Parliamentary Connections

The Treasury Select Committee has been berating the Financial Services Authority for its failure to get to grips with financial exclusion.

The select committee rightly points out that much more needs to be done and that producing leaflets and knocking out some advice on a website does not really scratch the surface of a growing problem. Proposals from Citizens Advice for IFAs to offer free advice, while worthy, also seem to offer little hope of addressing the problem.

Financial exclusion has grown as a problem over the last decade because the most effective mechanism for getting simple protection and savings products into the hands of the less well off was regulated out of existence. Home service insurance – personified by the Man from the Pru on his bicycle – worked. Tens of thousands of vulnerable families had decent basic protection because the insurance man would knock on their door every week to collect the premium, advise on changes in cover when family circumstances changed and provide friendly advice on family finance. It was very old-fashioned, relatively expensive and totally alien to the form-filling, fact find mentality that drives modern regulation. But it worked.

The simple truth is that people on low incomes, desperately trying to keep up with our consumer society are not going to go looking for financial advice. The advice needs to go to them which is precsiely the service the Man from the Pru offered. The challenge now is to find a way of reinventing that concept for the 21st century.

The Financial Services Authority's sudden move to demand greater transparency from hedge funds is very welcome and shows a degree of determination to cast light into the more mysterious corners of the markets that outstrips past reforms. Predictably, it has brought protests in its wake.
At the front of the queue of complainants are the hedge funds themselves who now suddenly face the prospect of having to explain themselves when short-selling stock that is the subject of a rights issue. What do they have to fear? If they have good reasons for doing this – beyond making themselves millions – then I am sure the intelligent people who run these funds will be able to articulate those reasons. If the reasons are threadbare and amount to little more than gambling on the failure of a rights issue then they will be exposed as such. I will be interested in the explanations because I have never quite understood why an institutional fund manager would lend stock to a hedge fund to drive down the price of shares in their portfolio. I always thought that fund managers liked to think they added value to a firm by holding its shares, not destroyed value.
So, there might be an element of protesting too much about the squeals from the hedge funds. The nervousness this pre-emptive FSA strike has induced elsewhere in the market, I understand a little better.
The FSA has always consulted widely before making major changes, almost over-consulted some would say. Does this move herald an era of more aggressive action on the part of the regulator?More of a take it or get out attitude? I don't know but I do know that it is the fear of many in the markets regulated by the FSA that it could be the dawn of a new reform culture down at Canary Wharf with less asking how people would like to be regulated and rather more telling them how they are going to be regulated.

The Treasury's latest response to the Northern Rock crisis seems to me a grave backward step in bank regulation.
I refer to the proposal that in future any Bank of England support for an ailing financial institution should be done on the hush-hush. Apparently, the Treasury and the Bank have convinced themselves that the Northern Rock crisis was all the fault of the media for telling people that it was being supported by the Bank. Hardly.
Northern Rock hit the buffers because its dimwitted board fooled itself into adopting a deeply flawed business model that couldn't withstand even the initial stresses of the nascent credit crunch last summer. It therefore went cap in hand to the Bank of England and, as soon as the news of central bank support became public, the queues started to form outside Northern Rock's branches. In future, says the Treasury, such support should be kept secret to prevent people with their savings invested in a failing institution knowing that their money might be at risk. I thought this was the era of transparency but I obviously got that one wrong.
I fully accept that by making public the need for central support you are likely to prompt people to worry about the security of their savings but surely they have a right to know. It just cannot be the right way of doing things in the 21st century to allow City bigwigs to fix up a deal - which may or may not work - behind closed doors and keep investors in the dark. It is a deeply patronising attitude that almost seems a throw back to another era.
It will be entirely to the good if the threat of having your investors know you are in trouble remains. It should provoke greater caution among managements who think they have come up with another "too good to be true" way of bucking the markets and leaving their competitors in the shade. The "What if?" testing of the risks in their business model should inject a greater note of caution if the ghosts of Northern Rock and its queues of anxious customers looms over their shoulders. Banish those ghosts and you take away some of the fear of the consequences of failing to run a responsible business.

