A few weeks ago Financial Mail on Sunday personal finance editor Jeff Prestridge wrote a column bemoaning the fact that Virgin Money would not break with banking tradition and scrap free banking.
He got a bit of stick in the reader comments section but the central point made in the piece was a very sound one. Namely, how will it be possible to significantly increase the general public’s trust in financial services when the industry is still so reliant on cross-subsidies and obscure charges?
Transparency and fairness are the order of the day, with SCM’s Alan Miller and TCF Investment’s Dan Norman helping to stoke up a political and media frenzy over “hidden charges” in the investment world.
It is easy to be cynical about the agenda behind such campaigns and the almost hysterical presentation of cost calculations being fed to the press. But it would be wrong to ignore or dismiss the demands for increased transparency.
There is always the concern that focusing purely on cost overshadows the most important figure for investors- performance net of all charges. But to suggest investors should be protected from too much information is to misread the public mood and underestimate the hunger for data encouraged by the internet.
How can you impress on people the dangers of a fixation on costs at all costs when there is a strong perception among investors that certain charges are being hidden from them?
Miller is calling for a more transparent breakdown of charges, such as those associated with dealing and administration, through his True and Fair campaign.
But surely this argument can be taken further and applied to the funding of the Financial Services Compensation Scheme?
The funding model for the FSCS is broken and in desperate need of repair. The hundreds of millions of pounds that have been paid out by advisers over the last few years through the continued failures of firms they have never dealt with adds the type of extra hidden client costs and cross-subsidy that Miller’s True and Fair campaign should be demanding be eradicated.
A review of the FSCS will hopefully begin this year and one proposal to address this situation would be a simple and transparent product levy.
In an interview with Money Marketing last year, FSCS chief executive Mark Neale described a product levy as a “tax on consumers”. However, Neale’s stance fails to appreciate that these type of costs are passed on to the consumer in any case through higher overall advice and product charges.
Would it not be fairer, cleaner and more transparent to end this opaque system and introduce a small product levy, paid when the product is bought, with the size of the levy dependent on product risk. Levies would be put in a pot to fund future compensation costs.
Consumers would appreciate that the guarantee offered by the FSCS has a value and will no longer be forced to pick up the bill for risky areas of the market that they are not involved in.
A product levy could not be introduced overnight, but pre-funding of investment compensation is on the agenda at a European level and could be introduced gradually to build up a sufficient pot. Such a system would require the powers that be to make the right calls on assessing risky areas of the market – but a quick look at the big compensation costs over the last few years would be a good starting point.
A few week’s ago Aifa suggested there is not the political appetite to introduce anything as radical as a product levy but this transparency movement should be the perfect vehicle to push forward such as proposal.
Hopefully an overhaul of the compensation system to remove the hidden charges ultimately paid by clients is something Miller’s True and Fair campaign, and other champions of transparency, will be willing to support.
Paul McMillan is editor of Money Marketing- follow him on twitter here