Much has been written over the last few months about the 1 per cent world and providers' reluctance to commit publicly to offering Sandler's proposed new suite of so-called “simple products”.
Sandler's proposals are currently being considered by a team at the Treasury. This will lead to a period of consultation in the New Year.
I believe that providers will sign up to the principle of these new products if they can be made economically viable.
Norwich Union has been a strong supporter of the concept of a simplified product range that can be sold under a lighter-touch sales regime. This was a central theme of our response to the original Sandler review.
We were, however, very clear in our view that price-capping, particularly at an uneconomic level, is not in the interests of consumers or the industry. We are in dialogue with policymakers on this.
The consumer needs to get a good deal, the distributor needs to be adequately rewarded and the provider needs to be able to make a return on their capital employed.
We doubt that these criteria will be fulfilled if a 1 per cent charge cap is imposed on these products which are primarily aimed at smaller savers.
An important part of the debate will be on the level of any price cap.
For providers, the development of new product propositions is capital-intensive and involves taking on assets, developing new admin systems and paying for the distribution and marketing of the product.
A price cap exposes a product provider and its shareholders to risk – the lower the cap, the higher the risk. This begs the question – does the provider want to take that risk in current market conditions and with capital at such a premium?
If an uneconomic price cap is set, I believe that many providers will choose to deploy their capital elsewhere, including outside the UK.
For any adviser, spending time on explaining products and their benefits to clients, administering cases and subsequently maintaining contact with clients, all has to be paid for out of the remuneration they receive. The level of any price cap is going to have a big influence on the scope for providers to pay commission that is viable for advisers.
For the consumer who does not save and contributes to the savings gap, how important is a 1 per cent price cap?
Will a maximum 1 per cent charge stimulate smaller savers to take action and go out and buy a Sandler product off the shelf? Probably not.
Norwich Union research has shown that 1 per cent products do not encourage greater numbers of lower income groups to go out and buy them. The reality is, that in most cases, smaller savers will still need to be marketed to and persuaded or encouraged.
The imposition of 1 per cent price capping would normally be considered madness in a market economy. For example, current account providers are not constrained by price restrictions and just look at the competitive market that has evolved there in the last two years as new players have successfully challenged the established order. The same has happened in credit cards.
But we are expected to put up with price restrictions in the pensions and long term savings markets. However, no company chooses to write uneconomic business, and Norwich Union is no exception. As things stand at the moment, if the Government does go ahead and impose a price cap of 1 per cent on Sandler's products, Norwich Union will simply not offer them on any kind of widespread basis.
Notwithstanding all the above, it is not yet certain that any charge cap will be set at 1 per cent. Until the product shape and regulatory environment is determined, we will continue to work constructively, sharing our experience and thinking with interested parties.
We must be able to operate in an environment which is commercially viable, where the consumer can be offered value-for-money products and where providers can realise a fair return. Sandler's products need to be built in such a way that they cover both the cost of the products themselves and distribution. As the method of distribution will vary, there needs to be flexibility in the charging structure to cater for this.
Peter Hales is sales and marketing director at Norwich Union Life.