Little jamón tomorrow for investors in Abbey funds

By Anne Ashworth, Personal Finance Editor

If Santander wins Abbey, this could spark further European cross-border banking mergers. But the average Abbey account-holder is probably less interested in the future structure of the banking industry, than in the service he would receive under Spanish ownership

THE City cannot yet agree whether Banco Santander Central Hispano is Abbey’s knight in shining armour, or a Don Quixote who will stir up further confusion at a bank already engaged in “turning banking upside down”. But a few things are already certain. Observers will not be able to resist making more “jamón tomorrow” jokes about the jamón serrano (ham) which will be one of the perks on offer to Abbey investors if they give their assent to the Santander bid.

These witticisms will sound particularly weak to the 865,000 holders of with-profits investments with Abbey National Life, Scottish Mutual and Scottish Provident, the bank’s life insurance division. For these customers, there is no likelihood of jam, or even ham, at any time soon. All three funds are closed and so are in a state close to benign neglect. Hoping for the restoration of bonuses would be tilting at windmills.

Santander says that it will inject £500 million into Abbey’s life insurance business. However, this will not suddenly liberate the incarcerated customers who cannot cash in their holdings without paying an exit fee or MVR (market value reduction), a piece of jargon that continues to be used despite Abbey’s plain words-only pledge, an essential part of the “turning banking upside down”. This underlines the impression that in this process of overhaul, the unfortunate with-profits holders are forgotten people.

IF SANTANDER wins Abbey, this could spark further European cross-border banking mergers. But the average Abbey account-holder is probably less interested in the future structure of the banking industry, than in the service he would receive under Spanish ownership.

For example, would it mean the abolition of sneaky overseas fees when using a cash machine in Spain? This is the kind of bank charge that we increasingly resent. When you use an overseas ATM, you pay 1.5 per cent of the amount withdrawn — foreign exchange loading fees are added on top, but these are not shown separately on your statement, so that you will not complain. Santander pledges to make Abbey “extremely competitive” but customers want to how it will be achieved.

THE bad news that we owe a trillion and the likelihood of another base rate increase should be the stimulus to sort out debt — not perhaps what you wish to hear in the holiday season, but personal finance sections must sometimes act the spoilsport.

You can limit your efforts to moving to one of the new cheaper fixed-rate mortgages, now becoming available amid expectations that rates will not need to rise as steeply as had previously been forecast. Or you can follow our ten-point plan on page 3. Think of it as an extreme makeover for your finances.

Tranferring existing credit card balances to a 0 per cent card makes sense, as you cut the cost of repaying your borrowings. But anyone attracted by Barclaycard’s offer of 0 per cent until August 2005 should note the experience of a Times Money reader.

Surprised to find that Barclaycard had given her a “derisory” credit limit of £800 — of little use to a person wishing to transfer large debts — she questioned the decision. Barclaycard conceded that she was a good credit risk, but would not budge. Our reader suspects that, when she starts to pay the card’s high standard rate of 17.9 per cent next summer, her credit limit will immediately be raised. She will now be giving her custom to a card company with a more genuine 0 per cent deal.

THE House of Commons Treasury Select Committee’s report into the long term savings industry is appropriately unflattering about the products on offer and the handsome remuneration paid to the bosses of companies that have failed their investors. The committee rightly concludes that the industry which “limps from crisis to crisis” is “too important to be left on its own to sort out its problems”.

There are some useful suggestions, including the introduction of a summary box, detailing the charges and the risk level of any investment. And it is hard not to agree that everyone, including government and consumers, should join in the process of reform. However, the Labour-dominated committee fails to point out how the current Government’s policies on pensions and Isas have played a role in undermining public confidence. Until the Government rethinks these policies, this industry has an excuse to serve us poorly.

MPs demand 'urgent limit' on commissions

By Pauline Skypala

A committee of MPs has called for "an urgent limit" to the payment of annual commission to independent financial advisers, which can continue for years after a product is sold regardless of whether the customer continues to receive advice.

The cross-party Treasury committee says in a long-awaited report on long-term saving that "the persistence of this practice is a clear sign that the market for financial advice is not working in the best interests of consumers".

The committee also called for a clearer system for telling savers how much they are paying for sales and advice and the relative costs of paying by a fee rather than commission.

It says that a "menu" system being introduced by the Financial Services Authority, which will show the commission payable to an IFA on a number of products and offer the alternative of a fee, does not go far enough down the route of full transparency.

The menu will not give an explicit comparison between the total cost of paying by fee or by commission over the likely lifetime of the product.

Much as the committee dislikes commission, though, it stops short of calling for a wholesale switch to fees even though several witnesses to its inquiry said this was the only way to make sure savers are given impartial advice.

The MPs accept that any move away from commission will have to be gradual. It heeded comments from the FSA that it is "difficult to make changes very quickly".

