8 July 2002
SANDLER SETS OUT PROPOSALS FOR SIMPLE AND CLEAR
RETAIL SAVINGS PRODUCTS
The Sandler Review of medium and long-term retail savings today published its final report, putting forward proposals for a set of simple and clear savings products accessible to the mass market.
Announcing publication, Ron Sandler said:
"It is of fundamental, and growing, public importance that Britain should have a savings industry that is both efficient and widely trusted. The long-term welfare of millions of people depends on it, as does the effective operation of our capital markets. The industry has achieved considerable success in many respects. But there are also grounds for concern.
"The Review has identified formidable challenges. But it has also sought to propose a clear agenda for Government, for the FSA and for the industry. These changes will take time to implement, but they offer a robust basis for the long-term future of the savings industry - one in which effective competitive forces can be made to work for the benefit of consumers, the wider economy and ultimately, the industry itself.
"The clear conclusion of the Review is that simplification of products and advice is the key to delivering effective competition and to empowering the consumer. Stripping out substantial elements of cost will enable lower income consumers to access savings products more easily."
The Review has identified two core problems in the UK savings market:
- Competitive forces in the industry do not work effectively to deliver cost efficiency or value-for-money investment practices.
- Savings levels are insufficient, particularly amongst the less well-off, in part because of the high cost of serving this segment.
These problems have various root causes:
- The UK retail savings market is extremely complex, with a vast array of subtly differentiated products and complex charging structures.
- There is considerable opacity. Price and performance are generally hard to compare and are often not even identifiable at all. This is particularly true for with-profits products.
- Consumers rely heavily on advice from intermediaries but have little or no understanding of the costs of advice, and are unable to gauge its quality. The advice itself is often compromised by the incentive effects of commission paid by product providers.
- Consumers require substantial regulatory intervention to protect their interests. The cost of this intervention contributes to pricing many lower and middle income savers out of the market.
The evidence of ineffective competition is widespread. For example, life industry cost efficiency has declined steadily in recent years. Charges for near-identical products can differ widely. In comparison with institutional behaviour, the prevalence of active management for retail funds is surprisingly high. The investment performance of unit trusts bears no relationship to their charges, and the average unit trust significantly under-performs the market.
The Review's recommendations for the FSA and the Government include:
- The introduction of a suite of simple regulated products, with capped charges, restrictions on investment profile and the ability to exit on reasonable terms. These products would be sold without the need for regulated advice; the regulation of the products themselves would provide the basis for consumer protection.
- A clearer and simpler structure for with-profits products. Although this cannot be delivered overnight - it will require consultation and staged implementation over time - it offers a sustainable long-term basis for future policies where performance is transparent, unnecessary jargon is removed, and effective competitive pressures can operate properly.
- A new model for independent advice, building on the work of the FSA. Only advisers who were not paid by providers would be permitted to call themselves "independent advisers". Payment for advice could still be contingent on a sale, as commission is today, but it would have to be negotiated between the adviser and the consumer, not the adviser and the product provider.
- Tax simplification measures, including abolition of the "qualifying policy" regime for life savings policies and an overhaul of pensions taxation. Over time, the tax system for retail savings products has become very complex, and simplifying it will help empower consumers. The Review believes that future Government action in this area should focus on simplification, and not on attempts to stimulate savings levels with tax incentives.
- Measures to boost consumer education in financial matters, including more financial resources, a ring-fenced budget and higher profile within the FSA.
- More stringent investment qualifications for financial advisers.
- A set of principles for retail savings products based on the Myners principles of investment, setting out what providers should disclose to consumers about their investment strategy.
Ron Sandler added:
"The Review alone cannot hope to remedy all the problems highlighted. It strongly supports the continuing efforts of the industry, the Government and the FSA to make improvements."
Notes for Editors
1. The Chancellor of the Exchequer announced the setting up of the Review at the launch of Enterprise for All - the Challenge for the Next Parliament on 18 June 2001 (Treasury press notice 67/01). He invited Ron Sandler, former CEO of Lloyd's of London and COO of NatWest Bank, and now Chairman of Computacenter and Kyte Group, to lead the Review.
2. Mr Sandler published a consultation document in July 2001 (Treasury press release 93/01) setting out the main issues which he was investigating and seeking views on them.
3. A copy of the report is available on the Treasury website.