Medium and Long-Term Retail Savings in the UK
Review by: Ron Sandler
Comment by: Stephen Wynn
(July 2002)

To: Home Page (Charters for Churners)

1. Introduction (Conclusions and Recommendations)

The Review of Ron Sandler, follows the Review of Paul Myners (1.1).

My main interest in this area is the high portfolio turnover which results in substantial hidden dealing charges, as discussed on my websites Stakeholder Pensions: The Hidden Charges and Comparative Tables: The Hidden Charges. If the Review's proposals for "stakeholder products" go ahead, I can look forward to setting up a further website "Stakeholder Products: The Hidden Charges" (Section 6 below).

The Review was a government response to various scandals, such as that of Equitable Life. Savers are concerned that their endowment policies, intended to pay off mortgages, as promised, will not in fact do so. The words "consumer worry", "consumer anxiety" and "consumer concern", do not seem to appear anywhere in the Review, but there is frequent reference to "consumer weakness", "consumer confusion", "consumer reluctance".

There is a reference to "concern" as in "give rise to concern" (7.80). But concern who by? This is policymakers. There is "policy concern" (3.30). Policymakers are concerned about "consumers", whom the Review describes as "weak", "confused", and "reluctant". It does not describe "consumers" as "concerned". But savers and policyholders are concerned. We are especially concerned about weak regulators and confused policymakers.

The remit of the Review is savers in the future, rather than existing savers. This look to the future approach, is a feature of this industry. We are repeatedly being presented with new kinds of policy or "product" which we are told are a vast improvement on the old kind, which are "complex", "opaque", etc. These new ones are "portable", "flexible", "low-cost", "simple and cheap" (10.10), "simple and comprehensible" (10.11), "simple, cheap and easy to understand" (52) etc, only to find in years to come that such claims are greatly exaggerated, to say the least.

2. Remit of the Review

1. "Identify the competitive forces and incentives that drive the industries concerned, in particular in relation to their approaches to investment,

2. and, where necessary, to suggest policy responses to ensure that consumers are well served." (1)

Part 1 is vague. Part 2 is less vague, but what is the meaning of "where necessary"? Something may be beneficial for "consumers" but not "necessary" in the opinion of the Review. What does "consumers are well served" mean? The government and industry want people to save more. Savers are interested in getting a good return on their savings.

The Review is trying to solve both problems. These are to some extent incompatible because restricting charges as proposed for its "stakeholder products", reduces the ability to make commission payments, which then reduces sales. This is a reason for the poor sales of stakeholder pensions.

A major problem, not discussed in the Review, is that many funds have an excessively high turnover of their share portfolios. This is largely responsible for "the average unit trust underperforms the market by 2.5 per cent a year" in the Foreword.

The "compexity and opacity" of "products" is a problem if savers have to understand them. Understanding "products" is surely in the first instance, the job of the FSA, rather than savers. But the Review states:

"Assessing the effectiveness of the regulatory regime is not within the remit of this Review." (5.1)

It does not seem to be clear from the remit quoted above, that "the effectiveness of the regulatory regime" is not within the remit. Why could it not be included in 2) "suggest policy responses to ensure that consumers are well served."? The Review says that it is concerned with "regulation" rather than "the effectiveness of the regulatory regime". The remit does not specify that the Review should concern itself with "the effectiveness of the regulatory regime", but neither does it say it should concern itself with "regulation". The Review is particularly concerned with the regulation of "products" and sales:

"For the Review, the two types of regulation of particular relevance are:

regulation of the sales process, carried out by the Financial Services Authority (FSA); and

product regulation (or quasi-regulation) by the Government through the creation of CAT standards and stakeholder pensions." (5.3)

It recommends:

"substituting product regulation for the current regulation of advice" (10.13)

But we already have "product regulation". In particular paragraph 8.58 states that unit trusts and OEICs, which are described as "products" in paragraph 129, are directly regulated by the FSA. The Review does not apparently discuss the regulation of "products" by the FSA, such as under the heading "Product regulation" (5.56).

The Foreword starts:

"The industry has achieved considerable success . . . But there are, nonetheless, grounds for concern:

The saving marketplace is generally daunting ...

Consumers rely heavily on advice ..."

The Review thinks "the industry" is fine - a great success. The problem is "the marketplace" and "consumers". The problem with this general approach, is for example my grand-father bought a policy in 1929. The value of the policy when it matured depends on what happened to the savings in the period 1929-2001. It depends on the industry, rather than what the market, or my grand-father, was like in 1929. The Foreword continues:

"Partly as a result, competitive forces do not always work effectively to deliver value."

That will not be corrected by any proposals the Review or anyone else can make. This suggests that the Review is attempting the impossible.

The Review does not contain any formal definitions. This is a problem with the entire text. For example what is the meaning of "the industry" and "a product"? To take another example, there is surely a qualitative difference between "a mutual fund" and "a pension". But in paragraph 129 they come first and second in the same list. Do "mutual funds" include investment trusts?

It is largely concerned with markets, sales, advice; that is inputs rather than institutions and the benefits provided, that is outputs or "outcomes". "Products" are discussed mainly in relation to markets, that is on the input side.

The Review is not concerned with compulsory saving. "It is not the role of this Review to make recommendations in this area." (177) Compulsion is a possible solution to many of the problems discussed in the Review. A problem with remits, is that the solution to problems within the remit may lie outside the remit. There may be plenty of problems within the remit, but few solutions. The present author is not restricted in this way. But then he is not serving on a government committee.

3. "Opaque and inconsistent terminology"

3.1 Consumers

The Review uses the terms "investor" (57), "saver" (70) and most often "consumer" as in:

"This complexity leads to consumer confusion." (15)

"A number of practices have served to compound this confusion:

The industry has historically used opaque and inconsistent terminology" (16)

"The savings marketplace is generally daunting for the consumer." (Foreword)

It seems better to say:

either: "The financial services marketplace is generally daunting for the consumer."

or: "The savings marketplace is generally daunting for the saver."

Consumers consume financial services, and savings marketplaces have savers. The frequent reference to "consumers" in the Review should please the Consumers' Association, though perhaps not the Plain English Campaign. For example, Part 1 headed "Analysis of the industry", starts with a further heading "Consumer weakness". The term "consumer" is used in the Financial Services and Markets Act (2000), whereas the previous Financial Services Act (1986) used the term "investor". According to the former Act, "consumers" in Section 5 (3) are "persons" who are "consumers" in Section 138:

"'Consumers' means persons-

(a) who are consumers for the purposes of section 138; "

Turning to Section 138 (7), we find:

" 'Consumers' means persons-

(a) who use, have used, or are or may be contemplating using, any of the services provided by-

(i) authorised persons in carrying on regulated activities;"

Elsewhere in the Act a "person" can be a "firm". According to the FSA's glossary of terms, a "person" is:

"(According to the Interpretations Act 1978) any persons, including a body of persons corporate or unicorporate (this is a natural person, a legal person, and for example, a partnership)."

