Out-Law Guide 4 min. read
26 Jan 2011, 4:19 pm
This guide is subject to UK law and was last updated on 26th January 2011.
The Government wants to encourage the development of a range of simple financial products for the mass market that "do what they say on the tin". But will these products be sufficiently attractive for the financial industry to back the initiative?
Many consumers lack confidence and capability when they make financial choices and this can result in them making poor decisions - or failing to make any financial plans at all.
Many fear they will suffer losses from a financial product that will outweigh any anticipated gain. Others, having made a decision, are reluctant to shop around for a better deal. As a result, many people are simply not saving enough or taking out enough insurance cover for their protection needs.
The Government believes part of the problem is that there is too much confusion and choice in the market. Products with marginally different features are difficult to compare. Terms, conditions and exclusions are often over-complicated and hidden in the small print – in any case, many people will not bother to read them properly.
And, although comparison websites can provide a useful service, many consumers who use them tend to focus on the headline price rather than the various product features on offer.
The Government's proposed solution is for the industry to develop a new range of simple products for consumers that are designed to be as straightforward as possible and which can be easily compared. These, the Government hopes, will ensure consumers understand the products they need, help them make better choices and encourage competition in the market.
In a consultation paper published in December 2010, the Treasury suggests the initial focus should be on non-investment products, such as savings accounts and protection products (term life assurance, critical illness and income protection cover), which can be straightforward enough to be purchased without regulated advice.
Bruno Geiringer, an insurance expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said:
"The idea behind a range of simple financial products for the mass market is a good one, especially when the Retail Distribution Review is expected to result in independent advice only becoming affordable for consumers at the high net worth top end.
"But it will need the cooperation of the providers and - except for the few providers who can count on selling significant volumes - they would need to be convinced that there would be an attractive and early pay-back in return for the investment required."
The Government is anticipating this will be a wholly voluntary initiative and that simple products will be developed by the industry in partnership with consumer groups and other interested parties.
The aim is to benefit those who lack confidence or experience in purchasing financial products, although the products themselves will not be specifically targeted towards any particular group.
Ideally, the Government would like to see simple products having a limited number of standardised features that will make them easier to compare, but it recognises this may be difficult to achieve in practice. It is also keen to see the new regime develop a clear brand recognition as a way of building trust and sustainable demand.
Importantly, the paper does not envisage any price caps. The Government believes competition between providers should keep prices low, and it is keenly aware that simple products need to be profitable for providers if the initiative is to succeed.
Past initiatives to encourage take-up of simple products such as stakeholder and CAT (Charges, Access, Terms) designed products have not resulted in any significant increase in consumer savings.
The Government now intends to re-examine the role stakeholder products play in the market. As part of the simple financial products initiative, it believes that there is a case for retaining stakeholder pensions, even though the pensions landscape will be changing significantly later this year with the introduction of the National Employment Savings Trust, the low cost, online pension scheme.
The paper also asks for views on retaining the basic advice regime. Basic advice follows pre-scripted questions to identify the customer’s financial needs from a range of stakeholder products.
Under the new retail investment advice regime (which comes into effect at the end of 2012), basic advice will be a form of restricted (as opposed to independent) advice. Most buyers of stakeholder products, however, require more guidance than the basic advice model provides.
Bruno Geiringer said that, if the simple products initiative takes off, the market can expect to see more interventionist regulations appearing in the new Consumer Protection and Markets Agency's rulebook.
"The Financial Services Authority has been following an increasingly interventionist strategy when it comes to preventing consumer detriment and this is likely to increase under the CPMA when it takes over as conduct regulator and consumer champion.
"Only this month, the FSA published a discussion paper exploring how far the CPMA's powers should go in terms of intervening in new product design and development."
But Geiringer warned that it is by no means clear whether the industry will give the initiative sufficient support:
"A crucial ingredient in the success of simple financial products will be some assurance that there will be no meddling or sudden curtailment of the regime in the future because of some change of government policy or change of political party in power.
"It is also unclear what would happen to the vast amount of existing savings that might all move across into these products causing a significant shock-lapse and a sharp reduction in the earnings of product providers" said Geiringer.
"Some parts of the provider industry may claim that simple products already exist to meet these objectives and that it is not necessary to intervene at the product level any more," Geiringer added. "Others will strongly object to the proposition that protection can be sold without proper advice.
"There will inevitably be some very different views and it is entirely possible that some consumer groups will welcome the proposals with open arms whilst those on the provider side will object vehemently against intervention to this extent."
The consultation closes on 25th March 2011.
Contact: Bruno Geiringer ([email protected] / 020 7418 7306)
See: The consultation paper (26-page / 311 KB PDF)