Summary Boxes
20. The current strategy for providing information
on long-term savings products appears to rest heavily on the assumption
that the saver will have an adviser who can be trusted to advise
them dispassionately on a product's suitability given their circumstances.
This assumption is usually warranted, but too often savers have
been mis-advised or misled as to a product's suitability. One
of the best ways of minimising the risk of mis-selling is to
provide savers with clear, accessible and succinct information
on the product so that they can judge its suitability for themselves.
In addition, some savers may, for a variety of reasons, not want
to use a financial adviser and we think it is important to respect
the rights of individuals to make that choice in designing the
regulatory framework. In the case of the less affluent, it may
be unrealistic to expect them to pay for the cost of "one-on-one"
financial advice. In these cases clear, accessible and succinct
information on the product becomes essential.
21. In theory, savers can do a reality check on the
suitability of a savings product by consulting the "Key Features"
document the FSA requires product providers to give to the client.
This is designed to tell the saver "the aims of the product,
the risks involved, the charges and the commitment that the consumer
will be making."[53]
Most witnesses in our inquiry felt that the current key features
document is not achieving its aims, although Mr Prosser, Chief
Executive of Legal & General, pointed out that the document
would usually be used in conjunction with an adviser.[54]
Mr Bloomer, the Chief Executive of Prudential, however, told us
the key features document "is not the most helpful document
for most customers in its current form… It is too long: normally
people just do not read things that are that long and complex.
We have to get to something more straightforward and simpler."[55]
Moreover the FSA's own website warns savers that "the Key
Features Document is not always easy to find amongst all the information
you'll be sent."[56]
The FSA also told us "some progress has been made in improving
the quality of information given to consumers about financial
products and services which they are considering buying or have
bought. But the situation is still far from satisfactory."[57]
In consequence, the regulator has been working on a shorter "Key
Facts" document, which will "include a 'Quick Guide'
(of no more than two pages)."[58]
The draft Key Facts document provided to the Committee nevertheless
remains a substantial document with, in addition to the two page
Quick Guide, three pages of "frequently asked questions"
and a three page "personalised example" to illustrate
costs and charges. Even so, it was criticised by some witnesses
for not being comprehensive enough. Mr Crombie, the Chief Executive
of Standard Life, for example, observed "the trouble is…
if you remove some of the features and relegate them to another
document, the consumer may miss things that are important to him."[59]
Equally, however, the Committee notes that the proposed Key Facts
document is too long to be incorporated prominently on the face
of marketing material to enable savers to see at a glance the
most important features of a savings product.
22. In our report on the credit card industry, we
concluded "the industry and regulatory frameworks need to
provide consumers with clear and understandable information. This
is clearly not happening currently. Important information is buried
in small print of often miniscule proportions, written in technical
jargon."[60] We
have reached similar conclusions in respect of the long-term savings
market. In the credit card market, we suggested "providing
customers with clear and transparent information about what are
necessarily complex products [should] now become a priority."[61]
We thus "challenged the industry to bring to the Committee
an agreed set of proposals"[62]
for a Summary Box, giving a clear presentation of the key elements
of the credit card in tabular format that "must be fully
standard and consistent, and the placement clear and prominent."[63]
We are pleased to note that the credit card industry and regulators
accepted our challenge and Summary Boxes are starting to appear
on credit card marketing material.
23. A similar Summary Box, encapsulating the crucial
features of often complex savings products in a simple, standardised
tabular form of the sort that could be included prominently on
the face of marketing material, would be valuable in helping to
provide better information to consumers in the long term savings
industry. Consumer groups we asked reacted positively to the idea
of a Summary Box. Mr McAteer, of the Consumers' Association, for
example, told us: "obviously anything that simplifies the
way information is presented has to be good", although he
went on to warn that a Summary Box should be "no substitute
or replacement for a duty of care on the advisers in the industry
to give good advice".[64]
Similarly, Mr Harvey, Chief Executive of Aviva, felt that developing
a suitable Summary Box for long-term savings products was a "perfectly
fair challenge"[65]
for the industry and all the Chief Executives of the major insurers
that we asked to commit to working to develop a Summary Box over
the coming months agreed to do so.[66]
The FSA also welcomed the idea, with Mr McCarthy, Chairman of
the FSA, assuring us that "one of the things we would like
to see, if it is practical to achieve, is a very short Summary
Box."[67]
24. We challenge the industry and regulators to
develop over the next six months a simple standardised Summary
Box, brief enough to be displayed prominently in most marketing
material. We would like all parties to report to us on progress
here by the end of the year. The Summary Box might show: whether
the client is guaranteed to get his money back, any other guarantees
attached to the product, the risk rating of the product, what
the investment is linked to, what the charges are and if there
are any penalties for early withdrawal. Such a Summary Box could
make a significant contribution to the understanding of long-term
savings products and considerably reduce the scope for mis-selling
and mis-advice.
