§ The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)My honourable friend the Financial Secretary to the Treasury (Ruth Kelly) has made the following Written Ministerial Statement.
In July 2002, Ron Sandler published his report into the medium and long-term savings industry in the UK. He found that the savings market was daunting for the consumer, that the industry's products were complex and opaque and that there were weak competitive pressures on providers of financial products. He identified a number of formidable challenges for the Government, the regulator and for the industry. He recommended the introduction of a suite of simple 37WS regulated products—with capped charges, investment risk controls and no exit penalties—to build on the existing stakeholder pension and CAT-mark regime and to entrench competition in the market, stripping out substantial elements of cost.
I can today announce some important steps forward which will offer a robust basis for the 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.
First, in response to Ron Sandler's recommendations, the FSA has successfully market-tested a new basic advice regime for stakeholder products. This would reduce the time taken for a typical pension sale from several hours to approximately 30 to 40 minutes. In the future, employees would be able to buy a pension or other stakeholder product in their lunch hour.
The FSA has today launched its consultation on the details of the new basic advice regime. The regime reflects the simpler, risk-controlled nature of stakeholder products while maintaining consumer protection.
Secondly, I can today announce that the charges on the new stakeholder regime will be excellent value for consumers, while allowing lower-income consumers greater access to financial products.
The Government have always maintained that the price cap for stakeholder products should reflect the economics of the stakeholder market.
Therefore, in 2003, the Treasury and the Department for Work and Pensions commissioned research by Deloitte on the market impact of a range of price caps to inform the Government's decision on the price cap. This research is being published today. We have also consulted widely with consumer groups and industry.
For the deposit account product, the Government have decided that the interest rate earned should be no lower than 1 per cent below the Bank of England base rate. This product will replace the cash ISA for which the price cap was set at 2 per cent below the base rate and therefore represents even better value for money for consumers.
For the medium-term product, the Government have decided to set the cap at an annual management charge of 1.5 per cent for the first 10 years that the product is held and 1.0 per cent thereafter. This will provide excellent value for money for consumers while giving providers satisfactory returns and the scope for price competition under the cap.
In the pension market, the stakeholder pension has already had a huge impact. Nearly 2 million stakeholder pensions have been sold and charges have been driven down right across the industry. When the price cap was set in 2000 it allowed for advice to be charged for separately. However, the market has not evolved as expected, with very few firms separately charging for advice. The result has been that the industry has been reluctant to sell its products to 38WS lower-income consumers. We have listened to representations from consumer groups and from the industry. The Government have therefore decided to raise the cap on the annual management charge for the stakeholder pension product to 1.5 per cent for the first 10 years that the product is held and 1.0 per cent thereafter, matching the cap set for the new medium-term product and encouraging long-term saving. This will allow the cost of basic advice to be incorporated under the cap, while maintaining excellent value for customers.
The Government would expect there to be significant price competition under these caps and in particular prices to be lower than 1 per cent for substantial numbers of stakeholder products sold, for example, without advice or to group schemes. We intend to review the new caps in three years to assess their impact on competition in the market.
We realise that, for less efficient providers these charge caps represent a challenge. But it is only right that firms are challenged so that our objectives of good deals for consumers and increasing efficiency are met. But for those firms that can exploit innovative and efficient ways of distributing stakeholder products, these charge caps represent an excellent opportunity for profitable growth and so I hope that they will be welcomed by the financial services industry.
The Treasury consultation document is available in the Vote Office and the Library of the House.