It seems that for example, a fund manager using the services of a stockbroker is a "consumer". The definition of "consumer" was discussed by the Treasury Committee. ^x There is an existing legal definition of "consumer" which is different from the meaning of "consumer" in the Review, where almost everyone is a consumer, for example:

"Pensions mis-selling arose because advisers persuaded consumers to leave their occupational schemes."(5.35)

The Review refers to "consumers of long-term retail savings products" (3.1). If you deposit cash in an individual savings account (ISA), you are consuming the services of the provider of the account, rather than the account itself. According to the Act consumers consume services, rather than "products".

People are becoming members of insurance companies as policyholders and also members of schemes, Collective Investment Schemes - unit trusts and OEICs, also personal and stakeholder pension schemes. Thus if savers are not "consuming products", what are they doing? We have mentioned: depositing money in accounts, signing contracts, buying financial services, buying membership.

The frequent use of the word "consumer" in the Review, rather than "saver" or "investor" implies that the Review is thinking of people as consumers of financial services in the first instance rather than savers and investors, but it is defining "consumers" as savers: "consumers of long-term retail savings products" (3.1). If you are a saver with a institution, then you are also a consumer of the services of the industry, such as the services of fund managers. But you remain a saver in the first instance.

Encouragement to save is also encouragement to be the opposite, that is to be consumers. Namely consumers of the services of the industry. "Consumer reluctance" is largely reluctance to be such consumers, rather than a reluctance to save.

The "protection of consumers" in the Financial Services and Markets Act (2000) should be changed to "the protection of savings", not from stock market fluctuations but especially from excessive charges. "The protection of consumers" is vague rather than "opaque and inconsistent" (3.13). It lacks precision. It seems to be giving the FSA the legal obligation to protect people, rather than their savings. Regulators sometimes say they are protecting the interests of consumers which is clearer than simply protecting consumers. For example the Food Standards Agency says The FSA will protect the interest of consumers.

The government is using vague terminology. My grand-father mentioned above, has not been alive for many years - so how could he be protected? Policymakers are confusing "savers", "consumers" and "savings". But does it matter? Is this not splitting hairs? One reason it does matter, is that it needs to be quite clear what is the role of the FSA. It "serves to fuel confusion generally" (33).

According to the Review consumers are not only "weak", "confused", "daunted" and "reluctant", they also have "inappropriately short timescales" (7.47). "Extensive use of confusing terminology.. serves to fuel consumer confusion generally." (33) "Commission also contributes to widespread confusion." (43) "Tax confusion" (90) adds to "the requirement for advice and the attendant need for regulatory supervision". Getting out of bed in the morning seems like an achievement!

I live near a shop that sells absolutely delicious Italian ice cream, but I am only a reluctant consumer. My girlfriend is not an equally reluctant consumer of chocolates. But if she falls for the stakeholder myths, and goes to either an adviser, IFA, intermediary (Forward) or distributor (4.30) - all four of whom give advice according to the Review - who persuade (4.3) her using "some sort of simple decision-tree approach" (10.49), to buy a such a "pension", neglecting to point out that they are

"operated by the same companies that ripped off millions in the great Tory misselling outrage of the late 1980s";

"A commission system...is highly effective in attracting otherwise reluctant consumers." (30)

"Consumer reluctance to engage in the savings process ..." (3.31)

The Review states:

"It is of fundamental, and growing, public importance that Britain should have a savings industry which is both efficient and widely trusted."

But the Review seems to discuss the topic of trust in only one paragraph (3.23). It is rarely mentioned. For example:

"Consumer confusion and lack of trust contribute to consumer unwillingness to save." (3.37)

The Review is concerned about distrust (confusion and reluctance), because it reduces levels of saving. It also causes worry and anxiety for Equitable Life policyholders. The words "worry" and "anxiety" do not seem to occur anywhere in the Review. "Concern" only applies policymakers.

The Review is concerned about "consumer weakness" because it causes "consumer detriment" (3.1) Its proposals in the area of advice, and the new "stakeholder products" (10.29) are intended to address this problem. In the area of with-profits it seeks instead to promote "competition" and "investment efficiency":

"The analysis and recommendations of the Review should be seen in this context, and not as a package for limiting consumer detriment. This is more properly the province of the FSA." (6.26)

According to the title the Review is about retail savings, rather than consumers. "Product providers" (3.23) "manufacture their own savings products" (4.11) which are "consumer goods" (15), but "consumers of long-term retail savings products" (3.1), may have an "appetite for equity investment" (7.64). This could be describing McDonald's fast-food.

3.2 "The industry"

In addition to "the industry", the Review mentions the: "retail savings industry" (7.1), "savings industry" (7.25) "financial services industry" (7.57) "long-term retail savings industry" (5.25), "UK retail savings industry" (16), "life industry" (107).

In paragraph 3.13 "the proliferation of products" is described as "a feature of the industry". This seems to imply that "products" are part of the industry. What does "the industry" consist of in addition to "products"?

The Review states that "unit trusts/OEICs are a highly fragmented industry" (9.58). There is also a "mutual fund industry" (113). Paragraph 162 refers to "different types of mutual fund" which includes investment trusts, in addition to unit trusts and OEICs. This seems to imply that part of the industry is not "directly regulated" by the FSA, since investment trusts are not directly regulated by the FSA (8.58).

A short definition of "the industry" is perhaps companies - "providers" and individuals regulated by the FSA, and unit trusts. The industry is mainly defined by legislation, such as the Insurance Companies Act 1982. A complete definition of "the industry" should list this legislation.

3.3 Providers

The Review is using the term "provider" to mean a company which is "providing products". Conversely all "products" must surely have "providers". Investment trusts unit trusts/OEICs are described as "two types of product" (97). But who according to the Review the "providers" of these "products"? The Review refers to "non-life companies" (159), but does not seem to mention "fund management company" or "investment company" (e.g. Merrill Lynch) anywhere (rather than open-ended investment company - OEIC).

It is unclear who will be the "providers" of the proposed "stakeholder products". Providers of stakeholder pensions include insurance companies, banks, investment companies and building societies.

"Providers" are often the "managers" of "schemes" such as unit trusts, referred to as schemes in the regulations. Also in the stakeholder regulations there are "trustees" and "managers" rather than "providers". In the case of trust-based stakeholder schemes, I have heard "providers" refer to the trustees.

3.4 Funds

The Review does not explain what is a unit trust, OEIC or unit-linked life fund, which it says are "fundamentally almost identical" (3.19). They could be described as kinds of fund. Professor Gower in his 1985 report Review of Investor Protection (Cmnd. 9125) which preceded the Financial Services Act (1986), described unit trusts and unit-linked life funds as "inextricably interwoven" (8.01). An insurance fund may be entirely invested in a particular unit trust, even one having the same name.

