Memorandum submitted by Mr Ron Sandler
(January 2004)
BACKGROUND
1. My Savings Review of 2001-02 highlighted
two core problems within the UK savings industry:
— Competitive forces do not work effectively
to deliver cost efficiency or value-for-money investment practices.
— Savings levels in the UK are insufficient,
particularly amongst the less affluent.
2. These problems are connected. They both
have their origins in the fact that savings products are generally
characterised by a high degree of complexity and opacity. Consumers,
as a result, tend to be daunted, confused and reluctant to engage
with the industry. They struggle to discern value-for-money and
are therefore unable to exert meaningful pressures on the industry
to deliver this.
NATURE OF
COMPETITION
3. Over a considerable period, the cost
base of the industry has risen at a surprisingly rapid rate. Whilst
this is partly attributable to the application of more stringent
regulation, it is also a reflection of the muted pressures on
the industry to seek cost efficiencies. Rather, the competitive
dynamic in the savings industry operates so as to encourage product
proliferation and ever greater levels of product complexity. Competition
in the industry tends to centre upon product features, largely
tax-related, rather than upon the fundamentals of cost and investment
performance.
4. Consumer weakness would be less of an
issue if independent intermediaries (IFAs) were able to act effectively
on behalf of consumers to ensure that value-for-money was delivered
by product providers. However, the ability of IFAs to perform
this role is compromised by the conflicts of interest inherent
in the prevalent commission system. It is also apparent that too
few intermediaries possess the necessary skills to provide effective
investment advice.
5. 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. Indeed, the FSA has taken
an explicit stance that it is not an economic regulator. Solutions
will therefore need to rely upon a long-term strategy of promoting
consumer empowerment, involving a combination of consumer education,
measures to promote simplification and greater transparency, and
the resolution of IFA conflicts of interest.
CONFIDENCE IN
THE SAVINGS
INDUSTRY
6. The combination of weak equity markets
and the spate of recent scandals have undoubtedly eroded trust
and confidence in the industry.
7. It would, nonetheless, be inappropriate
to view this as essentially a cyclical problem, which will be
rectified in due course by the emergence of healthier equity markets.
The reality is that consumers are generally confused and daunted
by long-term savings products, and suspicious of the opacity with
which the industry chooses to present its offerings. This has
served to establish an underlying mistrust of the industry. Although
it is impossible to establish precisely the extent to which the
low savings propensity in the UK is a result of this underlying
mistrust, there is almost certainly a causal relationship.
8. Whilst the industry is broadly aware
that complexity and opacity underpin the observed low underlying
levels of consumer confidence, it does not generally perceive
this as a problem needing to be addressed. Industry behaviour
reflects the implicit view that the benefits gained through complexity
and opacity out-weigh the countervailing benefits likely to arise
from a boost to consumer confidence through product simplification
and transparency.
THE "SAVINGS
GAP"
9. The existence of the "savings gap"
is undoubtedly closely connected to the confusion of consumers
and their inability to engage confidently with the industry. But
there is a particular economic dimension to the issue that needs
to be understood. The fixed costs associated with each new savings
transaction, including the costs of providing advice, have risen
to the point that it is uneconomic for the industry to target
all but the most affluent prospective savers. Much of this cost
rise can be traced to the imposition of more stringent regulations
upon the sales process.
10. Providing the less-affluent with access
to the savings market, which will inevitably involve the provision
of some form of face-to face contact, will therefore require a
substantial re-engineering of the costs of delivering product
and advice. This is most obviously achievable through transferring
the burden of regulation away from the sales process and onto
the products themselves. This is the underlying rationale for
my recommendation regarding the introduction of a suite of simple
regulated products, to be sold through a substantially deregulated
sales process.
SAVINGS REVIEW
RECOMMENDATIONS
11. As set out above, the regulated product
suite recommendation was aimed specifically at helping to close
the "savings gap", by making it economical for the industry
to target the smaller saver.
12. The remaining recommendations of the
Savings Review were a set of interventions aimed at promoting
consumer empowerment and, in so doing, creating consumer-driven
incentives for the industry to become more efficient and deliver
better value. These included the following measures:
— Reform of with-profits products.
— Removal of the conflicts inherent
in the delivery of advice.
— Clarification of key elements of
the regulatory regime.
— A strengthened consumer education
programme.
— Enhanced advisor qualifications.
— A requirement to disclose investment
principles.
13. These recommendations were all aimed
at improving the effectiveness of competition in the long-term
savings industry, which was the remit of the Review. Additionally,
although this was not the primary objective, it is my firm belief
that they would also contribute in a variety of ways to overcoming
the erosion of trust and confidence in the industry.
14. All of the principal recommendations
of the Savings Review have received the support of both the Government
and the FSA. In some areas, implementation has been completed
or is far advanced. Elsewhere, however, progress towards implementation
appears to have been slow. As far as I can judge, this is largely
a reflection of the legal complexities inherent in various of
the proposals, plus the extensive consultation process that the
FSA is required to undertake when considering changes to the regulatory
regime.
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