The impact of the proposed changes in FSA discussion paper 19 could
be profound. DP19 outlines the three proposed options for regulating
the sale of the Sandler suite of stakeholder-type products.
The Government would control product specifications and cap charges
at 1 per cent. The specifications would include a requirement that
the basic investments be lower risk. Sandler suggested a lighter
regulation regime for these products.
On charge-capping, DP19 repeats a section from the Tiner report of
October 2002: “To ensure that sufficient providers enter the market
for the new products and that there is a healthy level of
competition, the charge cap recommended by the Sandler review will
need to be set at a level that enables efficient firms to make a
reasonable return on capital.”
The FSA's reference to the charge cap is pleasing as it emphasises
the need to be realistic about operating profitably within 1 per
cent. As expected, the FSA is considering three options to govern the
sales process for these products:
Self-help, where warnings are given to the customer by the salesperson.
Guided self-help, where a series of filter questions is used by
the salesperson.
Focused advice, where a limited assessment of suitability is
made by the adviser.
Under the self-help option, customers would receive clear warnings
about the basis of the sales process and relevant risks. Caveat
emptor would apply and customers would be required to confirm they
understood the information given.
The key advantage is that sales costs are minimised. However, this
option carries a significant risk that customers will buy the wrong
products because they are not given guidance, only warnings.
Our instinct is that all forms of financial products should be
accompanied by a basic level of guidance or advice.
The guided self-help option uses filter questions set by the FSA
which would be used by the salesperson to screen out customers who
should not be thinking about buying the product concerned. This
carries the risk that the guidance given by the filter questions may
not provide enough information, resulting in buying the wrong
product. The salesperson and product provider would not be held
liable, provided guidelines were followed.
The area of protection products is interesting as the FSA appears to
envisage that customers with protection needs will be filtered out.
The Sandler review left open the question of whether protection
should be included in the suite of simplified products. This has a
number of potentially important implications, including the
complexity it potentially adds to the sales process, the proportion
of customers who are filtered out and the need for a distributor to
have access to an appropriate protection range.
Filter questions go some way to finding out what the customer needs.
However, there is still a danger of customers buying the wrong
product or becoming overextended.
Focused advice reduces the chance of this happening by providing a
limited assessment of suitability according to guidelines laid down
by the FSA. The key advantage is that customer detriment from
unsuitable sales is minimised but this needs to be balanced against
the more time-consuming sales process. This route poses a greater
challenge in terms of the charge cap. The industry must be flexible
on price capping for there to be any incentives to follow this option.
The proposals present interesting challenges for IFAs. The self-help
and guided self-help options have the potential to strengthen the
hand of IFAs by showing the true value they offer. They would be able
to clearly differentiate their offering and show the benefits of
individually tailored advice.
The differentiation becomes less clear with focused advice but this
perhaps offers a better opportunity for IFAs to incorporate the new
approach in their existing business model. The charge cap still
presents a significant barrier and it is doubtful that IFAs could
operate economically within it.
At Axa, we can see the value of this simplified sales approach in
appealing to people who do not access financial services products
through advice-led channels and we would favour the guided self-help
option. But we remain convinced that the bulk of products will be
supplied through provision of detailed advice to identify the most
suitable product for a customer rather than one that might be
suitable.
In 1999, ahead of the introduction of stakeholder pensions, the PIA
issued regulatory update 64, which required firms to take account of
the impending availability of stakeholder in framing pension
recommendations. There is clearly the risk of a similar situation
arising with Sandler products although the FSA says in DP19 that it
was left “unconvinced of the need to adopt the principle of RU64”.
While the FSA's comment refers specifically to the interim period
ahead of the introduction of Sandler products, we strongly believe
that the principle must be extended post-launch so that there is no
obligation within a full advice process to consider Sandler-style
products priced based on a streamlined sales process. This would be
an inappropriate and unfair comparison.
It is clear that the FSA is eager to consult with the industry on the
options and we welcome this. However, it is vital that we emphasise
the importance of a degree of guidance even for simple products.
Self-help products bought off the shelf may boost sales as part of a
bid to close the savings gap but it is a dangerous approach which
could lead to problems further down the line with customers not
realising what they have bought. We need to ensure not only that the
public is encouraged to save but that they buy the right products to
address their needs, which is why it is so important that the
facility for full financial advice is also encouraged to thrive.
The industry must respond by April 15. We must hope the FSA listens
to us and follows the path of advice because let's face it, we all
need a little of it.
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