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A review too far

The Government commissioned the Myners review to consider whether there are factors that distort decision-making on institutional investments. The review concluded that such factors do exist and recommended ways of tackling them, including replacing the minimum funding requirement and the introduction of two codes of best practice for defined-benefit schemes and defined-contribution schemes.

Codes of practice are a useful way of helping to raise standards because they are flexible and lead to behavioural changes over time.

But the report also recommended a review of all aspects of retail financial services including life insurance products. The Government has said it intends to take forward all of Myners&#39 recommendations.

Myners asserted that a review of retail financial services is necessary because:

In principle, competition to offer superior investment performance to retail investors should be the main driver of decision-making. In practice, although competition in the industry is intense, it tends not to focus directly on performance. This is particularly relevant to with-profits business where historic bonus levels and free-asset ratios are only loosely related to investment performance.

IFAs select products mostly on the basis of the commission system rather than potential investment performance.

Retail financial products are not explained clearly to consumers. The population as a whole has a poor understanding of investment and savings matters and, as a result, people do not plan adequately.

The retail review will cover the range of personal investment products available to small investors including life insurance, unit trusts, investment trusts and individual pension investments. It will examine the drivers underlying commission, consumer information and understanding, the nature and quality of advice, skills of financial advisers and the charging structures of products.

In fact, the retail review is unnecessary because there are already many reviews of the industry. For example, the FSA is reviewing the status disclosure and polarisation, product disclosure and with-profits funds. The Department of Work and Pensions is reviewing annual pension statements. The Faculty and Institute of Actuaries has recently completed a review of information for with-profits policyholders and the ABI&#39s Raising Standards initiative has reviewed information for customers of insurance companies. The Treasury select committee has also announced it will review with-profits policies.

Every review of commission so far has indicated that it does not influence IFAs&#39 recommendations. Myners produced no evidence of this. PIA disclosure reports and the London Economics review of polarisation concluded that IFAs are not commission-biased: “…despite anecdotal evidence that some IFAs and IFA networks do take advantage of their position to recommend products that yield them the greatest commission, there is little sign that this is happening on a wide scale. This view was supported by our interviews with a wide selection of providers using the IFA channel…”

Not only is a retail review unnecessary but such a review could end up disrupting the industry with no obvious benefits to consumers. Each time a review changes the information provided for consumers or working practices of advisers, the industry faces significant costs. The price of amending pension statements alone could cost the industry around£100m.

If each one of these reviews is implemented at different times, with different conclusions, consumers will end up paying billions of pounds indirectly through lower returns for the privilege of being confused by differing and contradictory information. The industry is in danger of being reviewed to death.

All the reviews that are currently running and which address the concerns in the Myners review are due to finish before the middle of 2002. The retail review will not be finished before then. Implementation of the current reviews could be delayed to incorporate the results and recommendations of the retail review. If the current reviews continue, the retail review will be redundant.

Given that the retail review will go ahead, the Treasury, FSA, DWP, Treasury select committee, Office of Fair Trading, Faculty and Institute of Actuaries and all other organisations involved in the regulation of financial information need to co-ordinate their activities. They must ensure that the results of their reviews are consistent, both in con-tent and timing.

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