Making Saving Simpler

In order to explore ways to strengthen the power of the public, the Carnegie UK Trust set up a Commission of Inquiry into the future of Civil Society. One of the major policies to spring out of it was a simple labelling measure, aimed at making financial products easier to understand. We enlisted Geoff Mulgan, chair of the commission, to tell us more...


For years, we've become accustomed to seeing labels on food products clearly explaining their content and how they have been produced. Similarly, when we buy clothes, labelling means you know exactly where the product was made and what it is made of. But why is it that when you go and choose which mortgage to take or which pension to invest your money, or even who to bank with, there is no such thing as financial labelling? And why are there so many products on the market that a lot of customers don't really understand (something that was driven home during the financial crisis)?

Making Good Society, a report which we recently published, calls for a ‘comprehensibility threshold' which would ensure a minimum standard of user-friendly language on financial products. Under our proposals, if it turned out that a majority of the customers of a financial product didn't understand a fundamental aspect of it, the Financial Services Authority (FSA )would require it to be removed from the market. The aim would be to put much greater pressure on providers to ensure that customers understood what risks and benefits they were signing up to.

Too often at the moment, business models essentially assume that customers won't really understand the nature of the product they're buying. This plan wouldn't stop the marketing of complex products completely - but would limit it to customers able to understand their complexities. If a majority of their actual customers didn't understand them, they would be removed from the market.

A second recommendation is for better labelling. Whether it's ISAs, bonds or savings, the public should have a right to know exactly where and how their money is being invested. That's why a recent commission of inquiry, funded by the Carnegie UK Trust, has recommended the introduction of compulsory ‘Fair Trade Style' labelling on financial products before they can be sold.

Both initiatives would enable customers to make fully informed choices before purchasing financial products, with all product information presented in a simple, jargon-free way. Greater responsibility would be placed on financial institutions to inform all customers of how the company invests its money, so people know whether not their money is buying shares in companies with good social and environmental track records. In an age of consumer power, this move would give the ordinary investor, faced with a wide array of choices, more control over the way their money is used.

Comprehensibility tests, likewise, would see the consumer being given greater power. Although there is currently a legal obligation on financial institutions to fully inform customers, most people find ‘financial language' difficult to understand. This, in turn, has wider implications, affecting the way in which the general public engage with financial institutions in terms of governance and accountability. It is only when the public can hold these big institutions to account that our failing financial system can properly reform itself and be truly ethical.

Ordinary investors do have the power to influence investment policies. Fair Pensions' recent campaign, Counting the Costs, saw citizens from across civil society hold BP and Shell to account with respect to the sustainability of their operations in Canada. This is just one example of ordinary people having the power to influence the policies of major financial institutions. And with this week's Budget announcement compelling UK banks to provide a basic bank account to every citizen, it is more crucial than ever that these institutions are transparent, accountable and compelled to communicate their products clearly to their customers.

Geoff Mulgan is chair of the Inquiry into the Future of Civil Society (www.futuresforcivilsociety.org)