The Financial Services Authority (FSA) is soon to become the Financial Conduct Authority. It has published a Retail Conduct Risk Outlook looking at the risks consumers face this year.
It said consumers were trying to save more by shopping around for the cheapest products and, as a result, buying and being sold unsuitable products.
Well there's a surprise – the cheapest is not the best. Has the regulator not heard the phrases:
- You get what you pay for
- Pay peanuts, you get monkeys
- Buy cheaply and you pay dearly
I could go on.
Cheap not cheerfulOn general insurance (home, motor etc) - one of the 15 risk areas identified - the FSA said: "Our experience is that consumers tend to shop around on price for their general insurance requirements, and findings from our consumer research confirm this and suggest this trend is increasing.
"This is generally a good practice for consumers, provided they are comparing like for like and have the information they need to make an informed decision about the product being offered."
- Consumers making purchasing decisions based on the cheapest initial premium without adequately considering the differences in the quality of insurance policies being offered and other post-sale charges.
- Firms selling add-on general insurance products, where the consumer is focused on the primary sale and may not understand the overall cost and value of the add-on to them.
- Firms manufacturing general insurance products of limited utility to consumers, which may therefore represent poor value and result in consumer detriment.
"If consumers focus on buying the cheapest product, without understanding the scope of the cover, the product may not be value for money and consumers will suffer detriment if they later find they are unable to make a claim or that they could have bought better value cover elsewhere," the report said.
Value v priceWell yes, but if someone buys Tesco Value blue and white labelled groceries they cannot expect them to be as good as Tesco Finest in the shiny silver packaging.
The word "value" is misleading. As millionaire investor Warren Buffet once said: "Price is what you pay, value is what you get." Tesco's blue and white label products are just cheap.
Is a regulator going to tell Tesco that it must not sell "value" products because they are inferior and consumers might get less good groceries under false pretences? No, of course not. So why not let insurers sell cheap rubbish to people if that is what consumers want to buy (and many do).
Financial products are complicated. Most of us need advice from experts to get the products that best suit us. And we don't need all products to be the same so we can just look at price. We need the wide variety of cover levels and options available to us so we buy the cover we do need but not pay for cover we don't need.
Know it all?There may well be a few big-heads out there who think they know it all and can go out and choose by price alone. But if they later discover that they are not covered for what they thought, or that the cheap company they chose is notoriously slow at paying claims, that's their fault, nobody else's. Pride come before a fall.
We don't pick our own sheep out of a flock – we rely on butchers to chose the best cuts. We don't choose our own medicines – we rely on doctors to prescribe them. We don't start court cases without first taking advice from a lawyer.
We don't need a nanny state regulator making all financial services products more expensive. We need better financial education for consumers so they realise their own limitations as well as the limitations of certain products. There's no substitute to getting proper, independent financial advice.