The Financial Services has discovered most people who take out with-profits investments have a basic...
The Financial Services has discovered most people who take out with-profits investments have a basic understanding of how the products work but still buy without reading the product information that is provided.
A survey commissioned by the FSA - as part of the with-profits review launched in February last year - reveals that although some aspects of with-profits, such as the long-term nature of the product and the existence of penalties on early surrender, are better understood, the knowledge of key features such as bonuses, guarantees and the application of smoothing is generally poor.
According to the FSA, there is little appreciation of the risk involved in with-profits investments, limited awareness of Market Value Adjusters (MVAs) and variable understanding of how and where funds are invested.
Summarised details of the research are published today in an Issues Paper on "Disclosure to Consumers" are highly critical of product provider activities and includes comments from organizations such as the Plain Language Commission (PLC) on how information about with-profits funds might be relayed and displayed to give both investors and intermediaries a better understanding of the product.
In particular, the PLC says a balance needs to be struck as many investor reports are written in complex, legalistic language which is designed to defend the company behind the product, rather than help the consumer.
Principal areas where consumer understanding needs to be improved, says the FSA paper, are identified as:
* The nature of with-profits products, including features such as smoothing, bonuses and guarantees;
* The benefits and risks of the product;
*How investment returns are calculated;
* Providers' policies on features such as smoothing, bonus calculation and MVAs;
* Factors other than investment performance that might affect the returns to policyholders; and
*How the investment is progressing after it has been bought.
The paper also warns, however, that disclosing an "information overload" may also produce a counter effect and would also deter consumers from reading, so short, simple information is required.
The report suggests a targeted approach is needed to take into account the fact that different audiences have different needs, so 'headline' information could be given to all consumers while more detailed information could be made available in a separate document to advisers and consumers who want it.
Anyone who wishes to respond to this, the third with-profits issue paper, has until February 15, 2002.
A fourth issue paper entitled 'Discretion and Fairness in With-Profits Policies' will be published soon, says the FSA, and will give more detailed consideration to the position of insurers and the discretionary information they need to remain competitive.
The with-profits review will then be completed in Spring.
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