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Stakes alive

The recent publication of the Treasury response to Ron Sandler&#39s proposals for a broader range of “stakeholder” products raised many interesting issues for the industry – not least who is actually going to sell them and how are they to do so profitably.

The industry may be encouraged to see a review of the 1 per cent cap and it is reassuring to see the powers that be recognising there needs to be a viable commercial model for such products. However, it must be a dangerous assumption that the Government will finally start taking the needs of the industry into account.

In considering these new products, we need to recognise that the consumer that the Government wants to help is very different from the traditional IFA client. Significantly, the latest proposals include for the first time elements that may, in fact, make the new stakeholder products unattractive to more sophisticated investors.

Limits on where the investments can be made and levels of investments may be commendable for the small saver, who will be reliant on the new products for a significant element of their security in later life. Those with more cash, however, may want to steer clear of products that, because of these protections, offer only limited growth potential.

It is easy to see that two very different distribution models could emerge for the varying types of investment.

In DP19, the FSA has already recognised that there will need to be a less onerous regulatory burden on these new arrangements. Could this mean that the key distributors of the new stakeholder products will not be the IFA community but other organisations with an established financial relationship with the target market?

In CP157, the FSA is proposing 10 different product categories for general insurance regulation, two for mortgages and only one for investments. It is not difficult to see why it might need to look again at the investment market and segment it rather more.

There would appear to be a very obvious case to differentiate between stakeholder products and the more sophisticated investments.

To operate effectively in the stakeholder market, it will be necessary to minimise the additional investment that must be made in managing each customer relationship. Any organisation that already has in place an active mechanism through which they can collect the premium may be able to develop such existing relationships. An active direct debit mandate and a facility to regularly provide statements to the investor could have a significant advantage.

Given the limited levels of premium expected and the restriction on charges, there must be a question over if, in fact, it would only be viable for organisations to offer stakeholder products if they have some other active financial relationship with the client. A number of life offices are reluctant to write individual stakeholder pensions – will the new products only exacerbate the position?

While the banks are obviously well placed in this area, if one looks slightly wider than the established financial services community it is not difficult to identify many organisations which may be able to fill this need. Utility companies would be an obvious example. If the stakeholder product becomes a simple commodity rather than a complex financial vehicle, why would consumers not buy units of investment in the same way as they currently buy units of gas or electricity?

Telecom companies may be even better placed. They certainly have a far better relationship with the youth market. For stakeholder to succeed it will be important to see significant numbers of young people begin to make modest provision for their future.

Increasingly, these utility companies are encouraging their customers to conduct much of their relationship online, giving meter readings and requesting services via their websites or mobile phones. It is doubtful that such organisations will necessarily want to commit to the capital constraint to allow them to manufacture financial products but there are white-labelling opportunities for life offices, many of which have already built self-service extranet facilities for their group pension schemes. These could be adapted to support a wider suite of financial products to be distributed via utilities.

There may also be opportunities rather closer to home, where it may be viable to bundle stakeholder products into other financial commodities. Historically, the life and pension market grew out of the insurance broking industry. Life and general insurance have been diverging over the last two decades but the fact that they are to be united under a single regulator may make it a good time to look at wider opportunities for interaction.

Motor and household policies require the issue of an annual renewal notice. However, in many cases, premiums are collected monthly by direct debit. Hence these contracts have in place the elements identified above as providing an opportunity to develop an existing financial relationship.

Add to this an existing relationship with an insurance adviser who will originally have set up the insurance and perhaps the proposition looks more attractive. If they were to be recognised as a separate product category, then why not have the general insurance community offer stakeholder products as bolt-ons to other insurances?

Many IFA firms still have related general insurance brokerages – and mortgage brokers have been actively offering additional insurances for many years. Why should stakeholder not become another part of this suite, provided that the regulatory regime is not unduly onerous?

Those who have been around in the industry long enough may remember the days when endowment mortgage plans frequently offered the option of additional investment units. Although this practice died out in the mid-1980s, perhaps it should be reconsidered in a different way for the 21st Century.

As an industry, we need to learn the lessons of stakeholder pensions. Limited margins mean we must find new and innovative ways of distribution, while at the same time limiting cost to an absolute minimum. Almost certainly, this is going to mean a completely different set of operating methods for the manufacture, distribution and maintenance of the wider stakeholder suite.

This is not a threat to the traditional advice community. On the contrary, it may offer excellent opportunities to incubate customer relationships that do not yet justify the time of a highly qualified IFA, but may do in the future.

I believe the new stakeholder products are an opportunity, provided we take a fresh approach to them and look at where existing relationships can be developed rather than having to build new ones.

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