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Bitter suite

Treasury reviewer-in-chief Ron Sandler&#39s vision of low-cost, easy-to-understand, lightly regulated products is to become a reality.

The Treasury will issue its views imminently but if anyone wanted to question the commitment of the Government and the FSA to implement of the new regime, they need look no further than the Tiner report, which says the products will be launched in early 2004.

This comes despite warnings from the industry, IFAs and even parts of the regulator about the products.

Perhaps it should not come as a surprise. Sandler, on the publication of his report, made it clear that while he he did not like CP121&#39s payment system and wanted to reform with-pro-fits policies, it was the stakeholder suite that was his most treasured recommendation and the one he most wanted implemented.

Judging by comments from Treasury Financial Secretary Ruth Kelly last week and, perhaps even more significantly, FSA chairman Howard Davies, suggesting that any of Canary Wharf&#39s reservations have been overcome, the products are ready for consultation prior to implementation. At least the FSA made some of its opposition known. On publication, its press spokespeople were pouring cold water on Sandler&#39s products and on his suggestion that the FSA should provide a definition of misselling.

Recently, the FSA, through David Severn, suggested that both the regulator and the ombudsman were concerned that the products would lead to a new regime, with the ombudsman&#39s decisions effectively creating a new regulatory framework.

It is a legitimate concern. Most believe the products to be sold outside the FSA&#39s remit, as currently planned, will create a parallel universe. Within this grand scheme, the ombudsman may find itself forced to convert from watchdog to regulator.

There is a body of thinking that the FSA has not always been happy about what has been thrust upon it, mostly by Treasury edict but any past contortions will pale in comparison with what the FSA is likely to issue around Sandler.

The sight of a rule-making body dealing with the regulation of financial services trying to make up rules for something intended to fall outside them should make the recent gymnastics used to justify depolarisation, attack IFAs and to rubbish past performance without proving anything look mild in comparison.

FSA watchers will probably allow themselves a smile. The rest of the industry will be alarmed.

But it is not the first and last time that a Government – and particularly this Government – has railroaded something through. Sandler is, after all, Gordon Brown&#39s appointment. To his credit, he helped sort out Lloyds and is clearly his own man. But his remedies for savings flit with the prevailing Treasury prejudices. This should not surprise many. His team at the Treasury was made up of Treasury officials so it was unlikely it would strike out in a radical new direction.

But given Sandler&#39s independence of mind, the extent of continuity with past Government policies is surprising. The ideas of Catmarking or kitemarking products have been around since Labour came to power.

Throughout their history, they have involved two things. These are price capping, except on mortgages, and a casual or even careless attitude to how the products are distributed.

Cat-standard Isas and kite-marked stakeholder were at the least careless on distribution and at worst negligent while the Cat-standard mortgage did not allow procuration fees, a decision taken by the Treasury despite protests by lenders.

The process was one of disintermediation – cutting out the middleman. Probably it was justified by the UK&#39s move, at least temporarily, into a low-inflation, low-Government-borrowing environment.

Sandler&#39s products sold without anything that anyone who has worked in financial services in the last two decades would recognise as advice is not exactly a radical departure. Where the products surprise is that they also opt out of regulation.

The problem is that Sandler&#39s initiative shows a lack of awareness of the track record of stakeholder products already available.

The Cat-standard Isa has had mixed reviews. On the whole, it has been restricted to trackers although, clearly, with markets heading south, the risk of this standard being seen as a Government seal of approval – with ensuing complaints – must increase.

There is also a suspicion that some providers have used the standard to overcharge for what is, after all, a very cheap way of accessing the stockmarket by taking charges up to the prescribed level. While the Cat standard has had mixed reviews, its cousin, the stakeholder pension, has failed.

Trade unions and product providers agree that average contributions are abysmal.

Its one saving grace, a not insignificant one, is that prices have been forced down for all contracts so anyone in a stakeholder has a good deal. But there are fears that stakeholder is now a cover for employers to downgrade pensions and it is cranking up the strains on providers at just the wrong time.

It was put forward without compulsion and it was bereft of any mechanism for marketing or sales apart from some insurers plundering the orphan estate to sell it. Not pleasant for the existing policyholders.

The Cat-standard mortgage never got off the ground. It had little to recommend it in such a fast-moving market although many brokers dispute that some of the mortgages available even meet the spirit of the regime.

What it did do by not allowing redemption penalties was set the tone for a mortgage market which many lenders believe helps those who switch mortgages at the expense of the more vulnerable who do not move and who may end up subsidising the sort of deals that lenders need to offer to secure new business.

The Cat mortgage was not entirely to blame for this but it did not help. Effectively, what came about from pressure to reduce redemption penalties was a classic example of the law of unintended consequences.

And so to Sandler. He wants somehow a price-capped range with limited advice sold outside existing regulatory channels. It seems amazing we have to set out the arguments again but here they are.

First, there is no adequate margin for distribution of these products. That applies to banks as much to direct multi-tied or independent advisers.

Second, the consequences of trying to meet this price cap, say, on with-profits, will only compound the problems being faced by providers while it is unlikely that many fund managers with their own problems will flock to offer a price-capped mutual fund.

For the pension, it is difficult to see how it can be anything but a stakeholder without the regulatory safeguards.

Finally, it promises to make a dog&#39s dinner of regulation when it was beginning to make some sense. The industry should have made a stand over stakeholder and it did not. It will be interesting to see how it reacts to Sandler.

Sandler&#39s new suite of stakeholder products will be built on what went before – foundations of sand.

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