The clearing of the decks before this week’s changing of the political guard has brought an unexpected bonus for the insurance industry with the announcement by Treasury minister Ed Balls that all travel insurance sales are going to be regulated by the Financial Services Authority from January 2009.
This argument has been running for years with travel agents fighting a fierce but misguided, rearguard action to stay out of the regulatory net. They initially won an exception with a lot of high sounding promises about better training, self regulation and monitoring of consumer complaints. We all knew that was only abit of polite window dressing to cover up the fact that the FSA couldn’t cope with taking on travel agents at the same time as the rest of the general insurance sales show.
Nevertheless, the Association of British Travel Agents had a chance to get their members in line but failed to take it. If ABTA had have introduced a tough training standard, a rigorous self-regulatory regime and done something to reduce the outrageous commissions their members earn off selling travel insurance they may have kept them out of the regulatory net. They failed on every count so no-one should feel sorry for them or their members. I certainly do not believe that statutory regulation per se will many force travel agents to stop selling insurance as ABTA has claimed today. Most of them earn far too much in commissions to chuck it in at the first scent of an FSA inspection.
Of course, what could happen is that the FSA starts to take a dim view of policies where less than 40% of the premium ends up in the hands of the underwriter and enforce some sort of disclosure regime on the market. Now, that would provoke a shake-out.
In the meantime, the industry as a whole will benefit from the Treasury’s change of heart. Travel insurance attracts a disproportionately high level of complaints and critical press coverage, tarnishing the image of the whole industry. Statutory regulation gives everyone a chance to put matters right and whatever job Ed Balls goes onto, the industry should be grateful to him for this legacy.
The only shame is that we have to wait until January 2009 for it to bite.

Every year or so the All Party Parliamentary Group on Insurance & Financial Services has a dinner with the trades unions representing workers in the financial services sector. Although there is spread of unions and staff associations active in the sector, dominated by AMICUS, they work together under the banner of Alliance for Finance.
The dinner has the habit of turning into abit of a platform for a group of Labour peers to show off their trade union credentials and the latest dinner last week was a particularly bad example of this habit with many of the Alliance for Finance representatives left feeling they hadn't had much of a chance to get their point of view across because they had been listening to speeches from members of the group – rather the opposite of how these events are meant to work. That said, they did air their concerns on a few key issues.
Top of their list was the pressure that bank and building society counter staff and call centre workers are put under to reach sales targets that the unions frequently consider to be unrealistic. Representatives from right across the sector felt that many of these targets could only be reached if customers were over-sold – if not blatently mis-sold – financial products. They felt this was now especially true of some things that are not caught in the Financial Services Authority net, such as credit cards and other debt-related products.
Running neatly in parallel with this fear is their concern about the lack of consumer education on personal finance. The unions are very supportive of the drive to include this in the national curriculum and were mildy critical of the Financial Services Authoirty for not doing more on this front.
Both of these issues have been recurring themes when the All Party Group has met the unions over the years. Things maybe moving on the consumer education front but no real work has ever been done on looking at the contribution that overly aggressive sales targets have made to the various mis-selling scandals over the last 20 years. Perhaps the unions could consider funding a university department to carry out some research into this so that they can come back next year with some hard evidence to prove the point.

