The Treasury's recent consultation paper on standards for retail financial services products extended an invitation for responses on the future structure of Catmarks.
I find it surprising that there has been so little comment on the really important questions. In particular, I wonder why no one in the industry has confronted the Treasury on what I call the 1 per cent question: Are price limits really a good thing?
Catmarks try to do two separate things. One is to simplify products and the other is to limit prices. Simplifying products clearly encourages consumers to compare products and shop around among providers, which has to be good for competition.
But price caps, although aiming to prevent consumers from being ripped off, can have negative side effects and the case for them is much less clear.
There are three main sorts of argument against price caps. One is that they may restrict competition by raising so-called barriers to entry. For example, they could make it unprofitable for innovative new (but low volume) providers to enter the market.
Second, we already know from the experience of Cat Isas and the effect stakeholder pensions have already had on pension charges that putting a low cap on prices has made it increasingly difficult to give advice. It is not at all clear that this is the right outcome in markets for complex products.
Caps may also make providers reduce the level of service they provide to high-cost parts of the market, especially the small savers the Government is trying to protect.
Finally, and most perversely, the fact that prices are capped may reduce the extent to which buyers focus on charges. Price-capped products act as a safe harbour for buyers, who can rest secure in the knowledge that they are not being ripped off.
But for some buyers, this safe harbour is unnecessary and discourages them from demanding advice or undertaking an active search for good-value products. Over the long run, this makes buyers lazy and makes the market less competitive.
The big reductions in charges in the pension market as a result of stakeholder have created a strong impetus for price caps to be more widely adopted and it is going to take convincing evidence to persuade the Treasury that this is not the right model for all markets.
However, the Treasury does seem prepared to step back and consider how the characteristics of Catmarks match up to their objectives.
The paper suggests – albeit with what sometimes looks like the wisdom of hindsight – that they had different objectives in different cases. The aim of the mortgage Catmark, it is argued, was to drive unattractive terms out of the market and evidence for success is that providers now make less use of mortgage indemnity insurance and redemption penalties. The cash Catmark meanwhile aimed to set the floor on the level of interest.
So, before new Catmarks are introduced, it is important to decide exactly what problems they are supposed to address and how important each of them are. Thus, in the proposals for Catmarks on long-term care or credit cards, for example, the industry needs to help the Treasury to determine what the objective should be – to protect consumers from being offered particular terms or to enhance the general level of competition.
Only then does it become possible to think constructively about what Catmark terms might be most appropriate. The Treasury has offered the industry an opportunity in this consultation to limit the amount of intervention in the future. It would be a mistake to pass this opportunity up.
Tim Wilsdon is a principal in Charles River Associates' financial services team (Twilsdon@crai.co.uk)