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Outside edge

When the ABI announced the introduction of the Raising Standards

initiative, my concerns were threefold.

First, as I understand it, Raising Standards is solely a life office

project that purports to represent the long-term savings industry. This is

wholly inappropriate as many long-term savings products are offered by

asset management groups and other types of business, including banks.

This life office focus is typical of the arrogance of a sector that seems

to believe it has a right to control this market. Since the abolition of

life assurance premium relief, the reasons for investing in a UK life

product for investment purposes have been arguable and such products most

certainly should not be assumed to be appropriate for the majority.

Second, a key area of the work concerns common terminology used in the

industry. For example, should we refer to with-profit or with-profits? This

is very valid in principle but recent launches of “new” with-profits

products by companies such as Scottish Widows and Scottish Equitable have

highlighted that no amount of commonality on definitions will assist

investors if the propositions being described are so radically different

from each other and from historic propositions bearing the same name.

With-profits has come to mean absolutely nothing at all and I would suggest

that alignment of terminology may actually serve to confuse and mislead

investors.

The third area that concerns me relates to penalties on early withdrawal –

and this is where the fundamental problems of the life industry really

become apparent. Early withdrawal penalties exist for the most part to

protect life offices from loss in the event of inappropriate advice or

short-term changes in a client&#39s circumstances. Such a loss can occur due

to the internal new business processing costs or the payment of commission

to an intermediary.

The first of these is solely an efficiency issue as, for some reason, it

costs life offices far more to process new business than it does for, say,

an asset manager. Why this should be I cannot be sure although I would be

unsurprised to learn that it relates to the respreading of (outrageous)

development and marketing costs.

The commission issue arises primarily as the life industry has never taken

a big step back and studied its distribution model. Flogging products

through a sometimes greedy and often unskilled part of the IFA market is

not a supportable model for 2003 and beyond, particularly where it is

approached through a branch network of largely inept broker consultants.

Investors are far more savvy than in the past and the fear of being ripped

off has never been more prevalent.

It is essential to eliminate front-end-load products if the life industry

is to prosper in any way going forward. The overly actuarial approach of

protecting everyone apart from the consumer is entirely inappropriate and

must be superceded. If a no-load approach typically operates in the

mediumand high-net-worth part of the business and is entirely sustainable,

why should it not be suitable for the mass market. Why not begin to

consider customer value rather than product value? If this means reliance

on a tied or multi-tied distribution model, then so be it, but you will not

succeed if you persist in the current vein.

In many ways, this is what Raising Standards is trying to achieve – the

problem is that the initiative sits at a level too far above the

fundamental industry issues of overall inefficiency, poor management and a

deeply flawed distribution model. If the life industry really wants to

remain a key provider of long-term savings, these deep, vital issues must

be addressed soon. For, if not, I fear you can forget about potentially

valuable initiatives such as Raising Standards and instead focus your

efforts on raising the white flag. If you don&#39t do it, someone else will.

Best wishes for the new year to all in the industry.

David Ferguson is director of Abacus

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