§ 4.50 p.m.
§ Lord Davies of Oldham rose to move, That the order laid before the House on 16 November be approved [First Report from the Joint Committee].
§ The noble Lord said: My Lords, I beg to move that this draft order be approved. The Government propose to legislate for a suite of simple savings and investment products through Statutory Instruments Nos. 2737 and 2738. They will be known as stakeholder products.
§ In July 2002, after a year-long independent review of the medium and long-term savings market, Ron Sandler reported back to the Chancellor of the Exchequer with a series of recommendations for the Government and the Financial Services Authority to consider. The Sandler review found that the UK retail savings industry has a number of features that are of some concern. The market is characterised by a high degree of complexity, a considerable number of product types and some complex charging structures.
§ Ron Sandler concluded that the solution lies in product regulation, as a system based on potentially highly complex products, sold with often equally complex advice, will inevitably exclude consumers below a certain level of income because of the relatively high fixed costs of the advice process. Product regulation, by contrast, provides an opportunity to minimise the fixed-cost element of interacting with the consumer, so opening the market to a wider range of consumers.
§ The Sandler review therefore recommended the introduction of a suite of simple and comprehensible products, the features of which would be sufficiently tightly regulated to ensure that, with certain additional safeguards, these could be purchased safely without the current regime of regulated, full and, of course, relatively costly advice. It was recommended that safeguards should include no initial charge for those products, that annual charges should be regulated and that there should be limits on investment risk.
§ Since July 2002, the Government have consulted extensively with firms in the financial services industry, their trade bodies and consumer groups, in order to inform the design of those products. That consultation has contributed to the positive reaction of major firms when the Government launched their consultation on this order. We have worked closely with the FSA to co-ordinate policy on product design and a basic advice regime through which these products may be distributed.1515
§ The measure that we are presenting today creates the new regulated activity of offering basic advice. The basic advice regime should reduce the time it takes to advise a client on a regulated product by 80 per cent—down from two and a half hours to half an hour for a stakeholder product—thus significantly reducing the fixed costs attached to distributing these products.
§ The consumer testing conducted by the FSA demonstrated that consumers like the basic advice process and that the majority of consumers will get good or adequate advice whereas currently they may be unable to access any advice at all. Advisers will have to observe the normal duty of care to their clients. Those receiving advice through the basic advice process will continue to have recourse to the financial ombudsman service. In our view, basic advice will result in innovation in the distribution of investment products and greater consumer choice in the advice market.
One of the key elements of the policy is a price cap, which has been set at a level to enable the most efficient providers to offer stakeholder products. Firms have supported the decision to raise the cap on the medium-term product from the current CAT-marked level of 1 per cent. Which?—the consumer body—was pleased that we had not accepted the arguments for up-front contribution charges. Norwich Union said that the changes, including to the stakeholder pension price cap, are,
good news for the consumer as there will be more products, choice and competition in the market; good for the industry as we now have clarity and a more economic price cap".
HBOS has said that the charge cap is realistic, commenting that:
It will aid transparency and enhance the level of competition within the savings industry. In addition, the decision will increase access to advice and products—all of this can only be good for consumers".
§ A key aim of the legislation is to reduce the risk that individuals will not save enough by ensuring that a low-cost pathway to saving is available for consumers who cannot access full advice or people who have been deterred by the complexity of products from investing through non-advised channels of distribution. Through the legislation, we also want to create a new competitive dynamic in the industry as a whole to put pressure on firms to offer other simplified, low-charging products, whether or not they use the stakeholder brand. I am optimistic that lower charges and increased efficiency will spread across the market following the initiative, benefiting all consumers of financial services products.
§ Stakeholder products provide an opportunity for firms to show that they value their customers by offering a suite of products that are fairly priced and easily understood, and whose performance can readily be compared between firms by consumers. Firms offering stakeholder products will send a clear message that they put their customers' needs first.
§ We are taking an important step here, with the aim of creating simple, transparent and low-cost savings and investment products. Accordingly, I commend the order to the House.1516
§ Moved, That the order laid before the House on 16 November be approved [First Report from the Joint Committee.].—(Lord Davies of Oldham.)
§ Baroness Noakes
My Lords, I thank the Minister for introducing the order. I should say at the outset that my party supports any initiatives to improve savings because, under this Government, the savings ratio has reached a near record low. Our own proposals are for a flexible lifetime savings account, but the Government prefer a more complex approach involving different products such as the Sandler products, child trust funds and stakeholder pensions. But we have a simple desire for people to build up greater funded savings and we support the Government to the extent that their actions achieve that.
