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A consumer&#39s view

Collapsing stockmarkets, insolvent life companies, war in Iraq – just when you thought it couldn&#39t get any worse, the Government decides to control profit margins on virtually all equity-based financial products.

What? Yes – that is what the implementation of the Sandler review means in effect. Last week, the Treasury outlined its proposals to extend stakeholder-type products with a 1 per cent cap on charges and invited representations from interested parties.

A range of stakeholder products was one of the main recommendations of the Sandler review of July 2002. The Treasury maintains that the idea behind them is to increase competition and make medium and long-term savings more accessible to lower-income savers.

It is difficult to see how fixing charges at 1 per cent will increase competition.

If the institutions got together and all agreed to fix, say, pension charges at 5 per cent up front and 1.5 a year, the Government would pounce immediately and denounce it as a cartel.

Although there is no doubt that low charges make financial products more attractive, the 1 per cent cap has done nothing to entice lower-income customers into saving for retirement.

The reason is obvious – low-income families do not have any spare cash to save.

The Government would find that cutting taxation to lowincome families would be far more effective.

The Treasury says the Sandler proposals will make products easier for customers to understand. That would definitely be an improvement. But this seems somewhat at odds with the other Sandler stakeholder objective – to control risk.

Structured products such as stockmarket guaranteed bonds or even with-profits investments limit risk. But no one would pretend that they are easy to understand.

Indeed one investor in a LloydsTSB stockmarket bond maintained that he did not understand the risk to his capital if certain criteria regarding the performance of a portfolio of 30 leading shares were not met in spite of 15 warnings to this effect in the literature. Amazingly, the FSA believed him and found in his favour.

“In order to be successful in getting lower-income people to save more for their future, the product specification must be right,” says Ruth Kelly, Financial Secretary to the Treasury. “These products will be simple, low-cost and risk-controlled.”

One thing is certain – the upshot of Sandler stakeholder-type products will be more companies going bust. Who will want to buy a typical unit-linked endowment with its high up-front charges or even a unit trust regular savings scheme if Sandler schemes with maximum charges of 1 per cent are on offer?

Life companies, in particular, are in no financial shape to see their gross margins cut to 1 per cent across the board.

An independent study carried out for the Bank of New York by Taylor Nelson Sofres finds, not unexpectedly, that banks and life insurance companies are the likeliest to cater for demand for Sandler products and fund managers are less likely to want to sell these products.

Because of the 1 per cent charge cap, internet sales are seen as crucial.

Most important, the 1 per cent charge is likely to lead to a review of in-house operations and back-office costs, adding further impetus to the outsourcing trend in fund servicing, the report concludes. “There is one key message that emerges from this research,” says Jeffrey Tessler, Bank of New York´s European manager, “cost control will be the key to sustained success.”

There is every reason to believe that Tessler and the report have reached the right conclusions. For the banks, the marginal cost of selling Sandler products over the counter is low. They have staff in the branches already with time on their hands.

But whether the life companies are in any fit financial state to embark upon the capital investment required to sell investment products online, or to reduce their overall gross profit margin to 1 per cent is another matter entirely.

It seems highly likely that many will decide, as they have with stakeholder pensions, that the game is not worth the candle.


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