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Eleventh Standing Committee on Delegated Legislation
Thursday 9 December 2004
[Mr. Jimmy Hood in the Chair]
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2004
9.55 am
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2004 (S.I. 2004 No. 2737).
I warmly welcome you to the Chair of our Committee, Mr. Hood. We correspond frequently, but it is a particular pleasure to debate this measure under your chairmanship this morning.
The Government propose to legislate for a suite of simple savings and investment products through statutory instruments Nos. 2737 and 2738. They will be known as stakeholder products. In July 2002, after a year-long independent review of the medium and long-term savings market, Ron Sandler reported back to my right hon. Friend the Chancellor of the Exchequer with a series of recommendations for the Government and the Financial Services Authority to consider.
The Sandler review found that the UK retail savings industry has a number of features that are of some concern. The market is characterised by a high degree of complexity, a considerable number of product types and complex charging structures. Technical terms, which are largely incomprehensible to most people, abound. And there is a severe lack of transparency on price and performance of products; in some cases consumers cannot get the information to work those out at all. This, the Sandler review argued, contributes to consumers' confusion and a reluctance to save, particularly among those on low to middle incomes.
The Sandler review demonstrated that competitive forces in the long-term savings industry drive towards greater complexity, not simplicity, of products. This leads to distribution economics that makes it difficult for people, even on moderate incomes, to access products. Ron Sandler concluded that the solution lies in product regulation, as a system based on potentially highly complex products, sold with often equally complex advice, will inevitably exclude consumers below a certain level of income because of the fixed costs of the advice process.
Product regulation, by contrast, provides an opportunity to minimise the fixed cost element of interacting with the consumer, so opening the market
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to a wider range of consumers. The Sandler review therefore recommended 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 safely without the current regime of regulated, full advice. It was recommended that safeguards should include no initial charge for these products, that annual charges should be regulated, and that there should be limits on investment risk.
Since July 2002, the Government have consulted extensively with firms in the financial services industry, their trade bodies, and consumer groups, in order to inform the design of these products. That extensive consultation has contributed to the positive reaction of major firms when the Government launched their consultation on the order. We have also worked closely with the FSA to co-ordinate policy on product design and a basic advice regime through which these products may be distributed. The measure that we are debating today creates the new regulated activity of offering basic advice. The basic advice regime should reduce the time it takes to advise a client on a regulated product by 80 per cent—from two and a half hours to half an hour for a stakeholder product—thus significantly reducing the fixed costs attached to distributing these products.
The consumer testing conducted by the FSA demonstrated that consumers like the basic advice process, and that the majority of consumers will get good or adequate advice whereas currently they may be unable to access any advice at all. Advisers will have to observe the normal duty of care to their clients, and those receiving advice through the basic advice process will continue to have recourse to the financial ombudsman service. In our view, basic advice will result in innovation in the distribution of investment products and greater consumer choice in the advice market.
Not saving enough will have a negative impact on any individual's quality of life throughout their life, but particularly in retirement. Widespread under-saving throughout a person's life also has consequences for the Government and the rest of society. Access to savings on a rainy day can prevent people from becoming victims of loan sharks and potentially starting on a downward spiral into crippling debt that they have no hope of repaying. By contrast, asset accumulation allows people more choices, for example to choose to retrain or add to their qualifications, improving their prospects for employment and advancement.
The recent report by the Treasury Committee on restoring confidence in the savings industry concluded that cutting the consumer time taken for the sales process through basic advice should play a key role in widening access to the savings market. The basic advice regime implemented in the order will enable those who are currently excluded from the market to access good quality, basic advice and good value products.
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The suite includes products for people with both short-term saving objectives and longer-term horizons. It caters for people with no appetite for investment risk as well as those want to trade off some risk for the possibility of higher returns. Let me explain what the suite will contain. The stakeholder cash deposit product will replace the current CAT-marked cash ISA. The medium-term product will replace the current CAT-marked equity ISA, with the additional safeguard of a limit on property and equity assets combined of 60 per cent. of the value of the investment fund. The medium-term product can also be offered in a ''smoothed'' form, whereby firms may hold back some of the investment return on a fund in order to cushion investors from the full impact of falls in markets. The FSA will work with firms that want to offer the smoothed product to test further its appropriateness for basic advice.
Following the independent research carried out by Deloitte in 2003, a charge cap for the medium-term investment product has been set at 1.5 per cent. of the investor's fund value per year for the first 10 years that an investor holds the product. After that, the charge cap falls to 1 per cent. The charge cap for the cash product requires firms to pay savers an interest rate within 1 per cent. of the Bank of England base rate to protect consumers from the negative effects of inertia.
The price caps have been set at a level to enable the most efficient providers to offer stakeholder products, and firms have supported the decision to raise the cap on the medium-term product from the current CAT-marked level of 1 per cent. Which?—the consumer body—was pleased that we had not accepted the arguments for up-front contribution charges. Norwich Union said that the changes, including to the stakeholder pension price cap, are
''good news for the consumer as there will be more products, choice and competition in the market; good for the industry as we now have clarity and a more economic price cap''.
