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Creating range of cheap and simple safe harbour products

Last month I gave a blueprint of a workable solution for filling the advice gap. In particular, I described a new lower (and cheaper) tier of advice and adviser that would use a range of simple products to reach the majority of the under-insured/saved/pensioned.

As part of this I mentioned that this approach could mean that a “safe harbour” was created. Several readers have asked me to explain that more.

Firstly a safe harbour can only work if the component parts that I will describe are all met. Only the range of simple products that carry a watertight mark are used. In our case this means that the financial products approved will do exactly what they say they will do.

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Protection – such as life insurance – is straightforward, provided the client has not lied about their health or circumstances. On their death the policy pays out. Simple.

The same principle would apply to any critical illness cover and income protection products included while the savings product would be a simple version of a cash and equity Isa. Being simple would not preclude underlining sophisticated investment mechanisms such as built-in guarantees. Think of target-dated funds or the use of derivatives, but (and it is a big but) the manufacturer would have to stand by the guarantee. From the consumer’s point of view it would still be simple, for example: “If you agree to invest X for Y years the minimum return is guaranteed to be Z.” Clearly only substantial organisations would be able to underwrite such products and even then the regulator could demand some counterparty cover so that in the remote chance of any failure, the consumer would not be left out of pocket.

The pensions saving product would be a low-cost version of a stakeholder pension with the options described above, for example, target-dated to age 55.

The easiest way to look at this is to consider other industries. Few consumers are pharmacists or doctors, but they trust medicines. Equally, we all drive cars, but these days few of us understand what takes place under the bonnet.

Equally the advice process would follow a common approach so that a consumer would have a near-identical experience whoever was advising them. The product they were sold, while probably from different suppliers, would be similar. Again, think of seeing your GP, practice nurse or pharmacy about a cold remedy. They would all follow a similar advice process and would then recommend a product. It could be an own-label brand or one from a range of manufacturers, but the underlying ingredients would be the same, and they would all have met the standards set by the regulator.

The advice process would also follow a good practice guide that could be provided by the Personal Finance Society, which already issues some excellent guides in other areas. Note that it is good practice, not best practice, as it is almost impossible to get agreement on what is best practice.

The advisers would still have to satisfy a qualification requirement and have a statement of professional standing. As they would be following a set process, there would be very little risk of giving bad advice. From the consumer’s viewpoint they would know that they were getting straightforward, low-cost products that would meet their needs. They would have to accept that it might not necessarily be the perfect solution, but this could be provided if they saw a financial planner who could give them a more bespoke service and use a wider range of products to meet their needs. This, of course, would come at a greater cost.