The ABI is preparing to throw down the gauntlet to the FSA on disclosure and is developing proposals to overhaul the regulator's projections' regime.
A source close to the ABI's projection and disclosure working group has revealed to Money Marketing details of the group's proposals, which it will submit to the FSA in June.
The ABI plans a shift away from projection rates as consumers' main source of information on a product, with more focus on a tiered risk system.
Many in the industry think the move looks like the insurance industry taking the initiative ahead of the FSA. It follows the regulator's decision to postpone its key facts' proposals, outlined in CP170 in February 2003.
Money Marketing's source believes the ABI's initiative ensures that it is in a strong enough position to influence the final shape of the overhauled regime.
The FSA says it has been consulting with several industry bodies, including the ABI, on its disclosure review and final proposals are to be published in the final quarter of the year. FSA spokeswoman Jackie Blyth says the ABI's opinions will be included alongside research from other groups in its discussion paper on reprojections, to be issued in the summer.
Aifa director general Paul Smee says: “I think it is well worth the ABI thinking things through on what is going to be a major project for the whole industry. It does need to be looked at from the ground up.”
Smee says the ABI's move should be seen as complementary to the FSA's review, “feeding in” to the process rather than a jump ahead of the regulator's proposals.
The FSA is carrying out a full-scale review of its disclosure regime and has started by reviewing projection rates. Projection rates are designed to give consumers an idea of the returns they can expect on their investments if they increase by a certain amount, for example, 4, 6 and 8 per cent. The FSA says it wants to make these projections easier for consumers to understand.
The ABI committee has looked at how other industries handle telling customers about potential product risks. App-liances such as washing mach-ines and dishwashers are marked according to their projected performance over a period of time.
This branding or scale is one of the ideas that the ABI group is considering, an idea first touched upon by FSA chairman Callum McCarthy. The FSA is also believed to be looking at financial services sectors in countries such as Australia and the US to gain a better understanding of how risk is illustrated.
Treasury select committee chairman John McFall is one the chief exponents of transparency for consumers. The committee has repeatedly questioned life and pension company executives on how they are planning to improve their customers' understanding of financial products.
McFall has suggested col-our-coding products or introducing a red-letter system that would see providers mailing red letters to policyholders if their policies are underperforming.
Scottish Widows has set its own agenda on projection rates. Last May, the company altered its projection rates for endowment policyholders to show what it described as more realistic levels of growth.
Marketing director Peter Jordan says this was a tough decision for the company but essential to give customers a more realistic idea of what they could expect from their investment.
Jordan says his firm is always looking at ways of categorising funds but this process is never straightforward. He says there are many variables that can be measured, including volatility and potential downside loss factoring in the likelihood of beating inflation.
Jordan says: “These figures do not necessarily put the investor in a better position because if you don not protect the investor from too much detail, they lose interest entirely.”
It is debatable whether companies will continue using projection rates, Jordan says they have done more harm than good, damaging consumer confidence by confusing policyholders. He says he is more in favour of some sort of colour-coding system which would distinguish products according to risk.
Sofa managing director Nick Bamford says he is in favour of any proposals which make life easier for the consumer but sounds a note of caution. He says: “This sounds like a very positive initiative from the ABI and it is high time the industry took the lead in this area but I think the rest of the industry should be working together to pace the FSA rather than producing separate sets of proposals.”
He says he is sceptical that any system that classifies the varying risks of different products could work, saying: “It is easy to determine the use and lifespan of white goods but financial products are entirely different. I do not think you can classify products in terms of risk, it depends on the person who buys the product.”
Bamford says because inv-estments have no set end date, it is impossible to tell how much money a client will end up paying into an investment. He says an IFA cannot predict a product's lifetime so it would be better for everyone to focus on financial planning to determine a client's potential exposure to risk.