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 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.

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 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.

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 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.