TSC: Summary box and traffic lights get thumbs-up from gov’t

By Jonathan Boyd

Government response to the Treasury Select Committee’s report Restoring confidence in long-term savings suggest the “summary box” and “traffic light” approaches to improving consumer understanding and confidence have got the thumbs-up.

John McFall, chairman of the Committee, says the response shows the government is keen to see results of industry and regulator work on the Summary Box, which the TSC has suggested be included on all marketing material for long-term savings products. There is also support for the Committee’s push for industry and the FSA to work together “on developing a standardised form of risk rating for financial products.” McFall says there is also government support for the “forum” proposed by the Committee to “focus on how the industry can better serve its customers”

The IMA and ABI have jointly published a letter today inviting “interested parties” to meet to discuss just how to establish such a forum. Fay Goddard, director of policy and technical services at the Association of IFAs, has already expressed concern at the determination of the Treasury Select Committee and government to push for a simplified ‘traffic light’ style risk assessment process. “We can risk rate products as we already do to some extent, but it is still the person’s individual acceptance of risk which matters as well,” says Goddard. “What might be green to one person is amber to another. It is the interactions and notion of understanding of risk, that the client is prepared to take, which matters. To try to tear it down into three categories of risk is dangerous. “If someone has never taken money out of a cash account and then moves into what appears to be a lower-risk equity-based stakeholder product, they still may not know the risks because such products have 60% equities. It is not about the risk of the products alone, but someone’s acceptance of risk.

Evidence from the TSC meetings in June and July revealed most companies and trade bodies – with the exception of the FSA – believed it was not possible to develop a ‘traffic light’ style risk assessment because it would not reflect the diverse nature of product fluctuation, the make-up of products and the needs of clients through life changes. Goddard similarly points out the risk profile of a product and client can change over time, which is why it is necessary for clients to continue to receive regular financial advice. Prudential is one of the life companies which has already attempted to tackle the difficulty of simplifying risk assessment as the firm has so far developed its own seven category risk pyramid. Colours on the Prudential pyramid run from blue for virtually no risk products, such as cash accounts and deposits to green for gilts and fixed interest investments, up to yellow for equity-based funds and red for specialist fund and direct investment in stocks.