Last month I wrote about the “accidental” collateral damage about to be inflicted on the friendly society sector due to regulations aimed at outlawing high net worth individuals exploiting a particular tax loophole. Unfortunately there is a far more insidious plot ahead that has the potential to inflict serious and lasting damage on the sector and it comes from Nigel Farage’s favourite institution.
A combination of draft regulations currently under discussion in the EU – the Packaged Retail Investment Products and Insurance Mediation Directive 2 – have the capacity to lay waste to a substantial part of the friendly society sector.
The trouble that is coming does tend to demonstrate everything that is wrong about Britain in Europe (for the record I’m a pro-European): European regulation not suited to the peculiarities of UK market plus our special ability to overcomplicate the implementation of European regulations.
In some European capitals, insurance products are regarded with some considerable suspicion. For them direct investment is the simple product construction, insurance wrapped products tend to be rather more complicated animals. Not so in the UK where personal pensions, life savings products, with-profits and (crucially for the friendly society sector) tax-exempt savings plans are the more day-to-day creatures with more exotic investments wrapped in OEICs and investment trusts.
With a European slant on the drafting then it’s no surprise that insurance products have been singled out for a new level of regulation. Effectively all insurance wrapped products will, according to these regulations, need to be sold after the provider has conducted some form of suitability test based on the client’s “knowledge and experience”. It won’t apply to direct investment.
So it will be possible to sell direct a geared investment trust in Chinese smaller companies with no suitability test but not so with an insurance wrapped UK tracker fund!
Of course a suitability test sounds harmless enough, and it’s difficult to object to. Who after all can argue that a client should be sold an unsuitable product? Perhaps that’s why the regulations have received such strong support especially from left wing MEPs keen to stand on the side of the consumer against the financial services providers.
Unfortunately in practice such a suitability test could get wildly complicated, especially due to the way the UK seems to have a particular knack for overcomplicating regulations from Brussels. How will for example the FSA, or FCA by then, interpret the obligation to meet the knowledge and experience test? On past form it’s unlikely to come in the guise of a clear set of rules and regulations that providers should follow? This ambiguity will force providers to regard a suitability test as advice, which of course can only be provided through an upfront fee.
A likely effect then will be to kill off the direct market for small premium insurance backed products. With a maximum premium of £25 a month friendly society tax-exempt savings plans are likely to be brought to an end if these regulations are implemented, and with it many friendly societies (especially those that haven’t diversified their product range – as Scottish Friendly has) will close.
What irony then that left wing MEPs, with the best of intentions, could be supporting regulations that could have the unintended consequence of ending a substantial proportion of the friendly society and mutual sector which was born of the same cooperative and mutual sector.
It’s almost enough to make you vote for UKIP, but I did say almost.