House of Commons - Treasury

Select Committee on Treasury Eighth Report

11 Conclusions

110. The bear market has exposed a catalogue of problems and scandals that has left a large body of savers feeling disillusioned with the long-term savings industry. These problems include:

about half of all with-profits policyholders, with savings worth around £160 billion, now find themselves in closed funds offering very limited long-term growth prospects;[330]
endowment mortgage policyholders are suffering a collective shortfall of approaching £40 billion;[331]
a £3 billion shortfall emerged at Equitable Life;[332]
savers with precipice bonds have suffered capital losses estimated at £2.2 billion;[333]
the FSA is pressing for £350 million to compensate investors for losses on split capital investment trusts.[334]

111. The Investment Management Association deduced from this background that "the lessons of the last few years for the industry are that products whose risks are not clear, or which raise unrealistic expectations in the minds of consumers, bring problems in their wake. The financial services industry therefore needs to set itself high standards in respect of product transparency, clarity of information and good client service. Investment products need to make clear to the investor how his or her money is invested, and what costs the investor is bearing… In addition, the industry needs to take care about the way in which it promotes products."[335] Carrying on with traditional industry practices is simply not an option in the view of many witnesses. The Association of Private Client Investment Management and Stockbrokers (APCIMS) told us that recent trends have resulted in the "purchaser being disillusioned with the product and with savings in general."[336] APCIMS went on to warn that it is "much easier for consumers to lose confidence than it is for that confidence to be regained."[337] The sheer scale, diversity and nature of the problems encountered by customers of the long-term savings industry in recent years show that the industry needs a thorough re-think of the nature of the products it sells, how it sells them and the "after-sales" service it provides to its customers. Regulators, the Government and other interested bodies can assist the industry through this process of reform, but our inquiry has made it clear that fundamentally what is needed is for the industry to recognise the problems confronting it and take responsibility for tackling them.

112. Apart from the damage caused by the bear market, the collapse in expected future investment returns as inflation has fallen is another issue that poses significant challenges for the long-term savings industry. Several witnesses pointed out that, with many products expected to deliver returns of 6% or so before costs on current FSA projections,[338] by the time costs are deducted savers will often get little more than they can expect in a good deposit account, with little reward for the risks inherent in tying up their cash in a long-term savings product.[339] Standard Life summarised the situation as being one in which the industry has "allowed a situation to develop where the Government's success in managing the shift from a high inflation, high interest rate economy to a low inflation, low interest one has created problems for customers, and in turn for the industry that serves them."[340] Presently, many areas of the long-term savings industry are struggling to offer returns that can realistically be expected to be much better than those available from a good deposit account, especially when allowance is made for the risks involved in most forms of long-term savings. This suggests that one of the main priorities for the long-term savings industry is to work out how it can deliver competitive returns to the saver. This is likely to require both the development of lower cost distribution mechanisms and a much greater emphasis on investment performance and asset allocation.

113. Some in the industry are still reluctant to accept that the industry has acquired a poor reputation among its customers, or believe that any problems are purely cyclical and will disappear as the equity market recovers.[341] Mr Sandler, however, told us that while "there is still a long way to go", he did detect "some glimmers of hope that the industry is beginning to acknowledge that it has a reputational problem and is now taking steps to rectify that."[342] We note that the Association of British Insurers, for example, has launched the "Raising Standards" initiative. This is overseen by the Pensions Protection and Investments Accreditation Board, who told us: "the scheme is a voluntary initiative by the industry. Its purpose is to improve performance in the conduct of business, and to build consumer confidence in the long-term pensions, protection and investments industry. It aims to ensure: clear information in a consistent format, written in plain language, high standards of customer service, including complaints handling, and fair treatment of customers."[343]

114. The Committee welcomes voluntary initiatives such as "Raising Standards" from the long-term savings industry. They can have an important role in tackling the issues undermining consumer confidence. We also note that the ABI has commissioned a study of the "scope for a new generation of initiatives on customer service… looking particularly at best practice in other sectors."[344] There is always a risk, however, that in an industry as diverse and fragmented as the long-term savings industry improvements taking place in one section will be undermined by a reluctance to change, or by difficulties arising, in another part. The FSA, for example, signalled to us that "for what was quite a specialised corner of the market, the damage to the reputation of financial services [from the problems arising in split capital investment trusts] generally has been quite great and quite disproportionate to the size of that particular corner of the business."[345] Parts of the long-term saving industry are undertaking a range of voluntary initiatives, such as the ABI's "Raising Standards" scheme, to improve the quality of the service they offer their customers. The Committee welcomes such initiatives. Some other parts of the industry, however, still appear to be wedded to behaviour that does little to persuade the public that things have really changed. The risk of reputational contagion in an industry so reliant on consumer trust underlines not only the role for firm and effective regulatory enforcement but also suggests that the industry itself needs to be more proactive in identifying and tackling activities that damage its image.

