole subset of claims that take 500, 600 or 700 days?

              Caroline Wayman: There is quite a broad range of complexity. That is the thing I wanted to come on to. PPI is often seen as just a single-issue thing that was sold by banks and is quite straightforward. Actually, PPI was sold across myriad different channels. Sometimes it is like I was able to be in the room, because I can listen to the telephone recordings and hear all of the things that were described earlier happening. I think that our cases are getting more complex as we work our way through. Our strategy has always been about trying to get people an answer as quickly as possible.

              Q64 Caroline Flint: Who is causing the block on that? Are the very organisations that caused the problem in the first place not giving you the information? Is it anything like the energy sector, where part of the issue was that they would not reply and provide the information on the complaints? Who is causing the block on the information? If it is that sector, why isn’t the FCA coming down on them like a tonne of bricks or being more transparent about who the guilty parties are?

              Caroline Wayman: I don’t think it is the same issue, but I don’t know. I am not directly familiar with the energy sector. Partly this is about build-up over time, and partly it is about complexity. More and more of our cases are harder fought and more difficult. For example, some of our cases now are not about whether it was mis-sold in the first place, but about the pounds or pence of what you should be paid. There can be a pretty complicated argument about exactly how to reconstruct what someone would have done with their credit card account over the past 12 years and how to assess that over time. Sometimes that involves gathering more information and sometimes it involves a more detailed investigation. An element of it is getting more complicated. At times, the complaints handling and the co-operation with the ombudsman have not been what we want them to be, but I think they have improved.

              The other really significant factor that I want to draw your attention to is that a number of our cases are now affected by all of us having to take account of the Supreme Court decision mentioned in the Report—a now famous case called Plevin v. Paragon, which is about unfair relationships and undisclosed commissions. The FCA is currently consulting on some guidance about how to approach that, but some of our cases now are tied up with complicated arguments about that as well.

              Q65 David Mowat: Let me ask the question in a different way then. Figure 14 in the Report says that there are some 39,000 open cases that are over two years old. Hopefully you are staffed up to get this fixed now, so as the volume decreases, do you have a published plan for what that will be, by quarter, so you know what target you’re hitting? Justice delayed in the end is justice not received, isn’t it?

              Caroline Wayman: That is absolutely right, so it is important that we get through cases as quickly as we can. It is important that we maintain the quality of our decision making, because we are the backstop, after all. It is very important that we get people fair answers, not just any answers. That is not to gold-plate things. We have systematised processes to a huge extent. What we have said is that we expect to be able to be handling our PPI cases in accordance with the standards that we achieve for everything else.

              Q66 David Mowat: Answer the question, then, on whether you have published a plan for that 39,000 and what it is going to look like over the next period. When do we expect the number to come down? Thirty-nine thousand is an awful lot of our constituents who are waiting. When is it going to come down to, say, less than 5,000? When would you expect to be there?

              Caroline Wayman: One of the things that the NAO recommended was that we publish such a plan, and we are very happy to take that recommendation forward.

              Q67 David Mowat: Okay, so you’re going to do that.

              Caroline Wayman: Yes, we will do that.

              Sir Amyas Morse: Sorry, I just want to make sure of something I heard you say there, as you were explaining so well what you were doing. I thought I heard you say, “At times, the co-operation of the FCA hasn’t been what we wanted it to be.”

              Caroline Wayman: No, no, no.

              Sir Amyas Morse: What was it that you were referring to, then?

              Caroline Wayman: Firms, financial businesses—certainly not my friend and colleague to the right of me. Did Tracey look alarmed at that point? That is certainly not what I—

              Sir Amyas Morse: That is why I thought I had better check.

              Caroline Wayman: Yes, financial firms.

              Sir Amyas Morse: And when they do not co-operate, what do you do?

              Caroline Wayman: We do a range of things. If people are not co-operating with our investigation, we do have powers to move forward with the investigation and just to decide in the absence of them providing their answer. If firms are systemically doing that, we tell Tracey.

              Sir Amyas Morse: Yes, but does this add up? Sorry, I just want to understand how meaningful a driver this is. If people are not co-operating with you, do they gain by that more or less net, by playing you long, or can you make sure they are under the hammer at that point? That is what I really want to get to.

              Q68 David Mowat: Do you charge interest?

              Caroline Wayman: In some ways it can be an expensive game, were anybody to want to play it. I think for the most part on PPI it has been more about operational constraints at the financial business end of things. The PPI complaint-handling operations at major banks in particular are enormous parts of their operation. I don’t defend them; it is just a fact that they have needed to staff up to be able to respond operationally. So I think more than anything it is the operational constraints that we have observed, rather than people deliberately trying to push it into the long grass. Importantly, some ombudsman schemes do not have this power, but we do have powers to require them to provide evidence, but in any event to say, “Well, you’ve had your chance and now I’m just going to decide, in the absence of you providing a defence.”

