UK - Most people who take out with-profits investments have only a rudimentary understanding of how they work and buy without reading the product information provided, new research from the Financial Services Authority (FSA) reveals.
Although some aspects of with-profits, such as the long-term nature of the product and the existence of penalties on early surrender, are better understood, the knowledge of key features such as bonuses, guarantees and the application of smoothing is generally poor. There is little appreciation of the risk involved in with-profits investments, limited awareness of market value adjusters (MVAs) and variable understanding of how and where funds are invested.
In a paper - Disclosure to Consumers - the FSA sets out principal areas where consumer understanding needs to be improved:
* The nature of with-profits products, including features such as smoothing, bonuses and guarantees
* The benefits and risks of the product
* How investment returns are calculated
* Providers’ policies on features such as smoothing, bonus calculation and MVAs
* Factors other than investment performance that might affect the returns to policyholders
* How the investment is progressing after it has been bought
However, the paper warns of the risk of information overload and suggests that disclosing all the information ideally required to understand the nature of the product and how it operates would not necessarily be effective at getting consumers to take it in.
Responses are requested by 15 February 2002. The FSA will draw on the responses to this paper, and those to the other issues papers, in bringing together the conclusions of the With-Profits Review in Spring 2002.
By Luke Clancy
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