This week I am returning to the subject of funding for the ever increasing costs of higher education. With one of my boys having completed a four-year university course, another having completed a three-year course (with the prospect of more “expenditure time” for me as he moves on to art school) and the third about to go to university, I feel a bit like Fred McMurray of My Three Sons fame (well, I always have, actually) but without the money and nice house.
Help is at hand (but not for me, I am sorry to say) in the shape of the child trust fund, which I have written about before and will no doubt again. Vouchers for £250 (plus delay payments) will land on the doormats of qualifying individuals next year. Then it will all become real.
To remind practitioners and financial product providers of this, the FSA has issued a special “commemorative” consultation paper on the sales regime for the CTF. Firms will need to be authorised to provide CTFs and there must be adequate levels of consumer protection.
There are two types of CTF – stakeholder and non-stakeholder. The former will be an equity-based product with statutory minimum standards.
To this extent, the stakeholder CTF will be comparable with stakeholder pensions and other stakeholder products with statutory minimum standards. These have been taken account of in the FSA's regulatory proposals. Non-stakeholder CTFs will be subject to existing regulatory requirements for the most part.
FSA retail policy division director Dan Waters says: “All children born on or after September 1, 2002 will qualify for a child trust fund. They will be taken out by experienced consumers and those less familiar with savings and investment products. Our regulatory proposals are designed to help ensure that consumers have what they need to take properly informed decisions.”
The “registered contact” (usually the child's parent) who manages the CTF account on behalf of the child will be treated as the customer for regulatory purposes. There will be a need for suitable risk warnings to be included in information for customers and I want to look at these in particular.
Before doing this, though, I would like to quote a few important extracts from the consultation paper. The particular statements that I believe advisers ought to find very interesting (and one of them actually is to do with risk) are as follows: “The purpose of CTFs is to:
Help people understand the benefits of saving and investing, Encourage parents and their children to develop the savings habit and engage with financial institutions, Ensure that in future all children have a financial asset at the start of adult life to invest in their futures and Build on financial education to help people make better financial choices throughout their lives.”
The consultation paper continues: “Point-of-sale material (that is, key features documents, key information and direct-offer financial promotions) for all types of CTFs will be required to include a risk warning to the effect that, once paid in, money cannot be taken out of the CTF by anyone other than the child at age 18. Point-of-sale material for non-stakeholder CTFs will need to include a prominent statement to alert customers to the fact that they are opening a non-stakeholder CTF and that a stakeholder CTF is available. This statement will also include a description of the main features of stakeholder CTFs.
“Point-of-sale material for stakeholder CTFs will be required to make clear that simply because it is a stakeholder CTF does not mean it is automatically a suitable investment.”
The importance of this fact cannot be underestimated. Investing up to £1,200 a year into a CTF account will undoubtedly be tax-effective. However, tax-effectiveness comes at a price and that price is largely in the shape of lack of control by the contributor, probably the child's parent or grandparent I mean, how will you feel if, after diligently investing £1,200 a year into your child's CTF, at age 18 he or she takes all the funds and walks off down the rough end of the Seven Sisters Road to buy a season ticket for the Spurs? It is to prevent catastrophes such as this that parents often like to exercise some control over funds that they invest. Non-CTF alternatives could be created that give control and tax-effectiveness.
The last extracts state: “The Government plans to launch a multi-media campaign later in 2004 and CTF information packs will be sent out from January 2005. We are discussing with the Inland Revenue the contributions that we might usefully make to this pack. We will review our own consumer materials to ensure that they include appropriate references to CTFs.”
The consultation paper adds: “All children living in the UK, to whom a child benefit award has been made, will automatically be entitled to a CTF with a contribution from the Government with which to open the account. To this extent, the CTF is a uniquely universal financial services product. Given that one of the Government's objectives is that family and friends can pay subscriptions into the account, the number of consumers with a potential interest in CTFs will be very large.
“This means a significant number of consumers will want to understand the purpose of CTFs, how they work and how to subscribe to them. Our proposed rules and guidance are designed to help ensure that, where it properly falls within the scope of our statutory responsibilities, consumers have what they need to make informed decisions.”
What a wonderful opportunity for advisers to benefit from a Government-sponsored multi-media advertising and public awareness campaign with targeted initiatives of their own to appropriate segments of their client base.