              Q69 David Mowat: There are two areas of the ombudsman service that the Report talks about. One we have covered—the timescales and things. The other is an extraordinary feature of what has happened in the last few years, and it affects all of you to a greater or lesser extent. We have paid out £20 billion and of that £20 billion some £5 billion has been intercepted by intermediaries, and we have let that happen. That is, on the face of it, a failure. Is that a reasonable statement—that it is a failure of the system? I am not saying it is a failure of the ombudsman, but it is a failure of the system that we have lost £5 billion to an industry that has been created to feed off this.

              Charles Roxburgh: Can I come in on that one? The Government has launched a consultation on whether the charges by claims management companies should be capped, and that consultation is out at the moment. The MOJ regulates them.

              Q70 David Mowat: It is horses and stable doors, isn’t it? So far it is £5 billion. There is a consultation, and I am delighted about that; I hope the Ministry of Justice will come back to it, and all the rest of it. Nevertheless, we have had this tsunami to deal with, and in the middle of this tsunami we have let intermediaries get in there and take £5 billion out of the system. Who is responsible for that? I am not sure it is clear to me who it is. Maybe because it is not clear to me who it is, it is nobody, or everybody.

              Caroline Flint: Can I add to that? I was astonished to see that, of the complaints to the ombudsman between 2010 and 2015, half were made by these claims management companies. Having taken up a case, they then bring it to you, Caroline, to sort out everything, and then at the end of the day they will take their slice of whatever deal is arrived at. Can that really be fair? Is that moral? Presumably they don’t come to you and say, “Sorry, we are rubbish, can you sort it out? We will forfeit our slice.” They are not saying that.

              David Mowat: I asked whose fault it was, and you could argue that the ombudsman service ought to have been proactive in dragging people in. For £5 billion, we could have been doing massive television advertising. That is a huge amount of money. You could argue that the whole system for which you guys are responsible could have been more proactive in dragging this in without the need for these intermediaries taking 30% off each claim. Is anybody going to answer me? You can all take it in turns, if you like.

              Caroline Wayman: I am sure everybody wants to chip in on this one.

              Chair: If you could be quick, because time is running on.

              Caroline Wayman: Sure. I agree that it is very disappointing that consumers have not received the entirety of their redress where it is owed. As you rightly observed, by the time this arrives at my door, they are already signed up with a claims management company. It is also worth saying that, away from mass claims issues such as PPI, claims management companies don’t really exist. Although they feature hugely in relation to PPI, they don’t really feature in my work load in other areas. Part of the reason why they thrived in PPI is, of course, because people don’t actually know whether they have been mis-sold.

              Q71 David Mowat: You said that PPI is 80% of your work load, or has been, so this is a prominent thing.

              Caroline Wayman: It absolutely is.

              Q72 Mr Bacon: Can you repeat the last thing you said, Ms Wayman? I think you said, “People don’t know,” but I didn’t catch the rest.

              Caroline Wayman: People don’t know that they’ve got a claim, That is one of the differences in this area of work.

              Q73 Chair: But Mr Mowat highlighted that the money could have been spent on giving wide publicity to the issue within the system.

              Caroline Wayman: Yes, there are things you could challenge.

              Mr Bacon: And you could have made the banks pay for it.

              Q74 David Mowat: So we have one answer. Does anybody else think that we could have done this better? I know it is hindsight and all the rest of it, but nevertheless could we have done this better?

              Charles Roxburgh: We would agree that the regulation of claims management companies needs looking at, which is why there is an independent review looking at that right now. As I said, the charges need to be capped, which is why that consultation is out there at the moment.

              Q75 David Mowat: Yes. I had a claims management company come and see me about the cap, and they were saying that it is unfair. They were not that bothered because this industry has only two more years of working any way, so they are playing it long. We are talking about stable doors and horses, and all that. We are regulating now. This happened very quickly. There was a tsunami, and I can see that the ombudsman was completely swamped by it, but nevertheless it has been around for a while and we are just consulting now, and all the rest of it. It doesn’t seem that good—£5 billion is a mammoth amount of money to have been taken out. Does anybody else want to have a go as to what happened?

              John Kingman: I really do not think you will get anyone on this panel to stand up and defend claims management companies.

              David Mowat: I am asking you to defend your system.

              Chair: Time please. Mr Kingman, could you answer?

              John Kingman: I don’t think it is correct to say, “Well, they’ve only got two more years, and therefore the problem will have gone away anyway.” These people will be very highly incentivised to find other areas of activity, believe me. Therefore, I do not accept that the action that the Government are taking is going to have value for only a short time.