Risk ratings
25. The long-term savings industry has been beset
by a series of problems where the risk of a savings product has
been widely misunderstood by consumers. The FSA told us: "we
expect consumers to consider carefully the risk disclosures given
in financial promotions where these are clearly presented and
to heed warnings given by the FSA about the risks in particular
products."[68] Unfortunately,
as Mr Tomlinson, Chairman of the Investment Management Association,
told us, "a lot of the [savings] products which have been
designed have just been too complicated for people to understand
the risk within them or even for the providers to understand fully
the risks that are implicit within them."[69]
This suggests that both the industry and the regulator need to
devote much more effort to assessing accurately the risk inherent
in savings products and ensuring that this risk assessment is
communicated to consumers in a way that is both understandable
and prominent.
26. The need for the industry to pay greater attention
to assessing and clearly communicating the risk inherent in any
saving product has been demonstrated by the problems encountered
in a string of products in recent years. Many of these products
were sold to large numbers of savers but the risks inherent in
them appear to have been clearly appreciated neither by the buyers,
nor, in some instances, the sellers. Our inquiry into split capital
investment trusts, for example, concluded that "many zeros
launched in the late 1990s (and subsequently) were structured
in such a way that, in adverse market conditions, [they] were
not low risk products. Even their designers appear not to have
fully understood how they would react to falling markets."[70]
Endowment mortgages similarly suffered from what Professor Davis
described as "a fundamental problem, in that you have a nominal
liability which is the bank loan which is mortgaged out there
but you are investing it in assets [equities] which in a sense
give a nice real return, but if you get disinflation, as we did
of course, the return on them is going to go down."[71]
It seems likely that many homeowners never appreciated the risk
inherent in this mismatch between the assets and liabilities in
the endowment mortgage product, not least because neither the
product providers nor the product distributors ever highlighted
it to them.
27. The FSA's current procedures for warning savers
about the risk inherent in particular products appear to be largely
ineffective. In the case of precipice bonds, for example, warnings
from the regulator about the risks inherent in these products
went unheeded or un-noticed by the market. The FSA told us: "in
December 1999 we issued a warning 'High income products: Make
sure you understand the risks' and placed a warning on our website
drawing specific attention to our concern that consumers needed
to understand that their capital may be at risk. This was backed
up with a press release aimed at encouraging the personal finance
press to raise concerns about the products."[72]
But "the majority of sales [of precipice bonds] took place
from 1999 to 2002",[73]
suggesting that many consumers either ignored, or never knew of,
the FSA's warning on these products.
