Figures from the Children's Mutual suggest providers and industry associations may have jumped the gun in celebrating the government's proposed 1.5% price cap in the new product rules.
David White, chief executive at The Children’s Mutual , says his company’s calculations are that on a basic £250 government grant coupled with family contributions of £25 per month, a provider will generally only make £5.60 profit after a year, once all the administration costs are covered.
Providers CIS and Foreign & Colonial are among those focused on the 1.5% cap, which they say will enable the product to be distributed to a much wider client base.
F&C is especially pleased about the proposal to not include the 0.5% stamp duty within the cap.
However, the reservations expressed in TCM’s numbers are reflected in the ABI’s response. While positive about the price cap, it warns success of CTFs will depend on a simplified sales process, which the FSA has yet to deliver.
”I am glad to see the Government is conscious of this and will be continuing to work closely with the FSA,” says Joanne Segars, ABI head of pensions and savings.
Ron Sandler, who drew up recommendations on simplified products on behalf of the Treasury, last month told the House of Commons Treasury Select Committee he was concerned about a couple of issues relating to the FSA’s approach to the issue.
One danger is the original proposals may become so watered down they would actually generate additional cost, which would make simplified products “unattractive” for consumers, he says.
The other danger involves suitability. If the products do not have a “degree of suitability” built into them, then they could end up producing worse outcomes for consumers. Sandler equates the suitability conundrum to deposit accounts, which, while simple, do not actually help people pay off their debts faster, if that is in their best financial interests.
The FSA says its research concludes the so-called guided self-help option is the best solution to minimising sales and distribution costs, while ensuring consumers get the most suitable products.
Meanwhile, Sandler’s view has been criticised by some working with people on low incomes for missing the crucial point that low income earners will not save without advice. That in turn means simplified products themselves will be of little use because the consumers they target will not take them up in any case.
Until the FSA delivers its proposals, it may be that the CTF price cap, although an improvement on the Stakeholder cap, should not be held up as a panacea.IFAonline
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