              Q76 David Mowat: PPI was the industrial one. I will tell you what was said to me. They said to me, “I’ve got a room full of people doing this work—hundreds of them. When PPI finishes it certainly won’t be roomfuls of people.” There may be something else in future but, if you look at the figures for cases for the ombudsman, PPI is pretty dominant.

              John Kingman: My point is that there will also be roomfuls of very clever people focused on finding the next thing.

              Q77 David Mowat: I agree with you and I’m not saying that the regulatory changes that are coming in are not good. They are good and I am glad you are doing that. I am just asking why we could perhaps not have done something more before.

              John Kingman: As you say, that is a judgment with the benefit of hindsight.

              Mr Bacon: This actually didn’t require the benefit of hindsight.

              Q78 Chair: One of the things we are trying to get out of this is that, we can talk about when it is done, but how ready and able are the Treasury and the FCA to work in more real time? I recognise that Tracey McDermott talked about complaints being an indicator with a lag, but this was apparent, as Mr Mowat has emphasised, many years ago, and yet we are only just acting now. That is the point of Mr Mowat’s question. Mr Kingman, you can say that with the benefit of hindsight we could have moved quicker. Why did the system not?

              Charles Roxburgh: Can I give some examples to show that when we become aware of something the Government have been keen to ask fast? Take payday lending: when that became an issue, they moved quickly to pass legislation through Parliament on payday lending. Exit charges on pensions—

              Chair: But why not on this one?

              Q79 David Mowat: We are at the tail end of it. Whenever we look at it, whether your two-year consultation comes in or not, if we look at the case volumes that the ombudsman is dealing with, we are at the tail end of this now. Therefore, yes, we can deal with it and it is good that we are. Everybody approves and applauds that.

              It was just a little bit too easy to say that it was obvious in hindsight, because it has been going on for quite a few years that we have known about it. I wonder whether there has been a systems failure here. Mr Kingman, the Chair called you the kingpin of this. You designed some of this stuff. Was there more that could reasonably have been done to have prevented £5 billion being hived off by intermediaries, to nobody’s benefit really?

              John Kingman: With the benefit of hindsight, it is clearly the case, with the work that we are doing now, that if we had known then what we know now, no doubt it would have been better if we had acted sooner. The Government are acting and will deal with this. To answer the Chairman’s question, were it to be decided—Tracey should comment—that the regulation should move to the FCA, we would expect the FCA to be ready to act quickly, and I am sure it will be.

              Q80 Chris Evans: But you knew, though, and would have known. The reason why I would use that example is, if I look at the miners’ compensation claims, which I was used to in the south Wales valleys, there were solicitors such as Beresford’s shaving off miners’ compensation for COPD and vibration white finger. You would have known that was likely to happen with these firms, and you have not taken action, Mr Kingman.

              I would also say that I can see on the horizon—and it does not take rocket science—that when pension reform comes in and all these innovative products that are alternatives to pensions come in, the same thing will happen again, and the claims management companies are going to do it all over again to you. You are fiddling while Rome burns.

              John Kingman: Tracey should comment on pensions freedom and the issues there. With respect, I do not accept that anyone foresaw the sheer scale of PPI. If you look, for example, at the provisions the banks have made, they have steadily grown way beyond anyone’s expectations, and I accept that the numbers are very large.

              Q81 Mr Bacon: No one knew the scale of the financial crash until it started to happen. It became much bigger much more quickly—Mr Kingman, you know all about that because you were in the Treasury at the time. You told this Committee many years ago that the Treasury was not prepared for it; it then tooled up and got ready for it. The experience of going through a major problem where the size of the problem only latterly became apparent to you, was one you already had.

              As Mr Evans said, the coal miners’ compensation scheme, which was looked at by this Committee, had £5.5 billion paid out. The NAO did a study on it. I remember that there was a solicitor in Doncaster paying himself a salary of £16.7 million. I remember getting Brian Bender, the permanent secretary at the Department for Trade and Industry, to agree that the purpose of the scheme was not to allow solicitors to give themselves salaries of £16.7 million. [Interruption.] Chair keeps saying in my ear, “Question”. My question is: why do you keep talking about hindsight? There was plenty of experience for you to draw on if you had chosen to do so.

              John Kingman: I really don’t think I have anything I can add. You are giving a view that it would have been better if the Government had acted more quickly. That is a very legitimate view.

                            Q82 Mr Bacon: You understood the nature of the beast, and when it did become apparent, which it did, that it was much bigger, why did you not then take action? This £3 billion to £5 billion that has gone to the claims management companies: plainly there is a cost in administering this, but that could have been a much smaller number, and more of that money—significantly more of that money—could have ended up back with consumers.

