SPC News Summary

SPC NEWS SUMMARY OCTOBER 2001

REVIEW OF MEDIUM AND LONG-TERM RETAIL SAVINGS : A CONSULTATION DOCUMENT

SPC has responded to the consultation document issued by Ron Sandler as part of his review of medium and long-term retail savings. This is a summary of our response.

Scope of the review

The review covers, among other things, insured occupational pension schemes. Insured money purchase occupational schemes (but not insured defined benefit schemes) share many common features with personal pensions, group personal pensions and stakeholder schemes, but they operate within a distinct framework of legislation and this needs to be kept in mind in the detail of any review.

Extending consumer influence

Education is important but many consumers place greater value on information, usually generic information. One of the greatest inhibitors to individuals obtaining more information is that those experienced in financial matters are wary of providing it, even generically, in case they contravene the Financial Services legislation. This applies to individual advisers, as well as employers/trustees of occupational pension schemes and covers a wide spread of environments, ranging from talking to local groups (e.g Rotary and schools) to discussing financial issues in a social setting. There would be great benefit in the regulators spelling out more clearly where the boundary lies between generic information and advice and specific regulated advice.

We nevertheless agree that there is a need for consumer financial education, but we doubt whether consumer influence on products will become a reality. It is not clear how the market would differ if there was greater consumer power and influence.

Any discussion of disclosure and information needs to bear in mind the risk of information overload on consumers, which can be positively harmful.

Consumer education must avoid excessive emphasis on products e.g. pension and ISAs, at the expense of first principles, such as financial need (including whether it is appropriate to save at all), investment and the risks associated with it. In reality, however well education addresses these often complex issues, many consumers will be reliant on advice in making decisions.

The corporate purchaser

Corporate purchasers and intermediaries do exert competitive pressures on providers. Generally speaking, the larger the purchaser, the greater the pressure which it can exert.

Markets generally work better where employers are involved because they bring to bear bulk buying power. Excessive regulatory hurdles discourage employer involvement.

Information to consumers : the regulatory framework

Regulation has by and large been effective, but is over prescriptive at the sales stage (for example in respect of key features documents) and over mechanistic at the monitoring/enforcement stage. This has added to regulatory cost.

Personal finance media and other information providers

The personal finance media are an important source of consumer information but one needs to be cautious as to how valuable a role they can play. Articles in the personal finance media need to be newsworthy and to attract advertising. While there might not be economic incentives relating to the sale of one product rather than others, there are, however, strong influences on the personal finance media which are not identical with the interests of consumers.

We believe that information providers can play a more significant role, but as commented above, the boundary between generic information and advice and specific regulated advice must be clear.

Choice of channel

Direct selling may well be appropriate where the consumer has clearly defined his or her need. We doubt whether strengthening brands in retail savings would materially increase sales, although it would affect market share within sales which are made.

Intermediaries : commercial incentives

All businesses seek to control costs, but the high cost of compliance, particularly among smaller IFAs, limits the scope for reducing costs. Inevitably, therefore, the emphasis will be on increasing revenue.

Both commission and fees must cover the cost of aborted as well as successful business. Fees are becoming increasingly popular among employers and wealthier individuals, thus effectively unbundling advice from selling, since the ultimate product is free from loading for commission. The main factor in consumers' reluctance to pay directly for advice is probably the fact that it is a highly visible charge, payable directly by them, in a single instalment.

An alternative method of remuneration might be for IFAs to charge fees, with these being "paid" by receipt by the IFA of the equivalent amount of commission. The balance would then be rebated into the product.

Commission disclosure is of limited real value to consumers, since they have no means of judging the appropriateness of a given rate of commission.

Commission levels are determined by market rates and pursuit of market share. They also have to cover compliance costs.

Differential commission could introduce product bias, but it is the role of the regulators to monitor this.

Commission levels were capped until 1990, firstly by the Life Offices Association (the predecessor of the Association of British Insurers) and later by LAUTRO. OFT deemed this capping to be anti-competitive and it was abolished. The result was a rise in commission levels. In principle, it could be appropriate to reintroduce capping of commission levels. Capping of fees would be inappropriate because they are often charged as an integral part of general financial advice, of which purchase of a product might only be a part.

Consumer loyalty is a function of trust in an individual adviser and, to a lesser extent, in their organisation. Our experience is that consumers engaging an IFA expect them to act independently on their behalf.

Intermediaries : regulation and scope of advice.

We agree that too much emphasis is often given to product advice over general investment strategy. To a degree this mirrors the emphasis in consumer education on products, rather than on understanding of financial concepts, to which we refer above. Suitability of advice is often a matter of subjective judgment, rather than of objective fact. Unfortunately, regulators generally apply mechanistic tests in relation to the monitoring and enforcement of suitability.

League tables are a useful tool for IFAs and the consumers alike.

Impact of government on product mix and design

CAT standards are appropriate in relatively simple products, e.g stakeholder pensions and ISAs. However, regulators should not assume that a CAT standard product is automatically superior to a non CAT standard equivalent, for example in setting requirements for comparing suitability of stakeholder schemes with personal pensions.

Fiscal structures have a profound effect on product design and on consumer behaviour and expectations. The consultation document does not seem to take this into account at all.

Costs and charging structures

Front end loading of regular premium products is an inherent result of commission structures. Where, for example, fees are charged, there is no front end load in the product.

Specific issue : with profits policies

As the consultation document notes, with profits policies are currently under review in their own right. In the context of this review, however, we would make the following observations:-

· Surrender values under with profits polices are no less poor than under regular premium unit linked policies

· With profit policies are very popular among investors, particularly those whose attitude to investment is conservative. For IFAs they are one of several investments on which it might be appropriate for them to advise.

· The argument in the final sentence of paragraph 73 of the consultation paper is mis-conceived. The smoothing of short-term viability is a major attraction of with profit policies and applies throughout the term, not just at the beginning.

· Modern contracts allow switches to and from with profits and unit linked, which includes a cash fund for those nearing retirement.

SPC WELCOMES PROGRESS ON MFR BUT WARNS ON WIND-UP COSTS

The government has announced consultation on regulations amending the Minimum Funding Requirement. At the same time it has set up a consultative group to assist in designing its replacement.

Commenting on these developments, Jane Samsworth, the SPC President, said

"We warmly welcome the proposal to extend the periods for correcting MFR deficits. This will give breathing space to employers struggling with current time limits and is a step which we suggested.

We also support the removal of the requirement for annual re-certification for schemes fully funded on the MFR basis. This is a sensible deregulatory measure, which we also advocated.

The proposals on the MFR debt on the employer on wind-up generally do not affect pensioners. They are already entitled to have their benefits secured on a buy-out basis on voluntary winding-up. As a result, less money is left for non-pensioners and their benefits have sometimes been reduced on winding-up. Under the proposals, the employer will be responsible for ensuring that the scheme can at least provide unreduced cash equivalents in respect of non-pensioners. This will more closely reflect their reasonable expectations. The extra cost may, however, cause difficulties for an employer if it has no practical alternative to winding-up its pension scheme.

We will continue to work with the government on the replacement of MFR through our membership of its consultative group".

NEW MEMBERS

The latest new SPC Members are Aegon Asset Management UK PLC, and Hazell Carr PLC, Abingdon.

JM/HMW 4.13

9 October, 2001