Ron Sandler's proposals for a suite of simplified products risk repeating stakeholder mistakes and there is still a danger that without good advice consumers may not understand the risks they face
The unearthing of the £27bn savings gap has passed into financial services folklore. Ever since it was identified, there have been numerous discussions between Government, regulators and the industry about it.
Few, if any, have challenged its existence, even if the precise quantum is a matter for speculation. Instead, the wide-ranging discussions have been focused on how to close it and the methods which could be used to encourage people to save and invest. Enter Ron Sandler with his proposals for a suite of 'simplified' products.
By agreeing to develop the Sandler products, HM Treasury is continuing down the road first trodden by stakeholder pensions. The idea is for these products to be simple savings and investment vehicles with low charges, designed to appeal to those in the middle to lower income groups.
So far, two consultative documents have been published on these proposed products, the closing dates of which have recently passed.
One document put forward the Treasury's proposals for the product specifications and the other, published by the FSA, addressed the options for how the selling of these products could be regulated.
In the Treasury's ideal world, these Sandler (so-called 'safe' products) with their regulated features, would be so attractive to their target audience, that they would virtually sell themselves. There would be limited promotion of the products and no need for costly advice. But the stakeholder pension experience has shown that any idea of products walking off the shelves in this way is clearly pie in the sky.
Experience has shown that stakeholder has not been so appealing to its target audience that it can sell itself without any help. Instead, there is a good deal of evidence to suggest that the built-in 1% cap on charges was set too low. Because firms were unable to accommodate the cost of distributing, marketing and, most importantly, the cost of giving advice on a stakeholder pension, the consequence was that it was not made available to those who needed it.
Similarly, advisers do not think that 'a Sandler product' is going to be snapped up by the public without persuasion, intermediation and advice, purely on the basis of its regulated features. The essential role of advice has become much clearer since the introduction of stakeholder and any price cap should reflect this changing perception because the target market is inextricably linked with its level.
There simply will not be the margins in these products to encourage active distribution or active marketing to consumers with no existing links to financial institutions ' that is, those people who the Government is particularly trying to target.
Advice will be particularly important in communicating clearly to consumers the risks and rewards associated with these products. A key characteristic of Sandler is 'controlled risk'. But controlled risk is not the same as no risk.
These proposed products expose the investor to the risks of the equity market and the implications of this will need to be clearly spelt out. Research indicates that many consumers in the Government's target market will be concerned to avoid any form of risk to their capital.
Without advice, consumers may confuse controlled risk with the absence of risk.
Many advisers would in fact argue that consumers who are entering the savings market for the first time would be better off avoiding equity-based products altogether. Instead, these consumers would best be served by an initial layer of savings in deposit-based vehicles, where their capital is secure. This would be preferable to any vehicle where there is risk to their capital.
Aifa has asked the Treasury to consider whether it is possible that the features inherent in the Sandler suite could be made available through National Savings products. This could be a more cost-effective method of meeting the Government's aims. The FSA in its discussion paper at least acknowledges advice has a part to play in the success of the 'simplified products'.
Not so long ago advice seemed to be regarded by some as an optional extra which could often be replaced by generic material. It is a good sign that there has been a move away from this position. There is also a helpful statement that they do not see the need to introduce the equivalent of RU64 guidance rules for Sandler products.
Of the FSA's three options for regulating the sale of these products, the proposals for 'focused advice' (Option Three) would seem to be the best and most stable means of ensuring that appropriate advice is given.
This approach would seem to be the one that is more closely aligned to a consumer's expectations. For a start, it uses the 'advice word', which fits with consumer preconceptions. It presumes that some understanding of a consumer's circumstances will be gained ' which is more likely to match most consumers' expectations. But it could also enable advice to be given in a specified area, quickly and efficiently by someone on the road to qualification but who has not necessarily reached the final goal. Not only does this tie in with the proposed modular approach to examination and qualification, it could also make the advice more economic to deliver.
The focused advice option would require advisers to be qualified to a basic level and perhaps in a specialist modular area. Consumers would benefit because if their case was one that required a more complex solution than a Sandler product, this would be more likely to be identified by an adviser operating at this level, than by one who is unqualified.
The main advantage of this option over the one the FSA has registered its initial preference ('guided self-help' ' Option Two) is that it makes it more probable that the consumer and the adviser will have a common understanding of the basis of their contact and of the nature of the advice given. It avoids that self-contradicting phrase 'generic advice', which seems designed to confuse the consumer with legal definitions and distinctions.
There is perhaps a further spin-off benefit from focused advice. This concept has wider application beyond the Sandler product suite and could usefully be extended to advice in general. It could mean that the process of giving and receiving advice would be streamlined.
As a consequence, this could have a positive impact on the availability of advice and on the take-up of financial services generally. It could also make a significant impact on closing that £27bn savings gap.
* Income: £9,500-£13,500 Age 25-35 (Assuming 7% Equity Return).
Tracey Mullins, director of Public Affairs, Association of Independent Financial Advisers
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