There is no doubting the decline of public confidence in long-term savings. The bear market in equities since 2000 has played a major part in that, both in reducing the value of people's savings and in exposing the weaknesses of financial services that had predicated many products and practices on an ever-rising market.
The resulting casualties are numerous and widespread. Half of all with-profits insurance policyholders, with savings of about £160 billion, are now in closed funds with limited long-term growth prospects. Endowment mortgage policyholders are suffering a collective shortfall of about £40 billion, and Equitable Life policyholders are suffering a £3 billion shortfall. Precipice bondholders have suffered a capital loss of £2 billion, and investors in split-capital investment trusts are pressing for £350 million in compensation. It is false to look on that catalogue of disasters and conclude, as some may be inclined to do, that this is all the result of a force of nature; that force is the largest bear market in living memory.
The Treasury Committee has held hearings and taken evidence on all the issues that I have just listed. Every hearing raises serious questions about the conduct of business. Those questions have been highlighted by the falling market; they have not been caused by it. Long-term savings are an industry of about £2,000 billion, whose health is vital for the prosperity of savers and the whole economy. Savings depend on the free choice of millions of individuals, and their choices depend on confidence that their savings will be safe and that they will receive fair and reasonable rewards. There can be no doubt that consumer confidence has been damaged, and it is no accident, as my hon. Friend Mr. Plaskitt pointed out, that the current ratio of savings to income is at a 10-year low.
The problems lie in what are often called retail financial services—that means financial services to the general public. Wholesale financial services for business are not included in the observations, but there is a danger of reputational contagion, because people abroad make no such distinctions and believe that the business practices of wholesale companies are under equal scrutiny. Such an effect would be particularly damaging at a time when immense opportunities for wholesale financial services are opening up in China and the rest of Asia, and throughout the European Union. It is essential for the financial services industry as a whole, for the United Kingdom economy and for individuals who have lost savings that the issues involved in the crisis of confidence are fully, frankly and openly addressed.
The beginning of a remedy is for the industry to recognise that many of the problems arise from its own attitudes and practices. Some of them might have been appropriate in the early part of the previous century, when the market for financial services was confined to a knowledgeable minority at the top of the income scale. The market is now far wider—and it is widening—and financial knowledge is limited. As my hon. Friend the Member for Warwick and Leamington said, it is essential that all retail financial products have a clear, accessible and succinct statement of their most salient characteristics and of the risks associated with them. The more such statements can be made in a summary box, with a common layout across all products, the more will individual understanding be enhanced, as well as competitiveness. Certainly the culture of microscopically small print, obscurely presented, needs to end. The appearance of deliberate obscurity needs to give way to a keenness to inform.
I have heard it said of some who criticise current practices that they want to abolish the principle of buyer beware. That is not true. Buyers cannot beware if they lack the basic information on which to make a judgment; neither can they beware if the inadequacy of products such as insurance policies or pensions are revealed only many years later.
Another argument is that the misunderstandings that lead to charges of mis-selling could be avoided only by increased financial education of the general public—for example, by including financial education in the national curriculum. Here, I differ from my hon. Friend; in my view, that argument is a cop-out. If every interest group that wanted such an approach were allowed an insertion into an already crowded curriculum, children would be at school 27 hours a day, and the school leaving age might have to be postponed. Moreover, big financial decisions are rare in life; a mortgage, a loan for a car and a choice of pension are the three biggest financial issues that most people ever face. People are likely to be interested and motivated only when the choice faces them, and not if it is a distant and remote possibility; but at that point, they will need advice.
Independent financial advisers currently dominate the distribution of long-term savings products. The great majority of them are paid by the product provider through commission. The commission reward arrangements lead to some ambiguity as to whether a product is sold for the benefit of the client or because of an attractive commission. Moreover, many people do not have access to such advice.
The Financial Services Authority has moved towards requiring a full declaration of the fees paid by the client. The Committee felt that a fuller comparison between the client paying a fee and the adviser receiving commission would be preferable. It would certainly be much more comprehensive. What is unacceptable, especially as it is not at all obvious, is the trail commission, whereby the adviser receives about 0.5 per cent. of the value of the product every year throughout its life. The justification given is that the adviser is available to give advice after the first purchase, but the reality is that the relationship between client and adviser is often discontinued. None the less, the commission continues.
A serious drawback with this business arrangement is that the company devising financial service products has no direct link with the ultimate customer, so it is not directly in touch with changing needs in the marketplace. Equally, products are produced at the behest of independent financial advisers, who have an interest in something new, distinct and eye-catching, with a view to enticing new business from clients.
The result is increasingly complex and elaborate products, whose nature is ever more difficult for the customer to comprehend. The trend towards complexity was noted by Mr. Ron Sandler in his inquiry into personal savings. The so-called Sandler products that he proposes are simple and easy to explain, and a minimum of advice is needed, so a much lower fee is appropriate. Such products are an attractive answer to the problem of conveying information without the need for independent advice.
For a wide range of clients, particularly those on low incomes, such standardised products appear to be a solution to many of the recent problems. They could also provide a firm foundation for a range of products offering higher rewards, but with correspondingly higher risks. Such products would be available to people who wished to take those higher risks or were in a position to do so.
A surprising feature of the industry, which my right hon. Friend Mr. McFall mentioned, is the absence of any forum in which the industry, consumer groups, the FSA and the Government can meet regularly. Such a forum would allow those involved to give an early warning of problems that were arising and to identify best practice in changing circumstances. It could also keep under review the complementarity of standardised Sandler-type products and the innovations brought out by the industry, whose role it is, after all, to innovate. Happily, such a forum has now been agreed, and I am pleased that my right hon. Friend will chair the inaugural meetings. That will, I am sure, guarantee a good launch and great success.
In summary, the direction that change must take in the financial services industry is clear. First, there needs to be a general duty of care towards the interests of the customer or client. Secondly, there has to be a deliberate and sustained policy of providing information in a form likely to be understood by the target customers. Thirdly, the operations involved in, for example, calculating bonuses, must be clear and open. The mystery of with-profits insurance policies, for example, to which Lord Penrose referred, does not fit into the 21st century. Fourthly, the reward systems for advisers and those running companies and societies must be closely aligned with the interests of customers, not at odds with them.
The solutions to the problems that have diminished public confidence in financial services lie with the members of the industry collectively. One black sheep can contaminate the reputation of everyone in the industry, and it has done. The FSA has a role to play as the industry policeman, but as in normal policing, it can work only if the general standards of behaviour are good and there are few transgressors to be apprehended. The industry must develop an ethos under which it is self-regulating and self-policing. As the Bishop of London said this week in the City, such an ethos arises from the ethical standards of behaviour of all who are involved. That is the route to trust, on which public confidence depends.