House of Commons - Treasury

Select Committee on Treasury Eighth Report

7 Sandler Products

63. The Sandler Review recommended that a suite of simple, standardised products should be introduced into the UK long-term savings market. Mr Sandler argued that "at present, competitive forces in the long-term savings industry actually drive towards greater complexity, not simplicity, of products. This leads to distribution economics which make it difficult for low/middle income consumers to access products. The heart of the solution lies in product regulation… Product regulation provides an embedded means of protection that does not rely on advice and so minimises the fixed cost element of interacting with the consumer. The Review therefore recommends the introduction of a suite of simple and comprehensible products, the features of which would be sufficiently tightly regulated to ensure that, with certain additional safeguards, these could be purchased without regulated advice."[195] Mr Sandler also recommended "there should be no initial charge, and annual charges for 'stakeholder' products should be regulated… The Review recommends that… a 1% ceiling would be a suitable starting point."[196]

The selling process

64. Many witnesses to our inquiry, from both the industry and consumer groups, expressed concern about the proposal that Sandler products might be sold without regulated advice. Mr Harvey of Aviva argued that it had to be accepted as part of the Sandler process that the risk of mis-selling was being transferred to the purchaser as a risk of mis-buying.[197] The Investment Management Association told us this implied that the Sandler product suite could "be dangerous if not introduced with the greatest care because of the risk of encouraging mis-buying."[198] The Financial Services Consumer Panel noted that "we are very concerned that Sandler products could be the next case of widespread sales of unsuitable products because consumers may not understand the risks of some of the products, which are equity-based, and may even have felt that the Government somehow guaranteed the products."[199] Mr McAteer of the Consumer Association also told us "anything that actually reduces the duty of care on these companies and restricts access to the ombudsman, I think it is going to undermine confidence even further."[200] Legal & General, however, emphasised that "to be low cost, the simple Stakeholder products must also have a simple selling process, as originally envisaged by Ron Sandler."[201]

65. Towards the end of our inquiry the Financial Secretary announced to the House that the Government was to move ahead with Mr Sandler's proposal, using a "new basic advice regime for stakeholder products. This would reduce the time taken for a typical pension sale from several hours to approximately 30-40 minutes. In the future, employees would be able to buy a pension or other stakeholder product in their lunch hour."[202] The FSA wrote to the Committee to inform us that within the basic advice process that would apply to Sandler products "certain key protections will remain: firms will have to gather information from consumers with the aim of trying to ensure that products they recommend are suitable for those consumers; and consumers will be able to take any complaints which they have been unable to resolve with the firm to the Financial Ombudsman Service."[203]

66. The Committee hopes that the basic advice process now proposed for Sandler products will go some way towards meeting the fears of consumer groups and others that the new simplified selling process would see large scale mis-selling with little prospect of consumer redress. We note that firms will still be expected to establish the basic suitability of a product for the client and that the client will have the right of appeal in any dispute to the Financial Ombudsman Service. The reduction in the consumer time taken for the sales process from several hours to a projected 40 minutes ought also to play a key role in widening access to the savings market.

Price caps

67. The price cap of 1% on Sandler products originally proposed was fiercely criticised by some witnesses before our inquiry. Ms Francis, Director General of the ABI, told us that "At 1 per cent the UK would be unique in the world in the low level of fees that were charged. Every other country that you compare with, including countries such as Australia, have a higher charge… you do need some additional charging up-front to enable you sensibly to cover the cost of advice, information and so forth." [204] Others within the industry were more positive and Invesco noted that "products priced at less than 1% already exist and have enjoyed growing market share throughout the 1990s."[205]

68. Many of those opposed to the 1% price cap pointed to what they viewed as the disappointing experience of stakeholder pensions. Prudential told us "we believe that the aim of promoting and selling Sandler stakeholder products would not be achieved in a 1 per cent regime… We urge the Treasury to relax the 1 per cent charge cap to allow the industry to promote and distribute Stakeholder pensions effectively."[206] Others, however, took a dramatically different view of the success of stakeholder pensions. The National Consumer Council, for example, observed that "over 1.5 million consumers (on a variety of incomes) of stakeholder pensions are now building up savings in a low-cost, flexible product. In addition, millions of consumers who continue to save in personal pensions have benefited from the general reduction in charges that followed the introduction of stakeholder pensions. Similar downward pressures on charges across the market might follow the introduction of the other stakeholder products."[207] The evidence we heard from the Building and Civil Engineering Benefits Schemes (B&CE) illustrated the success of some organisations in selling stakeholder pensions with a 1% price cap. They told us "We will be able to live within the 1% cap… This partnership between employers and individuals in the construction industry has given B&CE an advantage. But we believe that innovative commercial providers should have, from the outset, been looking to work with employers and unions in the manual industries to build a joint approach to pension provision."[208] The B&CE went on to suggest "the financial services industry as a whole has failed to rise to the challenge of the 1% world."[209]

