Memorandum submitted by Norwich Union
EXECUTIVE SUMMARY
As the UK's largest provider of life, pensions
and investment products Norwich Union is well placed to comment
on some of the issues related to financial inclusion, particularly
in relation to savings, advice and financial education, and is
pleased to submit the following thoughts.
1. We feel that any organisation with an
interest in encouraging consumers to take a more active interest
in their financial health should be engaged in championing and
delivering better financial capability. There are considerable
benefits to society if people are more able to manage their finances,
for example, less reliance on the State pension. We therefore
feel it would be appropriate for the cost of financial capability
to be largely met by the Government.
2. The cost of developing a strategy for
financial capability can be supported by the industry but only
in the context of a wider strategy and a considerable investment
by Government.
3. Generic advice as currently proposed
is unworkable, is not something we feel able to support and will
only add to the overall costs and confusion in relation to liability
for advice. "Generic advice" needs a clear definition
and boundary to ensure it does not fall into the realms and associated
liability of regulated advice. Without regulatory clarity and
as few barriers to entry as possible, the provision of generic
advice will fail to take off and an opportunity to broaden access
to information will have been lost.
4. Norwich Union feels "generic advice"
needs to be simple generic information (in other words "what
you need to know") clearly distinct from "advice"
and the selling process.
5. To encourage the widest take up of generic
financial information, "generic advice" should be made
widely available and strongly promoted to the public as part of
a broader Government-led awareness campaign to build financial
capability. It should use a separate `financial capability' brand
to be recognised by consumers as a trusted source of generic financial
information. A campaign led solely by the financial services industry
may not be seen as independent and in the interests of consumers.
6. It is essential the current regulatory
framework for Stakeholder products and Basic Advice is re-visited,
to increase the extent to which Stakeholder creates a real increase
in saving. It has proved hard to deliver within the price cap
and has limited the use of the model by providers and distributors.
It is realistic to conclude Stakeholder is yet to prove successful
in encouraging new saving.
7. Whilst the cost of regulation is likely
to have limited influence on consumer demand, there are many other
reasons why many people `switch off' from the financial services
industry. For example, confusion and inertia are likely to have
more effect on consumer demand than the cost of advice. In addition,
the cost of delivering advice means there is a tier of the population
that is currently uneconomic for the financial services industry
to serve.
8. We understand it is often the case that
the complexity of the State pension system means many people simply
do not know how much they are likely to receive from the Government
when they reach state pension age and therefore cannot make an
accurate decision on how much to save. Were the whole system of
state benefits to be simplified, advisers would find it much easier
to make recommendations and consumers would be able to take greater
ownership of pensions provision.
9. The proposed NPSS model of auto-enrolment
removes the need for advice, which reduces barriers of cost and
regulation. Generic information should be available to all customers
within the low charge, removing the need for advice but allowing
them to ensure they take the right choice to make the most of
their investment.
1. THE
ROLE OF
THE FSA, DEPARTMENT
FOR EDUCATION
AND SKILLS
AND OTHERS
IN PROMOTING
AND SUPPORTING
FINANCIAL EDUCATION
IN SCHOOLS,
OTHER EDUCATIONAL
INSTITUTIONS AND
THE WORKPLACE
AND THE
PROGRESS OF
THE NATIONAL
STRATEGY FOR
FINANCIAL CAPABILITY
1.1 We feel that any organisation with an
interest in encouraging consumers to take a more active interest
in their financial health should be engaged in championing and
delivering better financial capability. This would include government,
regulators, industry, consumer bodies such as Which?, charities,
employers and the media. It is important to increase consumers'
understanding and awareness of financial services, enabling them
to take better informed financial decisions with confidence.
1.2 As a leading financial services provider
and consistently one of the most trusted brands, we recognise
our responsibility in working with the regulator and the Government.
However, a strategy for financial capability can only be introduced
in the context of a national strategy for savings and can only
be achieved as a partnership between Government, the industry,
media, consumer groups and regulator. There are currently too
many conflicting agendas.
