I entirely agree. In fact, I would go further and say that as we see some new approaches to saving emerging, especially for those from lower-income groups, or those who have suffered financial exclusion, there is every possibility of seeing more in the way of mutuality replacing some of the vehicles that have de-mutualised. It seems that mutual savings devices come into being, start small and, as they grow bigger, there is a temptation to move out of that market. I hope that in the coming years we will see a replacement of some of the smaller, more localised and accessible vehicles. I think that many more of them will be on a mutual basis and this time I hope that they can sustain themselves.
A key element in restoring long-term confidence in savings will be dealing with the problem of risk assessment. We said in our report:
"The need for the industry to pay greater attention to assessing and clearly communicating the risk inherent in any saving product has been demonstrated by the problems encountered in a string of products in recent years."
I think that our phraseology was quite mild. If we were referring to problems such as Equitable Life, precipice bonds, splits or endowment mortgages, we could have used tougher language. I suspect that, if the right sort of risk assessment had been in place, it is possible that some—possibly even all—of those problems could have been avoided. The FSA told us that:
"there have been too many instances where the industry did not live up to its responsibilities to explain investment risk clearly to its customers at the outset."
For the main regulator to tell us that makes a forceful point.
It is fair to conclude, on the evidence given to us, that the industry has damaged itself by its conduct. I think that the regulator is backing up that point, which is why I am puzzled as to why the industry seems strangely reluctant to embrace innovative solutions to the problem of risk assessment. That problem is soluble. I am convinced that the industry could make much more progress in that sector. It needs greater transparency and needs risk indicators to be attached to the products. It should not be difficult to get to that point, or to get the language clear.
We took evidence from the actuarial profession, which has recently published a report on consumer understanding of risk. I am pleased that it endorsed the point that we are making:
"In providing financial advice, the discourse should be in everyday language and require the customer to have no understanding of the underlying financial markets".
However, it spoils it by saying,
"or the rational choice models," which fails to meet its first objective of putting things in everyday language. But never mind, its heart is in the right place and it is moving in the right direction.
It should not be difficult to get clear language on products. However diverse, sophisticated and complex they are, it should be and is possible for them to be explained in straightforward language. At the moment that is done through the key features document, which fails to deliver. That is why we are looking to the industry to develop concepts along the lines of the summary box, which was helpfully introduced in relation to credit cards and other credit products.
Product risk classification is also needed. Again, I am puzzled by the industry's reluctance to embrace that idea. It seems hesitant about going down that road. The interim reports that I have seen from the Association of British Insurers and the British Bankers' Association responding to our report, and statements that they have issued in the full knowledge that this debate was taking place today, are still not giving anything on trying to devise proper product risk classification. That will be a critical part of the solution if we are to restore long-term confidence in the products.
I cannot see the problem in making it clear in any promotional material on any product what the product is appropriate for. It should be possible to see quite easily whether a product is appropriate for short-term saving, medium-term saving or long-term saving. Those are three simple types of saving, but sometimes we find people choosing the wrong product in terms of what they expect to get from it. It should be straightforward to put that information on all promotional and introductory material for any savings product.
However, I think that we can go further. It should be possible to devise a fairly simple risk indicator. I have sometimes heard it suggested that a traffic light system will do, where the products are simply colour coded. I think that that is too simplistic and the market is much more complex than that. Having said that, it is still possible to have a fairly straightforward risk indicator system and one example would involve four essential groups.
The first question would be whether the savings instrument was appropriate for the cautious consumer. Is the investment a cautious one? It is if the capital is absolutely safe; if someone will get a steady and predictable return and limited fluctuations. That is a type of product that the cautious investment consumer should go for.
The second category could involve a more balanced investment, where the advice would be that it should not be someone's only investment vehicle. They should not put all their eggs into that basket, but it could be one investment. The returns might exceed the average but they could go below it. There will be higher fluctuations, but the person's capital sum is protected.
The third category would be for the adventurous investor. Again, it should not be a person's only investment vehicle. The returns will be volatile and their capital is not completely guaranteed. The fourth and final category would basically be for the speculator, of whom there are plenty. It should not be someone's only savings vehicle. They could make a bomb on it, but they could lose their shirt.
It is possible to put pretty much every offer that is available into one of those categories. That would greatly assist consumers in knowing which savings vehicle is appropriate for their needs and would greatly minimise the risk of people finding their money invested in the wrong product, or the risk of not having had a proper explanation about what the product was when they took it on.
The final major area where we urgently need to see progress is consumer education. That gap must be plugged. The FSA—the regulator—told us in evidence that consumer understanding in that area is "worryingly low". The Treasury Committee endorsed that, on the evidence that it took. Product simplification would, of course, help.
The view that we heard from the actuarial profession on that should be condemned at the outset. It told us in evidence that expenditure on consumer education would be wasted money and that it would be ineffective. It could not be more wrong. It went on to say that:
"a 'good' presentation will override good education every time."
First, that is nonsense, if one reflects upon it for any length of time. Secondly, it highlights the problem. For far too long, what we have had from the industry is slick presentation without sufficient consumer education to combat it. That is the blend that we have to obtain in order to solve the problem. Both areas need to be corrected. We need better standards in the industry, so that its presentations are genuine, factual and transparent, and greater consumer education, so that people can understand what is being offered.
Consumer education is, and has to be, in the industry's interest, because informed and confident consumers are far more likely to buy its products than those who lack confidence or lack information. As we saw in the distribution of savings that I mentioned earlier, if there is a tendency to push more money into housing because there is a lack of confidence in the industry, that is one way of solving the problem. If public confidence is built into that aspect of the savings industry, more products will go into it. There is no shortage of money to be saved, as I showed in my introduction. The thing is to get it into the right places.
The Pensions Commission report hit the nail on the head:
"A purely free market for private provision may be severely inefficient given the inherent imbalance of knowledge between customers and providers".
That statement is universally applicable, and reinforces the recommendation that I would make to the forum that will now begin its work.
It is worth pointing out that the industry spends at best only £10 million a year on supporting financial and consumer education, but £1.4 billion on advertising and promoting its products. That is a serious imbalance. If the industry really wants to contribute to rebuilding consumer confidence, we can start to take it seriously if it shifts only a small proportion of the money that it spends on advertising and promoting its products to supporting consumer education.
Neither the Government nor the FSA have the resources to fix the consumer education deficit. The National Association of Citizens Advice Bureaux certainly does not have the resources, but the industry does, and it must contribute. It would be a win-win situation for the industry if it did contribute a few of its resources to rebuild consumer confidence, as greater consumer confidence means more purchases of its products. It would simply be a sensible investment for it to make.
As I said, the industry can be taken seriously in its professed commitment to helping to restore confidence only when it starts to make substantial contributions to consumer education and financial literacy. There are huge opportunities for it to do so. Products can be delivered to people's homes and to the workplace, and information can be attached to existing products that are expanding and will expand further on the back of the introduction of the child trust fund this spring.
The industry collectively has made the greatest single contribution to the loss of confidence, so it behoves it collectively to make the greatest contribution to restoring it. If it joins in the work of the forum that my right hon. Friend the Member for Dumbarton will chair, I hope that it will get the opportunity to make that contribution and to show its seriousness of intent. If it seriously engages in all aspects of this agenda, it will do itself, consumers, and the British economy a favour.