Sandler and the Treasury's own goal

Anthony Hilton12 April 2012

A FEW years ago the Treasury decided, courtesy of the Cruickshank inquiry, that the high profits generated from small business banking services proved there was an absence of competition and that the market needed to be reformed. Today the Treasury, via Ron Sandler's inquiry into the retail savings market, has decided that the high and increasing cost structures of insurance companies prove that the market is uncompetitive and needs to be reformed.

Too much profit or too much cost, the Treasury can have it both ways. And, interestingly, in both cases its solution is the same: competition must be improved and the way to do it is by imposing strict price controls on the product.

You are forgiven for being slightly confused at this point because if price controls were the universal driver of efficiency, Soviet Russia would have been the world's most vibrant economy. Perhaps the Treasury thinks it was.

But one can see what Sandler is driving at. He says the retail savings market for investment products does not work properly, first because the products are so complicated that they cannot easily be compared to see which provides best value, and second because those who could help customers - the financial advisers - are in the pockets of the product providers as they live on the commissions they get from the insurance companies. No one really gets what they want. Customers don't like the products and suppliers don't make adequate profits.

But if most people would agree with the diagnosis, many will baulk at the solution. Sandler wants price-capped, simple products so easy to understand that they can be sold without advice and cashed in at minimal cost if the customer later wants something else. Where customers need advice on more complicated products, he wants those who call themselves independent advisers to get their money openly from the customer, not covertly from the product provider, and to be much better qualified.

He also makes some very sensible proposals for a major simplification of tax on various investment products, issues a plea that there be no further use of the tax system to seek to divert savings flows into any particular direction and calls for a lot more resources and effort to be devoted to educating consumers in financial matters. He hopes that out of the upheaval will, in time, come a well functioning market that will help more people save more effectively and create a dynamic and efficient savings industry.

Well, the cure might work if all the patients don't die on the operating table. But it could be that the more dynamic firms exit the industry because they feel there are easier ways to make a living. Either way, the most likely consequence of price-capping is that it will squeeze players out of the industry and lead to consolidation. Only the largest firms will be able to afford the marketing and distribution costs that go with low value, commoditised, mass-market products. Only they will be able to afford the advertising, and create the brand names and the systems.

It is entirely foreseeable, therefore, that within a few years the mass market end of the insurance industry will come down to perhaps four big players who will have carved up the market between them. They will all provide broadly the same kind of thing and all behave in broadly the same way.

If this reminds you of something we have already, do not be surprised. It is the model of the High Street banking industry - which the Treasury dislikes intensely. But there will be one big difference. Insurance and banking are the only British-owned bits left in the City, and insurance's days are now numbered. Cash-rich foreign firms still allowed to make profits in their home markets will surely mop up on the enfeebled Brits. The Treasury should be proud of itself.

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