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
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's 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't do it, someone else will.
Best wishes for the new year to all in the industry.
David Ferguson is director of Abacus