The deadline on the consultation period for the Treasury's review of the sale of travel insurance passed yesterday with absolutely no new light being shed on the subject.
Just about all the submissions were as predictable as they come and could have been written anytime in the last five years.
To sum up: The Association of British Travel Agents (ABTA) has stuck its head in its members' balance sheets and realised that they cream off too much commission for mis-selling travel insurance for it to risk even the most minimal acknowledgement that there might be a problem; on the other side, brokers and direct insurers are united in their condemnation of the shabby sales practices of most travel agents and the poor value of the policies they sell. Powerful backing for the latter viewpoint comes from a range of consumer groups, most recently reinforced by BBCTV's Watchdog programme. This demonstrated, yet again, that too many people go through unnecessary hardship and suffering because they were not sold the right travel insurance policy by a travel agent.
So, if nothing has changed in the view of the market participants what chance is there that the Treasury will now stand up to the mighty travel industry lobby and do what it should have done in the first place which is get the Financial Services Authoirty to regulate all sales of travel insurance?
I suppose the most optimistic sign is the mere fact that the review is taking place. It was initiated by new Treasury minister Ed Balls who, as I have pointed out before, shows a greater understanding of the insurance industry than most of his recent predecessors put together. In speeches I have heard him make he has given the strongest hint possible that his belief is that there is a problem with travel insurance which wasn't solved by ABTA's worthless promises about addressing the problem with rigourous self regulation. He is unlikley to be impressed by ABTA's submission which seems just a re-run of previous arguments.
The one that always srtikes me as the most specious is that proper regulation will lead to a lack of consumer choice. I think this is the complete opposite of the real effect of introducing a level playing field as, at the moment, people almost feel obliged to buy the insurance through the travel agent or tour operator – it is virtually a linked with no choice offered. This means they do not have the incentive to shop around for something better and, also, that the alternative providers know that a large chunk of the potential market is cut off from them, reducing their incentive to market to them. Put everyone in the same regulatory environment and I believe that alongside the major benefit of eliminating alot of mis-selling we will also see greater consumer choice.

John Greenway's dire warning at the Post Magazine Business Leaders Forum Parliamentary Reception on Tuesday evening that the Financial Services Compensation Scheme could be sending some large bills in the direction of insurance brokers, IFAs and insurers next year and the year after moves closer to reality every day.
Promises are being made by government as knee-jerk reactions to the unprecedented crisis that grips our banking system. It is simply a matter now of doing anything necessary to put out new fires before they engulf yet another institution that just weeks ago looked fireproof. Pledges to compensate those who put their money (foolishly?) into collapsed Icelandic banks are made without stopping to think who will pay or how. This all reaches far beyond what the FCSC was designed for or can reasonably be expected to cope with.
Fortunately, there will be an early opportunity for Parliament to survey this wreckage as the Banking Reform Bill is about to set off on its legislative passage. I expect the issue of who compensates the depositors and savers in failed banks to feature prominently in this debate and it may offer an opportunity for the insurance industry, especially the broker and IFA sectors, to lobby hard for some cast iron ringing fencing of banking liabilities.

There is a rising chorus of criticism of the ineffectiveness of Parliament during the current crisis. Today in The Guardian for instance, Simon Jenkins launches a stinging attack on the failure of the House of Commons to break away from its grouse-shooting long summer recess and compares it unfavourably with the American and Icelandic legislatures which he says, with some vindication, have stepped up to the mark.
I think he is being unfair in suggesting that MPs were roaming the moors looking for game as I suspect a majority of them don’t even have a passing familiarity with a grouse, dead or alive. The reason for the recess stretching all the way through September is the party conference season, still plonked in its traditional place in the calendar and still kicked off by the TUC at the beginning of September as it has been for over half a century. It has long looked an irrelevant circus, well past its sell by date, with none of the main parties daring to allow anything approaching genuine debate (let alone dissent) they are pointless talking shops.
This year they looked even more irrelevant as the financial storm clouds gathered and the winds of chaos blew with ever greater force. They should have been at Westminster, creating a sense of genuine purpose, articulating the fears and concerns of ordinary people – as the US Congress did so effectively – and injecting some much needed urgency into the Treasury, Bank of England and Financial Services Authority.
They missed that opportunity, however. So, what now?
I think Parliament has to look very hard at how it will scrutinise these newly nationalised – whether partially or wholly – financial institutions. I think the House of Commons Treasury Select Committee will do a good job in probing the regulatory triumvirate that looks to have been sleeping on the job and the bankers whose lack of understanding of their own businesses tipped the world into crisis. People will expect blame to be apportioned and will want to see those most responsible squirm and be punished: John McFall’s team is well placed to do this and to take it to the next, more constructive, level which is trying to understand what we have to do better to prevent such disasters befalling us again.
What I do not think they are well placed to do is to scrutinise how taxpayers’ stakes in financial institutions are being managed. This needs a fresh approach. No-one outside of a few City boardrooms expects the government to sign a blank cheque to bail-out institutions that have created, participated in and exacerbated the global collapse of financial markets. They need to be held to account and to have someone constantly looking over their shoulders on our behalf.
Parliament should set up a new Financial Institutions Select Committee made up of both MPs and Lords and chaired by Vince Cable, the Liberal Democrat’s widely respected Treasury spokesman. This committee should have extensive powers to demand that the directors of banks appear before it, that the institutions benefiting from public subsidy produce top quality financial information for it and also that they submit plans for major investments to it. This would breathe new life into Parliament, demonstrating that it has a new found determination to protect and promote our interests.

