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The Sandler Forum: Fears for tiers

How will the Treasury and FSA take forward Sandler&#39s proposals for a stakeholder suite of products in the new year?

Ron Sandler expressed a desire to reduce the UK&#39s savings gap by finding a better way of serving low to medium earners. It is clear that existing sales regulation comes at a cost so high that it is no longer financially viable to advise a growing sector of the population. Lighter-touch sales regulation, if less costly, would help but would at the same time reduce consumer protection. So Sandler proposed designing new products to be distributed under the lighter-touch sales regime, with greater consumer protection built in through product regulation.

In the coming weeks, the Treasury will unveil proposals in the contentious area of product regulation and the FSA will consult on the accompanying lighter-touch sales regulation. Seldom has there been a greater need for joined-up thin- king. To create a sustainable environment delivering increased savings, we must balance good value for consumers with appropriate reward for distributors and a reasonable return on capital for providers.

Consumers will, for the foreseeable future, buy only if sold to. This means we need distributors, who have to be rewarded appropriately for their efforts, including when advising lower earners. Equally, there must be products to sell but it is increasingly clear that providers will not be able to continue to offer products which offer no prospect of providing an acceptable return on increasingly limited capital.

Hopefully, the consultation process will provide the opportunity to explore fully where to strike an appropriate balance. Suggested areas for consultation are given below.

A lot of airtime has been given to the 1 per cent debate. The consultation process should focus not simply on what is an appropriate level of charge, it should also examine alternative shapes of charging structure. A level fund-related charge is wholly inconsistent with the incidence of costs incurred and the resulting capital strains place the supply of products under real risk.

The logical starting point would be a detailed examination of the underlying costs, both within manufacturing and distribution, focusing on current best practice. Based on this, opportunities to drive down costs through further efficiencies or reductions in unnecessary regulation should be grasped.

Equally, costs which will remain irrespective of such changes need to be allowed for. For example, while suitability tests may be weakened, consumers will still need persuasion to save in a vehicle suitable to their needs.

Looking at the products themselves, Sandler proposes that existing stakeholder pensions be subsumed into the new suite of products. We need to examine the practicalities of this, including any issues arising from the new suite disallowing wide fund choice. We also need meaningful consultation on what with-profits should mean within the new product range, with “new generation” funds without costly guarantees looking attractive.

Finally, and very importantly, we need to ensure that the introduction of these new products with the associated alternative sales regime builds on and does not damage the positive aspects of what we have today. Providers should be encouraged to continue to offer an innovative range of products to meet the wide and varied needs of consumers. A new suite of simpler products will have its place but should not be regarded as right for everyone. Equally, the full advice model serves many millions of consumers very well and must remain open to consumers who want it in future.

Lighter-touch sales regulation has been described as a second tier. It has a role to play in reducing the savings gap but any unintended weakening of the first tier can only make the £27bn gap bigger.

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