Some are complex by necessity, such as pensions and income protection. Others are complex because marketers add on questionable options and make it hard for customers to compare.
So what of Carol Sergeant’s suite of simple products? Let us look at each one:
Savings
The problem with savings products is bank interest rates at 0.5 per cent. There is nothing to tempt the saver. Thus providers complicate offers by linking current accounts or structured products to savings account offers or add options of dubious benefit. The prince of these must be Santander’s additional 0.1 per cent bonus if Rory McIlroy wins an eligible golf “Major”. This trivialises investment and ensures comparison is impossible. Temporary bonuses only work because savers often leave their money in ‘zombie’ accounts.
A simple savings account carrying a British Standards Institution Kitemark might have a place. The problem is that the return will be poor and will be uncompetitive against accounts where the sum invested is larger or the period longer. Ms Sergeant’s team has recognised this by adding a 30-day account, but this may not be enough.
VERDICT – Case not proven
Life Insurance
Too few people are insured. Swiss Re puts the protection gap at about £2.4 trillion. Is it because life insurance is too complicated? Of course not. It is the one product that marketers have largely ignored. Folk just do not recognise the need.
A flaw in the interim review was the insistence on standard terms and conditions with no options. There seems to be a softening towards added features but this major flaw remains. As it stands, terminal illness benefit will not be allowed, making these simple life plans inferior to every decent product on the market.
If this practice were to become the norm, we would return to a nasty market in second-hand life policies for unfortunate people who are dying and need to release cash.
Oddly enough, the review recognises the importance of such benefits. It actually states that: “It was important that consumers should be made aware of these features. A signposting process, including information and guidance from the Money Advice Service and pre- and post-sales communications from providers was recommended as an appropriate way.”
Imagine some poor soul trying to buy a ‘simple life product’, having to find a way through the maze of the Mas website, to find an ‘adviser’ who would point out that the simple product was just a bit too simple to be any good. Would this be automated (generic) advice? Or will Mas be employing actual advisers – presumably qualified?
These products are described as ‘entry level’. The implication is that you start with one of these until you can afford something better – except that they are unlikely to be cheaper. Surely it would be better to include an important benefit rather than point out its exclusion?
The working group now has the enviable task of deciding what a simple whole-life policy will look life – with profits, unit linked or non-profit. Before you answer, please consider what whole-life sales actually look like:
According to the Swiss Re Term and Health Watch 2012, term sales in 2011 were 1,488,106; whole-life sales were 400,682, of which 385,132 were guaranteed acceptance plans.
Other than funeral plans, about 14,000 non-linked plans were sold via all channels in 2011 – about 1 per cent of term sales. This hardly suggests there is a need for a simple whole-life plan – unless advisers have got it horribly wrong.
VERDICT – Simple life products are not required
Income Protection
There may be a need for a simple savings product; there is no need for a simple life product, but there certainly is a need for a simple income protection product. I am delighted that Ms Sergeant agrees with this and has included the product in the next stage. Do not underestimate the task. Arguably, the best income protection cover is group cover where a firm insures its staff. Rates are much lower and free cover (another odd expression) means that most members can be included without any underwriting.
VERDICT – Success is essential
As mentioned earlier, the standard terms and conditions approach is flawed. Products designed by committee do not work. The last such effort was stakeholder savings plans.
Who will design the products? Ms Sergeant has given this role to the trade associations, the British Bankers’ Association, the Building Societies Association and the Association of British Insurers. Trade associations are legitimately in business for the benefit of their members. They have no consumerist role. To ask them to facilitate specifically consumer-friendly products is an odd choice, especially the BBA after PPI, interest rate swap mis-selling and rigging of Libor rates by some of its most prominent members.
The work on development of the Simple IP product has been passed to the ABI. Apart from the issues around being a trade body, the ABI has hardly covered itself in protection glory by replacing its protection chief, Nick Kirwan, on budgetary grounds.
There are further challenges for them: IP will always be a more complex subject because there are very many more personal variables in protecting someone’s income than in providing for your family when you die or putting money away for a rainy day. Here, people do need advice and guidance, but the great majority will never visit an adviser so the issue is how can that guidance be delivered through all possible channels, for example, personally, online or in the workplace.
I am also concerned at the proposal to offer benefit terms of one, three or five years only and not to normal retirement date on the grounds that this would be expensive. The consumer should decide whether anything is too expensive or not, not the industry. This is very odd when looked at alongside the decision to include a whole-life policy.
One last point on the review – there are four full pages on governance and accreditation. There is not one on marketing or distribution.
I hope that the slight relaxation away from standard Ts & Cs will lead to the idea being dropped in favour of an approach where providers compete but have to meet a robust set of customer-friendly criteria to gain the kitemark. This, I am sure, is the only way forward. It will encourage them to design competitive products and to sell them. It will not be easy.
Clive Waller is managing director of CWC Research
Key points
– The term “simple financial products” is arguably an oxymoron.
– There may be a need for a simple savings product; there is no need for a simple life product, but there certainly is a need for a simple income protection product.
– There are four full pages on governance and accreditation, but there is not one on marketing or distribution.