The noble Lord will be aware that we are not uncritical of the child trust fund proposal. In addition to complexity, we have considerable reservations about how well it will work in practice in terms of generating significant new savings over and above the Government's own largesse. But it is better than nothing, which is why we did not oppose the Bill—save in one respect; namely, the extraordinarily convenient timing in electoral terms. The child trust fund vouchers are to be handed out just before a general election, which we predicted and appears to be the case.
The Government have been pursuing the Holy Grail of easy, low-risk investment, but the Sandler products seem not quite to be living up to their early promise. This order covers child trust funds and stakeholder pensions by allowing a simplified selling regime for both. It also covers other investments which are to be specified in Treasury regulations. Can the Minister say a little more about these other investments? He will be aware that the FSA has concluded that it cannot prescribe a simplified sales regime for smoothed investment products, which is one of the Sandler suggestions. What does that mean for further products to be covered by this order and therefore by the simplified sales regime? Will they be limited to a short-term cash deposit investment or will there be other investments? Lastly, when does the Treasury expect to finalise its views on that?
While the time-frame for stakeholder products generally may not be very critical, it is now only a matter of months until child trust funds go live, and I believe that vouchers will be sent out early in the new year. It is unfortunate, therefore, that providers have had to wait until now for clarification of the regulatory regime that is to apply to the sale of child trust fund products. This was raised both in your Lordships' House and in another place during the passage of the Bill.
The FSA said that the consultation would be published in April but it was not published until June. The combination of the delay in publication and the standard three-month consultation period is surely unacceptable when the providers of products were supposed to start registering with the Revenue in October and November in order to allow child trust funds to start to take effect from January.
1517 I am sure that this delay has caused real difficulties to providers. The Association of British Insurers, in its understated way, described the delays as,at the very least unfortunate".This may well have contributed to a relative lack of interest among potential providers in offering child trust funds. I searched unsuccessfully earlier this week for a list of providers in order to see whether the child trust funds had attracted the premier division or something less impressive. I note from today's Times that Fidelity has decided not to join in. Can the Minister say when the list will be available?
I am never accused of wanting to over-regulate business but I found concerning a report in the Times last month which stated that the FSA could not guarantee that stakeholder products will not be mis-sold. If that is the case, how will the Government make sure that those who invest in stakeholder products understand the issues? This is of especial concern to lower income groups who may have no experience of buying products of this kind and at whom these products are aimed. What guarantees can the Minister give that training for those giving basic advice which is covered by the order will be suitable and ensure that people are not sold products that they do not fully understand?
Specifically as regards child trust funds, I would be interested to hear how the Minister envisages advice being given to parents of young children. Child trust funds can be both stakeholder and non-stakeholder. Will the basic advice regime apply to parents asking only for a stakeholder product? What happens if they ask for a non-stakeholder product? How will the parent get a comparison between the two? What kind of questions will be asked in the simplified sales regime to ensure that the Government's hand outs are not mis-invested? I am sure that the Government will want to avoid a situation arising in a few years time where there could be many claims of mis-selling because parents have been directed towards inappropriate child trust funds—and, of course, the numbers involved are potentially huge.
We support the direction of travel outlined in the order but we have some concerns about how it will work in practice. Will the Minister say something about how the Government intend to keep the simplified sales regime under review? Ultimately, long-term products which need to change over time to reflect maturity—I cannot bear to use the dreadful term "lifestyling"—are complex products. It may be that the Holy Grail of simple products and simple advice does not exist in practice. I hope that the Government have some clear plans for a review of the simplified sales regime.
§ 5 p.m.
§ Lord Newby
My Lords, your Lordships will know that we opposed the Child Trust Funds Bill for a raft of reasons, but problems about mis-selling were not prominent among them. However, when the FSA expresses concerns even before the programme is 1518 introduced that child trust funds may well be mis-sold, it merely adds to our list of concerns about what might happen.
One thing about the stakeholder advice which must be welcomed is the fact that it will take so much less time. I take the point of the noble Baroness, Lady Noakes, about the difficulties of the Holy Grail and the shortness of the amount of advice. The Holy Grail itself, of course, has proved remarkably elusive. There is no doubt in my mind that the current immensely detailed—and therefore immensely costly—business of selling financial services products, especially when the amount being invested is relatively modest, is bound to reduce the numbers of both providers and investors. Attempting to search for the Holy Grail is therefore worth while.
