Saving up trouble

The UK savings crisis just got worse. Latest figures show that sales of tax-free ISAs (Individual Savings Accounts), chancellor Gordon Brown’s slim carrot to coax us all to put something by for the future, have plummeted in the wake of sharp stock market falls. They are down more than a third year-on-year.

Novice investors, for whom the ISA is designed as the first step in investing, have now experienced a continuously falling market for nearly three years. They are losing hope of seeing their money grow – and they must be losing faith in the idea of saving.

Given the energy invested by the current UK government in exhorting the public to save, and the variety of companies and institutions geared towards enabling them to do so, there is something ironic about how deeply engrained the off-hand attitude towards investors has become. The long-term savings industry scarcely seems to know where it might start to rebuild trust.

The shortcomings of the market can be distilled into one lousy advert. This depicts an ordinary saver who has just realised his life-long ambition by buying Muhammad Ali’s boxing gloves. Dreamed up by the global fund managers INVESCO, this advert is as uninformative and it is untruthful. For the saver is not in fact a saver at all, but an INVESCO employee. And the prized gloves are not the mighty Ali’s. They are any old gloves, ‘illustrative only’ of the authentic article. How do we know? Because it’s all there – in the dreaded small print along the bottom.

Equally deserving of a sardonic chuckle is the slogan from a rival firm, which boasts: ‘Jupiter – where ordinary performance is alien.’ Quite so. The firm’s heavily promoted Global Technology Fund has made a return to investors of minus 73 percent since its launch two years ago. No mention of that in the advert.

Yet it would be wrong to single these firms out. The sector as a whole willingly indulges in this kind of thing at a time when, thanks to Equitable Life, WorldCom and a slew of other scandals, consumer trust is in tatters. This is an industry that habitually shies away from plain speaking and has for decades honed tendentious terms such as ‘with-profits’ (one might no less honestly say ‘with-losses’) to peddle products.

Too many consumer products are opaque, contract and pricing structures complex, and the distribution channels restrictive. Clients are bamboozled. Some of the more thoughtful institutions now privately admit that the industry’s consumer-contemptuous approach contributes to the country’s billions-wide savings gap.

Go back a generation or two, and choosing financial products was the preserve of the well-heeled and educated. Now it is of vital importance to Joe Public. We are all shareholders now, through our pension funds and our endowment mortgages. All but the very poorest are drawn into sophisticated financial products (such as the notorious with-profits policies). And the vagaries of the global markets caused by the shenanigans of chief executives at a Vivendi or an Enron have a direct bearing on their prosperity.

The Financial Services Authority (FSA) has a statutory remit to coax punters into greater awareness about husbanding their dosh. Yet Brits remain stubbornly financially illiterate. An FSA consumer panel found that fewer than half of people surveyed had a decent understanding of products or could fathom the financial pages. Predictably, financial savvy plummets in lower, and more vulnerable, social groups.

Lack of confidence has itself become a disastrous psychological barrier. For most of us to go to a financial adviser, bank or pension specialist is to invite embarrassment as we expose our ignorance – while the expert across the desk remains smugly secure behind a wall of jargon. Hence few ordinary folk shop around.

According to an FSA estimate, 80 percent of consumers buy through tied distribution channels run by banks, insurance companies and so on. Or they simply turn off and focus on which hatchback to buy, or where to send the kids to schools – issues where they can easily grasp the basics.

Ironically, there is no shortage of retail products today – a Consumers’ Association study two years found there were no fewer than 30,000. But much choice in financial services is illusory. Some offerings are simple enough – building society accounts, for example (though investors who leave savings to grow in the same account for a period of years are systematically fleeced). But pensions and mortgages pitch consumers into an area of terrifying technicality – and sometimes, one suspects, deliberate obfuscation on the part of the industry.

As a result, traditional competition models don’t hold. Competition isn’t driven by active and informed consumers, and its benefits don’t accrue to them. The punter can be effectively trapped through penalties slapped on anyone who surrenders or transfers out of a scheme. Savings schemes can be structured in such a way that consumers are required to stay with the product before gaining any value.