115. A range of witnesses highlighted the current lack of communication between the various parties involved in the long-term savings industry. The ABI told us that, in the area of pensions, it felt that there was a clear need for a "partnership embracing Government, consumers and their representatives, employers, trade unions, the financial services industry and its regulators, particularly the FSA."[346] More broadly, Prudential took the view that "it is essential that Government, the FSA, the financial services industry, employers, consumer bodies and commentators work together" with the aim, among other things, of creating "a stable long-term savings infrastructure that has cross-party support and ensures people feel it is worthwhile saving."[347] Similarly, the Association of Friendly Societies suggested to us that "the Government, regulators and industry must work closer together and that as an initial step a forum should be set up,"[348] in particular to look at the issues of improving access to long-term savings for the less affluent. We are surprised that the industry currently fails to engage in serious dialogue on a regular basis with consumer bodies and other interested parties on issues such as pension reform, access for the less affluent or, indeed, general consumer confidence. This may well partly explain why the industry in recent years has seemed to limp from crisis to crisis. There is a need for the industry, the regulator and consumers to establish a collective, forward-looking joint agenda. This should particularly focus on how the industry can better serve its customers. We recommend the establishment of a broad ranging forum, including representatives from all parts of the industry, consumer groups, the FSA and Government. This should meet regularly with the aim of agreeing priorities, monitoring progress, giving early warning of problems that might be arising and putting pressure on laggards in the industry to catch up with best practice.

116. Doubts about the solvency of any institutions in the long-term savings industry are extremely damaging to consumer confidence. The Treasury, for example, told us that confidence in pension saving "has been undermined by firms becoming insolvent with under-funded defined benefit pension schemes."[349] In response to this, the Government has announced the introduction of the Pension Protection Fund. The Committee also notes the wide-ranging damage to confidence created by events at Equitable Life. The Financial Secretary told us of her confidence that the FSA's new proposal on realistic reporting "will make sure that the industry is on a sound capital base looking to the future."[350] The ABI told us that, while the details still needed to be clarified, "the broad thrust of the FSA's proposals has the support of the industry".[351] The ABI added that the FSA's proposals "ought to provide a secure basis on which the industry can conduct its business in the 21st century."[352] We note, however, Lord Penrose's conclusion that "constant review will be required to ensure that reporting requirements continue to focus on areas of current relevance to the exercise of regulatory powers."[353] One of the key roles of regulators in the field of long-term savings is to ensure that savers can have reasonable confidence in the solvency of the institutions to which they entrust their money. We welcome recent improvements here such as the FSA's proposals on realistic reporting. Lord Penrose's warning that "constant review" is needed to ensure that the regulations are still relevant is nevertheless an important one. There is no scope for complacency when it comes to public trust in the solidity of savings institutions.

117. Several witnesses told us there is "no magic bullet for restoring confidence".[354] The process is therefore likely to be incremental. For example, a requirement to provide better, readily accessible information about issues such as the risk of a product should both force product providers and others in the industry to think carefully about the nature of the savings products they offer and enable savers to assess more easily the suitability of any product. Often the suitability assessment by the consumer will be by way of a reality check on the advice they have been offered by a professional adviser.

118. At the heart of the question of advice to the consumer is the present business model of the industry which is heavily focussed on independent financial advisers who gain their rewards either from commission or fees. We recommend that the industry should explore alternative arrangements for advice based on the industry's duty of care to the consumer.

119. As well as those who would rather not have to seek advice, there are many who have no realistic access to advice even if they wanted it. Citizens Advice warned us "there are particular difficulties for those on low income in accessing suitable financial advice at a low cost. Distrust of financial advisers, not knowing how to find a suitable adviser and the cost of financial advice are significant factors for many consumers to put off seeking professional independent financial advice."[355] Too often, the response of the industry, the regulator and the Government to problems in the long-term savings industry is to assume that everyone has access to trusted financial advice. This is unrealistic. The easier provision of financial advice for those who want it is an important goal. The Committee recommends that an important test for all retail product information, tax, pension and benefit rules should be: "is the average person likely to be able to understand this unassisted?" Material that fails that test is unlikely to help take the long-term savings industry into the 21st century. Complex and opaque practices and products have been allowed to persist for too long. The average consumer feels excluded because they simply do not understand what the industry has to offer them. There is an urgent need for the industry, regulator, Government and consumer groups to come together to establish a coherent forward-looking programme of reform for the long-terms savings industry, and the consumer has to be its central focus.

330 Q 2062 Back

331 Fifth Report of Session 2003-04, Restoring confidence in long-term savings: Endowment mortgages, HC 394, page 3 Back

332 Q 583 Back

333 HC 71-II, Ev 349 para 6 Back

334 Q 1881 Back

335 HC 275, Ev 142 para 7.1 & 7.2 Back

336 HC 71-II, Ev 296 Back

337 ibid. Back

338 FSA press release, 23 June 2003 Back

339 See for example HC 71-II, Ev 310 para 6 and Q 302 Back

340 HC 71-II, Ev 399 Back

341 See for example HC 275, Ev 63 para 1.2 and Q337 Back