Of all the things the FSA is trying to fix, the news yesterday that it wants to 'fix' the consumer's 'misunderstanding' of projection rates must rank as one of the more unexplainable ones.
For, in this time of wrapping consumers in cotton wool and removing all references to 'Caveate Emptor' it does seem rather daft to remove one of the simpler and more easily understood tools required to help people understand what might happen to their hard-earned wealth.
Certainly, there is a valid argument to suggest people could mistake the numbers put forward as firm projection rates rather than guidance.
However, if the advice being given is being put into context at the time the numbers are pulled out of the drawer or printed off the screen, then it is hard to see why the FSA regards projection rates as an issue: nobody can predict the future, therefore even the most basic consumer must understand, and be made to understand, that a projection rate is at best an estimate.
From the perspective of the consumer, having a set of three numbers suggesting what might happen is at least better than no indication. Consumers are used to such tables in other areas of everyday life, meaning the medium of tables is well understood and contextualised.
Consider the purchase of a car. Most consumers understand there is a sticker price which can be negotiated. Most also understand that the real cost of ownership is depreciation, and that the rate of depreciation can be looked up in a book called Glass’s Guide.
Most consumers also understand that the forecast rate of depreciation is an estimate based on a number of factors, each one of which could change: depreciation rates could speed, i.e, the value of a car drop faster over time, if, for example, the trend for silver colour vehicles turns.
Thus, the use use of simple tables showing possible, but not certain, rates of growth on investments made at the very least helps explain what may happen when hard-earned money is saved in a particular way.
Removing projection rates from the discussion with clients leaves the average consumer without reference points, and is unlikely to improve trust or confidence in the ability of the financial services sector to look after their money sufficiently.
What do you think about the latest projection rate review? Is it necessary? Do consumers need projection rates? What happens if rates are scrapped? See the separate story for current IFA thoughts on this issue.
If you have any comments you would like to add to this or any other story, either email the editor or place your thoughts on the IFAonline discussion board.
John Nightingaleprincipal at Personal & Corporate Financial Planning, says:
Correct me if I'm wrong here, but I understand that the rates (set by the FSA) are Illustrations of what might happen if a fund grows at a set rate. They are not a guarantee.
The current rates (set by the FSA) have been reduced which has caused much of the furore surrounding Endowments, specifically ones with strong with profits funds, resulting in the payment of compensation for funds that at present look as though they may fall short, but if they don't at maturity will this compensation be returned (with interest).
Insurers have been forced (by the Treasury) to improve solvency ratios which has resulted in reduced returns on with profit funds as they cannot remain invested in equities which provide satisfactory returns, albeit variable. Perhaps someone could explain to the Treasury that what goes down generally comes up again.
Now the FSA want to make wholesale changes to these rates as the consumer does not really understand them.
As this industry works to rules (set by the FSA) which we have to impart to the consumer who does not understand them, perhaps the FSA, with all the money it takes from this industry could educate the consumer as to what the rules it sets actually mean. Rather than ask the industry to come up with suggestions, perhaps they could come up with some of their own, if they can find someone who understands the implications.
The CA, FSA et al don't want us to earn via commission from sales to impart this information to consumers. Until they come up with a viable solution, I cannot afford to work for free, and the consumer (generally) does not want to pay.
Don't shoot the messenger.IFAonline
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