28. There appears to be a wide recognition from all
parties that the assessment and communication of risk levels in
savings products is a problem that the industry and regulators
need to tackle. In its submission to our inquiry, the FSA wrote
"there have been too many instances where the industry did
not live up to its responsibilities to explain investment risk
clearly to its customers at the outset."[74]
The major product providers also appear to accept the need for
action. The Chief Executive of Aviva told us that "understanding
exactly what the risk profile of a product is, making sure it
is sold to a consumer who can afford that kind of risk profile—and
that they also realise that that is a risk they are taking—is
a really important means of diffusing later recriminations by
both parties."[75]
29. We suggested to various witnesses that it would
be both possible and extremely useful to develop a single summary
risk measure to be included in the proposed Summary Box. This
would both inform the consumer and ensure that the product provider
thought seriously about the risk inherent in the product. Mr Prosser
of Legal & General did not think this would be useful "for
the average consumer."[76]
Others were more positive. Mr Bloomer of Prudential told us it
could work, and agreed that such an approach could have avoided
many of the problems encountered, for example, in precipice bonds,[77]
but suggested that a standardised risk measure would only work
if it were confined to a "relatively small number" of
"relatively broad categories".[78]
Mr Crombie of Standard Life also felt a summary risk rating would
be useful, suggesting "it would undoubtedly be helpful to
consumers if we could standardise the way that risk was described."[79]
We asked Mr Tiner of the FSA if he felt it might be possible to
develop a simple risk indicator to be shown prominently on the
face of marketing material for a product, perhaps modelled on
a traffic lights system. He told us that while a "very simple
traffic light system could be quite difficult in practice"
[80]… "if
it is possible to reach a simplified scoring system or something
like that of relative risk weightings, then that would be a great
outcome" and he was "absolutely committing
the FSA to working with the industry on it."[81]
The Committee notes that towards the end of our inquiry the FSA
confirmed that it is now conducting work "on whether there
is a practical and consumer-friendly form of standardised risk
indicator which can be adopted."[82]
The Financial Secretary, however, warned of some potential practical
difficulties. She told the Committee that assigning a summary
risk rating to a financial product "is an interesting idea
but not without its difficulties", adding that "the
reason I think it is difficult is partly because the risk profile
of a particular product may change over time."[83]
30. The recent fall in equity markets has exposed
the fact that some of those manufacturing or selling long-term
savings products often have a poor understanding of the underlying
risks inherent in them. Too often, therefore, savers have bought
long-term savings products without any satisfactory explanation
of the inherent risks. This is a problem increasingly widely acknowledged
by the long-term savings industry itself. There is a need for
urgent action to correct this situation. The Committee believes
that a vital step in restoring confidence can be taken by developing
a simple system of signalling the inherent risk level of a savings
product. This should be suitable for inclusion in the "Summary
Box" we have proposed for all savings products and it ought
to be displayed prominently on the face of all marketing material.
While we acknowledge that there are practical issues to be overcome
in designing a summary risk measure and how it can be simply presented
to the client, we were encouraged by the statements of the leading
industry representatives who gave evidence to us. We welcome the
commitment of both the industry and the regulator to work together
to overcome these issues and we note the FSA's recent announcement
that it has now commissioned work on this project. We would ask
the regulator and the industry to report to us on progress here
by the end of the year. In products where the risk characteristics
may change over time, it is particularly important to give the
client a clear indication of this, perhaps via regular updates.
We recommend that the risk rating attached by the product provider
to the product should be regarded as an important part of the
sales advice given to the client. The industry should appreciate
that, if such an indicator is implemented, it would provide an
important safeguard against mis-selling.
52 HC 71-II, Ev 355 para 6 Back
53
HC 71-II, Ev 356 para 13 Back
54
Qq 1627-1628 Back
55
Q 1601 Back
56
http://www.fsa.gov.uk/consumer/search/index.html Back
57
HC 71-II, Ev 356 para 12 Back
58
HC 71-II, Ev 356 para 13 Back
59
Q 1607 Back
60
First Report, Session 2003-04, The Transparency of Credit Card
Charges, HC 125 paragraph 19 Back
61
ibid. Back
62
ibid., page 3 Back
63
ibid., paragraph 35 Back
64
Q 1434 Back
65
Q 1636 Back
66
Qq 1635, 1637 Back
67
Q 1984 Back
68
HC 71-II, Ev 350, para 12 Back
69
Q 1019 Back
70
Third Report, Session 2002-03, Split capital investment trusts,
HC 418 paragraph 29 Back
71
Q 109 Back
72
HC 71-II, Ev 350 para 15 Back
73
HC 71-II, Ev 349 para 4 Back
74
HC 275, Ev 98 para 5 Back
75
Q 1581 Back
76
Q 1616 Back
77
Qq 1624-1625 Back
78
Q 1619 Back
79
Q 1626 Back
80
Q 1972 Back
81
Q 1981 Back
82
FSA press release, 5 July 2004 Back
83
Q 2103 Back
