This section contains the Centre’s responses to major consultations issued by the Government and regulators.
Work and Pensions Committee Inquiry into Pensions Freedom and Choice
The Centre has submitted its response to the Work and Pensions Committee Inquiry into ‘Freedom and Choice’. We are concerned that the risks associated with freedom and choice have not been fully appreciated. At the time of the launch we warned that the reforms were a regressive policy, rushed and very poorly planned, and badly implemented.
Consumers might welcome the reforms – after all who can be against ‘freedom and choice’. But there is cognitive dissonance evident here. Consumers also want their pensions to be safe and reliable. However, consumers will be exposed to greater uncertainty and risks in the form of market, product, misselling and fraud, and longevity risks. In addition, the reforms are likely to push up the costs of providing financial advice, push up costs of saving for retirement and/ or reduce the value of pensions in retirement.
Savers now have a good value, collective option for accumulating retirement savings in the form of NEST. But, this will now be undermined by the additional costs introduced at the decumulation phase as a result of freedom and choice. Costs are particularly important for the groups of pension savers we focus on – underserved, lower-medium income households.
Sadly, some of our fears have already been borne out particularly with regard to scams. But the real damage will be done in the medium-longer term as the costs of saving for retirement are pushed up and consumers are exposed to greater market uncertainty and longevity risk. It is simple logic that when more costs are extracted from the pensions system this reduces the value of retirement savings meaning households have to save more to compensate.
There were, of course, problems with the old system and annuities rightly came in for some criticism. But, the old system did allow consumers to manage longevity risks. It is not progress to replace a system with some faults with a new system which exposes consumers to greater market, misselling/ scam, and longevity risks and ultimately pushes up the costs of saving for retirement.
Lower-medium income households who can afford to save comparatively low amounts are particularly affected by high costs. They are also disproportionately affected by poor advice and decision making – they cannot absorb the financial losses associated with market and misselling risks in the same way as better off households.
Freedom and choice threatens to reverse the very real progress made through automatic enrolment and NEST. If we think of AE/ NEST filling the pool of retirement savings, freedom and choice drains away those savings in the form of consumers drawing down savings and/ or the pensions and investment industry extracting value in the form of high costs.
But, there are interventions we can adopt now to mitigate the risks in the short-medium term. The priority is to ensure consumers have access to objective, impartial financial advice and pension decumulation ‘defaults’ to allow them to identify safer, better value options.
Our submission can be found here: Work and Pensions Commitee Pensions Freedom and Choice-FIC final submission
The Work and Pensions Committee terms of reference can be found here:
 The filling of the retirement savings pool needs to be speeded up anyway
FCA Credit Card Market Study: dealing with persistent debt, CP17/10
The Centre responded to the FCA’s consultation on proposals for dealing with persistent debt in the credit card market.
We argued that the nature of the problems identified by the FCA’s comprehensive analysis of the credit card market means that any interventions should have three separate but connected objectives:
- To encourage better consumer behaviours and change market norms in the consumer credit market – that is pre-empt and prevent a build-up of persistent debt and encourage borrowers to pay down debt quicker and so save money;
- To protect borrowers from exploitative and unfair practices – that is, the application of very high charges to what is in effect a captive market; and
- To promote a more competitive market – from the consumer perspective.
Interventions will have to address legacy problems and fix the market for the future.
We used those criteria to judge the FCA’s proposals. With this in mind, we were pleased that the FCA has recognised the problem and welcome some of the FCA’s proposals on interventions to help borrowers manage persistent and problem debt.
But, taken in the round, we do not believe that the package of proposals will be effective. In particular, we are very disappointed and perplexed that the FCA has not included potentially the most effective remedy – capping fees and interest rates on credit cards – for consultation. Capping the total cost of credit has been shown to work very effectively in the payday lending market. Capping fees and rates in the credit card market would be a more direct way of meeting the desired objectives of encouraging better behaviours and changing market norms, protecting borrowers, and promoting real competition.
Ruling out a remedy which has been shown to work in similar conditions without even consulting on it, or even explaining the decision, is worrying from a consumer protection perspective. But it also goes against the principles and practices of good regulation.
The FCA already has a duty to make general rules ‘with a view to securing an appropriate degree of protection for borrowers against excessive charges’. Therefore, it would have been well within the FCA’s remit to consult on a total cost of credit cap (including fees and rates). Significant numbers of borrowers in the credit card are still paying effective rates of more than 100% and are experiencing more detriment than payday lending borrowers. A cap on fees and rates in the credit card market would be entirely proportionate and would ensure regulatory consistency.
Behavioural interventions such as those proposed in the CP are very much unproven interventions. Any intervention which requires changes in consumer behaviour involves a great deal of uncertainty. Achieving sufficient behavioural change will be laborious and resource intensive. Whereas, capping rates and fees would have a demonstrable, direct and rapid effect on firm behaviour and, therefore, on the financial wellbeing of borrowers. We urge the FCA to go back to the drawing board and now consult on the introduction of a cap on consumer credit.
Nevertheless, some of the proposed remedies may make some difference in protecting vulnerable consumers in the meantime until better remedies are adopted. For example, ensuring faster repayments of balances is important as is requiring firms to improve their forbearance practices. But these can also be enhanced.
Rather than focus on persistent debt alone, the FCA should be thinking about persistent and/ or problem debt. The FCA’s approach means that a borrower could end up paying more in fees and rates than principal over a one year period and not be caught by these proposals. By any reasonable definition, paying more in fees and rates than principal over a one year period is problem debt. Therefore, we argue that the trigger points for intervention should 12 and 24 months.
Additional measures are needed to change market norms in this market. Therefore, we make two recommendations on this score. The FCA should change the default position on borrowing so that lenders cannot increase credit limits without express request and consent of borrowers. Similarly, the FCA should now actively consider requiring an increase in minimum repayments to a higher default level so that outstanding balances are repaid more quickly – of course, without causing financial difficulties for borrowers involved.
The FCA has determined that its concerns about unsolicited credit limit increases should be dealt with through voluntary industry remedies overseen by the Lending Standards Board (LSB). Of course, we support any interim initiatives to deal with this problem until more effective measures are introduced. But, it is of concern that the FCA does not appear to have committed to making public the compliance data, nor its own assessments of whether the LSB’s monitoring is robust enough. This oversight needs to be rectified. The FCA needs to commit to publishing compliance data plus regular assessments of whether this voluntary initiative is appropriate.
Our full submission can be found here: financial inclusion centre FCA persistent debt CP17-10 condoc final
 Openness to ideas, transparency, balance and objectivity, and consultative
 See CONC 5A.1.4, FCA Handbook, https://www.handbook.fca.org.uk/handbook/CONC/5A/1.html?date=2016-08-19
FCA Mission document
The Financial Inclusion Centre submitted a response to the FCA’s ‘Mission’ document consultation. We are very encouraged that the FCA is consulting on its mission. The document itself is very helpful for communicating the FCA’s priorities and how the FCA approaches its work.
In particular, we are very pleased about the greater emphasis now placed on vulnerable consumers. We support the view that resources should be concentrated on vulnerable consumers who are less able to withstand the impact of market failure or consumer detriment. This is more evidence that the FCA is adopting a more consumer-focused regulatory culture.
But we raised concerns about the FCA’s emphasis on what is known as ‘information asymmetries’ to explain market failure in financial services. There have been numerous attempts to use information disclosure to empower consumers in the hope that this will make markets more competitive, efficient, and firms treat consumers fairly. This has not been effective and the renewed emphasis on information disclosure and competition as a way of making markets work is a regressive step.
For further reading and to download the submission click here: FCA Mission consultation
FCA’s Financial Advice Market Review (FAMR) call for input
We welcomed the call for input into the so-called ‘financial advice gap’ in the UK – concerns that large numbers of consumers are unable (or unwilling) to access good quality, appropriate financial advice. Good advice is critical for promoting financial inclusion, financial resilience and security amongst households – particularly lower-medium income households which are the focus of our work at the Centre. But, it is important that we understand the real causes of the advice gap. Claims that over-regulation is the primary cause of the advice gap are wrong or disingenuous and used to try to reduce much needed consumer protection. Remedies based on false analysis would exacerbate rather than improve the situation.
For further reading and to download the response click here: FCA FAMR consultation
Reforming Financial Markets
The Financial Inclusion Centre submitted its response to HM Treasury’s important consultation on reforming financial markets. The Centre argues that the priorities for government intervention and financial market reforms should be to reform financial markets… Read More/Download Response
Ensuring access to a basic bank
A response to the European Commission’s consultation on how to ensure European Union citizens have access to a basic bank account… Read More/Download Response
A Review of Retail Distribution
Response to the FSA’s proposals to reform the distribution system for retail investment and pension products… Read More/Download Response
Banking Reform – Protecting Consumers
Response to the discussion paper issued by HM Treasury, the Financial Services Authority, and the Bank of England on reforming the deposit protection scheme in light of the Northern Rock scandal… Read More/Download Response