It clearly makes sense that these products are regulated by the FSA. I share many of the detailed questions of the noble Baroness, Lady Noakes, and a formal review of how this process is going, within a relatively short timescale, is more than usually welcome. That is particularly so as all families with very young children are going to be covered by this, and therefore a very large number of people will be affected by it. If anything goes wrong, there is scope for a very large number of people being mis-sold products over a very short period of time. Subject to those caveats, we support the order.
§ Lord Davies of Oldham
My Lords, I am grateful for the support advanced in both noble Lords' contributions and I recognise the anxieties about certain aspects of the proposals. The issues regarding the child trust fund were well exercised in another place and, as the noble Lord, Lord Newby, indicated, the Liberal Democrat Party has decided that it cannot support the concept of the child trust fund in principle. The noble Baroness, Lady Noakes, is considerably more generous than that in indicating that she has clear reservations and problems to he resolved, but that she is not against child trust funds in principle The child trust fund is one of a number of government initiatives to support saving and asset ownership.
Perhaps I may tackle the broad issue. In her general comments on the question of savings, the noble Baroness, Lady Noakes, indicated that there are problems with saving ratios. We must rehearse the arguments that we have had across the Dispatch Box on numerous occasions in the past. She will recognise that people are saving a great deal through house purchases and the mortgages they take out. One would be extremely neglectful of that important dimension of the economy if one did not recognise the extent to which people regard certain aspects of the type of saving we are discussing as "rainy day" savings. That is a more overt strategy for saving. The considerable investment that they put into it relates to other forms of saving, particularly investment in property.
It is suggested that people are currently pushing the boat out too far in borrowing, but we should recognise that that is occurring in the context of greater confidence regarding overall interest rates and because people have a greater asset base on which to borrow. But that does not alter the fact that we want to 1519 encourage intelligent, thoughtful saving that helps to cushion people against the inevitable shocks that occasionally occur in their lives and to make provision for future events. Some of those events are predictable. One of the beauties of the child trust fund is that it seeks to identify that the child will grow to a position in early maturity where substantial costs become a feature of life. That is why it is important that we should have a concept such as this.
The noble Baroness indicated that she had some anxieties about this matter. The FSA has expressed some concerns and it is in response to the FSA that various changes are now occurring. Under the FSA regime, providers must include short but balanced comparisons between stakeholder and non-stakeholder child trust funds so that there is a basis for intelligent comparison. The information pack going out to all parents will set out key points about the CTF and the different types of accounts and guarantee so that we are not faced with dangers of mis-selling. Definitive advice will be available.
As with all new policies, the Government carry out full evaluation of developments. I indicated in my opening statement that, if things go badly wrong, there is recourse to the ombudsman. The Financial Services Authority will also review any suggestions of mis-selling that may arise, and we will get early signals on the development of the policy. A development such as this of course requires constant evaluation and analysis. The noble Baroness will not be surprised if I give the obvious assurance that there are interests at play to guarantee that this process works successfully.
On broader products than the ones I identified, the Government are concerned to extend the range of products. It is for the market, of course, to develop strategies on how this might operate, but for the Government to ensure that there is a framework within which the market can develop in a livelier and more appropriate fashion than in the past. That is the issue with regard to the attempt to put clear ceilings on initial costs so that we ensure that people are not deterred by what look like very substantial outlays before they have even made a decision on whether to invest. That is an important part of the provisions which I outlined.
I recognise that there are anxieties about early development at this stage, particularly with regard to the child trust fund. This was well articulated in the other place; the Liberal Democrat Party indicated that it was not prepared to support the concept, while the party of the noble Baroness, Lady Noakes, adopted a more measured and considered approach. We intend to ensure that it is successful. It is an important part of that armoury of new provision for those who have not saved sufficiently in the past or felt confident enough about procedures to save.
§ Baroness Noakes
My Lords, before the Minister sits down, the order applies to child trust funds, stakeholder pensions and investments of any kind specified in regulations. I asked the Minister what other investments were being contemplated, given that 1520 the smoothed investment product is now deemed not to be suitable for the simplified advice regime. I also asked when the Treasury would determine that.
§ Lord Davies of Oldham
My Lords, we will reach a position on that very shortly. I will write to the noble Baroness and give her precise details on that important point. I commend the order to the House.
§ On Question, Motion agreed to.