Why the introduction of “Simple Financial Products” may do more harm than good

The introduction of "Simple Financial Products" scares the pants off me

The introduction of "Simple Financial Products" scares the pants off me

The plan for a new "Simple Financial Products" kitemark could run the risk of misleading customers into getting poor deals. While I know many would’ve thought I’d support it – unless done right, it risks more harm than good.

Listen to this on Radio 5

I’m writing this blog on the back of a debate on Radio 5 I was involved in on this, so the best thing to do is for you to listen to that.

Radio 5 discussion on Simple Products

My main worry is about pushing simple products

If you can’t listen to that, then here (scrappily written while waiting for a train at the station), are my main concerns. I haven’t yet read the full plans so if these are covered off – great, if not, they need addressing.

  • CAT standards didn’t work.

    We’ve tried simple products before – it was the CAT standard and it failed. The products may’ve been simple but they didn’t trouble the best-buy tables.

  • Providers use it as a way to give worse rates.

    The risk is (and this is what happened with CATs) that because they have the ‘simple products’ stamp, their marketing concentrates on that and therefore they don’t need to offer as high rates, as people who are already scared of financial services go for the safety of the kyte mark even if it’s not the right deal for them.

  • Simple isn’t better. 

  • In itself simple isn’t always good – finance is and can be complex – like many other things in life. What we really need is financial education so people can understand the variance of products out there (thankfully its coming, see Financial ed. to be added to curriculum).

    Of course, where products can be simple and competitive that’s great – but it can’t always be the driving force. It’s not simple I want, it’s clear and transparent and without catches – not quite the same thing.

  • It could end up killing things that help.

    The classic example is introductory savings account bonuses. Here, a good chunk of your interest is made up of a 1-2 year rate hike, which once it ends means your rate plummets.

    During high interest rate times, these were relatively meaningless and I, like others, used to push for ‘clean accounts’ where the rate was fair.

    Yet in these times of pitifully low rates – actually they’ve become a boon. A savings rate that promises 2.5% of which 2% is a year’s bonus is effectively guaranteeing a minimum rate of 2% for a year (unless the UK moves to negative interest rates, which we’ll deal with in the extremely unlikely event it ever happens).

    That guarantee is worth having. Of course you need to accept that in a year’s time you’ll need to ditch and switch, but the same’s likely true of clean accounts anyway – as they can drop their rates whenever they want too.

    The original discussion on simple financial products was to avoid products like those with bonuses – pushing people away from the only accounts paying anything resembling decent interest right now.

    More in my Why I disagree with banning bonus rates blog.

  • Products should be in plain English anyway.  

  • Listening to the organisation responsible for ‘simple products’ on Radio 5, it seems the concept has moved more towards this just being about plain English. 

    Of course this is a good aim. Yet to treat customers fairly, all firms should use plain English anyway. To give those a stamp that do – lets off those that don’t. They simply shouldn’t be allowed in the marketplace if their product isn’t being explained properly.

    And even if we do use this kitemark system, if it is simply a plain English criteria then call it that, "Plain English Products", rather than something else.

I’d love your thoughts.