1.3 Norwich Union therefore feels it would
be appropriate for the cost of financial capability to be largely
met by the government. The cost of developing a strategy for financial
capability can be supported by the industry but only in the context
of a wider strategy and a considerable investment by Government.
There are considerable benefits to society if people become more
able to manage their finances through all their life stages. For
example people will be less reliant on the state pension and benefits,
and more able to cope with unexpected financial setbacks such
as illness, unemployment or disability. We believe these benefits
are far greater than would accrue to any individual organisations.
1.4 As well as tackling the adult population,
financial education must reach people as they start out in life,
incorporating it into numerous subject areas within the national
curriculum in a creative and engaging way which can be easily
understood. Starting young would ensure that the skills, interest
and understanding are carried with them throughout their adult
life.
1.5 For this reason, in 2004 Norwich Union
became a sponsor of the Personal Finance Education Group (Pfeg),
for a period of four years through to 2007. Pfeg is the key charity
working within schools across the UK at a strategic level to promote
the development of financial capability and we are proud to be
a sponsor of their work. It is important that teachers feel confident
in teaching and discussing finance with school children. Our contribution
to pfeg supports its online communication strategy with schools,
teachers and the wider financial education community. The website
is pfeg's prime means of communication and it aims to make it
the first port of call for teachers looking for information on
financial education.
1.6 As the Committee will be aware, the
FSA is currently leading an initiative to develop and implement
a national strategy for financial capability. The strategy brings
together a wide range of representatives from government, industry,
charities, consumer bodies and more.
1.7 Norwich Union sits on the FSA's Financial
Capability Workplace Advice Working Group, and is committed to
working to build financial capability in the UK. We believe using
the workplace as a gateway creates excellent opportunities to
deliver financial education and information and access to financial
advice and has the potential to benefit a large proportion of
the population.
1.8 The progress of the financial capability
strategy has been mixed, with some strands moving quickly and
others making slower progress. Norwich Union feels it is right
that a benchmarking analysis is finalised prior to the launch
of a national strategy, allowing any subsequent improvements in
capability to be tracked. However, we feel it is crucial that
the success of any strategy is measured in terms of actual positive
changes to peoples' financial behaviour and decision making, such
as increased levels of pension savings, which is a key deliverable
of a successful capability initiative. Work is continuing to develop
a compelling business case for further investment.
1.9 Over the long term we believe a successful
financial capability strategy could see consumers regularly reviewing
their finances, shopping around, and making fewer unsuitable purchases.
In time this could result in greater consumer empowerment, better
targeted product design, lower costs for customers, better sales
practices and less need for regulatory intervention.
2. THE PROVISION
AND REGULATION
OF GENERIC
FINANCIAL ADVICE
ABOUT DEBT
AND SAVINGS
Defining generic advice
2.1 Generic advice as currently proposed
is unworkable, is not something we feel able to support, and will
only add to the overall costs and confusion in relation to liability
for advice. We need to focus on the provision of information which
will support the capability strategy and provide a basis for customers
to take the right choices within a non-advice based pensions market
(Stakeholder or otherwise), as proposed through the National Pensions
Savings Scheme.
2.2 As things stand, financial advice is
valuable not just in helping customers make specific product choices,
but in making them save at all by overcoming inertia and reiterating
to consumers the benefits of planning ahead and making the right
financial decisions at the right time. Inertia is arguably the
greatest barrier to saving and the hardest to overcome.
2.3 If inertia is tackled by, as with Turner's
proposals, the introduction of auto-enrolment, the need for advice
is largely replaced by a requirement to deliver relevant generic
information to help consumers identify their financial priorities
and most appropriate choices for the NPSS, such as fund choice.
2.4 Norwich Union feels "generic advice"
should be simple generic information clearly distinct from "advice""
and the selling process. It should provide general information
to individuals at different stages of their life, ranging from
buying a new home to starting a family, to prompt them to ask
themselves the right questions throughout their lives and address
their changing needs. In particular, it should direct consumers
to further sources of information or advice. Throughout this paper,
where we refer to "generic advice", our interpretation
of this is that it is information only and not advice.
