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Outside edge – Tony Kempster

The plot thickens. Ron Sandler now holds out the prospect of a three-tier market – independent advisers who are not paid by product providers, salespeople who can sell but not advise on the full range of products and woodentops who can flog price-controlled products to all and sundry without fear of retribution if those products are unsuitable for the customer&#39s circumstances. Run that last bit by me again…

Big Ron&#39s proposal is that by controlling the price and design of a limited range of simple products, these can be sold by unqualified folk to customers on the basis of caveat emptor. The idea is that, provided the salesperson explains to the customer that he is totally unqualified to advise and has no responsibility for understanding the customer&#39s circumstances, then the customer has no rights against either the salesperson or the product provider if an unsuitable product is sold.

The only circumstances in which the customer has rights is if the salesman fails to explain the rules or the product fails to do what it is supposed to do. It is the customer&#39s responsibility to ensure that the product is suitable.

Two questions occur to me. Will Sandler&#39s proposals help to rebuild the savings ratio? How will customers fair at the hands of those who sell these products?

Given that Sandler is blatant in his report that it is probably better that somebody gets sold an unsuitable product than that they get no product at all, my guess is that bancassurers will embrace the new rules whole-heartedly. We shall see an increase in the propensity to save within the mass market, driven by the banks&#39 urge to succeed at last in their efforts to grow profits from selling investment products. No doubt, lots of life insurance companies denuded of controlled distribution capacity are busy romancing banks for strategic alliances.

Don&#39t misunderstand me. I support broadly what Sandler has proposed – product regulation instead of advice regulation for mass-market purchases of simple price-controlled products. My grouse is that he has not gone far enough. The scariest bit in his report is the part that deals with the investment elements of the new stakeholder products. In a typically erudite piece of analysis, Sandler and his team come to the conclusion that, in order to protect customers from an inappropriate degree of investment risk, the fund should have a minimum component of fixed-income securities and that equity investments in the fund should be under a requirement not to invest wholly in a single market or sector.

So, having – rightly in my view – castigated the industry in general and advisers in particular for not adopting a sufficiently rigorous approach to understanding the customer&#39s appetite for risk and developing an appropriate asset allocation strategy, the authors of the report come up with an instant asset allocation recipe for everybody who invests in these new products.

The trouble is it is so vague that it will not protect the vulnerable from either investment risk or inflation risk.

Sandler cannot have his cake and eat it too. If he is to go for product regulation, then he must go the whole way and legislate investment media and product guarantees in the same way these are regulated in many parts of Europe and North America. If he is not going to do that, then he must protect customers from their own mistakes and from the greed and incompetence of those who would sell them these products.

Taking away the customer&#39s right to redress for being sold an inappropriate product without facing up to the need for full product regulation will indeed drive up the savings ratio but it is highly likely to lead to extensive mis-buying of products.

Perhaps Sandler should now ask the FSA to come up with a snappy definition of misbuying?

Tony Kempster is a distribution strategist

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