HBOS has said that the charge cap is realistic, commenting that
''it will aid transparency and enhance the level of competition within the savings industry. In addition, the decision will increase access to advice and products—all of this can only be good for consumers''.
A key aim of the legislation is to reduce the risk that individuals will not save enough by ensuring that a low-cost pathway to saving is available for consumers who cannot access full advice or people who have been deterred by the complexity of products from investing through non-advised channels of distribution. Through the legislation, we also want to create a new competitive dynamic in the industry as a whole to put pressure on firms to offer other simplified, low-charging products, whether or not they use the stakeholder brand. I am optimistic that lower charges and increased efficiency will spread across the market following the initiative, benefiting all consumers of financial services products.
The recent report by the Treasury Committee highlighted that greater confidence in our financial services industry is needed. We shall debate that report in Westminster Hall this afternoon. It stated that
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''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''.
Stakeholder products provide an opportunity for firms to show that they value their customers by offering a suite of products that are fairly priced and easily understood and whose performance can readily be compared between firms by consumers. Firms offering stakeholder products will send a clear message that they put their customers' needs first.
We are taking an important step and I commend the order and the aim of creating simple, transparent and low-cost savings and investment products to the Committee.
10.6 am
Mr. Richard Spring (West Suffolk) (Con): What a pleasure it is to see you chairing our proceedings, Mr. Hood.
I am grateful to the Minister for setting out the order. As he said, it makes provision of basic advice to a retail consumer on a stakeholder product a regulated activity. Under section 19 of the Financial Services and Markets Act 2000, regulated activities may be carried out only by people who are authorised. Initially, the regulations will apply only to two stakeholder products: child trust funds and stakeholder pension schemes. I shall concentrate on child trust funds, as it is only a matter of months before the parents of the first recipients will see vouchers for the accounts coming through their letterboxes. First, however, I should like to know what other products the Minister expects will be defined in future, to be covered by this order.
My party supports the principle of child trust funds. They are a complicated way to encourage savings and it is important that the Government take notice of other approaches, such as the Conservative party's clear and simple lifetime savings accounts policy. Nevertheless, given that the savings ratio has fallen by one third under this Government—a situation different from that in other European countries—it is vital that people be encouraged to save, and child trust funds are one way of doing that.
The first batch of child trust funds will be issued in April next year, which is conveniently close to the likely date of the next general election and just five months away. It is unfortunate, therefore, that providers have had to wait until now for clarification of the regulatory regime that will apply to the sale of the funds. My party criticised the delay in publishing the sales regime consultation paper while the Bill that became the Child Trust Funds Act 2004 was in Committee. The Financial Services Authority told us originally that the consultation paper would be published in April, but it did not emerge until June.
The combination of the delay in publication and the standard three-month consultation period has been less than desirable, given that providers of products
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had to start registering with the Inland Revenue in October and November, and that from January they need to be able to start accepting applications for children born between September 2002 and April 2005. The delay has caused considerable difficulties to providers. Indeed, during that period of uncertainty, my hon. Friend the Member for Tatton (Mr. Osborne) said:
''When I spoke to the Association of British Insurers . . . I was told:
'The lack of information on the sales regime hinders providers' ability to take an informed decision on market entry—for example, we don't know if the CTF will be covered by the Sandler sales process or not. Early announcement of the charge cap which will apply to the CTF was welcome, but without the details of the sales regime providers will have an incomplete picture with which to consider offering the CTF . . . the timing of the publication of information on the sales regime is, at the very least, unfortunate.'''—[Official Report, 13 May 2004; Vol. 421, c. 494.]
It is obviously important to the Government that the scheme should begin in April and we welcome the clarification of the sales regime that will apply. However, I repeat that it is unfortunate that such an important matter has taken so long to clarify. The relative lack of interest among some providers in offering child trust funds might be attributed to those delays.
A report in, I think, The Times last month stated that the FSA could not guarantee that child trust funds will not be mis-sold, which is worrying, as child trust funds are designed to widen access to financial products, particularly to lower-income groups who have perhaps had less experience of buying products of that type. What guarantees can the Minister give that training for those giving basic advice will be suitable, and how will he ensure that as far as possible people are not sold products that they do not fully understand? I understand the principle behind Sandler, but the matter is worth exploring.
We all want to avoid claims of mis-selling being put to the financial ombudsman in a few years' time, as has been the case with endowment policies. It is especially important that consumers are alerted to the differences between stakeholder and non-stakeholder child trust funds and receive a balanced comparison. What thought has the Minister given to ensuring that the difference is made clear?
I welcome the fact that transitional provision is made for existing part 4 permissions, so as not to increase the regulatory burden on providers. Indeed, it was heartening that the director of retail policy at the FSA said that the FSA
''looked closely at ways of keeping the guidelines for industry simple and low cost to maintain an efficient market''.
A sensible regulatory approach is vital to providers of stakeholder products, as is protection and information for consumers. In this instance, the
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Government seem to have struck a sensible balance between the two. Their approach may be over-complex and unambitious compared with the lifetime savings account advocated by my party, but it is a step in the right direction.
I welcome the belated clarification outlined in the regulations.
10.12 am
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