The financial services industry is a large industry. It employs about 2.5 million people and is a crucial part of our economy; some 18 per cent. of our GDP may well be linked to the financial services industry. Most of those who work in it are decent, honest and truthful in their personal lives. That has to be said at the start of a speech which will contain a number of criticisms.
There are problems in that industry that require regulation. Although we must be careful that over-regulation does not damage competitiveness or risk-taking, we have to ensure that there is sufficient regulation to protect the consumer. We are debating whether self-regulation is really adequate.
The Treasury Select Committee, of which I am a member, is currently examining that issue. Clearly, it does not seem to have been adequate until now, because we have had a series of scandals and we have had to reorganise the SROs, FIMBRA and LAUTRO. From July, some areas under their control will be passed to the Personal Investment Authority. The PIA will also have a greater independent element.
I was struck by the comments of a number of those who gave evidence to the Select Committee, who saw self-regulation as an important concept whereby the industry would begin to run itself. They were quite critical of the position we are approaching, in which the PIA has a large independent element. That means that we are moving away from self-regulation towards more independent regulation.
Some parts of the industry take the view that if we are to move away in that sense from self-regulation, we might as well have single-tier statutory regulation. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that the move to statutory regulation from self-regulation may not be such a big step in practice, because the elements of each system may contain parts of both. Indeed, a statutory system may well have practitioners closely involved in the way in which it is run.
The man from the Pru, Mr. Mike Newmarch, when he gave evidence to the Select Committee, took the view that we should have a single-tier statutory system which would be a much more accountable and effective form of regulation. Indeed, the Pru announced today that it would prefer to be directly regulated by the SIB. That is all part of the industry's ability to shop around for the regulation that it wants. In a sense, I disagree with that element of the current SRO system, but the Pru is trying to make the point that a single tier of statutory regulation through the SIB or a similar organisation might be the best route.
There is a strong case for change and for a move towards a system of regulation that can inspire greater public confidence. The key issue is confidence. The current scandals will become more serious. The home loans scandal and the pension transfer scandal will find their way on to the front pages and undermine public confidence in that important part of our economy. It is not necessary just for the consumer and for the industry; it is necessary for our economy and our country to have confidence in the financial services industry. That confidence does not exist at the moment.
The Countrywide Independent Advisers told the Select Committee that the public feels little better provided for than it did before the Financial Services Act and, as we have already heard, the Consumers Association regards the present regulatory system as unacceptable and not providing a basis for any confidence.
The pension scandal should not be underestimated. It threatens not just to expose incompetence and bad advice from some salesmen; it will also further undermine the whole financial services industry. When the SIB says that 500,000 workers might need to be compensated, when there is talk of £2 million to £3 million—and when the Association of British Insurers is suggesting that it could be £300 million—in compensation, there is a significant crisis of confidence in the financial services industry. That crisis must be addressed by the Government.
If that amount of compensation or anything like it has to be paid, someone will be paying for it. The people who will be paying for it are those who pay premiums into the various parts of the financial services industry. It will hit the consumer. That is the nature of the problem.
There is more than the problem of individual salesmen being incompetent or dishonest. Some of the media have suggested that that is the central issue, but there is also institutionalised incompetence and dishonesty within some companies that have had respectable reputations to date. As we are now beginning to understand, they have institutionalised both incompetence and dishonesty within their procedures by employing barely trained salesmen for short periods on commission only.
The Norwich Union has now suspended its work force, having admitted the inadequacy of its training after the SIB drew attention to the problem. We should not be to quick to criticise the Norwich, because it took action. If we are too critical and if there is too much publicity, other companies may well be deterred from taking that necessary action.
Evidence to the Treasury Select Committee—I have not had the opportunity independently to evaluate it, so I am just reporting it—was that companies such as Abbey Life have sent salesmen off to work after half a day's training with a copy of the "Yellow Pages". Allied Dunbar employs most of its sales work force on a commission-only basis. General Portfolio has indulged in pyramid selling.
Not all companies have done that. Others, such as Clerical and Medical, are moving towards a salaried sales force. It seems to be working for them. All that shows the degree to which we should be concerned about the standards of many, until now, respectable companies within the financial services industry.
A local concern has already been mentioned. Some 67,000 miners and 27,000 teachers have transferred their pensions from occupational schemes into other schemes where they may well be much worse off as a result. Three pits my constituency have closed, and Daw Mill, the only remaining one, has lost half its work force. As soon as the redundancies were announced, the salesmen were trying to encourage the miners to transfer out of their pension schemes and to invest their redundancy payments in particular ways.
Many people lost because those who were advising them were not competent to do so. They were called independent financial advisers, and in some cases they were not independent enough—and certainly they were not good enough to give advice. Today, the chairman of FIMBRA told the Select Committee that he saw the biggest issue facing the financial services industry as incompetence, as did the chief executive of the PIA when she gave evidence to the Select Committee.
Turing to the PIA, after hearing from both the chairman and the chief executive of the PIA, I am not convinced that they would restore confidence. Mr. Joe Palmer, the chairman of the PIA, was formerly associated with Legal and General, which has recently been fined because of the lack of proper regulation of its work force. To put in charge of an organisation that is seeking to restore confidence in the financial services sector a person with such a record does not inspire confidence in me, and I suspect that it will not inspire confidence in the public. Also, Miss Colette Bowe is associated in the public mind with the Westland scandal.
It does not reflect upon the honesty, integrity or ability of either of those individuals. Although it may be understandable to have one person who has been associated in the public mind with a scandal being placed in charge of a regulatory organisation which is trying to restore confidence, to have in charge of such an organisation two people associated in the public mind with scandals is not the right approach.
I hope that I have made it clear that what I have said does not reflect on either the competence or the integrity of those people, as individuals; it reflects more on the perception that the public may well have of an organisation that—if it is to continue—desperately needs public confidence. I suggest that, if those two people remain in place, it will not have that confidence.