69. Alongside the new basic advice regime the Treasury announced that it was setting the price cap for Sandler products at 1.5% for the first ten years, reducing to 1% thereafter. This announcement has been welcomed by many in the industry. HBOS plc, for example, wrote to us that they believed "that a 1.5% annual charge is realistic" and that the decision "will increase access to advice and products… [which can]…only be good for consumers."[210]

70. The Treasury also announced that the 1% price cap for stakeholder pensions would be raised to 1.5%. The Financial Secretary told us that the extra 50 basis points on the price cap above Mr Sandler's proposals was a "charge explicitly for advice but only for the first ten years" and that "returns, over a period of 25 years say, are virtually identical to [those] if you charged one per cent the whole way through."[211] The Financial Secretary went on to tell us that for those with stakeholder pensions already "We very much expect that the industry will retain their current charging structures. We will be negotiating this closely."[212] We also asked the Financial Secretary if she had considered linking charges more explicitly to performance and she told us that the fact that there was no up-front fee or exit penalty was a good incentive for the industry to deliver good returns in order to encourage client retention.[213]

71. The Committee notes the 1.5% price cap set on the first ten years of non-cash Sandler products and notes also that the advice component of the new products is higher than that proposed by Mr Sandler when he recommended a 1% price cap. We are disappointed, however, that part of the charge is not more clearly linked to the investment performance of the products. Given that the higher charges for stakeholder pensions are explicitly for additional advice in the selling process, it would clearly be unfair for product providers to levy the higher charge on existing stakeholder pension contracts. We expect the Government to monitor charges on existing contracts very closely as the new stakeholder charges are introduced.

The price cap setting process

72. As well as ensuring reasonable charges to the consumer, price caps on regulated products can help improve the efficiency of the industry by encouraging low cost producers and placing additional pressure on others to lower their costs. Mr Sandler indicated that "improving the efficiency of the industry presents a considerable challenge. Consumer weakness and the absence of meaningful incentives from within the industry to address inefficiencies mean that, without some form of external intervention, persistence of the status quo is inevitable. Such intervention is unlikely from the FSA, whose remit as regards consumer protection does not, in practice, extend to a concern about industry efficiency considerations and levels of charges."[214] The current system of setting price caps by Ministerial announcement has been criticised, however, for its lack of openness and vulnerability to lobbying. Ms Johnstone, Director of Policy at the National Consumer Council (NCC), told us "a price cap is a kind of economic regulation and you have to set it properly with proper economic analysis on a basis of fact. At the moment it is just who can shout the loudest; it appears to be just about lobbying and that is a hopeless way".[215] The NCC pointed out: "A rigorous, analytical framework is needed to make decisions of this nature. Ministers and government departments are not responsible for setting price-caps in other sectors, such as telecoms or energy. Decisions in these sectors are now made by independent regulators based on extensive research, open consultation and clear time-frames."[216]

73. Regulated price caps for regulated products in the financial services industry serve the dual role of guaranteeing the client the price he will pay and putting additional pressure to improve efficiency on an industry where consumer weakness has reduced the normal competitive pressures to drive down costs. But caps set too low can reduce product range and stifle new product development, thus limiting real choice for consumers. Where such caps are to be set, it would be preferable if they were set by an independent body after clear and transparent analysis. The price cap should be consistent with fair returns to both savers and the most efficient producers in the industry but should maintain downward pressures on the cost base of less efficient producers.

195 Medium and Long-Term Retail Savings in the UK, A Review, HM Treasury July 2002, page 23 Back

196 ibid., page 24 Back

197 Q 1762 Back

198 HC 275, Ev 146 para17.1 Back

199 HC 275, Ev 123 para 32 Back

200 Q1452 Back

201 HC 275, Ev 153 para 5.6 Back

202 HC Debates, 17 June 2004, col 53WS Back

203 HC 71-II, Ev 357 para 16 Back

204 Q 66 Back

205 HC 275, Ev 135 para 4.5 Back

206 HC 275, Ev 165 paras 5 and 9(g) Back