Conclusions and recommendations
Confidence in long-term savings
1. Long-term
savings represent a £1,900 billion-plus market and are vital
for the future prosperity of both savers and the wider economy.
The government and the industry have a strong interest in encouraging
saving. We note that the current savings ratio remains below the
average over the past ten years. This Committee believes that
individual savers ought to be best placed to decide how much and
in what form they should be saving. To ensure that they are in
a position to make such decisions, it is essential that savers
can be confident both that they will be treated fairly by the
long-term savings industry and that they will be given clear,
readily accessible and factual information on savings-related
issues. (Paragraph 13)
2. It is widely accepted
that a lack of consumer confidence in parts of the financial services
industry is now deterring many households from saving as much
as they might otherwise choose to. This is likely to have significant
adverse long-term consequences, not just for savers and the financial
services industry, but also for the wider economy. The overwhelming
weight of the evidence presented to us also suggests that a range
of issues extending well beyond the recent fall in equity values
has damaged consumer confidence in the industry. In consequence,
it would be foolhardy for the industry or others to assume that
a simple recovery in equity market conditions will be enough to
restore the industry's reputation in the eyes of consumers. (Paragraph
18)
Improving product information
3. It
became clear during the course of our inquiry that the current
information on savings products provided to savers is sometimes
not effective in allowing them to make an informed judgement as
to the suitability of a product. There is a need for urgent action
to re-balance the "asymmetries of information" in the
financial services industry by improving the information available
to consumers. (Paragraph 19)
4. 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. (Paragraph 20)
5. 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. (Paragraph 24)
6. 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. (Paragraph
30)
Aligning savers' and industry needs
7. That
some companies are judged by authoritative outside observers to
be exploiting consumers for perceived short-term gains while damaging
the long-term reputation of the industry suggests that fundamental
changes are needed to provide better alignment between the interests
of the industry, at all levels, and consumers. (Paragraph 31)
8. The Committee recognises
that ultimately the level of remuneration of senior management
in the financial services industry is a matter for shareholders
and, in the case of mutual societies, members. The recent trend
in institutional shareholders becoming more active in challenging
remuneration reports is welcome, and greater shareholder activism
should be encouraged. Shareholders and the membership of mutually
owned organisations can nevertheless only benefit from anything
which helps restore consumer confidence in the industry; and we
suggest that greater transparency in the determination of senior
executive remuneration and a more direct linkage between remuneration
and the performance of those institutions relative to market conditions
and accepted benchmarks would be useful in this respect. (Paragraph
35)
9. In the Committee's
view it seems likely that as long as most of the selling activity
in the long-term savings industry is rewarded on a commission
basis, many savers may remain suspicious that they are being sold
a product for the wrong reasons. Shifting away from the current
commission-based sales system common in much of the industry is
likely to be a key component of any strategy to rebuild consumer
confidence in the industry after the long catalogue of mis-selling
scandals in recent years. (Paragraph 36)
10. The Committee
welcomes the commitment from the ABI to assess the role of commission
payments in the long-term savings industry and examine possible
alternatives. We would emphasise the negative image created in
the eyes of some potential savers by the current commission-driven
distribution model. Account should also be taken of the extent
to which the heavy cost burden of the current exhaustive regulatory
regime reflects a need to offset the conflicts of interest created
by payment by commission. (Paragraph 38)
11. The evidence presented
to our inquiry suggests that the retail long-term savings industry
gives insufficient weight to the issue of asset allocation and
the investment returns it delivers to savers. The fee structure
that currently dominates the industry primarily rewards the initial
sale. A fee structure containing a stronger linkage to subsequent
investment performance would help align more closely the long-term
interests of the saver and the industry. (Paragraph 40)
Improving distribution: IFAs, fees and commissions
12. The
gap that is apparent between the major companies and their ultimate
clients is unhelpful when it comes to rebuilding consumer confidence
in the industry, given that better communication with savers is
likely to be an important part of the rebuilding process. IFAs
now dominate the distribution of long-term savings products in
the United Kingdom and the Committee recognises the positive role
that many IFAs perform. The current reliance on IFAs as a means
of selling financial services and advising potential savers nevertheless
risks leaving a large segment of the population without effective
access either to financial advice or to long-term savings products.
This reflects the general focus of IFAs, for sound commercial
reasons, on the more affluent members of the community. The fact
that many potential savers have little or no regular access to
advice needs to be recognised by regulators and the industry when
communicating with the public. Planned reforms of the distribution
of financial services should attach a higher priority to widening
access to the financial services industry beyond the relatively
affluent that are currently the main focus of IFAs. (Paragraph
44)
13. Full and open
disclosure of fees and commissions in a manner that is readily
comprehensible to savers and gives them a balanced view of the
various options is a vital part of delivering an efficient market
in financial advice and long-term savings products. The current
proposals from the FSA fall short of this goal in several key
respects. There should be no suspicion that an adviser might be
able to steer a client towards paying commission that might add
substantially to the client's advice bill, to the detriment not
only of the client but also the more efficient and fairer operators
in the advice market. It should be a basic requirement that each
client should be given an explicit comparison of the total cost,
in cash terms, of buying a product on a fee basis and the total
cost on a commission basis over the likely life of the product.