              John Kingman: All I can say is that we are taking action. As the problem has grown, the Ministry of Justice has been responsible for regulating this industry. You can imagine there has been lively dialogue with the Ministry of Justice about the actions that were necessary. We are consulting both on capping the charges and on changing the regulation. I do not think there is much I can add.

              Tracey McDermott: Can I just add one thing, which is not so much about what we did in relation to PPI? I think it is absolutely clear that there are an enormous number of lessons that the regulators and, indeed, the industry have learned from PPI. Some of those are around CMCs; some of them are around how you deal with mass mis-selling claims, because of the pressures on the ombudsman that have been created, because of the way the decision was made to deal with it on a points-driven basis.

              We have looked at those when we have been designing other schemes; and when we look at something like the card protection plan scheme, where there were, obviously, not the numbers of PPI but potentially 7 million claimants, one of the things we took into account when designing the appropriate redress scheme there was how do we make a scheme work that doesn’t require CMCs, that is clear to consumers—they don’t need to do that; that is time-limited; that gives people transparent ways to claim. We used a court-approved scheme of arrangement, there, which delivered £450 million of compensation to customers within seven months, without any need to use CMCs.

              That is not defending what happened in the past in relation to PPI, but we have taken on board the need to ensure that where possible we try to deliver claims redress packages without requiring CMCs. I think it is also important, however, to say that in amongst all the people who may have contributed to the rise of CMCs, part of the reason CMCs arose was that people were not confident that their banks would deal properly with their complaint; so actually it is very important.

              If you look at package bank accounts, which is another area, you will see that the way in which banks have dealt with those complaints is completely different; and that is partly because of the work the FCA and the Financial Ombudsman Service have done. It is also because they have recognised that if they leave complaints and do not deal with them properly, they get the CMCs coming in from sideways as well.

              Chair: We are going to touch on the issue about who has access to viewing how those complaints work a little later, towards the end.

              Q83 Chris Evans: It is quite interesting with claims management companies: the only person who lobbied me before this Committee was somebody representing a claims management company.

              Ms McDermott, I seem to be picking on you, but I want you to talk to me about what plans you have for pension reform. I know many companies are complaining that because of rules and regulations their regulation compliance is higher than their levies to the ombudsman and yourselves; but in the hope of avoiding another scandal like PPI, there is a real space here for real innovation. I am just wondering what plans you have for the future to make sure another scandal doesn’t occur.

              Tracey McDermott: In relation to pensions freedoms, or pensions reforms, a significant amount of work has been done by the FCA in terms of trying to address precisely the point that you raise, which is that obviously changes of this nature create a new set of risks to consumers. We haven’t actually seen an enormous amount of innovation and new products yet; but obviously we expect that there will be and we expect that that will be good, generally, for consumers; so we want that to happen.

              The most immediate things that we have done were in the short term. The freedoms came in; we introduced new rules requiring firms to give what we call the retirement risk warnings, which cover things like issues around health, scams, dependents, tax, and so on. Obviously the Pension Wise scheme has been set up by the Government, and we are responsible for setting the standards on that. We have also been working individually with firms—particularly the largest insurers—to review their non-advice sales, to look at how customers are being advised. That is something which will carry on as we go forward.

              We have been very focused, and indeed the industry is very focused, on the fact that this cannot become another mis-selling scandal. As time goes by, obviously innovation will develop; new products will develop. One of things we are doing is working very closely with firms as they start to think about those products, to try and ensure that they think through the risk to consumers as a result, and that we do not have vast sales of products which simply are not suitable for people.

              Q84 Chris Evans: You said at the beginning that you do not sign off on individual products. Do you think that at this point, with massive changes coming to the pensions market, maybe you have to go beyond your remit and start looking at the individual products?

              Tracey McDermott: I think that if we were to move into approving individual products, that would be a massive shift of emphasis for the organisation, which parliamentarians would probably want to debate. There is a real downside risk of pre-approving products, which is that you actually quell good innovation, which is positive and for the benefit of customers as well. Frankly, regulators are not in business because we are entrepreneurial people with lots of new ideas about how to create new products. We tend to be quite cautious, risk-averse people. That is why we are regulators.

              Chair: As Mr Evans has highlighted, the long-term risk of these going wrong for people, for both the individuals and for the taxpayer who may pick up the costs if those people do not have money to live on in retirement, is huge.

              Q85 Kevin Foster: There is one thing that always puzzles me about claims management companies. The banks knew which of their customers were affected; I understand they have a register. It is relatively simple for the customer to make the claim, so why didn’t you require the banks to simply write to their customers to alert them to the fact that they might have been eligible for compensation? Why were they not required to write to their customers suggesting that they make a claim if they have not done so already, thereby avoiding this whole issue of claims management companies?

