But there is a temptation to consider this new attempt by the FSA to grapple with the marketing of financial products in the UK as an indication of the failure of its earlier attempts. That would be unfair, though. Consider, for instance, Annex 3 of the report, which reviews the efforts of many other countries to address the same issue. Almost every westernised nation, it seems, is seeking to upgrade the quality of the purchase decision when consumers buy financial products. They have adopted many different approaches, but I suspect the FSA is correct in its conclusion that no other country has alighted upon a regime "that tackles the issues in a way that has worked better than in the UK". Nevertheless, there is still a big job to be done here.
The Review of Retail Distribution does not explicitly say so, but you cannot read it without concluding (or reinforcing your longstanding conviction) that the main root of evil in this sector is the payment of commissions by providers of financial products to financial advisers. The paper is, excusably, light on statistics, but the one on page 50 is a real standout: in the UK last year, no less than 63 per cent of single-premium individual pension sales were accounted for by switches from one provider to another … "which might suggest a significant amount of inappropriate [commission-generating] activity".
Apparently, the FSA's sustainability group advised, in relation to this statistic, that "there can be benefits for customers from switching to lower cost alternatives…". Well, in my view, that might account for 0.63 per cent of the switches. Concerning the rest, "might suggest inappropriate activity" is one way of putting it; "absolutely certainly demonstrates…" is another.
Unfortunately, commission is very difficult to stamp out for three reasons: 1) it is such a vital source of revenue that it is all but impossible to imagine what the sector would look like without it; 2) high-level economic policy-makers are concerned that if society does not pay an inappropriate amount for an army of salesmen to persuade us to save, then we will neglect to do so - in other words, stamping out commission would create a bigger problem than it would solve; and 3) consumers simply cannot grasp the fact that the man sitting in front of them and the people behind him are being paid via a long-term and hugely expensive levy on the returns from their savings.
So, here’s a suggestion to address the third issue. Investment products should be required to be sold with a warning comparing the total impact of fees over 20 years with the impact of fees on the least expensive indexed product on the market. I believe this slot is currently occupied by the Fidelity Moneybuilder UK Index Fund, which has an annual management charge of 0.1 per cent and total expenses of 0.3 per cent. The warning would run like this:
1. This product aims to deliver you a greater return than you would obtain by buying the Fidelity Moneybuilder Index fund directly. It will need to do so because our costs are much higher. Very few people understand the effect of fees - even apparently small ones –-on investment returns, SO PLEASE READ THE FOLLOWING CAREFULLY.
2. If you invest £5,000 in the Fidelity Moneybuilder Index and it achieves 7 per cent growth a year for 20 years, your £5,000 will grow to £18,000. If you invest in our product and it achieves 7 per cent growth a year, the effect of our higher fees will be that you will end up with only £12,000.
3. But we aim to do better. In fact, even to match the Fidelity Moneybuilder, we will have to outperform the market index by an average of 2.4 per cent every year for 20 years.
4. In the FSA database of 15,000 funds offered to the public over the past 20 years (see No Free Lunch, 25 May 2007), only 10 funds have achieved this kind of performance. We aim to be the eleventh.