In a report published in April 2002 the Consumers Association explained: ‘There are many factors which exist that weaken the influence of consumers and undermine effective competition…. Many products are simply flawed and represent poor value for money. With pensions or long-term investments value may not become known for 25 to 35 years.’

The industry has pulled off a neat trick: the consumer takes the hit if the financial product proves a dud or unsuitable. Moreover firms can disguise steep price hikes by the simple expedient of lowering investment return over the years. Cleverly, firms have shifted risk away from themselves. But there is a price: they have made purchasing a financial product a hairy experience for the customer.

A year ago competition minister Melanie Johnson promised to magnify the small print on loans. ‘The expensive catch shouldn’t be hidden in microscopic text’, she said. And she vowed to stop an interest-free credit sting whereby, if consumers miss their final payment by even one day, they can be hit with penal backdated interest to the date on which an item was first purchased.

But dodgy products are not the whole story. The financial institutions’ communication instincts seem to have atrophied. According to the FSA, the industry spends £1.4billion a year on advertising, mostly uninspiring brand-building stuff. But my perfectly respectable pension fund cannot explain intelligibly to me why I should opt back into SERPS (the state earning related pension scheme). It sends out a mind-boggling eight-page form letter awash with technical terms and no glossary.

Doubtless there are well-intentioned people within the firms pleading to speak to consumers with clarity. But they find themselves outgunned by the legalism of lawyers and pedantry of actuaries. Rather than run the risk that one person in 10,000 is misled (and might sue), firms routinely carpet bomb consumers with information that they can’t take in: comprehensiveness triumphs over comprehensibility, and the consumer is left, mushroom-like, in the dark.

Few industries could survive being so unresponsive to customers. Take supermarkets. If the tomatoes are squelchy, the donuts hard and the check-out staff rip us off, we vote with our trolleys when we do next week’s shop. Similarly, you can test a car (though not the servicing) before you buy. But with many financial products you buy blind.

Because of the complexity, punters are supposed to turn to financial advisers. But here too Britain has a jerry-built system, confusing and open to abuse. Consider the FSA’s deadpan description of the public’s take on commission, the lifeblood of these all-important intermediaries:

‘Most consumers are confused about how advisers are paid and generally unaware of commissions. They first become aware of commission when they meet an adviser… Most consumers think the product provider bears the cost of commission or they do not think about it at all. Only the most financially sophisticated understand that the commission the adviser receives will come out of the charges on the product they buy. When they do understand the position, most consumers think commission may bias advice and say they would prefer to pay a fee for independent advice.’

For my part, I had a perfunctory conversation with my financial adviser over whether I should pay a fee or she should take commission, and she then deemed the matter settled: she should get a fee. A consumer paying £200 a month into a 25-year unit-linked pension from 1996 would be expected to pay nearly £4000 in charges – a reduction in yield of 11.5 percent on their investment. The percentage is higher if you are poor and save less.

The scale of the savings scandal is set out in July’s Treasury-sponsored inquiry drafted by Ron Sandler, a former £450,000-a year chief operating officer at NatWest bank. The 200-page analysis is a savage indictment of the way the long-term saving industry is run for the interests of the producers. Sadly, firms have shrugged off the bucket of ordure heaped on their heads by focusing their fire on the contentious remedies put forward by Sandler. These include creation of ‘non-toxic’ simple investment products that would be hard to mis-sell and would be lightly regulated.

The FSA also has plans to shake-up the structure of financial advisers, abolishing the so-called polarisation between Independent Financial Advisers (IFAs) and advisers tied to one company. But this is opposed by the Consumers Association, which avers that ‘within the bounds of a systematic market failure, IFAs generally recommend lower charging products and are more likely to rebate commission’.

Faced by these conflicting stances and the sheer passivity of the consumer it is hard not to be defeatist. A corporate governance and regulatory framework that ensures that investors’ and shareholders’ interests are better balanced would be a start. But, ultimately, firms need to grasp it is in their self-interest to communicate openly and to nurture the trust. Otherwise, increasing numbers of would-be savers will cheerfully walk away from the industry.

Victor Smart is a writer, broadcaster and journalist.

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spiked-issue: Economics