              Tracey McDermott: We did require banks to do what we call root cause analysis of areas around complaints. I think they have written to—I can’t remember the precise number—between 3 and 4 million people directly, where they are able to target those people, and say that they may have been mis-sold because of that. The ability of the banks to write generically to everyone who ever had PPI is not quite so straightforward, particularly when you are talking about policies that go back 15 or 20 years where the records no longer exist. So we have required banks to do targeted communications to people who may have been mis-sold, and we have seen the results of that in much higher complaint rates in those populations.

              The consultation we are currently doing on whether to impose a time limit in relation to PPI also includes—a point your colleague made earlier—a proposal for an extensive communications campaign to publicise both the fact of the two-year deadline and also the fact that complaints can be made direct without going through a CMC.

              Chair: A claims management company.

              Tracey McDermott: Yes.

              Q86 Kevin Foster: To be honest, you probably won’t need to worry about promoting your two-year deadline, because I suspect a number of these companies will be only too happy to do it themselves. Why not look at setting up more automatic compensation schemes, particularly as, as we have touched on, many of these claims are fairly simple to process? There is no particular complexity to them, hence why they have been so lucrative for the companies concerned. When I did legal work, you didn’t want a complex case; you wanted a nice simple one that you could very easily claim a fee on. Why not look at setting up more automatic schemes?

              Tracey McDermott: The aim we have when we set up a redress scheme is to ensure that people who have been mis-sold the wrong product get compensation, and that compensation is not paid to people who were not mis-sold the wrong product. It is quite rare that 100% of the people who received a particular product should not have had it at all, so the general approach that we have taken to redress, which I think is right in terms of incentives for people, is that you should try to encourage the right people to complain, not just encourage everybody to complain in a sort of bonanza. Automatic redress is really only suitable if you have got a product flaw, like a product recall.

              Q87 Kevin Foster: There has been a bonanza for the claims management companies.

              Tracey McDermott: That’s right, but that would not have been made any better by having automatic payment.

              Q88 Kevin Foster: By definition, it would have been. With an automatic compensation system, you would not have needed to make a claim, so why would you go to a claims management company to ask them to handle it for you?

              Tracey McDermott: You would still have needed to make a claim. You could not automatically compensate people unless you know that they were buying the products. The records going back for the period of time that we are talking about in relation to PPI claims are just not there. So if you had a PPI product 15 years ago with your credit card, that is not something that would have been required to be retained either under the general law or under our rules, so it is not a straightforward exercise of identifying people.

              I would point again to the Card Protection Plan programme that we talked about earlier, which was not automatic compensation in that you did have to claim, but because we did know the population of people who had that, they did all receive I think three letters saying, “If you wish to claim, this is how you do it. Fill in the form and send it back.” So it was not automatic compensation, but it was closer to it.

              Q89 Caroline Flint: This question is for Mr Roxburgh or whoever wants to answer the question. Would you be prepared to look at putting a stop to claims management companies being able to go to the ombudsman and effectively ask them to finish a case, and then still get paid for it?

              Charles Roxburgh: Responsibility for regulation of the claims management companies rests with the MOJ.

              Q90 Caroline Flint: Okay. Will you take that back to the MOJ?

              Charles Roxburgh: Yes.

              Q91 Caroline Flint: Do you think there is an issue with the industry paying the compensation to the ombudsman and then paying to the claims management companies as well? It doubles the amount of money, and it is also a huge amount of money that ultimately affects the cost of products for consumers.

              Charles Roxburgh: Yes. The MOJ is looking at exactly this issue through the consultation on whether or not it should be capped.

              Q92 Caroline Flint: The second question is directly to you, Mr Roxburgh. Despite the fact that it has been given a particular responsibility to audit the FCA, the NAO has said that it feels limited by a lack of disclosure of information. Is the Treasury prepared to change that to ensure that the NAO can do its job of seeing whether there is efficiency, value for money and effectiveness in the use of resources?

              Charles Roxburgh: We have already started work on looking at what that would mean for us and the FCA. We are going through the detail of what exactly the information would be, what it would mean for the FCA to release it, what types of information are required, what the risks are and how the NAO would handle it. We have already started that work and we are going to give it very detailed consideration, and we will then come back with a decision.

              Q93 Mr Bacon: When you say that you are going to look at it and at how the NAO would handle it, are you worried that the NAO would leak or lose the information? After all, they audit the security and intelligence services, and GCHQ; I think you can trust them with the information, can’t you?

