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.

Credit card bills to carry warning

Sean Poulter, Mail on Sunday

BANKS are to print a warning on credit card bills, advising customers against making only the minimum monthly repayment.

The warning, which will appear on all statements by the end of the year, will tell customers that taking this option will only increase the size of the final debt. The industry claims this is a dramatic shift in policy and will ensure that consumers don't see credit cards as the best way to borrow long term. The decision follows intense pressure from MPs and consumer groups who are worried that total UK family debt has spiralled to more than £1trillion, with the amount owed on credit cards at a record £56.38bn. It comes after the suicides of at least two men - Stephen Lewis and Dereck Rawson - who amassed huge credit card debts while making only minimum monthly repayments. Both eventually found it impossible even to meet the minimum repayment and were then hounded by the banks involved. Rawson, 51, who ran up debts of almost £100,000 - the vast bulk of it interest payments and penalty charges - hanged himself at his home in Yaxley, Cambridgeshire, in May. Lewis, 37, from Worksop, Nottinghamshire, hanged himself in July last year after amassing debts of £70,000. The warning proposed by the Association of Payment Clearing Services reads: 'If you make only the minimum payment each month, it will take you longer and cost you more to clear your balance.'

The move, and others to deliver more honest information on charges and interest rates, are meant to satisfy MPs on the Treasury Select Committee who will interrogate bank industry bosses next week on credit card charging. The MPs are concerned that tens of thousands of hard-pressed consumers are making only the minimum monthly repayment required by their card company. The figure varies, but can be as little as 2% of the amount owed and not even cover the interest. The cardholder ends up paying interest on the interest - at punitive rates - while the lifespan of the debt is extended over many years. As well as the warning, the banks yesterday pledged to share information on credit card customers more widely, which should allow them to spot those with lots of cards and debts they cannot handle. An 'honesty box' will be printed on marketing material spelling out charges and interest rates. There will also be controls on issuing credit card cheques, which carry huge charges and interest rates. And there will be stricter rules on whether banks can increase credit limits without being asked. However, MPs are unlikely to be satisfied because banks will still have 11 ways to calculate the APR - Annual Percentage Rate of interest - creating confusion over the best deal. And many are refusing to print the honesty box on monthly statements, which would be the best way to remind customers of charges.