Publicising generic advice
2.5 Generic information is currently available
to consumers but the challenge is to make them aware of it, direct
them to sources of information and most importantly stimulate
them into taking action.
2.6 To encourage the widest take up of generic
financial information, "generic advice" should be made
widely available and strongly promoted to the public as part of
a broader government-led awareness campaign to build financial
capability. It should focus on raising peoples' awareness and
understanding of the need to take personal responsibility for
their financial situation and show how to access relevant information
which enables them to do so.
2.7 Such a campaign should use a separate
`financial capability' brand to make them recognisable to consumers
as a trusted source of generic financial information. A campaign
led solely by the financial services industry may not be seen
as independent and in the interests of consumers.
2.8 Financial services companies could work
with the Government and the regulator to develop impartial generic
financial information such as guides and fact sheets as part of
this independent financial capability brand. These could be offered
in a variety of forms and through as many distribution channels
as possible such as hard copy materials, on the internet, presented
in the workplace and talked through face-to-face where appropriate.
Regulatory issues
2.9 Responding to the FSA's paper "Financial
Capability: developing the role of generic financial advice"
in October 2005, Norwich Union felt the FSA's proposed model for
"generic advice" bore too much resemblance to the existing
regulated process in terms of the attached liability, cost and
associated time commitments.
2.10 A clear definition and boundary needs
to be established for "generic advice" to ensure providers
of this service are clear the services they provide do not fall
into the realms and associated liability of regulated advice.
The FSA also proposes certain standards and accreditation processes
for providers of generic advice which would further increase costs.
Without regulatory clarity and as few barriers to entry as possible,
generic advice will fail to take off and an opportunity to broaden
access to information will have been lost.
2.11 Norwich Union recognises its role in
providing relevant and helpful information both to its customers
and employees. However, it would not be commercially viable for
us to provide "generic advice" to the mass market in
its current form due to the level of regulation and liability
attached to the proposed model.
2.12 Unfortunately, regulations can often
restrict providers from offering sensible recommendations to customers
about the financial priorities they should consider—customers
often contact us requesting guidance and we are unable to provide
information that is not connected to their specific product. It
seems there is currently an information gap, and consumers would
benefit if providers were permitted to offer information and guidance
in a wider context.
2.13 For example, if a customer calls having
received an endowment reprojection letter, we are not able to
suggest they increase their contributions in order to achieve
their target amount. Also, we cannot offer sensible guidance if
a customer asks whether they should increase the cover of a protection
policy if they move to a higher value property with a larger mortgage.
In both cases we are able only to refer them to an adviser, which
may be an unnecessarily complex process for the issues they need
to address and is an additional hurdle which we know many customers
will fail to overcome due to high levels of inertia.
2.14 It is important to look at how to make
fully regulated financial advice more accessible to all earlier
in life, providing access to advice at the right time. To reflect
the fact that the industry has responded to lessons learnt from
past experiences, a lighter touch regulatory regime should be
applicable to full advice which would reduce the costs to providers
and ultimately to consumers. This would allow financial advice
to be more widely available to those on lower incomes who would
then be able to afford financial advice, whilst at the same time
making it more economically viable for providers to serve this
market.
3. THE IMPACT
OF THE
BASIC ADVICE
REGIME IN
ENCOURAGING SAVING
3.1 Basic Advice was initially envisaged
to be a "guided self-help" process, however further
layers of complexity were added to the model which increased costs.
It is therefore hard to deliver within the price cap and has limited
the use of the model by providers and distributors. As a result
the market for Basic Advice has been relatively small with few
companies offering this service, choosing instead to focus their
resources on the provision of fully regulated financial advice.
3.2 Anecdotal evidence from some of our
distributors supports this view. It indicates the market for the
Stakeholder Medium Term Savings Product has been hindered by the
fact the Basic Advice regime is not as light touch as hoped and
it has therefore been difficult to develop a cost-effective sales
regime for these products. The product is only available through
Norwich Union if specifically requested by a customer and sold
as execution only, sales have therefore been low. It is realistic
to conclude the Stakeholder initiative is yet to prove successful
in encouraging new saving.