              Charles Roxburgh: It is just that it is extremely sensitive information. It is not a question of trust—

              Q94 Mr Bacon: Well, so is the information that they see from MI6, MI5 and GCHQ.

              Charles Roxburgh: Yes, but we want to understand how it would be handled. If it is going to be used in a value-for-money report, we want to know how it would be sanitised and anonymised, so we need to go through that due process of saying, “How would it be released by the FCA?”—there are EU rules with which they have to comply, so we would need to understand what that process would be—and, “How would it be protected by the NAO?” We just haven’t yet had time to go through those processes.

              Q95 Mr Bacon: Please don’t tempt me to say how we could solve the problem of the EU rules. Surely there are things that they need to know to enable them to assess how the FCA is functioning as a regulator and whether or not it is effective, efficient and economic—such as what the firms’ bonus schemes are—without which they cannot fulfil Parliament’s will. Do you agree with that?

              Charles Roxburgh: I am not in any way disputing that it is a highly relevant recommendation; we just need to go through the due process of understanding both how the FCA would release that information and how the NAO would use it. We haven’t yet gone through those processes, but that is what we have started the work on already.

              Mr Bacon: Okay.

              Q96 David Mowat: Ms McDermott, two or three times this afternoon you have said that you don’t want to “discourage innovative products”—you used that for the sign-off. When you used that phrase, my thought was that the last thing our financial services industry currently needs is more innovative products, which presumably means some kinds of derivative. The serious point is that we want simpler products that are low-cost and work. Perhaps I should just leave that with you. The industry talks about innovative products a lot, but when you strip down what an innovative product is, it is very often just an opportunity for an intermediary to make more money than they really should have done. That is my view.

              Tracey McDermott: I absolutely agree that we do not need lots of complex products that are designed to make money for the provider rather than for the consumer, but it is right that we as a regulator should encourage products coming to market that we think are actually good for consumers. A lot of the work we have been doing with Project Innovate is about asking how we can make it easier to do things like AML, or for services such as Nutmeg that provide an investment service over the internet. There is a need for new products in the pensions space, because if you are not buying an annuity, the only alternative at the moment is drawdown, which is not really a great choice. There needs to be something that bridges the gap between those two, so new products have to be developed, and we are keen to ensure that they are developed in a way that is safe.

              Q97 Chair: Perhaps you could take a leaf out of Ms Flint’s book when she was a Minister in the Department of Health and introduced a traffic light system for healthy food. Have you thought of introducing a traffic light system for financial services products?

              Tracey McDermott: We have thought about that quite a lot, but we have decided that at this stage we do not think it is something we should take forward. That is partly because when you dig down into how you would rate them, the questions that you have to answer are not about saying, “This is X% sugar and X% salt.” What are you judging the risk of? Are you judging the inflation risk? Are you judging the longevity risk? Are you judging the market risk? There may be ways in which you could rate some of those issues in particular areas. We do not have a plan to do that at the moment, but it is something we keep under review.

              Q98 Mr Bacon: When Alistair Darling became the Chancellor of the Exchequer in the last Labour Government and the crash happened, one of the things he says happened to him is that he got a phone call from the chairman of a major bank, who said, among other things, that the bank needed billions and had about two or three hours to get it. That chairman also said, “Chancellor, from now on, we’re going to sell products we understand,” which was quite shocking. What fundamental change has there been in the structure of the financial services industry since then, so that that’s not going to happen again?

              John Kingman: Let me give one answer, and Tracey can add anything she wants to add. One very fundamental change is that the consequences for financial institutions of bad decisions they took and bad conduct have come back to haunt them, with massive fines and serious consequences for individuals. Tracey has done an amazing job making that happen. I really would not underestimate that. If you are sitting in a financial institution that has paid billions and billions in fines, that changes the dynamic from the one that prevailed before the crisis—no question.

              Q99 Mr Bacon: Are you sure it is not just the cost of doing business? We had a professor from Stanford a few months ago in a Committee room saying precisely that—that it is just the cost of doing business.

              John Kingman: Well, it is a very high cost. There was a major bank the other day commenting, rightly or wrongly, that all the profit they had made in recent years has been paid out in fines. That is a consequence of the bad actions taken in the past.

              Q100 Chair: I want to touch on a couple of points. One is professional indemnity insurance, which the NAO mentions in paragraph 4.13 on page 42 of the Report. It seems there is something going wrong here. Either it is too expensive for the small businesses, or some people are deliberately underinsuring. Is that the case? Are they deliberately underinsuring to put the cost back on to the taxpayer? What could be done to make that better? I don’t know which one of you would be best to answer that.

              Tracey McDermott: If I may start, independent financial advisers are generally required to have professional indemnity insurance. It has definitely become the case over recent years that that indemnity insurance has become less useful at the point when it is actually required—

              Chair: So it’s not much good, then, is it?

