Personal Finance: A hard financial lesson to learn

Rules forcing companies to disclose their fees to investors have failed to live up to hopes that they might cut costs.

"If consumers really understood how poor many financial products are then they simply couldn't be sold," is one of the hard-hitting conclusions of a Consumers' Association report into financial services.

The report, entitled Disclosure: Protecting Consumers, says consumers have an alarmingly low level of knowledge about financial products and blames a lack of education, the financial services companies and the approach taken by the City watchdog, the Personal Investment Authority (PIA).

The PIA forces companies to disclose a wide range of details about their products with the aim of protecting consumers but the report says this has "failed".

The association wants radical change and calls for products to be rated on a scale of one to five for factors including performance, charges, and flexibility, leading to the eventual introduction of a kite marking system.

The report comes as the Financial Services Authority, the Government's new super financial regulator that will take on the PIA's responsibilities, publishes research warning that many people have poor financial literacy and saying there are "significant gaps" in the provision of financial education.

The PIA's disclosure regime insists consumers are provided with a "key features" document before buying a financial product. This contains brief descriptions of products' aims, with details such as the effect of charges, projections on how much money the investor might get back, risk warnings, the effect of any tax, the consumer's commitment to pay premiums, and more.

Efforts are made to keep them simple but they often run to several pages. According to the CA this means many people get put off and simply do not bother to read them.

The CA survey found nearly half its sample did not even know they had a key features document and three quarters had not read it, few were aware of what charges they were paying and there was a general mistrust of financial services companies.

Mick McAteer, senior policy officer at the Consumers' Association, says: "We already had strong anecdotal evidence that disclosure was not working. The charges on personal pensions, for example, have hardly come down since it was introduced. We wanted to find out what was going on at the point of sale."

Mr McAteer adds: "Our findings underlined the need for a re-think of the regulation of financial services. The financial services industry is years behind other sectors, such as electrical goods and motor cars, in terms of 'safety' and the level of confidence felt by consumers when buying products."

The Consumers' Association calls for greater education but says this must not be used by the industry as a way of trying to persuade people to buy more products.

It argues in favour of a rating system which builds on a model already used in Which? magazine. This in effect provides a benchmark, plus a set of scores which mark products according to how close they are to the benchmark.

The education campaign, the CA says, is intended to enhance consumer interest and confidence, while at the same time promoting the relevance of financial planning in people's everyday lives. Among the things the report wants to see is further promotion of the benefits of fee-based independent financial advice.

Ultimately, the CA believes, much of the problem lies with poor products. The report argues that rating products must also mean introducing minimum standards. This means setting maximum charges, restricting transfer penalties and enhancing flexibility of products; "Confidence can be improved through education, but it will be misguided if substandard products persist," the report concludes.