Unit trusts, OEICs and unit-linked life funds, are not the only kind of open-ended fund. The funds of a personal or stakeholder pension scheme under an "irrevocable trust" (8.39), with an investment company is another kind of open-ended fund, which is a unit-linked pension fund but not a unit trust, OEIC or unit-linked life fund. (For example the International Managed Fund and UK Balanced Equity Fund of Marks and Spencer Financial Services.) If you want to find out about portfolio turnover, these kinds of fund are very different. Unit trusts have accounts which are readily available from which portfolio turnover can be calculated.

Thus open-ended funds can be divided into: a) life funds, b) unit trusts, c) OEICs, d) unit-linked pension funds. Investment trusts are closed-ended.

3.5 "Products"

The word "contract" (Figure 9.3) is in keeping with the series of green papers under the title A new contract for welfare. But the Review usually uses the term "product". Some readers may not realise that they are the same. The "products" are really contracts. Nothing has been grown or manufactured. People are being persuaded to sign contracts rather than "sold products". The contract does not exist until it has been signed. There is just a piece of paper. "Products" are contracts for the services to be provided by the industry.

A problem with the use of the word "product" in comparison to "contract", is the need for a definition. For example OEICs are referred to as "products" in paragraph 2.3. In this case a company has become a product. Who is the provider?

In the Foreword it states:

"The savings marketplace is generally daunting for the consumer, with much jargon and a vast range of subtly differentiate products."

There is for example the: "savings product" (3.23), "investment product" (3.68), "financial product" (3.24) "retail savings product" (15), "financial or insurance product" (3.41), "life and pension product" (7.5), "equity-related product" (7.10), "with-profits product" (7.11), "life product" (7.32), "life insurance product" (7.32), "life and unit trust/OEIC product" (7.38), "unit-linked product" (7.54), "long-term product" (7.77), "individual product" (8.1), "long-term financial product" (8.7), "CAT product" (5.57), "single premium and unit-linked product" (5.71), "stakeholder product" (5.72), "single premium product" (5.72), "actively managed investment product" (5.73), "long-term retail savings product" (5.75), "charge-capped product" (5.77), "life insurance savings product" (6.50), "low-cost product" (Foreword), "simple regulated product" (Foreword), "good value product" (9.13), "higher commission product" (9.15), "simple product" (9.24). When referring to an "XYZ product". It is not always clear whether this is a type of "product", which has an exact legal definition, such as "with-profits", or is just a description such as "good value". If the latter, it seems clearer to say "a product which is XYZ".

"Mutual funds" are defined in paragraph 2.3 to be unit trusts, open-ended investment companies (OEICs) and investment trusts. They had already been mentioned in for example, paragraph 129. My Oxford English Dictionary defines: "mutual fund n. N. Amer. a unit trust." It would have been helpful if the Review included a glossary of terms. It took some time for me to discover that "mutual funds" include investment trusts.

"Stakeholder products" include mutual funds (129). "Investment trusts are not directly regulated by the FSA" (8.58). The Review is therefore recommending that not all "stakeholder products" should be regulated by the FSA. But at the same time the Review emphasises the need for "product regulation". "The heart of the solution lies in product regulation" (127).

What is a "product"? Investment trusts are referred to as a "type of product" in paragraph 97. Split capital investment trusts (Splits) have been in the news recently. Many investors have lost their capital, whilst being assured originally that they were safe investments. Aberdeen Asset Management, the company at the centre of the scandal, is regulated by the FSA, which states that:

"although Splits are investment companies, they are not regulated as Collective Investment Schemes (as are for example unit trust schemes)".

This implies that other kinds of "investment companies" are "regulated as Collective Investment Schemes". The FSA's glossary of terms does not define what is meant by "investment company". But it does define an investment company with variable capital a "company incorporated under the OEIC regulations". This is an ICVC. Rule 1.1.1 of the FSA's Conduct of Business Rules (COB) states: "COB applies to every firm (except an ICVC) as specified in the remainder of this chapter." Thus the COB rules do not apparently apply to OEICs. How does "product regulation" in the Review relate to "regulated as Collective Investment Schemes" and the COB rules?

The proposed "stakeholder products" (10.7) seem to be a new "product type" (4), though type does not seem to have a very exact meaning in the Review. Paragraph 97 refers to investment trusts and unit trusts/OEICs as "types of product". In paragraph 8.5 they described as a category, a "sub-category" of "mutual funds" which are a "category of savings product".

Being a new "product type" implies the need for special legislation and regulations. I would have liked to see a definition of "product", or preferably the word should not be used. What is meant by "product regulation"? Neither of these terms are defined in the FSA's glossary of terms. This glossary defines "product provider" and "packaged product", which does not include investment trusts.

"Product regulation" (10.13) in the Review, seems to mean standards like ISA CAT standards (5.57), and those for stakeholder pensions. It can be divided into a) legislation and regulations, b) the enforcement of this legislation and regulations. The latter is defined in the Financial Services and Markets Act (2000), which does not seem to mention the word "product" at all.

The manufacture-provide-consume terminology gives the impression that because of a steadfast dedication to public service, "providers" spend their time manufacturing "products" for consumption by consumers who are "not discerning or sophisticated investors" (9.14), "weak" (3,1) and even half-starved, since they will consume anything however "impenetrable" (3.11) and "inconsistent" (3.13). The Review is using "saver", "investor" and "consumer" interchangeably, and also "product" and "contract", which some readers may find confusing.

In conclusion, I dislike the word "products" as in: "consumers of long-term retail savings products" (3.1), "product providers" (9.6). "Consumers" and "providers" are consuming and providing financial services, rather than "products". The "savings product", "investment product" etc mentioned above are contracts rather than "products".

3.6 "Charges"

Under the heading "Opaque terminology" the Review gives examples of "charges":

"examples include: administration charge, service charge, establishment fee; policy fee; expense charge; management charge; fund related charge; and bid-offer spread." (3.14)

There are also "expenses":

"which include trustees' fees, registrars' costs, custody expenses, audit and regulators' fees." (7.27)

"including brokers' fees and stamp duty" (7.27)

and also the bid-offer spread cost, and an "adjustment":

"an explicit Market Value Adjustment (MVA)" (10.140).

The regulations for stakeholder pensions have both "reductions" and "deductions", like the FSA's Conduct of Business rules, where there are also "penalties" and "subscriptions" (6.6.67).

I like the term charges to denote any of the above, except for the bid-offer spread. The Review distinguishes between "explicit charges" and "hidden" or "undisclosed" costs, "principally dealing costs" such as broking commission (7.26, page 131). It seems more specific for example, to describe broking commission as a hidden charge and also as a dealing charge. In the Review "charges" are not "hidden" or "undisclosed" - only "costs".

We distinguish between a) management charges, b) expenses, c) dealing charges, d) dealing costs (which are the sum of dealing charges and the bid-offer spread).

