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Five years of New Labour

Since coming to power in 1997, one of Labour&#39s main initiatives for the financial services industry has been to establish a central regulator to sweep away the sprawling mass of individual professional bodies. The creation of the FSA was intended to maintain market confidence, promote public understanding of the financial system, protect consumers and fight financial crime.

Since inception, the FSA has had to work hard to absorb the previous regulatory structures and to establish clear lines of authoritative demarcation. It is consolidating its role and influence daily, both as a regulatory authority and as a provider of information to the consumer, most notably through its website.

It has recently added comparative product tables to its site, beginning with investment Isas (UK growth and tracker funds), followed by personal and stakeholder pensions, investment bonds and savings and mortgage endowments.

But the FSA has found that it is not always easy to police an industry that has, in recent years, proved increasingly inventive. It has already had its competence questioned on a number of occasions, the latest being over Equitable Life, and its judgement questioned over issues such as endowment mortgages.

Product innovation

The first new financial products introduced by the Government were Isas, which were brought in to replace Peps and Tessas. With the exception of insurance Isas, they have proved popular. Mini cash Isas have been particularly successful, with approximately £27bn invested in 2001.

One of the most controversial developments has been the introduction of Catmarked products. Cat standards were introduced on Isas in April 1999, followed by mortgages in October 1999.

There does not appear to be much hard data on the uptake of Cat-standard products. However, their main effect has been to make new products more user-friendly. Their influence is beginning to reduce the incidence of some of the more onerous terms and conditions that are built into products, especially mortgage products. One example of this is the percentage of fixed-rate mortgages with no tie-in period after the end of the fixed period. This has improved from 76.7 per cent to 85.1 per cent between October 1999 and January 2002.

The Government&#39s newest product initiative, stakeholder pensions, incorporate the Cat concept in the product specification. However, it is too early to say how far stakeholder will go to achieve its aim of encouraging people on low and medium incomes to take out personal pensions. First impressions are that stakeholder is missing this target but has encouraged wealthier people to take out pensions for other members of their family.

How have providers&#39 product offerings evolved since 1997? A major difference is the larger number of products offered in all the major areas, particularly savings and mortgages. Mortgages have seen a steady rise in numbers and variability of product offerings. While the core products might be similar, differentiation has been achieved by the continued segmentation of the market into smaller sub-groups. These recognise the fact that consumers have different requirements and circumstances.

In fact, financial products in some cases are beginning to resemble typical fast-moving consumer products with all the variability this implies. Flexibility has increased and there has been a significant change in the way products are marketed.

While the choice of products has multiplied, the availability of information has expanded exponentially. Every financial institution has a website and there are numerous other financial websites full of data for savvy consumers.

With the low relative costs of trading via the internet, many of the best rates for savings products can only be obtained via this medium. Typically, internet accounts make up half of any top 10 best buys in the instant access/no notice savings arena.

However, with several of the bigger building societies changing status from mutual to plc, the need to drive shareholder value has seen some tightening in rates. While internet accounts dominate the best buy tables, branch-based accounts especially have seen their rates slide.

Other developments have seen an increase in tracker products. Trackers are seen as a safer option in an increasingly volatile investment market but even these are now being questioned as safe havens for money as world stockmarkets fall and the industrial world hovers on the brink of recession.

Fewer tax advantages

The 1997 Budget removed the tax credits paid to pension funds and companies. It also reduced mortgage tax relief to 10 per cent from the following April before scrapping it in April 2000. Tax relief on private medical insurance for the over-60s was withdrawn in the same Budget.

The logic of removing tax credits from pension funds by a Government pledged to encourage personal financial responsibility was lost on many. Four years on, it has led to the position where many occupational schemes wonder if they can fund their liabilities.

The message seems to be clear – the Government will help with information and pressure providers to produce user-friendly products but will not give much away in tax relief.

Extension of regulation

The thorny question of polarisation has not been resolved but the FSA has surprised everyone with the boldness of its January 2002 proposals. It wants to abolish the existing polarisation regime, make firms purporting to offer independent advice operate on a defined-payment system and remove rules that limit investment in firms of IFAs.

Consultation paper 121 invites responses to the proposal by April 19, 2002, prior to consulting again later in the year on draft rules. Much of the drive behind the proposal is aimed at eliminating commission bias, increasing transparency and opening up financial advice to more people.

In December 2001, it was announced that the FSA will regulate both mortgage advice and general insurance broking. The driver behind the mortgage decision was the knowledge that buying a mortgage is likely to be a person&#39s biggest financial commitment. It should, therefore, only be entered into after the purchaser has received high quality and understandable advice.

It makes sense for general insurance to be linked in with mortgage regulation because many of the 12,500 UK mortgage brokers also sell general insurance. As well as mainstream insurance products, the FSA will be looking at insurance sold as part of a package with another product.

Tackling social exclusion

Financial exclusion has been a constant theme over the life of the Government. There are many aspects of the problem, ranging from access to bank accounts, home contents insurance and credit to the cost of financial advice. The Government has made some progress, with all the high-street banks now offering basic bank accounts, but less progress has been made with other products.

Over the past five years, the Government&#39s strategy has been to simplify financial products, thereby making buying them a more transparent transaction. It has done this both by designing new products, such as stakeholder pensions and Isas, but also by introducing new product standards.

This strategy has not been entirely altruistic. The Government recognises the demographic imperative of getting people to be more responsible for their own financial future and is determined to remove obstacles to this.

While the economic background has been reasonably benign until now, the Government must carry through its agenda in a more hostile financial environment. It has to win the argument that personal financial products are beneficial against a background of falling annuity and savings rates, a weak stockmarket and increasingly sceptical public.

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