If you need any confirmation of the low regard in which banks are now held by MPs just listen to the deafening silence that greeted the Competition Commission's draconian action on payment protection insurance. In any normal climate, there would have been some sharply divided views on the blanket ban on the sale of single premium PPI with new loans and the clampdown on point-of-sale promotion of regular premium policies. Now, there is silence.

It is no good the Association of British Insurers bleating that some people who need this cover may now not bother with it. Its members connived with the banks and building society to miss-sell the product for years so that people paid far too much, often for policies that wouldn't cover them anyway as they might be self-employed or have a pre-existing medical condition.

PPI was, at best, over-sold by the banks. I have sat through meetings between MPs of all parties and the trade unions in the finance sector where the unions complained bitterly that the only way counter staff in banks could meet the targets set for them on the sale of PPI policies was to sell them to people who would never be entitled to make a claim. Insurers must have been as aware of this as the banks, yet they let it go on.

Clearly, the Competition Commission has taken the view that banks and insurers - with 20 years of miss-selling products between them - simply can't be trusted to clean up their own act so they have done it for them. It will cost banks a tidy sum in lost commissions.

This may turn out to be the first of many regulatory clampdowns on financial products as the government and regulators battle to regain public confidence in their ability to control the institutions that are blamed for the financial and economic crisis that now engulfs us. It is essentially a battle for hearts and minds - and a very political battle as the next General Election is now no more than 15 months away -  but it may take us in the direction of an over-regulated industry that finds its scope for innovation gravely restricted as the economy recovers.

There is no shock value in the current crisis-ridden climate when a consumer group says the financial services sector has a mountain to climb to restore consumer confidence. Which? - once the Consumers Association - set out this case with admirably clarity when it spoke to the All Party Parliamentary Group on Insurance & Financial Services recently. More of a shock was its critique of a regulatory system that we all know has failed but which few have yet pointed so clearly at where they believe the fundamental fault lines lie. More of that later.

As hard as he might try, it looks as if Gordon Brown has already lost control of the debate on the future regulation of the world's financial services industries. His pleas to President Obama and the US Congress for a co-ordinated global response sounded very fine but lacked substance and, crucially, lacked credibility. His hopes of pulling off a deal at the G20 Summit next month now look very slim.

Most of the rest of the world is not looking to the UK or the United States for a lead in reforming the way financial markets and the firms that play in them are regulated for the simple reason that they think the Anglo-US approach of the last 25 years has a lot to do with the mess the world's economies are currently in as many leading commentators are starting to point out. Europe, in particular, does not want a UK or US solution and is already busily working at its own. Last week's Larosiere report spells out a new approach that has quickly won approval in the European Commission and among key national governments in mainland Europe. The Larosiere Report?  You haven't heard of it? You can be forgiven because the coverage in the UK of this key report for the European Commission by former International Monetary Fund managing director Jacques de Larosiere has been poorly covered here. Yet, it has set the EU on a course to create three new pan-national regulatory bodies - the European Banking Authority, the European Securities Authority and the European Insurance Authority.