3.3 The need for a partnership with regulators
is emphasised by the failure of the Basic Advice regime to provide
low cost access for the majority of the population to simple savings
products. It is essential the current regulatory framework for
Stakeholder products is revisited, to increase the extent to which
Stakeholder is successful and creates a real increase in saving
in the UK.
4. THE EXTENT
TO WHICH
DECISIONS ON
SAVING ARE
INFLUENCED BY
FACTORS AFFECTED
BY FINANCIAL
SERVICES REGULATION,
SUCH AS
COST OF
REGULATED ADVICE,
AS OPPOSED
TO OTHER
FACTORS, SUCH
AS THE
STATE BENEFITS
SYSTEM
Cost of regulation
4.1 Whilst the cost of regulation is likely
to have limited influence on consumer demand, there are many other
reasons why many people "switch off" from the financial
services industry. For example, confusion and inertia are likely
to have more effect on consumer demand than the cost of advice.
4.2 However, the cost of delivering advice
means there is a tier of the population that is currently uneconomic
for the financial services industry, including Norwich Union,
to serve. This includes those who simply can't save (and therefore
shouldn't be encouraged to), and those `marginal' savers who are
currently uneconomic to reach and service due to significant regulatory
costs coupled with lower than average contributions and persistency.
4.3 Distribution costs are also relatively
high as financial products have to be sold rather than bought
due to the high levels of inertia surrounding financial services.
An effective financial capability strategy which made consumers
feel more empowered to take financial decisions may lead to increased
demand for financial products and thereby reduce the acquisition
costs of selling. This could widen the market that is profitable
for providers and advisers to service, leading to greater financial
inclusion as a whole and more individuals with appropriate financial
products.
Other regulatory issues
4.4 Other than increasing costs, financial
regulation can create additional disincentives which prevent consumers
engaging with financial services. Regulatory requirements increase
the administration required in servicing customers and can add
complexity and time to the advice process.
4.5 In addition, overly prescriptive regulation
around issues of customer communications may deter potential consumers
as they see the industry as too complex and hard to understand.
Imposing prescribed formats for customer communications (such
as the detail required by the rules regarding the Menu introduced
under depolarisation to increase clarity around costs of advice)
may make financial information more confusing and too detailed
for consumers. Simpler, higher level information may encourage
more people to engage with financial services.
4.6 We would therefore welcome a constructive
debate with the FSA around making customer communications, and
regulation as a whole, less prescribed and detailed. We do not
feel it is in the interests of either consumers or the industry
to present customers with detail we know they will neither read,
nor want. However, it is important that regulation is proportionate
to the consumer risks involved.
Consumer inertia
4.7 Whilst issues of regulation may have
some effect on peoples' financial engagement, there are a number
of other factors which also affect decisions to save. Research
commissioned by Norwich Union highlighted that consumer inertia
is triggered by feelings that people can't afford to save or have
high levels of personal debt, media scare stories, fear and anxiety
(in some cases prompted by confusion over Government messages)
or simply the fact that people do not think about saving for the
long-term as they believe they have plenty of time.[218]
The effect of State provision
4.8 We understand it is often the case that
the complexity of the State pension system means many people simply
do not know how much they are likely to receive from the Government
when they reach State pension age and therefore cannot make an
accurate decision on how much to save. Also, advisers can sometimes
find it hard to recommend a particular course of action in light
of complexity in the system. For example, decisions about whether
to contract out of the State Second Pension (S2P) arrangements
have become increasingly marginal and difficult for advisers to
give clear advice on in recent years.
4.9 There is unawareness and uncertainty
around eligibility for state benefits, means testing etc. However,
financial advisers must develop and retain a working knowledge
of the state systems as they would be unable to advise without
confirming a client's benefit entitlement or the impact on their
state benefits of any provisions they may make. This would increase
the `time to serve' a client, competence requirements, and the
need for maintenance of competence as there is no single, clear
source of accurate information about state benefits and the impact
of personal provision on them. It is therefore more economic for
advisers to avoid customers in the "marginal" income
groups. Were the whole system of state benefits to be simplified,
advisers would find it much easier to make recommendations and
consumers would be able to take greater ownership of pensions
provision.
