Guidance is golden

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&#39s 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&#39s 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&#39s face it, we all

need a little of it.

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