After fulminating on the inadequacies of the commission system, the report rather lamely asks the industry and the FSA to monitor the cost of buying products on a fee or commission basis and the proportions of savers opting to pay via fees or commission.

This suits IFAs, most of whom, according to the Association of Independent Financial Advisers (AIFA), intend to switch to charging fees, but in an evolutionary rather than revolutionary way.

Fay Goddard of the AIFA says most IFAs now offer the option of paying a fee, ahead of a regulatory requirement to do so, and 10 to 15 per cent are wholly fee-based. She adds that the AIFA is "trying desperately to move on from the idea that financial advice is about selling products", though she acknowledges that a good proportion of IFAs are still product-focused.

Providers just want to get their products to market, but some are keen to see a change to the commission system. The Association of Investment Trust Companies (AITC) says the most effective way to raise standards of advice for investors would be to unbundle the cost of advice from the cost of the product.

"This change would make it essential for advisers to demonstrate that their advice adds value and is worth paying for," the AITC says.

Most life companies and investment fund managers are highly dependent on IFAs to sell their products. They have tended to compete for their business, often through commission deals, rather than compete for customers by offering lower prices.

The committee's broad conclusion was that people are not saving enough because they are not being treated fairly by the financial services industry. Their confidence has been damaged by a catalogue of problems, including the estimated £2.2bn of capital losses by savers in precipice bonds, the collective mortgage endowment shortfall approaching £40bn and the £160bn of savers' money locked up in closed with-profits funds.

The MPs say the industry needs to rethink the products it sells, how it sells them and the after-sales service it provides. It wants the industry to provide better information about its products, particularly about how risky they are and the costs involved.

The report was welcomed by consumer groups and hailed as "constructive" by the industry, but some commentators were disappointed that it focused on products rather than on financial planning, and had little to say about the role of government policy.

Ros Altmann, an independent pensions expert and governor of the London School of Economics, says the committee has fallen into the same trap as the industry. The trap is to see the problem in terms of the way products are manufactured and sold, rather than looking at the bigger picture.

"Confidence in long-term savings does require change on the part of the financial services providers and advisers, but in the context of current government policy, pension savings have been undermined," she says.

The failure of occupational pension schemes, the move towards defined contribution schemes, with the associated transfer of investment and longevity risk from employers to employees, and the penalties imposed by the means test on pension savings have all contributed to the loss of consumer confidence. "It is impossible to see how confidence can be restored without a change in the state pension system and fairer savings incentives," says Altmann.

Other glaring omissions include the failure to consider the potential role of National Savings & Investments products, some of which are "ideal for medium term savings" in Altmann's view; the lack of emphasis on financial planning help; no mention of child trust funds; and no discussion of the annuity market or the needs of people after retirement.

AIFA was also concerned at the committee's focus on products, and says it is difficult to see how some of the MPs' recommendations will do much to rebuild confidence.

Goddard says: "Understanding risk and encouraging people to save are not purely about products."

The report calls for a standardised summary box for products, detailing what a product is linked to, if there is a capital guarantee, how risky the product is and what the charges are. The box should also contain a standardised risk indicator.

Risk is one of the committee's main concerns. It says that "repeated mistakes, misunderstandings and misrepresentations" about product risk "have severely damaged consumer confidence in the long-term savings industry".

It adds that some providers and financial advisers often have a poor understanding of the underlying risks inherent in long-term savings products.

TSC report: Summary boxes "must be introduced" within 6 months

By Johanna Gornitzki

Industry and the FSA must create a summary box for every financial service products within the next six months to meet new 'guidelines' set out by the Treasury Select Committee.

Latest report by the TSC, entitled 'Restoring confidence in long-term savings', suggests improving product information is essential if consumer confidence in the UK is ever going to be restored.

Challenging both the industry and the regulator, the Committee urges them to develop a "simple standardised Summary Box" within the next six months, which should be short enough to be able to be displayed within most marketing material.

Even though firms have six months to design the summary box, TSC members want feedback on the issue even earlier than that. "We would like all the parties to report to us on progress here by the end of the year," the report says.

As a part of the Summary Box, the TSC believes products should be 'risk-rated' to "signal" whether they are high or low risk.

Although the Committee acknowledges this may give rise to some "practical difficulties", especially as some products change over time, the TSC still believes a simple risk rate system would be a "vital step in restoring confidence".

TSC says: “We recommend that the risk rating attached by the product provider to the product should be regarded as an important part of the sales advice given to the client.”

“The industry should appreciate that, if such an indicator is implemented, it would provide an important safeguard against mis-selling.”

The Summary Box should also include information on whether clients are guaranteed to get their money back or not should the markets take a downward turn and whether there are any other guarantees attached to the product.

Charges for the product should also be outlined as well as any possible early redemption fees, the TSC report adds.