              Tracey McDermott: —because of the fact that the excesses have been pushed up and so on. It is not, I don’t think, about deliberate underinsurance, so much as it is about the insurers imposing significant excesses and a combination of that with relatively low capital requirements for independent financial advisers, which mean they do not have much of a buffer in the extent of claims. We have consulted recently on increasing the capital requirements, which will cover some of that gap in relation to professional indemnity insurance. We will also be doing a review this year of Financial Services Compensation Scheme funding and the levy, because it is also a concern to small businesses that that is very unpredictable, and one of the things we will be examining as part of that is how the PI market is actually working.

              Chair: So you would be looking at things like differentiated insurance for different sizes or types of advisers, for example.

              Q101 Mr Bacon: PI market—you don’t mean private investigators, do you?

              Tracey McDermott: Apologies—professional indemnity. Sorry, I am too used to using initials. I think it is too early to say what the outcomes will be, but we want to understand the extent of this issue in terms of what types of firms it is affecting, what types of claims it is affecting and whether it is relevant to certain types of products or advice or whether it is a widespread problem across all sectors of the industry.

              Q102 Chair: May I quote from the Report, because the difficulty for consumers when this goes wrong is immense? Part way down the paragraph it says, “The amounts recovered depend on the individual circumstances of failed firms, and tend to lag compensation payments because it can take a long time to recover assets.” So if you are the person who has got the claim, you are going to suffer and/or the taxpayer has to backfill through the compensation scheme.

              Tracey McDermott: The way in which it works is that the FSCS will pay out the consumer at the point that they have determined their claim, so they do not suffer from a delay—

              Q103 Chair: Up to a certain level.

              Tracey McDermott: Up to a certain level.

              Chair: That is one of the problems.

              Tracey McDermott: They do not suffer the delay there. The delay is then that the FSCS will take legal action to try to recover what it can from the firm and in cases involving professional indemnity insurance it will have a decision that it makes around the likelihood of litigation success against the professional indemnity insurer. The levy payers, who are the other industry players, are the people who bear that cost, and that is why the FSCS levy is quite unpredictable year on year, because if a number of claims—

              Q104 Chair: Just to be clear, do they bear the cost of the legal action as well?

              Tracey McDermott: They bear the cost, so the FSCS effectively sues whoever it is—

              Q105 Chair: Yes, I get that. The legal costs—

              Tracey McDermott: That is all paid for by the levy payers as part of their fees.

              Q106 Chair: But the cap on, for instance, bank accounts has gone down to, I think, £75,000 from £85,000. Am I right?

              Tracey McDermott: Yes.

              Q107 Chair: So if proper insurance was in place, the seller or the bank—in that case perhaps a big bank might not be such an issue; they might have insurance, but for other products is there going to be a limit on what the organisation that sold the product would be—

              Tracey McDermott: Where this problem typically arises is very much in the advice space, so it is on products such as eData and so on, which are typically sold by IFAs as safe products but weren’t actually safe products. Different limits are applicable to different products on what the recovery is from the FSCS. I can’t remember what they are off the top of my head, but I am happy to write to you.

              Q108 Chair: We are really flagging a concern here and the NAO flag it quite clearly. You are looking at it. What is the timescale roughly?

              Tracey McDermott: The review into FSCS funding will be started in the next quarter, I imagine, when we will start the process. Obviously that then requires us to go out and consult, so it will be over the course of the next year.

              Q109 Chair: And the insurance bit will be only a part of that, so you will consult, you will put your report together and that will come out when—in roughly a year’s time?

              Tracey McDermott: Probably.

              Q110 Chair: And then you will present it to the Treasury or to Parliament.

              Tracey McDermott: Depending on what the recommendations are in relation to FSCS funding—they may be changes that we make through rules or they may be things where we are proposing legislative changes.

              Chair: So it could still be some time.

              Tracey McDermott: It could be some time.

              Q111 Chair: I want to ask you all, what is the next big issue you see coming down the line? Packaged bank accounts we would bank as one. Caroline Wayman, what are your early indicators saying, from the complaints that you are getting, is the next big concern for consumers?

              Caroline Wayman: Packaged bank accounts have probably been the biggest thing over the last year, which has been touched on already. Aside from that, our complaints are fairly stable. So away from PPI and packaged bank accounts, we have had a consistent level of complaints for the last few years. We probably see more issues around the consumer credit market, albeit complaint volumes are not that great yet; that is probably where we see the greatest issues around hardship.

              One other thematic thing I might mention is issues around fraud. That is a really difficult area of casework. Not that it is huge volumes of cases; it is more that it can involve very significant sums of money for individuals.

