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Did driving down prices win consumers a better deal?

The first time I met Paul Lewis, the Radio 4 Moneybox presenter and perhaps one of Britain’s most influential financial journalists, he told me that he felt the only way to improve financial services was to place the consumer first at all times. Indeed, I often boast that my businesses succeed because we put the client first and this year’s profit a bit behind.

A decade later and the cost of most of the then overpriced financial services instruments has plummeted. It certainly was not any reforming zeal amongst the product providers – public opinion, regulatory pressure, the internet and intensifying competition have reduced average charges for the things everyman needs, regularpremium pensions, investment and protection. To a background of regular scandals generally perpetrated by the market’s biggest firms, the consumer’s advocates have dictated the pricing agenda very successfully and won the consumer a far better deal.

So this is good news. Or is it? Has it gone too far? I only ask because far fewer people contribute to private pensions, save regularly and protect themselves and their dependants against the financial effects of death or disability than did when prices were higher. Pile it high and sell it cheap has not worked. Some would blame all the scandals, but in truth they would not stop people doing the right thing, unless people were very happy not to do anything at all.

In fact, I wonder if the new Money Advice Service, and John McFall’s dismissed call for price controls on private pensions, might not one day be seen as the high water mark of the state’s effort to help us to help themselves. Of course, we have Nest to come, but in terms of new initiatives, the penny might just be dropping that while low charges and online explanations might help the wise few, they do not achieve virtuous financial behaviour in enough consumers for society to be successful in the long term.

I wonder if policymaker consensus is not forming that what is needed to serve consumers best is the responsible marketing of financial responsibility. As that cannot now be state-funded, then logically consumers would have to pay enough in charges to allow those who sell to them to build budgets capable of delivering changes in behaviour. Now there is a challenge – should those who buy pay a bit more, so that those who sell can get more people to buy and thus improve the nation’s financial health? The alternative is to do nothing or attempt to inflict compulsion on a nation deeply disrespectful of all those who might compel. That is only likely if the Government has given up all hope of a responsible, regulated free market delivering contented savers.

And while, given all the historic pain the larger financial services sellers have caused consumers, that might well be where many opinion-formers are, I suspect the decision-makers in Whitehall and Canary Wharf are retreating from the McFall-like certainty that cheap is the only way, and beginning to think that it might best serve the consuming public if they let those who sell make what profit the regulated market allows them and thus gain the power to market their versions of financial responsibility to the public. It means allowing the marketers a corner, while the FSA ensures that rogue rippers-off are found out fast. No matter how big they are. A pipedream Paul, or the way it should always have been?

Tom Baigrie is managing director at Lifesearch

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There are 8 comments at the moment, we would love to hear your opinion too.

  1. “A decade later and the cost of most of the then overpriced financial services instruments has plummeted”

    With advisers often now charging 1% pa or more ( plus other costs) , and platform charges my overall impression of the investment market is that it is more expensive than in the past and likely to get even more expensive post RDR.

  2. The introduction of Stakeholder pensions certainly brought costs down, and all the schemes we’ve set up in the last 10 years have had an AMC of 1% or less, with no other charges.

    However, RDR is without doubt pushing that cost up significanty – the move to platforms means that most clients will be paying an AMC (including any CAR) of between 1.5 and 3%.

    How this can be in the client’s best interest is beyond me….

  3. 1. John Blackmore. Nonsense. You know not of what you speak.

    2. It is an absolute economic fact that price controls made by statute and enforced by coercion never ever work. Hence the collapse in the sales of financial products.

    3. The thing that drives down price and ups quality is competition in the free market. Nothing else does, especially not the pronouncements of largely ignorant bureaucrats.

    4. Financial services products are a distress purchase. The vast majority of people are motivated by immediate gratification. Deferring that gratification is not something the vast majority of people will ever do. And the only way to motivate them to do so is to make them scared.

    5. If the state offers universal benefits and promises to look after you from the ‘cradle to the garve’ it is a rational response not to bother to do anything for yourself.

    6. If on top of that you create a regulatory structure that can only continue to justify its own existence by making sure that financial services continually ‘fails’ you engender in people the notion that it is not trustworthy. It is a self confirming prophecy.

    7. Capitalism is entirely about maximising production and doing more for less everyday. Which enables people do less for more everyday. Why is anyone surprised that prices always fall and quality always goes up? And this has nothing absolutely nothing whatsoever to do with the Failed FSA.

  4. @jason Ball. True, but wrong headed.

    1. Stakeholder = price control (see my comment above on that as an idea)
    2. I was doing reg prem pensions at about 0.6% amc before Stakeholder was even announced…
    3….but, in order to provide ‘servicing’ – review meetings, reminder correspondence etc etc I charged fees to client. This pushed the cost to the client up to oooo say 2% to 3% if expressed as an AMC (Hint. See ‘opportunity Cost’).
    4. Platforms are very efficient. Our bare PP on a Platform for a fund >100K is about 0.95% p.a. reducing to about 0.65% p.a. for funds over £350,000 ish. To this we add our service commissions/fees of about 0.7% p.a. (average).
    5. But, dealing with small pensions savings for lower income individuals is costly to them. But should they be saving at all? If they do all they will do is exclude themselves from benefits (see pt. 5 in my earlier post). Another failure of central planning Fabianistic bureaucratic welfareism.

  5. The trouble with the do-gooders and the FSA is that they think that the selling (of any product, not only financial products) is a ‘dirty’ occupation and that everyone involved is crooked and commission-hungry.

    The fact is that even if you manufacture the best product of its type in the whole universe, without a successful sales force your business will die (and the potential buyers will never derive the benefits that the product might have bestowed upon them).

    Selling is the foundation stone of capitalism.

    Good sales people are highly valued in the US – here they are treated like pariahs, especially by all those self-serving, self-righteous, feather-bedded quangocrats at Canary Wharf.

    Provided clients are treated fairly, and advice and products are reasonably tailored to needs and affordability, sales people should be rewarded appropriately. And, make no mistake, by helping to promote self-sufficiency in the general public the financial services sales person is benefitting the whole of society at large !

    Of course, the government have spent several decades promoting State dependancy rather than self-sufficiency (even though the capacity and willingness of the State to support individuals in times of severe crisis or in retirement is almost non-existent).

    The government and the FSA are the problem – not sales and commission.

  6. stephen rowland 23rd August 2011 at 1:48 pm

    I wholehearedly agree with ‘anonymous 12.34’ – as it is the ‘Holier than Thou brigade & Do-Gooders’ that are absolutely ruining this country in most walks of life. If you preach laziness & State Benefits instead of Self Preservation – you get what you deserve & why generally Financial Services is in such a mess & in undoubtable terminal decline!

  7. Underwriter Support 23rd August 2011 at 2:24 pm

    Absolutely anon no.2 – which is why there needs to be a lot more imagination at political level about this.

    Legislation to enforce protection might be the only way to achieve consumer buy-in on the scale that is required. Not all would be suitable of course, but ideas such as compulsory life assurance are interesting.

    It’s the simplest form of insurance, the easiest to understand, isn’t exposed to as much non-disclosure as others, and it’s relatively cheap. Compare this with motor insurance and you get my drift.

  8. @ Steven Farrall – I was talking about investments ( OEIC and ISA). You are possibly refering to pension and Life company contracts ?

    The fees that you charge are in some way related to the costs that you have to face ? and these costs have possibly risen as a result of FSA activity ?

    Anyway the figures that you quote arel higher than I would want to pay as an investor and a good deal higher than I used to pay years ago. Regulation over the last 24 years has done nothing but increase the cost of advised Unit Trust/OEIC investment.

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