(Paragraph 48)
14. For IFAs to receive
trail commission whether or not they are providing any real on-going
advice to the client is unacceptable. The persistence of this
practice is a clear sign that the market for financial advice
is not working in the best interests of consumers. The Committee
urges the major product providers, IFAs and the regulator to limit
urgently the basis on which trail commissions are paid in the
financial services industry and to ensure that such payments only
occur when the client is actually receiving the annual advice
that such commissions are supposed to fund. Clients opting to
pay for financial advice via fees should be given the explicit
option of paying an annual fee for any on-going advice they receive
rather than having trail commission paid from their investment.
(Paragraph 50)
15. The Committee
acknowledges the need for a measured approach towards reform of
the financial advice market. Even so, given the potential failings
we have identified in the proposed menu approach to reform, we
ask the FSA and the industry to collect and publish regular data
on the relative cost of buying major products on a fee and commission
basis and the percentage of savers opting to pay via fees or commission.
(Paragraph 52)
Improving distribution: self-regulation of IFAs
and others in the industry
16. The
Committee deplores the fact that a major trade body such as the
AIFA has no code of ethics, particularly given the key role IFAs
play in terms of the experience most consumers have of the long-term
savings industry. Across the industry there is a danger that companies
and trade bodies are abrogating their responsibilities in relying
so heavily on the FSA to police and deliver good standards of
behaviour. External regulation by a body such as the FSA should
not be seen as a substitute for effective self-regulation within
the industry via codes which react quickly and flexibly to problems
as they arise. All the major trade bodies in the long-term savings
industry should have clear codes of practice which take the standards
of behaviour laid down by the FSA as a minimum but aim to improve
on the FSA's requirements in those areas where the industry feels
that better standards will do most to help its customer base.
We call on the Association of Independent Financial Advisers to
establish a code of ethics for its members, to monitor compliance
with it and to establish a means of enforcement for members who
do not comply. (Paragraph 55)
With-profits products
17. It
is evident that in many instances savers are no longer content
to allow the managers of with-profits funds wide discretion or
to accept limited disclosure of the performance of the funds on
which their savings depend. Many investors also do not understand
the reasons for apparently large market value adjustment (MVA)
exit penalties and consider they are unfair. It is not clear from
the evidence presented to our inquiry that either the FSA's proposed
reforms for existing with-profits funds—CP207—or the
proposed disclosure requirements in the new smoothed investment
Sandler products go far enough in terms of disclosure to satisfy
consumer concerns in this area. As long as investors cannot regularly
see the performance of the underlying investment fund and can
be subject to MVA exit penalties without clear explanation there
may be consumer reluctance to re-enter this area of the long-term
savings industry. Firms should be required to give a much clearer
explanation of the scale of, and reasons for, any MVA exit penalty
imposed. (Paragraph 58)
18. £160 billion
is now invested in closed funds. This is an issue in that policyholders
can often feel their savings are now trapped in policies offering
lower prospects of growth. All the signs are that this problem
will grow further in the future. The Committee recognises that
a consolidation process among the many with-profits funds that
have now closed to new business is both desirable and inevitable.
It places the highest priority on the FSA ensuring that policyholders
are treated satisfactorily through this process. They should not
be confronted by punitive exit penalties and should receive a
fair share of the efficiency benefits that will hopefully result
from such transactions. (Paragraph 60)
19. It is still far
from clear to the Committee that the actuarial profession can
be relied on actively to alert the public in cases where policyholders'
interests are being sacrificed in favour of the interests of management
or shareholders. We welcome the Morris review of the actuarial
profession and consider reform here to be overdue. Nevertheless,
any recommendations made by Sir Derek are necessarily going to
take some time to implement. In the meanwhile, a period of rapid
change is taking place in the with-profits industry and many of
the changes could lead to particular tensions between the interests
of policyholders and the interests of managers and shareholders
of with-profits funds. In the face of continuing doubts about
the readiness of the actuarial profession to safeguard policyholders'
interests through this period of change we consider it particularly
important that the FSA scrutinises closely changes and transactions
in the with-profits area and demonstrates to investors that their
interests are being preserved. (Paragraph 62)
Sandler products
20.
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. (Paragraph 66)
21. 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. (Paragraph
71)
22. 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. (Paragraph 73)
The FSA
23. The
Committee agrees with the view of the overwhelming majority of
witnesses that the current low level of confidence in the financial
services industry is in large part a reflection of the weak regulatory
framework and inappropriate industry practices that existed before
the arrival of the FSA. (Paragraph 77)
24. The evidence we
have heard in the course of this inquiry tends to confirm that
FSMA is currently working well. Apart from in the limited area
of money-laundering regulations, we received no specific complaints
of excessively burdensome regulation from the major companies
in the industry, while consumer groups generally acknowledged
a significant improvement in the protection afforded to the consumer.
We note, however, that both the industry and the regulator agree
that the current money laundering regulations require simplification.