              Q112 Chair: Tracey McDermott, what is your perspective?

              Tracey McDermott: Obviously—this will sound glib, but it is not intended to—if we knew what the next huge problem was, we would be doing something to stop it happening. In relation to packaged bank accounts, the numbers are high, but they are high largely because we stepped in to take action and said we thought there were problems with the way they were being sold, so I think those have been addressed. I would echo Caroline’s point that consumer credit is something we are very focused on. That came to regulation by the FCA in 2014.

              Q113 Chair: What particular issues are you focusing on?

              Tracey McDermott: We are very focused on the way in which management works and we are very focused on payday. There have been significant changes in the payday market, which I think has improved it a lot for consumers, but it is still an area where you are dealing with people who are vulnerable. Debt management is another area we are looking at very closely.

              Q114 Chair: On that very issue, the decrease in interest has meant that some lenders will be lending more to cover their costs, so you can have over-indebtedness of some of the poorest people. Certainly in my constituency that is a concern. Do you look at the impact of the decisions that have been made, sometimes by Governments and sometimes by you?

              Tracey McDermott: In relation to the payday cap specifically, we did a lot of work before we introduced the cap to try to model what the potential impacts would be. Obviously, we now have to monitor those as they play through. We think over-indebtedness has been reduced as a result of the restrictions—not just because of the cap, but because of the affordability restrictions that we have imposed on firms—rather than increased, but clearly we are keeping an eye on that, and we have said that we will review the operation of the cap. I can’t now recall whether that is next year or the year after, but we have said that in a period after its introduction, we will review how it is operating.

              Q115 Chair: And if you had to review something like that, how quickly could you turn it around? Would it have to go back through Government, or would it be something you could make a decision on?

              Tracey McDermott: The work we did in relation to the introduction of the payday cap was an incredibly detailed piece of analytical work trying to understand the framework. It would certainly take a number of months to do the work. How long it would then take to change anything very much depends on what it is you decide wants to be changed. If the conclusion of the review was that we thought it was broadly working okay, with a couple of small changes required to our rules, it could be quite quick. If we thought there was a fundamental problem and that the cap was at the wrong level, we would have to re-consult on a different level of cap. If we decided that there was something that required statutory intervention, obviously that is a different timescale.

              Q116 Chair: My final question is from the consumer point of view. When people are applying for everything from a loan to a mortgage—mostly it will be loans—fixed fees will be applied. We have seen this discussion around mortgages, with high fees but low interest rates. People are often not very good at doing the maths. An example I came across was a loan offered with heavy selling on a courier to courier the documents at vast expense, which a quick calculation shows nearly doubled the interest rate on the total relatively small loan. Many of my constituents would understand that, but many wouldn’t. It is not something that people are always very alert to. Are you looking at fees at all? I don’t know whether the ombudsman gets many complaints about that sort of thing, where people suddenly do the maths afterwards and realise what they have been sold.

              Tracey McDermott: We do look at fees. In the example Caroline gave earlier on credit broking, one of the big challenges is not just the first credit broker taking a fee but a fee being taken by a whole series of introducers, none of whom give you a loan. We have introduced rules there, and we have also taken action against individual firms. We have also looked, not so much in the loan space but in relation to general insurance, at add-on products—things that get added on at the end of your journey through the price comparison websites. You think that you’ve got a great deal and then, all of a sudden, you find that, in fact, it costs you £X to have your name on the policy, or whatever it is. We have introduced restrictions in relation to that, and we have also introduced requirements as to what has to be put up front—the core elements that you will actually be paying. It is very much an area of focus. It isn’t something that we have had an enormous amount of complaints about, and if you have information about that, we would be very keen to hear it. Quite often those very vulnerable customers are not the people who actually pick up the phone to us or to Caroline. We are very keen to get intelligence, if there is any, of issues that are going wrong.

              Chair: We have previously looked at the money advice work done by Government. These things are all very important, too, in helping people to understand how to do the maths and in making sure that our schoolchildren are learning. My former colleague Ed Balls introduced that, and I believe it is happening in schools.

              I thank you all for coming along. You don’t need us to say that this is a serious issue. I think you got an understanding from the tone of questioning of how anxious and concerned we all are, and I don’t doubt that you are, too. We will keep pushing you on this, and on making sure that you are value for money for the taxpayer while getting a good deal for the consumer and doing as much as you can to stop these things happening, or to catch them as early as possible. Our uncorrected transcript will be up on the website in the next couple of days, possibly by the weekend. We will send you a copy. I expect that our Report will be out some time after the Easter recess. I thank you very much for coming.

              Oral evidence: Financial services mis-selling: regulation and redress, HC 847                            17