Simplified products have to be popular and influence other products to work. Mindful Money has doubts.

14th March 2013

The Government is to create a range of simplified products that should meet high standards and avoid certain consumer unfriendly features as reported in the Telegraph this week.

The range will include easy access savings accounts, 30-day notice savings accounts and life cover. It hopes that this will encourage people to buy these products and be sure they will deliver on certain simple terms.

The new savings products will not offer bonus or introductory interest rates and all savers will be paid the same rate, regardless of the length of time they hold the product.

The scheme will involve the British Standards Institution which is by far and away the best thing about the proposals. The BSI has welcomed the opportunity to set standards for the products in this press release.

But it not the first time the Government has attempted to kitemark products and the concept has a chequered history. The Labour Government set up a similar Cat standard for stocks and shares Isas (the CAT stood for charges, access and terms) with charges set at one per cent per annum, but only a couple of fund managers and insurers got involved and the products did not sell well at all.

It did the same with mortgages, and if anything the initiative was even more of a damp squib. Finally, and arguably slightly more significantly, it did so with stakeholder pension products too.

This was a little bit more of a success. The initiative had three strands, first charges were capped at 1 per cent, financial advisers had to show they had considered offering the pension before they could offer any other products and finally, it came at the same time as employers with four employees or more had to offer a workplace pension.

The reform succeeded in one way. It brought down the price of personal pensions dramatically, particularly high charges in the early years and it allowed switching without penalties. Both developments were good news if you bought the pension. But what it did not do, perhaps because there was a failure to really force employers to offer company schemes, was that it didn’t spread pension provision. Many schemes were opened but stayed empty becoming known as shell schemes.

That reform has now been replaced with a new one known as auto-enrolment, which is compulsory for employers at least.

So marks so far for kitemarking products? Well at most we would give it 5 out of ten and maybe that’s a bit generous.

To work, a kitemarked initiative has improve the terms that customers get from products. And those products, in a free market economy, have to be popular. Those are quite high barriers.

This new initiative is first trying to sort out life insurance, but for no reason Mindful Money can quite understand, given that the products are price driven and don’t fail to pay out if you die with cover. It doesn’t make sense unless it is a try-out to be extended to other insurance products.

With instant access and 30 days notice accounts, we can see some merit in making sure the rate stays the same with no bonus or introductory rates that are then cut back. But again, we wonder if the real need isn’t in the cash Isa market, where rates can be cut dramatically after the first year teaser rate to something derisory.

So at Mindful Money we are a little bit puzzled. We could see a role if financial providers of insurance, fund management or pensions started to compete to get their products kitemarked because they met certain BSI terms, though the more difficult the product the more complicated the terms would be. There might be even more call for this in the new workplace pensions arena to help employers choose a scheme.

But unless this is a rehearsal, at Mindful Money, we are uncertain this limited initiative will influence the markets concerned, nor as a result consumers and the products they buy.


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