(Paragraph 81)
25. Those accused
of wrongdoing by the FSA clearly have a right to defend themselves
at fair hearings. However, the length of time contested cases
are taking to bring to a conclusion denies the public the speedy
redress they have the right to expect in cases of wrongdoing.
The fact that those under investigation have a right to anonymity
reinforces the need to speed up enforcement actions. How this
should be achieved should be addressed in the current review by
the Government of the Financial Services and Markets Act 2000.
(Paragraph 84)
The Financial Ombudsman Service
26. The
Financial Ombudsman Service currently commands wide support among
the industry and consumers as an inexpensive and speedy way of
resolving disputes and achieving redress where redress is due.
Introducing a general right of appeal into the Ombudsman process
risks undermining confidence in a system which is currently working
well. The Committee notes that the Chief Ombudsman sees substantial
disadvantages in introducing any general right of appeal and that
the major insurers are not pressing for such a right. While there
may be scope to improve co-ordination between the FSA and FOS
in certain cases with wide implications, the Committee believes
that calls for a general appeals process should be resisted. (Paragraph
86)
Public knowledge of the FSA's role
27. Greater
public knowledge of the FSA's role and activities in protecting
their interests can only do good in terms of restoring consumers'
confidence in the financial services industry after a chequered
history of weak regulation and successive mis-selling scandals.
We recommend that the FSA should now engage in a publicity campaign.
The aim should be to ensure that potential savers are fully aware
that underpinning the financial services industry there is an
effective regulatory body ensuring that the industry treats its
customers fairly. We welcome the recent launch by the FSA of a
hotline for firms and the public to report misleading advertisements,
but would observe that this is only likely to be effective if
the public are regularly reminded by advertising of the hotline
number and the FSA's role in regulating the financial sector.
(Paragraph 90)
Tax & benefits
28. The
Committee welcomes recent moves to simplify some aspects of the
tax regime for pensions and long-term savings. It is important,
given the sums of money involved from the Exchequer, that the
tax reliefs and incentives granted to long-term savings are as
effective as possible in achieving their stated objectives. The
evidence we have received in the course of this inquiry suggests
that there is substantial scope for improving the coherence of
the present complex tax regime in promoting savings. (Paragraph
92)
29. The Committee
welcomes the recent simplifications of the tax system surrounding
pension savings and the additional flexibility this has introduced
into the pensions market. The freedom to make annual pension contributions
up to £215,000 a year is unlikely, even so, to have a significant
impact on the attitude of younger workers and those on modest
incomes towards pension savings. While the Committee accepts that
savers should be discouraged from withdrawing cash from their
pension schemes, except in times of emergency, granting more flexible
access to pension savings during periods of unemployment or illness
has proved effective overseas in improving the attractiveness
of saving via a pension scheme. We recommend that the Government
should examine the feasibility of such an option in the UK. (Paragraph
96)
30. The evidence we
have heard on the workings of the Pension Credit highlights the
need for the working of the new means-tested benefits system to
be monitored closely. There still seems to be considerable uncertainty
as to how many households could see deductions under the means-testing
arrangements and the size of pension fund that is likely to attract
benefits deductions. We recommend a detailed study of how the
new system is working, which would considerably clarify the debate
on how effective the new Pension Credit is at delivering benefits
to those who need help while not penalising those who have attempted
to make provision for their own future. (Paragraph 99)
Financial capability: consumer education, workplace
advice, Citizens Advice Bureaux
31. The
Committee found wide support from the industry and consumer bodies
for the FSA's efforts to coordinate a programme aimed at improving
financial literacy among consumers, alongside a general recognition
that such work needs to be viewed as very long term and is unlikely
to bear fruit for a generation. In this context it is particularly
important to see work on improved consumer understanding of financial
issues as an addition to, rather than a replacement of, efforts
to make the information available to consumers on financial products
clearer and more accessible. We also support the proposition—which
we found to have wide general acceptance—that the financial
services industry should make a substantial contribution towards
the cost of any expanded programme aimed at improving financial
capability. (Paragraph 102)
32. The workplace
has strong advantages in delivering financial advice and services
to savers, particularly those who are less affluent. It is deplorable
that complex and poorly understood rules have until now hampered
efforts to provide financial advice through the work place. We
welcome the commitment given to us by the Minister to push ahead
with reform here. We hope that in the future the workplace will
develop as a popular delivery channel for a wide range of financial
services. (Paragraph 106)
33. We welcome moves
to review the regulations surrounding the provision of generic
financial advice by voluntary agencies such as Citizens Advice
Bureaux, but the issue of funding also needs to be addressed.
If the current pilot scheme on the provision of financial advice
via CAB offices proves successful, the whole of the financial
services sector, including banks, credit card companies and the
long-term savings industry, should support Citizens Advice's work
in this area. (Paragraph 109)
Overall conclusions
34. 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. (Paragraph 111)
35. 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. (Paragraph 112)
36. 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.
(Paragraph 114)
37. 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. (Paragraph 115)
38. 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.
(Paragraph 116)
39. We recommend that
the industry should explore alternative arrangements based on
the industry's duty of care to the consumer. (Paragraph 118)
40. 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.
(Paragraph 119)
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