Official stamp doesn’t make a product safe

The UK government appears to be at the forefront of a European trend towards encouraging buying rather than selling of financial products. Ron Sandler’s report on long-term savings, presented to the government last year, has influenced the recent Budget. The report called for simple products that could be bought without advice, allowing charges to be capped at one per cent a year. It contended that tax breaks do not encourage lower earners to save, but rather wealthy people to invest in tax efficient vehicles. Now Chancellor Gordon Brown has launched the Child Trust Fund. The so-called “baby bond” will provide all children with an endowment of at least Ł250 (e350), with incentives for parents to contribute further. Rather than providing tax breaks, the government is likely to match contributions up to a certain threshold. The bond will be offered through banks, building societies and insurance companies. It remains to be seen whether there will be any investment restrictions limiting, say, investment in equities. If there were, the products could more easily be sold without advice. However, experience has demonstrated that without incentives there tends to be poor take-up of such schemes. Following the disappointment of stakeholder pensions, insurance companies are now trying to persuade the decision-makers in government that, in order to provide a robust offering, and to pay for a degree of advice, charges must be higher. Lower charges are to be welcomed, but not if this causes insurers to be so stretched that they are financially weakened. A two-tier savings system seems likely. The low cost products will offer a limited range of investment options and a simplified charging structure. There would be a separate range for those who require more comprehensive investment options. The danger will be that an individual might believe that a product is safe because it has an official stamp. Advice may not be needed for the actual product selection, but it may be required to determine how much needs to be saved and how much risk can be taken. The counter argument is that it is better to do something rather than nothing, and perhaps overall that is the government’s objective: remove tax breaks, provide incentives for those with lower existing savings, reduce charges, and everyone will start saving. Will the rest of Europe follow suit?

Christine Ross is head of financial planning at SG Hambros.