Savings and life and income protection insurance are first to be simplified to help consumers compare products
The government has launched a consultation on the development of "simple" financial products to help promote personal responsibility by enabling consumers to compare and understand products more easily.
The products should "do what they say on the tin" so that consumers can compare a set of standard features to simplify decision making. The first to be developed will be deposit savings, and life and income protection insurance policies.
However, although attempts by the previous government to introduce a simpler range of financial products included caps on charges, this government does not intend to impose the same control over costs, allowing providers to charge whatever they like for the new, simple products.
In the consultation document, the Treasury argues there are so many products available, consumers are unable to make sense of the choices. For example, there are more than 2,000 savings products, including cash Isas, easy access and notice accounts, from nearly 150 providers. To complicate choice further, a product's features can change during its lifetime ? such as introductory interest rates on credit cards and savings accounts, which make it difficult to determine the best deal overall.
Qualitative research for the Treasury shows that the overwhelming and confusing choice has resulted in consumer apathy towards their finances, and a reluctance to spend much time looking at them. It also found that consumers fear they may not be making effective decisions or have missed the hidden "catches? when purchasing products.
Mark Hoban, financial secretary to the Treasury, said: "The government is committed to helping consumers take responsibility for their finances. To do this they need to be able to make sense of the huge range of financial products in the market. Simple financial products will help them to do that, by providing a safe choice and a common benchmark against which other products can be compared."
It is not the first time the government has tried to introduce simpler financial products. CAT standards ? which stands for charges, access and terms ? to ensure customers got a "reasonable" deal were introduced in the 1990s, initially for cash Isas but then, in 2000, for residential mortgages.
Firms had no reason to promote CAT standard products and the scheme had little impact on Isas, but thousands of CAT standard mortgage borrowers with the Nationwide Building Society are still enjoying mortgage interest rates set at just 2% above the Bank of England base rate, producing a current rate of 2.5%. The Nationwide admitted recently that the guarantee had cost it �300m in the first six months of this year.
In 2001 the government introduced stakeholder pensions schemes which had a 1% a year cap on charges, and this concept was extended to Isas and child trust funds in 2005. Charges were set on the assumption that stakeholder pensions would be so simple and low cost that customers would not need face-to-face advice ? so no margin for commission was built in.
Again, as there was no incentive for financial advisers to sell stakeholder pensions, sales failed to take off, but the cap resulted in pension providers competing by lowering the charges on non-stakeholder products.
However, this time the government says it does not want simple products to be subject to mandatory price caps. The consultation document says: "We believe that if products are transparent and easily comparable, competition between providers should lead to prices being kept low, without the need for price regulation or standardised costs.
"The government believes that the combination of a voluntary approach and no price caps should be sufficient to ensure that simple products can be profitable for providers."
Consumer group Which? welcomed the consultation. A spokesman said: "We will be engaging in the consultation process and asking for clear evidence that competition alone will keep prices at a reasonable level for the consumer. One of the clear benefits of previous product regulation initiatives such as CAT standard mortgages has been the controls on costs for consumers. Millions of consumers at Nationwide are now benefiting from terms introduced by CAT standards that standard variable rates would not be more than 2% above Bank of England base rates."
A spokesman for Nationwide Building Society said: "In helping to improve consumer empowerment in financial services, the issue of simple products must be looked at together with a range of other factors, including consumers' financial capability, transparency and consumer choice."
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