FOOL'S EYE VIEW
Relative Values

By Jane Mack (TMFJane)
February 1, 2002

The City watchdog, the Financial Services Authority, published its first set of long term plans yesterday and, you know what, if they were permitted to have a sense of humour about their strategic aims, we could practically be related!

As regular readers will know one of The Motley Fool's mottoes is 'educate, amuse and enrich' and if you knocked out the middle verb, the FSA could almost be family. A bit like one of those rather straight-laced middle-aged uncles you'd go to for an explanation of how mortgages work. He'll explain, tell you your options but won't tell you what to do because he feels it's a decision you have to make for yourself.

For example, the new 'Plan and Budget, 2002/03' focuses in large part on how they intend to help people to make better-informed financial decisions. (See what I mean? We'd have called the document something much more light-hearted like 'Pig in a Poke' or 'A Budget for Beer: your plan of action!'). It acknowledges that too often consumers blindly make financial decisions they don't really understand and lose out as a result – and they intend to increase their efforts to do something about it.

The point is that the report maps out pretty much the sort of action that we've been calling for for years; consumers need to be educated about how the financial industry works so that they can take control of their money and build a decent future for themselves. Although The Motley Fool can only point out the pros and cons of the products on sale and explain how they work, the FSA actually has the power to prevent the cons. In fact it has already managed to shake up the industry on occasion by putting the pressure on.

Actually, these powers could be considered a bit of problem – for the FSA. You'll gather that its remit is not only to educate and protect the consumer, but also to regulate the companies who supply the financial products we want to buy. And that must be like walking a rather thin tightrope. Companies have to be able to make a profit after all, so you can't exactly tie their hands behind their back in your efforts to make them toe the line. The regulator has to strike a balance between ensuring that firms are fair in the way they develop and market their products so that consumers know exactly what they're buying - but at the same time allowing the industry's shareholders to make some money out of it. Let's face it, shareholders are consumers too.

Anyway, back to the actual 'Plan and Budget' report...

The FSA is clearly quite cautious about the current economic environment describing it as 'less benign' than in previous years and it sees this as a good reason for increasing their efforts to promote public understanding of financial products. It is concerned that low or falling nominal returns on investments such as pension funds and endowment plans may not be understood by the consumer and that they'll get a shock when they get a lower payout than anticipated.

The FSA believes that this in turn could lead to a drop in consumer confidence and that some people may feel inclined to take greater risks for greater returns. That's fine if they understand what they're doing but not if they don't. There's also the other part of the equation to worry about which is that while more and more individuals are beginning to take control of their finances, there is still a huge lack of awareness and much apathy amongst the majority – particularly in the field of pensions provision.

The FSA hopes to change this by increasing its provision of information through its website, its helpline and through public campaigns.

In fact, they've already started doing this by producing a free CD-Rom designed to help consumers evaluate their financial needs. There is also a series of comparative tables and interactive Decision Trees on their website which are also an extremely useful starting point. And they played a big part in the introduction of financial education in schools too so that the youngsters who follow us don't make the sort of silly mistakes many of us 'grown-ups' have made over the years!

Most importantly, they want consumers to truly understand the risks and returns of various financial products. To that end they will continue to help and encourage companies to cut the use of confusing jargon as well as limiting the barriers they impose on customers who want to switch products.

Don't get me wrong. No-one is above criticism including the FSA but it does make me feel as if there is finally a somebody out there with real power who is coming from pretty much the same direction as we are.

FSA consumer helpline: 0845 606 1234 | FSA web site