These new regulators will be given wide powers to impose supervisory standards on national regulators, make binding decisions on technical issues (very likely to include powers over product design) and enforce adequate prudential supervision in conjunction with another new body, the European Systemic Risk Council. Certain pan-European organisations will find themselves closely regulated for the first time with credit ratings agencies at the top of the list - they are in for a very nasty shock if these recommendations go through. For the time-being, the EU envisages micro-level regulation of individual firms being left with national regulators but it sets out a course towards far greater control in the future, threatening to bring a range of other market and conduct of business issues under the remit of its new structure.

The report and the Commission make a nod in the direction of the world outside Europe's borders by urging a "deepening of the EU's bilateral financial relations with all its major partners" but here, in the very next line, is the key statement of intent "There is an opportunity for the EU to seize global leadership". This is where the battle lines will be drawn and it is hard to see Gordon Brown's voice being heard above the noise of that battle.

There are some scores to be settled with the UK among many regulators in Europe dating back to the creation of the Single Market in financial services in 1992 when the UK won a protracted argument over the balance between prudential regulation and product regulation, with the EU rules coming down firmly in favour of the former. At the time, many financial products in Germany, France, Italy and Spain were tightly regulated in terms of design and rates. All of that was replaced by a more UK orientated system of prudential supervision and it is that system that many in Europe believe has now failed, no more so that in the UK. Larosiere comes back time and again in his report to the need to regulate at much more detailed level, especially when it comes to hedge funds, over-the -counter derivatives and credit default swaps. It also has things to say on the need for greater risk retention by the issuers of securitised products and calls for common rules for what it rather vaguely refers to as "investment funds".

The UK has given a lukewarm welcome to the Larosiere report but merely praising it as a "good basis for further discussions" as Alistair Darling did this week is hardly going to win friends at the European Commission, especially as he goes on to dismiss the idea of given any new pan-European bodies powers over national regulators. Europe sees it as the agenda for those discussions and we can expect to see France and Germany pressing this at the G20 summit. They are not interested in the sort of wishy-washy talk of global co-operation that the Prime Minister peddled to the US Congress this week: they want firm action with tough new rules and see how to deliver that as the starting point for debate, not merely as an option for discussion.

If the UK financial services sector wants to engage in the real debate over the future of regulation it will be much better advised to look to Brussels rather than to Westminster.

The last week has seen a flurry of activity around the world on the regulatory front but I have a suspicion that the only people who will be really satisfied are the very people at whom the reforms are aimed - the institutions that caused the financial storms of the last year or so. As far as I see it, the United States and Europe have such fundamentally different approaches to this that it is hard to see any global regulatory consensus emerging, let alone concerted action to put in place a regulatory system that would prevent the near collapse of the western financial system again. We have to remember that we are only looking at a slightly calmer scene now because of the billions of public money poured into propping up the system and its institutions. As Sir Martin Sorrell observed on Radio 4 last Friday, the amount of public debt racked up dealing with this is equivalent to the cost of a major war and it should be inconceivable that no-one is held account for causing that war.

Let's start in the UK.

At the annual Mansion House Dinner in the City of London last week, we saw the government and the Bank of England at loggerheads over the path regulatory reform should take. One was pleading for very limited action, saying that we should just look to the boards of the banks and other financial institutions to take a longer term, more responsible view. The other argued for some tough action to ensure that we didn't create monsters that were "too big to fail", suggesting that there could be a Glass-Steagal like split of investment and retail banking. You might have thought the Governor of the Bank of England was the one arguing for just having a quiet word in the ears of the City grandees. You would be wrong. It was a Labour Chancellor of the Exchequer, talking in the wake of the worst financial and economic crisis in over 60 Years.