The management charges are generally explicit charges and are specified on contracts. Expenses ("additional expenses", 7.27) are expenses incurred by the provider and charged to the savings accounts of savers. They may be explicit or hidden "depending on the type of the product" (7.29). Dealing charges are hidden, "netted off investment return" (10.137). They are brokers' commission and stamp duty.

On this website we are mainly concerned with dealing costs, which are discussed for example in the paper Measuring Value Added in the Pensions Industry (2000) by David Blake and John Board:

"There is also no disclosure requirement for retail funds to report turnover figures. So even with retail funds, there is no real disincentive to churn the portfolio...One way of keeping charges down is full disclosure for each function provided by the scheme provider, including dealing costs in the case of actively managed funds. This, in turn would require the public reporting of turnover data by actively managed funds."

There should not be any hidden charges. Expenses are an anomally. If the management charge does not pay for all the expenses incurred in managing savings, what does it pay for?

"Stakeholder pensions" is a wrong use of the word "pension", since a pension is an income not a saving scheme. All expressions do not have to have an exact definition, such as "the savings landscape" (10.181), but if they are used in a technical context, it is confusing to have several words with the same meaning. There is for example the "annual charge" (10.29), "annual management charge" (7.26), "annual explicit charge" (Figure 7.4). What is the difference? What is the difference between "additional expenses" (7.27) and "operating expenses" (7.30)?

The Treasury states:

"Our CAT standards will get rid of the small print and hidden charges that worry people so much."

The CAT standards do not get rid of the hidden charges. The Review uses the expression "product regulation" (5.3) for these standards. A "product" will be able to call itself a "stakeholder product" (discussed in Section 5 below), if and only if it conforms with these standards. Referring to "the Treasury's two flagship reform efforts, CAT-marked ISAs and Stakeholder pensions", in his recent CSFI report Waiting for Ariadne, Kevin James estimates:

"Explicit charges account for only about half of true total charges. It follows that the Treasury's price cap captures only about half of the true total price of investing. Moreover, one might expect the proportion of charges captured by the cap to fall over time, as the cap's very existence creates a strong incentive for funds to devise ways to increase the proportion of the true total charges levied in the form of hidden charges. The Treasury's approach fails because it does not capture hidden charges." (page 35)

The "half" is only an average. One half for fund A, could be one quarter for fund B.

Brokers' commission and stamp duty on the purchase of shares, is not included in the cap on charges of the CAT standards. The effect of portfolio turnover is therefore concealed.

The accounts of unit trusts in my possession do not seem to mention "stamp duty" (7.27). which is apparently "netted off investment return" (10.137). They sometimes mention "stamp duty reserve tax" (8.38). This effects the price of units: "The SDRT provision, where levied, has the effect of increasing the acquisition cost of units, or decreasing the redemption proceeds (as appropriate)". Even though they may say that they pay SDRT, they rarely give the total amount paid.

This lack of disclosure of taxation is a contrast with the United States, with its Mutual Fund Tax Awareness Act (2000). This is concerned with the disclosure of the effect of portfolio turnover on investment performance, resulting from taxation:

"require expanded disclosure in investment company prospectuses and annual reports of the after-tax effects of portfolio turnover on returns to investors."

In its October 1999 Consultation Paper Comparative Information for Financial Services, the FSA states:

"All the products considered by this paper have costs and charges, some of which may not be obvious to potential consumers ... In effect, they represent the price that the company charges for managing the consumer's investment." (6.8)

How much of the costs and charges is spent looking after "consumer's investment"? According to a recent article in FT Money by a reporter Kevin Brown, more is spent on sales than on looking after investments:

"An industry in which hundreds of companies spend three times as much money marketing 30,000 individual products as they do managing investments is bound to generate some scepticism."

3.7 Plain English

In many States of the United States you are not allowed to talk in gobbledegook. There are laws against it:

"Seven states have passed laws to regulate the comprehensibility of consumer contracts; fifteen have similar legislation pending. In addition, laws have been passed in twenty-eight states to control the readability and usability of life, property and casualty, and health insurance contracts. These laws have one common objective: to ensure that the average person can understand the rights, obligations, and restrictions in various contracts."

Does "product regulation" in the Review mean having standard forms of contract, free from "opaque and inconsistent terminology" (3.13)? This quest for greater readability in insurance contracts in the US, seems to be a contrast with the provisions of the Third Life Directive of the EU. In the quest to promote a single market, it prohibits the standardisation of documentation. One company selling the new "stakeholder products" could refer to "deductions", and another to "reductions". The Directive states:

"Member States shall not adopt provisions requiring the prior approval or systematic notification of general and special policy conditions . . . of forms and other printed documents which an assurance undertaking intends to use in its dealings with policyholders." (EEC92/96, Chapter 3, Article 9, 10th November 1992)

This part of the Directive should be abrogated. A "policy" is a contract made with an insurance company. "Insurance" should not be confused with "assurance". The orginal, and correct, use of these terms, is for example: you insure your house e.g. against fire, and you are given an assurance. Your house is insured and you are assured. It is therefore not possible to ask, which came first insurance or assurance? The insurance is on the house and the assurance is on you.

Standardised contracts exist in many areas, such as the building industry. The Review does not say that the "stakeholder products" will be "standardised". The word "standardise" does not apparently appear anywhere in the Review, except for the idea of a "standardised 'portable' fact-find" (5.32).

A contributor to a discssion board has a list of 29 terms for benefits from his policies. I am in favour of standardised documentation. The Review should be as well, since it advocates "financial literacy" (3.79), and one of its findings is:

"Information is only of use to consumers to the extent they can understand it." (3.78)

There are two ways of learning French. You can either concentrate on the differences with English, or on the similarities. The same two approaches apply to "products". The Review states "there are a considerable number of product types. and a huge range of products." (4), and "there are very large numbers of almost identical products" (9.1). It would not be difficult to standardise documentation of almost identical "products".

At most only a few academics will protest at a change in the meaning of a word like "reversionary" (6.7). But changing the meaning of words like "consumer" and "pension", should be of concern to English speakers everywhere. The Review has drawn the line at "adviser" and "independent adviser" (10.77), but this is only a start.

3.8 Numbers

Insurance policy numbers do not change, but other kinds of numbers such as account numbers for ISAs do change, or various new kinds of numbers may be introduced such as "reference numbers" and "scheme numbers". The explanation given is the introduction of a new IT system, or as it says in the report they are "addressing the legacy system problem" (9.51). When addressing this problem, they should keep the same numbers.

When I asked on one occasion why they were not keeping the same numbers, I was told that the new system generates its own numbers. It seemed to have some kind of random number generator. These changes cause considerable confusion to savers and executors. Company names change and also the amounts in accounts. When in addition account numbers change, it becomes practically impossible to keep track of investments.

Indeed savers sometimes lose track of their investments leading to the orphan fund problem. The Review uses the word "outcomes", in quotes as in "supervisors are now expected to deal with issues by focussing on 'outcomes'" (5.47). The quotation seems to be from the FSA, which uses "outcome", also for example as the outcome of a complaint, or a job application. The Review gives "outcomes" a general meaning as in "outcomes for consumers" (9.2), "satisfactory outcomes" (7.2). This seems to be an unconventional use of this word, and I therefore do not think it should be used in this way.

3.9 Definitions

What is the meaning of "retail financial services market" in:

"The FSA's overall regulatory agenda is to improve the fairness and effective working of the retail financial services market." (3.81) Note: This seems to be a quotation from the FSA paragraph 1.3. I cannot find the word "fairness" in the Financial Services and Markets Act (2000).

It presumably means advice. The main service is looking after savings, charges for which are specified on "products". But the Review indicates that "product regulation" is carried out by the government rather than the FSA, in 5.3 quoted above. It follows that substituting "product regulation" for the regulation of advice, as proposed by the Review, will leave the FSA with nothing to do!

Paragraph 3.81 says that the FSA is regulating "the market", rather than "the industry". Whereas according to the Financial Services Act and Markets Act (2000) it is regulating both. Paragraph 3) of the Act refers to "the system", which includes "markets and exchanges" and "regulated activities".

What does a "product" consist of? Does "product regulation" apply to all its parts, or are there some parts which it does not reach? "Intermediary" seems to be the same as "distributor" in: "consumers rely heavily on advice from intermediaries" (Foreword). "Distributors are .. in the business of . . . 'advice'" (4.30). Some readers may think that "financial service" as in "financial services industry" includes accountants.

In short, it would have been helpful if the Review had kicked-off with some definitions, or had a glossary of terms. There is often the use of the word "include", as in "charges ... include the following components" (7.26), "expenses .. include" (7.27), "dealing costs, including ..." (7.27). But this is not a definition. Surely the number of items under dealing costs cannot be very numerous, so that it would be possible to give a complete list. This is the advantage of a website. If one receives e-mails asking for footnotes, these can be added, whereas in the case of a printed report, this is not possible. Some definitions are given below.

I would like to see definitions of terms in the Review such as "the industry", "pension" (129), "product". How can a "stakeholder product" be a "mutual fund" (129)? These terms are also not defined in the FSA's glossary of terms, where for example a "package product" is stated to include stakeholder pension schemes (not mentioning personal pension schemes) and also units of unit trusts.

According to my Oxford English Dictionary a "pension" (129) is a "regular payment". The Review is using terms with a sense which is different from that in the Oxford English Dictionary, which are not defined in the FSA's glossary of terms, and which are moreover not defined in the Review.

To summarise:

1. Words in everyday use such as "consumer" and "pension" should not be given unfamiliar meanings.

2. There should be plain English definitions of words not in common use.

3. Technical vocabulary should be minimal. Two different words should not be used, if they have the same meaning.

Conclusion:

1. Terminology, plain English, anti-gobbledegook legislation, standard forms of contract, are part of the same subject. A committee should be established to decide what to do about this topic.

2. Public worry and anxiety are an important components of "consumer detriment" (3.1).

3. Replace "the protection of consumers" in the Financial Services and Markets Act (2000), with "the protection of savings".

4. "Consumer weakness"

The Review has three "consumer weakness" headings (14, 3.1, 3.20). Investors need strong organisations to represent their interests. The Swedish Shareholders' Association, for example, has 142 thousand members. We do not have an equivalent organisation in this country. Savers and investors should be deciding the kind of regulation they require to protect their savings. They should be deciding government policy in this area, rather than policymakers.

The main reason for opaque contracts ("products") is lack of demand. Information is not provided because it is not requested. Insurance funds do not have accounts like unit trusts, largely because they are not requested. This is a role of representative organisations.

A second solution to the problem of "consumer weakness", is that people should not actually be consumers, consuming the services of the industry. I am one of those people who favour the idea of compulsory saving, discussed in the Addendum below.

I agree that education can have only a "limited effect" (10.90) As you get older, it becomes less a question of what you know, and more one of what you have forgotten. The Review states that "consumers" have a "lack of understanding of the products" (23). But what is it about products they do not understand? They do not understand the importance of portfolio turnover. This should form part of consumer education. It would promote public awareness, which is a objective of the FSA under the Financial Services and Markets Act (2000):

"4. - (1) The public awareness objective is: promoting public understanding of the financial system."

Many people are already knowledgeable about financial services. Unless they wish to learn about the topic, those people who are not knowledgeable, should be allowed to get on with their lives without having to "understand the financial system", the "opaque terminology", "lack of clarity and consistency in the reporting of product charges" (3.13) and so on.

Some of us find interest in looking after our investments. But many people are worried and made continually anxious by the responsibility and do not have the spare time to devote to this task. People have family and work responsibilities. The government is also encouraging people to be involved in various activities. This the problem with "consumer education" (10.89-97), most people too busy to follow stock markets and read the financial pages in newspapers.

The government's approach to pensions is giving too much responsibility to individuals, such as whether or not to contract out of the State Second Pension (5.83, which is not included as part of the stakeholder decision trees 5.79). The FSA states:

"Contracting-out is an important decision and you need to consider all the implications, particularly if you are around the age of 50. If you want help with your decision, you should consult a financial adviser."

The government is "looking to individuals to make greater self-provision" (3.79):

"In the modern world people will increasingly have to look after their own interests for themselves. No government could realistically hope to meet everyone's expectation for welfare services at a tolerable level of taxation." (15)

Too much responsibility is being given to people to "look after their own interests". This leads to the possibility of making mistakes and the need for advice. For this reason I do not like the proposed reform of the system of payment to advisers:

"What is needed is to make the commission payment, which should be remuneration for the provision of advice, the subject of negotiation purely between the adviser and the consumer, with no provider involvement." (10.60)

I disagree. The less people need to know and negotiate, the better.

"Consumers are generally not discerning or sophisticated investors." (9.14)

They are moreover, for the most part, not discerning or sophisticated negotiators, at least when it comes to savings contracts. Such negotiation requires savers to compare the tariffs of different advisers - that is shop around for advice:

"the adviser would present the consumer with a 'tariff sheet' ... consumers would be in a position to compare these across advisers" (10.64)

But the Review states:

"consumers generally fail to shop around for advice" (4.82)

There needs to be a cap on commissions, like the stakeholder cap on charges, and the former Maximum Commission Agreement, abolished on 1st January 1990. Commissions to IFAs should preferably be abolished altogther, as recommended in the Summary:

"The definition of an 'independent adviser' should be that he is an adviser who is not paid by a provider; and the use of the word 'adviser' should be restricted to those who meet the 'independence' criterion." (143)

Conclusion:

1. People are being requested to look after their own affairs to an excessive extent, in particular whether or not to contract out of the State Second Pension.

2. Abolish commissions to IFAs.

5."A suite of simple and comprehensible products"

"The root cause of the problems in the retail savings industry is consumer weakness." (10.89)

The reason for consumer weakness is "features of the UK retail savings industry" in Chapter 3:

"The preceding section has set out the root causes of consumer weakness " (3.20)

The preceding section is headed "Industry development", starting: "A number of features of the UK retail savings industry have served to compound consumer confusion" (3.13). These "features" in 3.13 relate to contracts. "The sheer quantity of products on offer is itself overwhelming." (3.18). They are similar in this respect to the quantity of terminology. It is better to make things responsible for problems rather than people, because the former do not answer back (at least for the foreseeable future!), however overwhelming the quantity. In this respect contracts are ideal.

Following this insight, the Review proposes to introduce new "stakeholder products" (126-139) which are "simple and cheap" (10.11). "Stakeholder products" is a "working title" (130). Stakeholder pensions are sometimes referred to as "stakeholder products". The proposed new "stakeholder products", will therefore need to be called something else to avoid confusion. It could also be confusing to describe the new contracts as "regulated". A company could say "regulated by the FSA", with the possibility of misapprehension, whether this applies to the contract or only to the company.

The Review proposes to introduce "simpler, less opaque products" (2.8) What does "opaque" mean? This is largely high charges resulting from high portfolio turnover. It states "annual charges for these products should be regulated" (10.29). "Annual charges" are "annual management charges" (7.26) which are explicit charges. They do not include dealing charges resulting from portfolio turnover. It proposes a 1 per cent charge limit on the annual management charge (10.31).

We already have experience with such a 1 per cent cap on charges. When someone points out, as happened recently on a Motley Fool bulletin board that stakeholder pensions have charges outside the cap, this comes as a considerable surprise, to most people, as can be seen from contributions to this discussion:

The Review seeks to introduce new "products" which can be "sold safely", whether or not the sale is accompanied with advice. "Substituting product regulation for the current regulation of advice." (10.13). "The heart of the solution lies in product regulation." (10.14) According to the Financial Services and Markets Act (2000) the FSA regulates "persons" and "activities". There seems to be no mention of "products". There are "authorised persons" and "regulated activities", but no reference for example to "authorised products".

The regulation of sales did not prevent the personal pensions mis-selling scandal. This was caused in the first instance by mis-selling rather than wrong contracts. People were persuaded to "leave their occupational schemes" (5.35). It would have been less of a scandal had personal pensions had a better investment performance - which is a contract issue.

Mis-selling is practically impossible to prevent. People often believe verbal statements, which are not in writing, which may turn out to be false in future years. There is more generally wide scope for misunderstanding, and inadequate provision of information. For example, in the Motley Fool discussion board on Equitable Life, FSAVC policyholders complain about not being told of GAR and GIR policies. For example:

"I complained to EL that my scheme did not have the favourable GAR term, and was told that no FSAVCs had GARs."

"It still seems pretty immoral to be offering GIR + GAR AVC schemes at the same time as offering non-GIR + non-GAR FSAVCs - especially when my contract said that, after deductions, my contributions secured a slice of the fund in my name. Nothing about being liable to highjacking by other policyholders"

Whether or not regulation is successful depends mainly on who is doing the regulating. The mis-selling resulted from self-regulation of the industry. This results in weak regulators. The Review discusses "consumer weakness" at length (1.4, 3.1, 3.20), but there is no mention of regulator weakness. This self-regulation is being continued with the formation of the FSA. Rather than weakness, Paul Braithwaite, Chairman Equitable Life Members' Action Group, in a letter to the Chancellor, refers to "the regulators acting hand in glove with the regulated".

By "product regulation" the Review means essentially extending CAT standards. This a mild kind of regulation in comparison to standard forms of contract. The term "product regulation", seems a slight exaggeration.

"The Review therefore recommends the introduction of a suite of simple and comprehensible products. The features of these would be sufficiently tightly regulated to ensure that, with certain additional safeguards, a consumer could be sold these products safely without regulated advice." (10.12)

"The Review recommends that three products should be available within this suite:

a mutual fund or unit-linked life fund.

a pension; and

a with-profits product." (129)

This is similar to Table 2.1 in the Review which gives "Savings category": "Individual pensions", "Life savings products", "Retail unit trusts/OEICs", "Retail investment trusts". Some questions to ask about the "product" are: Is it unit-linked or with-profits? Who is the "provider"? Is this an insurance company? Is it a part of a pension scheme?

It seems unclear from the Review how the new "stakeholder products" will differ from existing ISAs with CAT standards. How will a stakeholder product which is "a pension", differ from a stakeholder pension? ISAs and stakeholder pensions can be bought without advice. A considerable effort will be required to introduce new legislation and regulations for a new "product type" (4). It will presumably require an Act of Parliament. What are the corresponding advantages of a new "suit of simple and comprehensible products" (10.12)?

The emphasis with personal pensions was on "portable", with stakeholder pensions it was "low-cost". In the case of the proposed "stakeholder products" it is on "simplicity". Not only will the "products" be "simple and straightforward" (10.4) but there will be a "simple and clear warning at the point of sale" spoken in "clear English" (10.24):

"The sales process should begin with the person selling the "product" giving a number of 'plain English' warnings to the consumer."

"It would be essential for these warnings to be simple and limited in number, or they would loose their effectiveness. " (10.25)

Paragraph 10.24 gives a list of warnings which should be included "at a minimum":

that the consumer was being offered the opportunity to buy a restricted number of simple products, and that the salesman was not in a position to provide expert advice on the appropriateness of other products owned by the consumer;

that, of the suit of regulated products, the pension would be unlikely to be suitable for:

- people on low incomes who were above a certain age;

- people who had access to an occupational scheme

if purchasers were in either category, they should restrict their choice to one of the non-pension "stakeholder" products, and seek advice on their pension arrangements;

that the products being sold had an element of financial markets risk, and that therefore consumers should consider carefully before they put too much savings in them;

that these products were not for meeting specific future liabilities, as their future value could not be guaranteed; and

that the purchase should not be considered if the intended savings horizon was less than, say, five years.

The probability of substantial hidden charges resulting from high portfolio turnover is missing from this list of warnings. The Review states that the list "could be extended to mandating the use of some simple decision trees". (10.24, footnote). The customer "would then certify that he or she had received and understood these" (10.24). This seems to apply to the warnings, and not to the decision trees, which is just as well since the use of the decision trees will be "kept to a minimum" (10.24, footnote).

There will also be a simple key features document which "discloses only a few important features" (10.98), and a "short and simple 'Buyer's Guide', including a prominent list of questions for the consumer to ask his adviser." (10.188).

The Review says "a consumer could be sold these products safely without regulated advice" (10.19). The new "stakeholder products" should be a sufficiently good investment to sell themselves without savers needing to be talked into buying them. This suggests that the Review is not expecting them to be a particularly good investment. The cap on charges will restrict commissions, so that there will not be much encouragement to sell these "products".

The Review suggests that the government regulates "products" and the FSA regulates sales:

"For the Review, the two types of regulation of particular relevance are:

regulation of the sales process, carried out by the Financial Services Authority (FSA); and

product regulation (or quasi-regulation) by the Government through the creation of CAT standards and stakeholder pensions." (5.3)

We can distinguish between: what is being regulated, the sales, contract or company; who is doing the regulation, the government or FSA; the kind of regulation, whether legislation/regulations or enforcement.

CAT standards and stakeholder pensions are defined by legislation and regulations. The enforcement of these regulations is regulation carried out by the FSA. For example the FSA regulates collective investment schemes, and its handbook on these schemes, refers to "product regulation". It also regulates stakeholder schemes, which are also regulated by OPRA. Who will regulate the new "stakeholder products" (10.7)? The Review states for example:

"It is for the FSA and the Government to determine between them the appropriate division of responsibilities for taking forward the Review's recommendations in this area." (10.50)

This is a problem with the FSA in general, there is a who-does-what problem, as between the Treasury and FSA. This kind of demarcation problem would not arise if the FSA were part of government, like regulators in other countries such as the SEC in the United States, Finansinspektionen in Sweden, Bundesanstalt für Finanzdienstleistungsaufsicht (BAFin) in Germany, and so on.

The Financial Services and Markets Act (2000) was an upheaval masquerading as a reform. The FSA is controlled by the industry, subject to overall control by the Treasury, which leaves detailed day-to-day issues to the FSA. The FSA is financed by the industry. It is different in this respect to OPRA which receives a substantial government grant. It is staffed to some extent by the industry, sometimes referred to as "practitioners on secondment".

Of course the industry does not like "product regulation". The FSA therefore claims that there is a "serious risk" that it will be harmful for "consumers", restricting: innovation, competition, choice, and it "might lower consumers' standards of care" (see paragraph 41).

Sales should be regulated by trading standards officers, like consumer goods. The FSA is essentially controlled by the industry, which is therefore regulating its own sales.

I agree with the list of "challenges" (4.5), but not entirely with "the advice process" (4.9). In the case of one interview "endeavour to establish" was "insist on knowing". I refused to give my own "income and tax position" to the adviser. He seemed to be prying and the interview terminated.

I suspected at the time, that he wanted to know my circumstances in order to try to sell me various kinds of "products", but it may have been only because of a know-your-customer rule (5.26). This is apparently more a de-facto than a de-jure rule, not to help advisers give advice but to avoid mis-selling:

"There is no written regulatory requirement for a lengthy and heavily documented sales process; but on the basis of past experience, industry participants believe this to be required, if they are to avoid future regulatory sanctions." (5.88)

"conversely the sanctions for not gathering copious information are perceived to be potentially very serious" (47)

Based on this one interview, I would like to see a don't-know-your-customer or right-to-privacy-rule. You should not have to disclose your details to get advice. The industry tends to emphasise the provision of "products" to suit individual requirements, when investors just want a reasonable return over some period of time, which is not an individual requirement but is common to investors in general.

The Review suggests "using some sort of simple decision-tree approach" (10.49), for its new "stakeholder products", to satisfy the know-your-customer requirements proposed in the new Investment Services Directive.

The challenges faced by investors (4.5): "overall complexity of the market", "basic types of product", "specialist advice on product features","manage their investments on their beha.......lf", all relate to the market and "products". Whereas the fact-find "basic details on customer" etc (4.9) all relate to the customer. The customer wants to know about the market. It is not clear why the adviser needs to know in detail about the customer, though some basic information may be necessary such as whether they have a steady job, and when they will retire.

Stakeholder schemes scarcely have accounts. They are largely based on insurance funds, which do not have accounts individually, being part of the life fund of insurance companies. Compare this with the Annual Report and Accounts of the ATP scheme. How will the accounts of the proposed new "stakeholder products" compare with those of large occupational pension schemes such as USS mentioned above? Would you invest in a company with no accounts?

Will the proposed "stakeholder products" be organised into schemes? These schemes should have Annual Report and Accounts. The stakeholder legislation and regulations refer consistently to stakeholder schemes, rather than "pensions", "products", "policies" etc. Whereas the Review refers to new "stakeholder products".

Conclusions for "stakeholder products":

1. It is not clear what advantages they have in comparison to ISAs with CAT standards and stakeholder pensions.

2. The CAT cap on charges for the ISA CAT standards, is only on explicit charges, leaving hidden costs and charges.

3. The new stakeholder products should have proper accounts.

4. In comparison to occupational pension schemes there will be no trustees - at least the topic of trustees has not been discussed in the Review.

6. Stakeholder Products: The Hidden Charges (top)

The proposal to restrict charges and promote simplicity is welcome. The annual management charge for unit trusts was restricted to about 0.5% of capital until 1979, when it was relaxed by the incoming Conservative government. It was combined with the initial charge to be a maximum 13% over 20 years. There could be a 3% initial charge and 0.5% annual charge. A future Conservative government might similarly relax the cap on charges for the proposed "stakeholder products". The same industry which was happy and successful with 0.5%, is now arguing that 1% is a squeeze (Figure 5.3).

Unfortunately simplicity and cheapness could be an illusion, or an exaggeration. There could be just less complexity and less expense. "Retail savings products are inherently more complex than any other types of consumer goods." (3.4)

The new "stakeholder products" will have a cap or ceiling on "annual charges" which are "regulated":

"The Review recommends that there should be no initial charge, and that annual charges for these products should be regulated." (10.29)

Which annual charges? The only "annual charge" mentioned is the "annual management charge". The Review distinguishes between:

1. initial charge, (7.26)

2. annual management charge, (7.26)

3. additional expenses, (7.27)

4. dealing costs. (7.27)

In "impact of undisclosed costs" (7.26, page 131) the initial charge and annual management charge are described as "explicit charges". Additional expenses 3) and dealing costs 4) are described as "undisclosed costs". It follows that the "explicit charges", (1 and 2) are regulated, that is capped but the "undisclosed costs" 3) and 4) are not regulated, that is they are not capped. Therefore the Review seems to be proposing that additional expenses 3) should not be included in the cap on charges for "stakeholder products". It states "the treatment of the 'additional expenses' category depends on the type of product," (7.29).

I understand, though I am not entirely sure, that in the case of stakeholder pensions, the additional expenses 3) are included in the cap on charges. What is the definition of "dealing costs" 4)? Paragraph 7.4 page 131, mentions "broking commission" and "other dealing costs - the 'spread' between the price paid for the security and a reference price in the market, for example". What does "for example" mean? What else is there?

"Dealing costs" are a) brokers commission, b) stamp duty, c) the 'spread'. Is there anything else? The stakeholder regulations define dealing charges outside the cap on charges: "where any stamp duty or other charges are incurred directly in the sale or purchase of securities" 5(c). What are the "other charges"? The Review refers to:

" categories of cost which are charged directly to the fund ... dealing costs, including brokers' fees and stamp duty " (7.27).

The "including" implies there are other "dealing costs" in addition to brokers' fees and stamp duty. What are these?

The 3) and 4) could be substantially higher than 2):

"Taken together, the impact of undisclosed costs and unsuccessful stock selection were substantial (2.5% per annum over the period studied) and considerably greater than the explicit charges." (7.26, page 131)

According to the diagram (Figure 7.4) the explicit charges are 1.2%. The "gap between the market rate of return and return available to investor" is 2.5%. Subtracting 1.2%, we obtain 1.3% for the impact of undisclosed costs and unsuccessful stock selection, rather than 2.5%. There is a reference to the February 2000 Occasional Paper of the FSA The Price of Retail Investing in the UK by Kevin R. James. This diagram does not occur in his paper.

A 2.5% impact of undisclosed costs can be seen in a very similar diagram in Annex 2 of the October 1999 Consultation Paper Comparative Information for Financial Services:

Figure 7.4 is a crucial diagram. But it seems rather risky to base the reform of an entire industry on the work of one author, however broad his shoulders, especially when this diagram does not appear in the work cited. In a footnote on page 131, the Review refers to a further paper Triumph of the Optimists. This sounds interesting, but I have not been able to find it, since the Review does not specify whereabouts it is published. We need further information. We need information about the returns made by all "products" for the entire industry, and over substantial time periods. This implies a computer system.

Thus having a cap on explicit charges 1) and 2) is not a large reform as there could be another 1.3-2.5% of undisclosed costs. Adding the 1% annual management charge, it can be seen that the stakeholder world is a 2.3-3.5 per cent world rather a "1 per cent world" (5.56). The Review discusses "consumer education" (10.89-10.97). The stakeholder cap on charges is an example of mis-education. The simple charges for stakeholder pensions are an illusion, as they will be also for the "stakeholder products", as proposed in the Review.

The cap on charges of stakeholder pensions is expressed in various ways such as: "Providers are only allowed to charge a maximum of 1% a year in fees.", "There is only one charge payable on a Stakeholder pension known as an Annual Management Charge.", "Schemes may only charge a maximum of 1% per year of funds accrued.". The Department for Work and Pensions shows the situation more accurately when it says: "As well as the one per cent, the law allows pension providers to recover costs and charges they have to pay for certain other things." (stakeholder regulations, paragraph 5 (c)).

It seems from the proposals for "stakeholder products" in the Review, that the "providers" will once again be saying one thing and the DWP the opposite. I look forward to setting up a website "Stakeholder Products: The Hidden charges", following my websites Comparative Tables: The Hidden Charges and Stakeholder Pensions: The Hidden Charges .

This is a problem with saying there is a "1 per cent cap" (10.31) or "1 per cent ceiling" (10.32), without at the same time saying there are additional dealing costs and charges. Companies use a variety of expressions, such as "1 per cent and that's it". Some such expressions are on my website Stakeholder Pensions: The Hidden Charges. Many savers do not realise that there are at least dealing charges, in addition to the 1 per cent. They may then make an investment which they would not have made had they realised there are additional charges. It is not sufficient to say there is a 1 per cent cap on "annual charges" (134), because savers may not realise that not all charges are annual charges.

I am in favour of restricting charges. The problem with the proposed restriction of charges for "stakeholder products" in the Review, is that only the annual management charge is being restricted. Savers will then be told there is "a cap on charges", and most will not realise that the cap does not apply to all charges.

The Review divides the "impact of undisclosed costs" into:

" - explicit charges (the annual management charge);

- undisclosed costs (principally dealing costs); and

- underperformance as a result of unsuccessful stock selection decisions (to the exent that this occurs).

Explicit charges can be separated out. The other two elements cannot, because while dealing costs in the shape of broking commission are a single and unambiguous number, other dealing costs - the "spread" between the price paid for the security and a reference price in the market, for example - are not." (7.26, page 131)

The Review often describes "costs" as "hidden" (7.38) and "undisclosed", but apparently never "charges". It refers to dealing costs, rather that dealing charges. Using this terminology the Treasury can say that the CAT standards "get rid of hidden charges", but not that they "get rid of hidden costs". "Additional expenses" (7.27) are referred to as one of two "categories of cost which are charged directly to the fund" rather than "charges". There seems to be no reference to "hidden charges" anywhere in the Review. It is then unclear which are the "hidden charges" being "got rid of" by the CAT standards referred to in Section 3.6 above.

Broking commission is a "single and unambiguous number", to the industry, and so is stamp duty. But the same does not apply to investors, because they are not disclosed. They are "separated out" by the industry, but cannot be separated out by investors, because they are concealed. The cost of the "spread" can at least be estimated from portfolio turnover, such as by multiplying the portfolio turnover by 1 per cent. It will be substantially higher for a unit trust with a portfolio turnover of over 300 per cent per annum, than one with a turnover of less than 20 per cent per annum.

The "'spread' between the price paid for the security and a reference price in the market", is an exact number. Multiplying this by the size of the trade and then summing over all trades, we then obtain an exact measure for the total spread cost. This is apparently the way the spread cost is calculated for each fund in Table 2 below. "Spread costs are tallied using a fund-by-fund quarter-by-quarter examination of stocks traded." Another table from the same paper gives the average spread per dollar traded, for each fund.

It is difficult to believe that part of the 2.5% of undisclosed costs mentioned above (7.26), is caused by unsuccessful stock selection. This would imply that fund managers are systematically choosing the wrong stocks. In which case they should all be sacked and replaced by computers. There is a tendency to blame poor investment performance on wrong choice of investment when in fact it is caused by high charges.

The Review recommends that all costs should be shown with its proposed reformed with-profits policies, except for dealing costs:

"all costs should be shown, rather than being netted off investment return. However, it will be important to ensure consistency with unit trusts/OEICs, which have certain costs which can be treated in this way." (10.137)

This states that to ensure "consistency", dealing costs, such as brokers' commissions and stamp duty, should not only be concealed for its "stakeholder products", they should also be concealed for its new with-profits policies (not discussed on this website) by being "netted off investment return".

The Review states that "a 1 per cent ceiling would be a suitable starting point" (134). Where does this 1 per cent come from? The Review refers to:

"The Review has seen some confidential modelling of stakeholder profitability carried out by providers that supports the generally held view in the industry that the pay back time for stakeholder products is of the order of 10-15 years." (5.75)

Of course the industry claims that it is being tightly squeezed by the stakeholder cap on charges. But how does this compare, for example, with the Danish ATP scheme. The Director's Report for the year 2001 states that: