Let me begin with a question (two actually).
- Have you been around Canary Wharf in the last few months?
- Have you ever seen a document written by a lawyer?
The answer to both of these will probably be yes.
Canary Wharf is the most recession-proof place in the UK in my estimation. Against my will, I have been dragged into bars there on different nights of the week and on each occasion the joint has been jumping by 6.30pm.
Who are these people with lots of disposable income I wonder?
Representatively, a number must be employees of the FSA (soon to change its name to the much more memorable and distinctive FCA – or possibly the PRA. I’d explain the difference but this article is about simplicity).
I occasionally visit the FSA and am struck by the size of the workforce. A less charitable person than me would question what all these people do.
I am satisfied that they are hard at work” regulating” – shame on anyone who thinks otherwise.
The reason I mention lawyers is that, in my experience, they populate and heavily influence compliance departments.
Compliance is the driving force most evident in product development in the UK and has been for many years. A pity that, because compliance and simplicity seem to inhabit different territory.
In fact, I’m not sure where simplicity lives at the moment.
Indeed, I’m not sure if it has ever had a permanent dwelling-place in the financial services industry.
After all, it wouldn’t say much for the compliance and regulatory industries in the UK (I think we can fairly call them that) if they let people buy simple products would it?
No, that would never do.
If my tone is a little cynical, I have tried hard not to be but have sadly failed.
When I saw the Treasury paper last December, my heart did not exactly soar, but it did beat a little quicker.
Simple products that can be bought via a simplified advice model are desirable if they represent good value.
Cash savings plans and income protection products were the initial products pinpointed by the Treasury for simplified advice.
They might work for savings plans but, as someone who has a lot to do with income protection (IP), it has been very hard to develop really simple IP products that are easy to buy.
Unless you mean PPI products, of course, many of which are currently sitting on the naughty step.
I’m not sure if relaxing controls on IP product design following the PPI debacle is something the FSA/FCA/PRA would be happy to do even if some bright young thinkers in the Treasury have rightly focused on the need to simplify these products.
However, the problem is more complex than that.
Let’s look at IP. A really simple product will not have different occupational classes that complicate pricing.
This means the basic price has to be loaded, which means it is unlikely to be particularly competitively costed. Waiting periods need to be similar those that exist now.
The underwriting process must be streamlined and easy for proposers to use – three questions at maximum and no hidden bombshells like pre-existing condition exclusions.
About 75% of IP cases go through some form of underwriting scrutiny and many are loaded. A simple product has to be one with minimal underwriting that can go on risk quickly.
Most lives need to be eligible, so basic pricing needs to accommodate this and it will be very difficult to satisfy underwriters and actuaries that the fund is not exposing itself to long-term claims.
The likelihood is, then, that the benefit has to be paid for a maximum period of three or five years and this may not meet the needs of every mortgage lender or every householder for that matter.
Policy conditions need to be very clear, basic and comprehensible.
A simple product must be one that has a transparent claims process (and we must know what percentage of claims are paid) and one which customers have trust in. There can be no hidden exclusions and the proposition must be very clear.
I would love to see such a product, but a lot of people in the industry will need persuading that this wouldn’t be a step into the unknown.
Is it achievable? Yes, but I wonder if there is the courage in the industry to do it.
Certainly, the product must not look like PPI mark two – a simple product that sold well, but didn’t pay out very often.
It is here we really need a leap of faith that will embrace all parties including the regulators and the lawyers.
Can simplicity be consistent with good sense in protection business?
I think it can, but I am not convinced that the industry or the framework it operates within are really ready for the massive shift in thinking this would require.
There is one more thing.
In the recent past, we have seen three concepts: private medical insurance for older lives, pension term assurances and child trust funds envisaged and stimulated by the Treasury and then summarily junked in at least two situations, because the concept was too popular and cost more than the economists had anticipated.
How sad it would be if, having thrown the shackles off, we really did see simple products selling too well for the comfort of the Treasury.
I don’t think this would happen, but what do I know?
However, excuse my cynicism because I’d like nothing more than this initiative to be progressed.
It is just that I am not sure, for the various reasons I’ve outlined, that enough people within and without the industry share my enthusiasm.