4.10 Clearly one of the key barriers to
saving in the UK is that there are competing pressures on peoples'
monthly wallet, but for people on modest incomes some of these
"other" necessary financial costs are disproportionately
high relative to those on higher incomes. For example, people
may have to find extra cash to insure their home because they
were only able to afford to buy a property situated in a flood
plain, or pay more for car insurance because they are under 25
or so and considered a "high risk". This would therefore
reduce still further the amount available each month to put aside
into savings schemes.
4.11 Norwich Union is trying to help bring
these higher relative costs down. We commissioned the first privately
funded map of the UK specifically for insurance purposes which
enables us to price flood risk more accurately and responsibly.
This allows us to provide cover at address point level, providing
affordable cover for some customers who live in post codes generally
labelled as extremely high flood risk.
4.12 We have also been testing a new usage
based "Pay As You Drive"TM motor insurance product,
which monitors how often, when and where customers use their vehicles.
In future Norwich Union is keen to offer tailored motor insurance
premiums based on individual circumstances, which could help make
motoring more affordable for lower income groups.
4.13 The cost of regulation does affect
peoples' ability to save (most notably by restricting the ability
of providers and advisers to serve a wider market and increasing
complexity in the advice process) other factors would also need
to be addressed to maximise financial inclusion and individuals'
engagement with the financial services industry. Finding ways
to overcome customer inertia, further simplifying customer communications
and increasing levels of financial capability would all help stimulate
people to take the right savings decisions.
5. OTHER OBSERVATIONS
National Pensions Savings Scheme
5.1 The National Pensions Savings Scheme
(NPSS) proposed by the Pensions Commission aims to encourage more
people to save for a pension and to enable them to do so at low
cost. Norwich Union can see the sense in introducing a low cost
scheme open to everyone in the UK which strips out the major costs
of distribution and advice by bringing an element of compulsion
to contributions. We accept the argument that currently the private
sector cannot afford to offer advice to those on lower incomes
and welcome new ideas on how to bridge this gap.
5.2 However, the proposed model for the
NPSS assumes auto-enrolment removes completely the need for advice
and we feel this approach may be too simplistic. Generic information
should be available to all customers within the low charge, removing
the need for advice but allowing them to ensure they take the
right choice to make the most of their investment in the product.
5.3 For example, customers would benefit
from information to help them tailor their fund choices to their
life stage and attitude to risk. Someone in their early twenties
may suffer detriment if they stay in a default, low risk fund
and lose out on the potential capital gains of a higher risk/higher
growth fund over a forty or fifty year period. Alternatively,
a low risk fund may be more appropriate for someone in their fifties
or sixties.
5.4 In addition, it may be appropriate for
some consumers to opt out of the NPSS, for example if they are
on low incomes and need to service debt. Advice, or at least generic
information to help them assess their own priorities, would be
required to make the right choices.
5.5 The NPSS, or a similar low-cost model,
should help increase financial inclusion, but the benefits of
this would be increased if coupled with an effective capability
strategy and the appropriate generic information.
The need for advice
5.6 Across the whole financial services
market, consensus needs to be reached on where advice is essential,
where it should be optional, and where it adds little or no benefit
to consumers, and can be removed with little consumer detriment.
5.7 In the context of the NPSS, older consumers
and those with complex legacy financial arrangements would benefit
from independent advice to assess whether the NPSS product would
be appropriate for them. However, for younger employees with simple
financial arrangements, the decision on whether to stay opted
into the product is a simple one, and their information requirements
would centre on levels of contributions and fund choice.
5.8 Other products, for example simple protection
products or simple savings, could be seen to offer a straightforward
proposition and could be sold without full advice, with little
product risk for consumers. This would reduce complexity in the
market and reduce costs associated with regulated advice.
January 2006
218 Headlight Vision, Saving for Retirement,
commissioned by Norwich Union, January 2005. Back
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