New Labour has always been in thrall to the City. It is one of the reasons why the credit bubble was allowed to grow so huge before bursting and why so many high risk products were allowed to corrode institutional balance sheets. Labour trusted the City, probably because it doesn't really understand it, and its whole approach to regulation has been to allow the City to get on with making money, naively it thought for the country. I have seen no clearer indication that this is a government that has run out of ideas, incapable of changing course even when its previous course took the country onto the rocks, than its failure to grasp the need for a radical overhaul of financial regulation and the failed tripartite system.

The day after this stunning public divergence between the government and the central bank in the UK, the Obama administration in the United States came out with its proposed reforms. I don't want to be too dismissive of such a complex plan but it is a mess. There seems to be a regulator for everything, a whole new tier of federal regulation to overlay the already cumbersome regulatory system that some parts of the financial sector, such as the insurance industry, have to contend with at state level. In some ways it is reminiscent of the UK's first stab at comprehensive regulation of the financial services sector with the 1988 Financial Services Act which spawned a real alphabet soup of narrow sector regulators. There is a certain sense of déjà vu in reading US commentators attacking the Obama plan on the same grounds. It will leave gaps and create opportunities for regulatory arbitragemand these will be exploited by those who don't want to be properly supervised.

In Europe, meanwhile, there seems to be a greater sense of purpose, even if couldn't look more different to the US approach if it tried.

The European Union wants to move to fewer, supranational regulators and has an ambitious plan for getting there. Despite UK doubts - opposition would probably be a more accurate description of the government's stance - this plan is edging ahead and was largely approved at the summit of EU leaders at the end of last week.

So far, despite fierce attacks on "Anglo-Saxon" attitudes to regulation and the contribution these have made to the crisis, EU leaders have been keen to keep the dissenting UK government on board and have made compromises around the chairmanship of the proposed new regulators to achieve this. To understand why they have done this you have to look at the wider political scene in Europe.

The EU needs to get the Lisbon Treaty ratified, a process that will probably take until the end of this year. The Labour government backs the treaty and has never been prepared to contemplate bowing to demands for it to be put to a referendum in the UK. The Tories oppose the treaty and have said that if it is not ratified if (or as they see it, when) they become the government, they will stop the ratification process, possibly putting the treaty to a referendum. This is a doomsday scenario as far as the rest of the EU is concerned so they are prepared to go quite a long way to making Gordon Brown's life as easy as possible to ensure he survives until the treaty is finally nailed down. While it is very hard to imagine a British government falling over a dust up in Europe on financial regulation, such is the febrile nature of British politics at the moment EU leaders are not prepared to contribute to the Prime Minister's discomfort and risk him being forced into an autumn General Election.

So, where does that leave the much vaunted desire of world leaders (as expressed at April's G20 Summit) to make sure we never have to go through the same crisis again? Frankly, it is desperately hard to tell but I still think that the most coherent and focused case for reform has been that made by the EU. The challenge they will face is translating that into a global plan.

Meanwhile, those most in need of a firm regulatory grip being placed on their collar will look at this huge divergence of approaches with a smug satisfaction.

• Banking Crisis: International Dimensions, Eleventth Report, to be published at 11.00am on Friday 24 July
• Evaluating the Efficiency Programme, Thirteenth Report, to be published at 00.01am on Tuesday 28 July
• Banking Crisis: regulation and supervision, Fourteenth Report, to be puublished at 00.01am on Friday 31 July
• Mortgage arrears and access to mortgage finance, Fifteenth Report, to be published at 00.01am on Saturday 8 August
• Banking Crisis: dealing with the failure of the UK banks: Government, UK Financial Investments Ltd and Financial Services Authority Responses to the Seventh Report from the Committee, to be published at 11.00am on Friday 24 July
• Banking Crisis: reforming corporate governance and pay in the City: Government, UK Financial Investments Ltd and Financial Services Authority Responses to the Ninth Report from the Committee, to be published at 11.00am on Friday 24 July.