One of the fundamental problems with the FSA's approach to simplified stakeholder products and the basic advice regime is that, no matter how simple the product, without a proper investigation of the individual's finances, aims and requirements, there is always a very real risk of misselling.
Stakeholder pensions are a case in point. It is probably just as well that the vast majority of pension policies sold to individuals have been taken up by the relatively wealthy middle classes – high-income families where the husband has been investing in stakeholders for his non-working wife and children.
This type of investor fully understands what stakeholder pensions are about, wants to take advantage of the tax breaks available and is well aware that once the money is invested it can only be accessed on retirement.
No doubt, these families are wealthy enough to have other savings which can be used to help out their offspring with buying their own home.
But if the postbags to newspapers are typical, there are vast numbers of individuals who do not realise that money invested in a pension cannot be withdrawn until retirement – under any circumstances – just as there are large numbers of individuals who do not realise that if they die one year after taking out an annuity, the money invested frequently dies with them.
For families on average incomes and below, virtually any financial product, except perhaps a bank or building society account, is probably a mistake and could involve the adviser in a claim for misselling at a later date.
The individual's resour-ces are so small that even a minor problem such as two weeks off work with flu could create the need to call on their savings.
For these savers, it is difficult not to agree with John Ellis of the LIA that the stakeholder suite should not include any product where the individual's capital is at risk.
Moreover, even where the capital is not at risk, for example a guaranteed equity bond where a return of capital is guaranteed, or a guaranteed growth bond, where there are either penalties for early encashment or no facility to access the money at all except on death or maturity, the investor could claim misselling if they did not fully appreciate they could not get at their cash in an emergency.
The LIA also makes the very important point that, “the clear lack of understanding thrown up by the FSA's research, shows that many consumers who are subject to advice, may well believe that redress is obtained if anything goes wrong.”
Very true. The regulatory legislation itself has produced a compensation culture and, regardless of whether consumers understand the product or not, an increasing number will claim compensation if problems subsequently emerge.
The FSA proposals for basic advice produce almost as many problems as they are likely to solve. As Ellis points out, when consumers are given any information at all, they quite often take it as advice.
The level of financial ignorance among the general public is high and there is not much enthusiasm among those on average earnings or below to educate themselves – except to work out the broad principle that almost any savings will simply disqualify them from free State social security benefits.
Part of the problem is that the Government is trying to encourage savings among a sector of the population who simply cannot afford to save. It would be better advised to reform the tax regime and release the lower-earning half of the population from tax -at the very least on their small savings.
The Government's own estimates show that 85 per cent of pensioners will qualify for the savings element of pension credit. In other words, they have savings of less than £6,000.
Why not simply abolish tax on savings up to a certain limit? None of these pensioners are wealthy and it is outrageous that they pay any tax at all on income of £10,000 or less – the Government's official poverty level.
For the industry, the real worry is the spectre raised by John Ellis of IFA firms set up specifically to provide “basic advice”. Ellis wants to see basic advice given in the context of IFA firms which are already within the full advisory regime. Otherwise, we face the prospect that all the years of regulation, training and competence will be wasted as “cowboy” sales organisations move into the non-controlled basic advice field.