Focus is on fairness and education

The FSA has set out its objectives for the year ahead and its focus will be on the fair treatment of customers and promoting financial capability, says Bill Warren

At the beginning of each year, the Financial Services Authority publishes two key documents that summarise the state of the markets it regulates and its priorities for the year to come – its Financial Risk Outlook and its Business Plan.

Few of us will have the time or inclination to study these publications in depth but they contain information of considerable interest to the mortgage and general insurance sectors which we should be aware of.

Traditionally, the Financial Risk Outlook is published ahead of the Business Plan and sets out the prevailing and developing economic and financial conditions in which the FSA must achieve its four statutory objectives.

These are maintaining market confidence in the financial system, promoting public understanding of the financial system, securing protection for consumers and reducing financial crime. Bearing in mind that two of the four objectives are concerned with consumers and that mortgage and GI firms are in the front line of consumer contact, it’s perhaps most useful to go straight to section D of the Financial Risk Outlook entitled ‘Consumers’ engagement with industry’.

Under this heading, the background economic factors that represent risks to the FSA’s second and third objectives include the fact that consumers are generally ill-prepared for a weaker economic environment, many have a low level of financial capability and often the risks of the financial products purchased are not properly understood.

Consumer borrowing grew 10.4% in the year to November 2006 and in Q3 2006 the level of secured debt as a percentage of disposable income reached 126%. Rising property prices have given home owners access to mortgage equity to enable refinancing of unsecured debts, but despite this there have been sharp rises in bankruptcies, individual voluntary arrangements and repossessions.

Overall, consumers’ needs for financial products are becoming increasingly complex but many of them lack financial capability in key areas.

Finally in this section, under the sub-heading ‘Mortgage and GI intermediaries’ it is pointed out that the share of new mortgage business sold via brokers increased to 58% as of September 2006, and that brokers are particularly active in distributing mortgages to consumers with impaired credit status and those who do not conform to normal lending criteria, such as the self-employed.

While new products are helping to service these needs in the context of growing consumer indebtedness, “at the same time this presents potential risks about the fair treatment of customers”. These last four words bring us back to familiar ground.

It’s therefore not surprising that the Business Plan for the FSA’s retail work sets out its priorities as Treating Customers Fairly, financial capability, payment protection insurance and the review of retail distribution.

The National Strategy for Financial Capability is seen as so crucial to achieving its objectives that the FSA has included an extra 7.4m for this in its 2007/08 budget, bringing the annual spend on the project to 17.1m this year and continuing at 15m to 20m each year until 2010/11.

The scope of the FSA’s consumer-facing work is impressive. By the end of 2007/08, the Learning Money Matters schools programme will have been delivered to 310,000 more children in secondary schools and a Parents’ Guide to Money is planned for 20,000 new parents.

In higher education, the Money Doctors toolkit will be provided to 31 more universities and will start rolling out to further education colleges. Training will be given to workers in 50 major organisations providing services to young people not in employment, education or training. For those in employment, Make the Most of Your Money material will be provided to a further 520,000 employees.

If you are wondering why you will be paying higher FSA fees to improve the financial education of the population, John Tiner, chief executive of the FSA, has the answer.

“Over time, improving people’s financial capability will contribute to more effective and efficient retail markets, reducing the need for regulatory intervention and enabling firms to develop practices that better suit the needs of their customers,” he says.

In other words, it will be easier to achieve TCF ideals if customers understand what we tell them, and this in turn will help the regulator gain more confidence in our sector.