Paul Farrow: The push for simple products
It would seem that many firms have had enough. They are getting increasingly frustrated at seeing more of their hard-earned profits passed over to the Financial Services Compensation Scheme to cover payouts.
This is why calls for simple financial products for the masses, which protect them from losing their shirts from their backs, are gathering pace.
Private client investment managers such as Brewin Dolphin and Cazenove are lobbying hard because they feel that “we are in danger of entrenching a one-size-fits-all approach to financial regulation” and replacing “face-to-face enforcement with call centres and modelling”.
These companies say evidence suggests that far too many small investors are being poorly served by the present regulatory regime. They point to FSCS claims figures which show that while a total of £0.5 billion was paid out to investors last year, the average payout was £14,000, which means there are tens of thousands of relatively low value claims every year.
You can understand their frustration and it is frustration that many advisers will feel too - paying for the fault of others. The rationale for simple products is perfectly sound.
Brewin envisages it would involve enhanced protection for the Joneses with a simplified product range, but a different regulatory regime for those above a clearly defined threshold and who want to put up their savings as risk capital.
The question is whether simple products will ever see the light of day.
We all remember the Cat standards, with their cap on charges, ease of access and transparent terms. They were introduced to win the trust of consumers but were a complete washout.
For a start, most providers paid lip service to them. Barely any unit trust had the Cat mark while a survey showed that a confused public did not understand what Cat stood for.
Cat standards bit the dust when Ron Sandler proposed a “suite of savings products” in 2005. But Sandler’s products, designed to restore confidence in the industry, also failed miserably. Just two insurers - Norwich Union and L&G - offered these new government-backed low-cost savings plans when they went live in 2005.
The key to any simplified regime, rests not with the regulator, be it the out-going FSA or the new Financial Conduct Authority. It lies with product providers.
But, for some reason, providers seem intent on bamboozling investors by making perfectly decent products more complicated.
Exchange-traded funds are a perfect example of this. Their initial sales pitch was fine - a simple cheap way to get exposure to the stock market without any bells and whistles. Now a new breed of ETFs has emerged - ones that involve swaps and counterparty risks.
You can throw structured products and absolute return funds into the mix too.
I agree that consumers need products that are easy to understand. We know that the complexity of with-profits funds, precipice bonds and split-capital investment trusts have done plenty of damage to consumers in the past. Consumers also need products they can trust - that’s why National Savings does so well, irrespective of whether its products offer decent value.
There is an opportunity, with the creation of the FCA, to do what the FSA palpably failed to do - protect consumers. Any lobbying that persuades Mark Hoban and his steering group to fight for simple products will be welcome, not just by consumers, but by those that have to stump up cash to the FSCS.
But if we think that financial institutions are going to go along with such a plan without a fight we have to think again. For them, life is just never complicated enough.
Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing