Who can you trust with your money?
Comment by Stephen Wynn

on the Consultation Document preparatory to

Review of Medium and Long-Term Retail Savings in the UK
by Ron Sandler

1. Background

The Review of Ron Sandler will be concerned with retail saving, which means saving in for example unit trusts and personal pensions, which are provided by institutions regulated by the Financial Services Authority. It follows the report of Paul Myners Institutional Investment in the United Kingdom: A Review published in March 2001. This was largely concerned with the investment of self-administered occupational pension schemes. They generally make investments directly rather than having providers who are financial institutions like personal pensions.

The further away from the investor the control his money is, the more untrustworthy this control becomes. Looking after your own money, having this money looked after by trustees appointed by yourself, is safe. As money is invested or reinvested in companies which change their names, amalgamate, demutualise or are taken over, the more out of control the savings becomes. The investor is uneasy if not suspicious of name changes, new management, amalgamations, excessive salaries and bonuses, involvement in scandals such as for the mis-selling of personal pensions, hidden charges and so on. This all produces a fear of investing in the future, whereas the government states that it is committed to encouraging people to save.

A major concern of the Consultation Document is how to "mitigate weak consumer influence". Section 4 headed "The Value Chain Consumers", starts "In efficient markets the purchases of the end-consumer will ultimately drive behaviour and market structure." (paragraph 15)

This assumes that the only influence consumers can have is by their purchases, that is at the moment of purchase. But what happens after someone becomes a policyholder, that is after a purchase. What influence can policyholders have on the companies in which they hold policies?

Paragraph 15 states that "Even basic matters . . are not well understood. Consumers do not generally research widely prior to making a purchase decision." This is one reason why we need to seek for ways in which consumers can have an influence, other than by purchasing decisions.

The Sandler Review will result in recommendations, some of which such as the control of commissions, may be adopted by the government. Consumer influence will probably remain weak, though hopefully less than previously. Whose job it is to see that consumer influence is not weak after the Review? It is the job of trade unions to see that the influence of workers is not weak, especially by collective pay negotiations. By analogy, to ensure that the influence of consumers is not weak, we need strong Investor Associations.

3. Charges not known to the investor

The Consultation Document states that "The industry has been extremely successful in encouraging people to save for the long term." (paragraph 10) Rather than "encouraging people to save", most often people have spare cash which they do not have an immediate use for, but will or may have a use for in the future. In the meantime it needs to be put somewhere.

The Foreword of the Consultation Document asks "is the consumer being well served with products which are low cost and offer attractive returns in relation to the risks involved?" The rates of return provided to retail investors by the products of the financial services industry has been poor in comparison to "market rates". This is discussed for example in the February 2000 occasional paper of the FSA, The Price of Retail Investing in the UK written by Kevin James.

He estimates that only about half of this underperformance can be attributed to explicit charges. In the case of stakeholder pensions these explicit charges are the providers management charge which is capped at 1 per cent. The DSS stakeholder guidelines state that in addition there are dealing charges such as stamp duty.

"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. For example, when they have to pay any stamp duty or other charges for buying and selling investments for your fund

This implies that the only charges are the provider's management charges and dealing charges (appart from optional charges for advice or insurance). That is all implicit charges are dealing charges. However according to the calculations on my website Stakeholder Pensions: The Hidden Charges (Section 3.2), only a proportion of implicit charges are dealing charges. What are the other implicit charges? I have heard for example that another hidden charge can be manipulation of the bid/offer spread of units, according to whether more people are buying or selling units.

"Unit trusts and stakeholder pensions are both the subject of detailed product regulation on charges." (paragraph 26) The regulations are arguably not very detailed. The management charges for unit trusts do not include various fees and the dealing charges.

The constantly emphasised 1 per cent cap on charges of stakeholder pensions does not include dealing charges such as stamp duty. This is discussed on my website (also discussed by me on the Radio 4 Money Box programme).

The attempt to gain consumer confidence by giving the impression that the maximum 1 per cent charge for stakeholder pensions is a sole deduction only results in suspicions when it is revealed that there are other charges and the "one per cent" is a piece of verbal ingenuity.

An article in The Sunday Times headed Revealed: the true cost of stakeholder (20th May 2001) starts:

"INVESTORS in stakeholder schemes could be cheated out of tens of thousands of pounds in retirement because the cost of running the plans can be twice as high as the quoted annual 1% charge, writes Kathryn Cooper."

Such articles do not inspired confidence in the trustworthiness of stakeholder pensions. Indeed sales have been poor. They were introduced on 6th April. According to the ABI 59,000 stakeholder pensions were sold in the first quarter since they were introduced (the second quarter of the ABI statistics) with new premiums of £64 million. It was reported in the Financial Times (14th August) that most of these sales have been part of the Building and Civil Engineering Scheme, which has "60 per cent of the market, dwarfing the share of the established names".

Investors cannot know what are the dealing charges at the time of purchase, because they are in the future. The Consultation Document refers to a "two-part charging structure" (paragraph 67). But this apparently only refers to explicit charges, and does not include dealing charges which can be more than the explicit charges.

High dealing charges result from excessively high portfolio turnover. This is converting long-term saving into short-term saving. A recent article in the magazine US News states: "You're investing long term. Most fund managers aren't."

This article gives a table showing actively managed funds with high fund turnover performing worse than those with low turnover. There needs to be a similar diagram for actively managed funds in this country. There is literature comparing actively managed funds with passively managed funds, that is index-tracking. This diagram goes a step further. Some actively managed funds are more actively managed than others. The less actively managed the better. The merit of index-tracking largely derives from low portfolio turnover. The article distinguishes between "investing" and "playing the market". The latter is not "efficient investment decision making". (paragraph 7)

"When you have portfolio turnover of more than 100 percent, it makes little difference what you know about a company, because you'll own it for less than a year."

Consumers are in general not informed about portfolio turnover, which is one reason why "costs and charges are poorly understood by consumers". (paragraph 11) They are kept in the dark.

Fund turnover such as for unit trusts, should arguably be restricted by law. So that a fund cannot sell more than a certain percentage of its portfolio if it is expanding or buy more than a certain value if it is contracting.

A reason for high portfolio turnover especially of unit trusts is to generate soft commissions. The Consultation Document asks:

"How do life insurance companies and collective investment schemes currently measure up against the Myners principles." (paragraph 53)

The Myners Review recommended that soft commissions should be abolished:

"The report recommends that it is good practice for institutional investment management mandates to incorporate a management fee inclusive of any external research, information or transaction services acquired or used by the fund manager rather than these costs being passed on to the client." (paragraph 5.113)

Life and pension companies apparently measure up hardly at all to this principle. Soft commissions are common.

The Consultation Document states that stakeholder pensions have no transfer charges. (paragraph 67) But transfers will incur costs. There will for example be dealing costs if, as the result of transfers, one provider has to sell investments and another has to make new investments. Who pays?

4. "Retrospective reviews some years later"

The Equitable Life guaranteed annuity rate (GAR) debacle prompts the question, what is to prevent insurance companies making all sorts of promises and subsequently saying: "Sorry we do not have the funds to fulfil our promises." The Policyholders Protection Scheme (and Investors Compensation Scheme) does not apply unless the company goes bankrupt. This is surely an argument in favour of product regulation to ensure that companies have adequate funds to fulfil promises. Product regulation need not restrict innovation any more than it does in the pharmaceutical industry.

In his book Regulating Pensions: Too Many Rules, Too Little Competition (IEA, 1996) Professor David Simpson economic adviser to Standard Life, states that there is often no "review and sanction" of new products prior to launch under the Financial Services Act 1986:

"some of the regulatory authorities bodies set up under the Act have not been prepared to review and sanction new products prior to their launch, but have reserved the right to carry out retrospective reviews some years later. A notable example being the introduction of single premium with-profits bonds in 1990. These products were on the market for some years before the regulators indicated they had some concerns about them. By that time, several billion pounds' worth had been sold." (page 46)

Paragraph 62 of the Consultation Document refers to "the product regulation regime". Since the regulators are acting on behalf of the industry they will obviously approve products which are profitable for the industry. Products such as unit and investment trusts, personal and stakeholder pensions are defined by government legislation and regulations. It should be the responsibility of the government and regulators, to see that all products of the financial services industry meet minimum standards.

There should be review and sanction of new products prior to launch, by regulators who act on behalf of investors rather than the industry. The term "products" is slightly confusing since they are really contracts - nothing has been manufactured. There should ideally be standard forms of contract with standardised wording. Standardised wording is prohibited for life assurance poducts under the EU Third Life Directive:

"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)

The Treasury states: "Our CAT standards will get rid of the small print and hidden charges that worry people so much". They do not get rid of stockbrokers' commissions as a hidden charge.

5. The need for accounts

All unitised funds selling units to the public should have audited accounts, available on request. Investors should not have to make do with indicators such as those in the Comparative Tables being developed by the FSA or the key features which it discusses in Informing Consumers: a review of product information at the point of sale. These are intended to help individual investors make informed investment decisions.

Helping investors make decisions is not the only reason why there is a need for disclosure of information. A second reason is that it acts as a check on integrity, and promotes accountability especially to avoid hidden charges. For this reason it is essential to have proper accounts. Unit trusts have accounts but total dealing charges are missing. Insurance bonds and insurance funds do not have such accounts. They have reports known as (or at least which were formerly known as) "DTI Returns". These are not at all the same as proper accounts for each fund.

Such accounts should show:

An insurance bond invested in an insurance fund typically contains only a nominal amount of life insurance such as 1.5 per cent of capital. This is a legal requirement for the bond to qualify as insurance - which is surely an anomally.

Insurance funds are often invested in unit trusts. The report Review of Investor Protection by Professor L.C.B. Gower (cmnd 9125) which preceded the Financial Services Act 1986 described insurance funds and unit trusts as "inextricably interwoven" (paragraph 8.01). The insurance fund and the unit trust in which it is invested may have the same name - causing confusion to investors.

Insurance funds were developed by the insurance industry to cash in on the success of unit trusts. An insurance company and a unit trust company may be combined in the sense that the XYZ organisation may consist of XYZ Insurance Limited and XYZ Unit Trust Managers Ltd. There is not competition between the insurance company and the unit company because they are the same organisation.

Insurance funds are the subject of the 1973 Report of the Committee on Property Bonds and Equity-Linked Life Assurance Linked Life Assurance (cmnd 5281). The Committee had eight members with Chairman Sir Hilary Scott. It had a consumer representative Miss Eirlys Roberts, who presented a dissenting view (page 74-75).

"I do not share the Committee's view that full disclosure of information, coupled with the present and proposed control exercised by the Department, is sufficient to protect the consumer. In the first place, it must be remembered that - admirable as disclosure of information is - it reaches only the best-educated section of the population."

She recommended a change in the legislation:

"it would appear that it is impossible to divorce life assurance and property bonds from the subject of investments such as unit trusts. And it does not, in my opinion, make sense to deal with property bonds under insurance law alone. There is already one framework of law for unit trusts, and another (entirely different) framework of law for insurance. What seems to be needed is an extension and improvement of the law governing unit trusts, to include funds linked to property and other speculative investments."

The Committee recommended that insurance funds should have accounts:

"We are of the opinion that life companies should be required to prepare at least annually a revenue account and a balance sheet for each internal fund, and that the Department should be empowered to require the preparation of those accounts more frequently." (paragraph 158)

6. "Is there a case for regulatory intervention in the setting of fees and commission levels?" (paragraph 38)

Fees and commissions should be restricted. Commissions were formerly restricted under the Maximum Commission Agreement. Judging from the experience of various friends and acquaintances independent financial advisers (IFAs) are to a considerable extent just life assurance salesmen. They tend to recommend the products which pay the highest commissions. It seems that they cannot be trusted in general, though no doubt there are good IFAs who can be trusted.

In the case of single premium with-profits bonds, I have read that the commission may be 6% of the premium. This seems to be an example of commission escalation. Commission levels increased sharply when the MCA was abolished, from 1st January 1990. Professor Gower said in his report mentioned above:

"But, as I see it, it can never be advantageous to the public to permit insurance companies to compete with one another in the sale of their policies by escalating the commissions which they pay to intermediaries." (paragraph 8.39)

The front-end loading of expense charges is contentious or politically unacceptable, because policies requiring the regular payment of premiums are poor value if payments are not maintained. People may be encouraged to save who should not be.

This seems to be the main reason why the stakeholder cap on charges was introduced, because it restricts or prohibits the front-end loading of expense charges. But this greatly restricts the incentives to encouraging saving, since the policies are then not recommended by financial advisers, because there is no commission. This is a reason why the sales of stakeholder pensions are so poor.

This is one of several areas where the Financial Services Authority should be taking the lead, and surely would be if it were not controlled by the industry.

7. "Is weak consumer influence inevitable? Can action be taken to mitigate it?" (paragraph 21)

The phrase "weak consumer influence" is used four times in the Consultation Document. (paragraphs 15,21,56) This is a political problem - organisations versus individuals. The government, providers and regulators are organisations. In the area of financial services, individuals negotiating with organisations tend to have a weak negotiating position.

Investors seek to maximise the return they obtain from their investments, whereas the government, industry and regulators are mainly concerned with maintaining a profitable financial services industry. Even mutual companies have to promote themselves in the market in order to survive. So that they seek all the time to make sales.

One reason for the weak negotiating position of consumers is that the products of the industry are shaddowy. If you buy a car you know what you have bought because it is in your garage. Whereas if you buy a personal pension it is with the provider. The benefits to be provided are not well defined, they depend on future investment performance and annuity rates.

Furthermore the name of the provider may change. It may be taken over, or demutualise. Government legislation or regulations may change. There are hidden charges. Even if consumers were fully informed about charges they would still be at a disadvantage in negotiating charges individually, rather than having charges negotiated collectively on their behalf by trustees.

The Consulation Document lists various "grounds for concern" in paragraph 11 starting: "many consumers lack the time for or expertise in savings and investment issues, and there is limited shopping around." This is the reason why most people buy the products of the retail financial industry. Otherwise they would buy shares on the stock market. The most enterprising and energetic investors probably do not even buy shares but set up their own companies.

The Consultation Document asks in paragraph 21, to what extent can various actions mitigate the weak influence of consumers:

7.1 "To what extent can regulation compensate for it?" (paragraph 21)

To some extent. Stronger regulation would help to compensate for weak consumer influence. But the FSA is controlled by the financial services industry, in the sense that it is a continuation of the previous system of self-regulation. Of course the industry does not want to be regulated.

The regulators seem to be less under the control of the Treasury than previously, since powers are transferred to the FSA by statute, that is the Financial Services and Markets Act 2000, whereas powers were transferred to the self-regulating authorities by statutory instruments. The term "self-regulating" implies that the regulators are controlled by the industry. It does not follow that the regulators are any more under the control of the Treasury just because this term is no longer being used.

The FSA is financed by the industry largely directly from charges on the capital of savers. For example the fees to regulators in unit trust accounts is taken out of the capital of unit holders.

7.2 "To what extent can consumer education compensate for it?" (paragraph 21)

Not very much. Most consumers lack the time to go on education courses. Who decides what is the content of of the education? Will this education include a discussion of dealing charges, such as stamp duty on share purchases, for products such as stakeholder pensions and unit trusts?

7.3 "To what extent can improvements in the quality of information provided to consumers by the industry help to improve consumer influence?" (paragraph 21)

To some extent. Who decides what information consumers require? This should be decided by consumers themselves or their representative organisations. As mentioned above, considerable publicity has been given to the stakeholder cap on charges. But it turns out that dealing charges are outside the cap. They appeared in the DSS guidelines for the first time in April. Company representatives are saying that everything is included in the cap (except for optional extras), without mentioning dealing charges.

Who is the information provided to? There needs to be a distinction between individual consumers and consumer organisations. There is a cost involved in providing information. That provided to individuals tends to be sales promotion.

Paragraph 27 of the Consultation Document asks "What has been the role of the personal financial media?" I took several newspapers to the Press Complaints Commission for saying that stakeholder pensions have a 1 per cent cap on charges, without mentioning further charges. The Financial Times agreed that dealing charges should be mentioned. The response to the complaints before the DSS guidelines changed in April, was that they were following these guidelines, which did not mention dealing charges. That is the press follows the guidelines rather the regulations. The guidelines were poor quality of information provided to consumers by the government.

The DSS published summaries of the responses to the Consultation Briefs on stakeholder pensions. These did not specify whether or not most responses were from the industry. A sentence "Most respondents said that . . ", is probably saying what the industry thinks since most respondents are the industry.

The green paper A new contract for Welfare: Partnership in Pensions (1998), stated that responses would be made available to the public. When the present author asked to see them by visiting the DSS or Record Office of the House of Lords, he was told that this was not possible, but he could be sent photocopies of a limited number. Responses to most other green papers can be seen in the Record Office. Instead of being able to see the responses, he was sent the names and addresses of all 518 respondents!

Promising that responses will be made available means all responses. Similarly saying that charges on stakeholder pensions are capped at 1 per cent, means all charges. To say later to someone who has bought a policy that there other charges such as stamp duty which are not included, is dishonest and mis-selling.

The Financial Times did mention dealing charges for stakeholder pensions in subsequent articles following the complaint, as promised. A complaint about an article in The Sunday Times may have prompted its article on dealing charges, mentioned above.

7.4 "Does new technology offer opportunities to increase consumer power by making information, particularly comparative information, more accessible?" (paragraph 21)

To some extent. It will not be much help in enabling consumers to compare products, because there are so many thousands of products.

The internet can be helpful in various other ways. It can help to find missing policyholders. In the recent Equitable Life guaranteed annuity debacle, Paul Braithwaite chairman of the Equitable Life Members' Action Group rejected claims by Charles Thompson chief executive of Equitable Life that publishing a report that led to the recent reduction in policy values would be too costly because "There are no cost implications of publishing it on the internet" (Financial Times 6th August 2001).

New technology could give more power to individual investors not just by the provision of information, but, for example, by online share dealing. A new website has recent appeared called the "Investor Revolution". It is currently setting up an online stockbroking service (expected to start in the next few months). IR claims to represent shareholders. It started last year and states that it has over 17,000 "members". Membership is free. Members are correspondents, who are for example using the bulletin boards. I am not familiar with IR beyond what is on their website. It seems to be more than just a stockbroker masquerading as a Shareholders' Association. I certainly hope so.

8. The need for collective action: collective saving is less costly

Consumers can have little influence acting on an individual basis. But they can have considerable influence acting collectively, by: a) a new form of mutuality, b) stronger or new associations for investors. This is discussed below. The government clearly believes in representative democracy. To act collectively there need to be forms of representative democracy, such as member-nominated trustees in the case occupational pension schemes.

I hope that the Sandler Review will take a broad view of the subject of retail saving. The starting point should perhaps be the rates of return provided by the industry, especially following the report of Kevin James mentioned above.

These rates of return need to be related to explicit and implicit costs and charges, distinguishing between dealing costs and other implicit costs. The govenment states that it is committed to encouraging people to save. This encouragement is mainly by means of tax concessions, and national insurance rebates in the case of contracted-out pensions. This is very inefficient because the value of these tax concessions is generally entirely eaten up by charges.

The costs and charges need to be related to the cost of pension schemes such as the Danish Labour Market Supplementary Pension (Arbejdsmarkedets Tillaegspension ATP) discussed on my website. The Director's Report for the year 2000 states that administrative expenses were DKr 111m (£ 1 = DKr 11.86 on 13th August 2001):

"Pension activity costs amounted to DKK 85m of this amount (equivalent to DKK 20 for each member), whereas investment activity costs accounted for DKK 26m (equivalent to 0.011 per cent of assets or just DKK 6 for each member)."

How can the comparatively high charges of stakeholder pensions and other products in this country be justified in comparison to these costs?

The Danish scheme is compulsory for employees. It is like a collective decision to save. This is far cheaper than persuading people to save individually. There is talk of the introduction of compulsion for stakeholder pensions. This proposal is unacceptable. But compulsion would be acceptable for a properly constituted new scheme. The Sandler Review will hopefully study the relative merits of saving on an individual and collective basis.

9. The need to separate new legislation from old legislation

The government has a problem in the area of pensions, which it is seeking to solve by defining a new product stakeholder pensions. This is a wrong general approach. It should instead define a new institution.

Existing financial institutions are a manifestation of past legislation. The amount of such legislation and regulations involved with stakeholder pensions is considerable, which makes them hard to understand. For example stakeholder pensions sold by insurance companies are legally insurance policies. They are therefore invested in insurance funds which do not have proper accounts as discussed above. The new legislation for stakeholder pensions is muddled with the old legislation for insurance. The stakeholder business is not separated from the other business. They are another "packaged product". The same staff who are involved with stakeholder pensions are likely to be involved with other kinds of products.

It would be far preferable for stakeholder pensions to be provided by new "stakeholder mutuals", which have a constitution worthy of the confidence and trust of members: properly appointed boards, proper accounts, a magazine, regional meetings for members and so on; like the Danish ATP scheme, mentioned above.

10. The need for a new kind of mutuality

The products of the financial services are really contracts for looking after the capital of savers. Someone looking after someone else's capital is of course presented with the temptation to think of ways in which they can help themselves to it - without acting illegally.

There is a motivation to use some of this capital to promote new business such as by the payment of commissions, so that the provider of the products can continue in existence and its employees remain in jobs. This seems to be encouraged by the insurance tax paid by insurance companies. I understand that this is charged on investment income: interest, dividends and capital gains, less expenses which includes commissions. This seems to be a tax incentive to encourage the payment of commissions, because the more commissions paid, the less tax.

Organisations looking after the capital of investors should be acting on behalf of these investors. Such organisations need to be constituted to prevent the temptation to help themselves to this capital. It is hard to do this just by regulation. For example a way that organisations can help themselves to this capital, is reported to be manipulation of the bid/offer spread of units.

I argue on my website Stakeholder Pensions: The Hidden Charges that a new kind of mutuality needs be introduced in this country for saving on a collective basis. This requires the establishment of new mutual organisations, and compulsory saving. The proposed new kind of mutuality is intended to give more influence to savers.

The topic of mutuality will hopefully form part of the recently established inquiry into Equitable Life under Lord Penrose:

"The purpose of the independent inquiry is to provide an authoritative account of the Society's affairs and to draw lessons for the future on the conduct, administration and regulation of life assurance business."

I am in favour of the concept of mutuality in general. The Co-operative Party has published five pamphlets under the heading "New Mutualism". For example one is about football clubs. There has been a scandal where I live in Brighton, with the directors of Brighton and Hove Albion who were the owners, selling the local football ground. This would surely not have happened if the club had had a mutual constitution.

Demos has published a book (or report) about mutuality To Our Mutual Advantage by Charles Leadbeater and Ian Christie (Demos Associates):

"In Germany and France there are restrictions on the winding-up of a mutual that have prevented carpet-bagging of the kind seen recently in the UK. These restrictions are one reason why mutual banks account for 37 per cent of retail deposits in France, 35 per cent in the Netherlands and about 30 per cent in Germany..

Mutuality is not finished - unleashing its potential should be one of the priorities of New Labour's second term."

Its potential is being unleashed - but not in the way they intended. Paul Braithwaite chairman of the Equitable Life Members' Action Group stated in a recent letter to the Chancellor about Equitable Life:

"But mutuality as a form of governance in a Society with an archaic constitution and an incompetent self-serving board renders it, quite simply, impossible for members to exercise discipline. Particularly when the regime is supported, back to back, by the regulators acting hand in glove with the regulated."

This indicates that Equitable Life is a wrong or inadequate kind of mutuality. It is not even "equitable". According to Clause 4 "limitation of liability of members" of the Equitable's Article of Association one group of policyholders, such as non-GAR policyholders is not allowed to subsidise another group such as GAR policyholders. Therefore non-GAR policyholders should not be affected by the GAR guarantees. This is of course far from the case, so that Equitable Life is not being equitable between different groups of policyholders as required by its own Articles of Association.

The right form of mutuality would "help to compensate for the relatively weak position of the consumer". (paragraph 56) Mutual building societies tend to give better interest rates for savers and borrowers. With so many demutualisations of building societies and insurance companies, mutuality in financial services in this country is gradually fading away. There needs to be an introduction of new kinds of mutuality.

Friendly societies are associated with groups of people, who can then watch over the society. But these groups can be very general such as Homeowners and Family Assurance, with the result that there is then no well defined group with a representative organisation to watch over the society. Equitable Life was clearly not being watched over adequately while it sold guaranteed annuities. Organisations which are not sufficiently accountable tend to be run for the benefit of the people running the organisations. The directors of Equitable responsible for selling guaranteed annuities are now in comfortable retirement.

A private members bill is being introduced by Gareth Thomas MP, with its Second Reading on 25th January 2002.

"The Industrial and Provident Societies Bill proposes to protect co-operative and mutual businesses from the activities of small and unrepresentative groups of carpetbaggers acting for personal gain. It is proposed to raise the percentage vote required in a demutualisation resolution to 75%, on a minimum turnout of 50% of those eligible to vote. A further clause would give new co-operatives the right to constitutionally safeguard their mutual status."

11. Investor Associations - a way to improve consumer influence

The organisations most concerned with protecting savings are for example the Consumers' Association and the various Action Groups for members of Equitable Life (see the Equitable Life Members Help Group). Successive governments have not shown the same amount of concern.

The Equitable action groups were set up last year following the House of Lords ruling requiring the payment of guaranteed annuities. This is rather like trying to "close the stable door after the horse has bolted", since there had not apparently previously been a group representing Equitable policyholders. The Equitable ceased selling policies with guaranteed annuities in 1988 with the introduction of personal pensions. The Equitable GAR debacle shows that there is a continuing need for investor associations representing the interests of policyholders in general and Equitable Life policyholders in particular.

The Financial Times reported on 6th August (page 2):

"Equitable Life policyholder action groups have reacted angrily to comments from Charles Thomson, the mutual life assurer's chief executive, that he has no plans to publish the financial review that led to the recent sharp reductions in fund values."

Paul Braithwaite said:

"'From our point of view the most damaging thing is the vacuum of information.'"

The policyholders of Equitable Life who after all own the company, should surely be able to obtain information about the company, on request. This implies that suitably constituted groups of policyholders should be given legal powers, especially to obtain information.

The Swedish Shareholders' Association has 142 thousand members. A reason for its success, is that it has its own stockbroker. This is like a mutual stockbroker - which we do not yet have in this country. The magazine of the Swedish Shareholders' Association is apparently a useful source of information for investors, in comparison to the financial press which I have been told is less developed than in this country.

A further reason for the success of the Swedish Shareholders' Association and the comparative success of Shareholders' Associations in other countries is that they have investment clubs. In this country investment clubs are mainly supervised by Proshare. But Proshare is concerned with promoting share ownership. This is not the same as promoting shareholder rights, like the United Kingdom Shareholders' Association (UKSA).

The DSS (now the Department for Work and Pensions) had a committee advising it about stakeholder pensions, which consisted almost entirely of industry representatives, with the result that stakeholder pensions are formulated from the point of view of the industry rather than future members. A reason for more influential Investor Associations is that then investors can be better represented on such government committees.

The FSA has several industry committees and only one Consumer Panel - appointed by the Board of the FSA. The Collective Investment Schemes Forum is one such industry committee. The Consumers' Association has a representative. Since this consumer representative is in such a minority, he or she can always be out-voted.

UKSA is constantly complaining about government committees studying topics of concern to private shareholders, which do not have a shareholder representative. It has a representative on the Consultative Committee of the Company Law Review, which is apparently the first time UKSA has a representative on such a committee.

UKSA only has 500-600 members. It does its best to respond to government consultations on topics of concern to private shareholders, but can only respond to a small fraction of all these consultations. Strong Investor Associations would have the resources to respond to these consultations. Most responses in the area of financial services such as the Sandler Review, come from the financial services industry.

The government can strengthen Investor Associations by asking them to do tasks for which there is payment. For example the trade unions in Denmark provide labour market statistics for the government. This strengthens the trade union movement.

12. The stakeholder flop^*

Stakeholder pensions are looking increasingly like a flop, as discussed by Toby Walne in an article in the Mail on Sunday. It is reported by the ABI that only about two-thirds of the companies requiring to register with a provider of stakeholder pensions had done so by the October deadline. David Willetts shadow secretary of state for work and pensions is reported in the Financial Times of 8th October 2001 to have warned:

"as many as 200,000 companies faced a collective fine of £10bn for failing to meet today's deadline for registering with a provider of stakeholder pensions." (page 12)

Total sales of stakeholder pensions by the end of September 2001 are reported to be 415,805 thousand. But this is an exaggeration because most of this number are not really sales but personal pensions which have converted into stakeholder pensions. The International Institute of Banking and Financial Services reports "of the 224,506 plans opened by the end of June, 175,000 involved transfers", and the Building and Civil Engineering Scheme had 61% of the market. An article in the Financial Times (November 14, page 6) reported

"Less than 1 per cent of the 5m people the government hoped would sign up to stakeholder pensions have done so, the Conservatives said last night. Of the 416,000 stakeholder pensions sold, only 34,000 went to the target group earning £10,000-£20,000."

13. Conclusion^*

The area of financial services is disaster prone. There is currently for example the Equitable Life GAR debacle, and endowment policies sold for mortgage protection which do not repay mortgages as promised.

These scandals are a reflection of an underlying problem which needs to be addressed. People are making a business out of looking after other people's money. The work is turned into a business and then charges made by companies for the services performed. The main reason why our Health Service is so much cheaper than that in the United States, is that in the United States fees are more often charged for particular medical services. There is a "fee-for-service" system, rather than the work being done by employees without specific charges.

Whoever is looking after your capital, if you are not doing so yourself, should not be doing this as a business and then charging fees for services performed - such as the maximum 1% provider's management charge for stakeholder pensions. Your capital should be looked after by suitably appointed trustees, who are responsible for costs and charges. The members of defined benefit occupational pension schemes do not have to individually negotiate charges. They are not even aware of them. The cost of running the schemes is the responsibility of trustees rather than individual members.

The underlying problem of our financial services industry, is the fee-for-service system. There is a need for a new kind of mutuality which does not use this system, where each individual investor does not have to negotiate charges. This will require the establishment of new institutions by law, which will need to specify how they are constituted, such as how the trustees are appointed.