Life assurers ?should have risk rating system?

Life assurance chiefs were urged by MPs on Tuesday to come up with a risk rating system for their products to prevent further mis-selling scandals and to work towards a model less reliant on paying commission to financial advisers.

The Commons Treasury select committee said companies should consider replacing the typical 20-page document explaining how a product works and introduce a summary box that stressed the balance between the risk and potential reward.

Appearing before the committee, the bosses of Aviva (which trades in the UK as Norwich Union), Legal General, Prudential and Standard Life, admitted they needed to do more to ensure consumers understood the risks of products they buy.

Richard Harvey, chief executive of Aviva, said companies had found themselves ?caught out? by the lack of understanding by consumers that products such as mortgage endowments were linked to the performance of the stock market.

He said customers had discovered ?they were not as protected as they thought they were?.

Angela Eagle, Labour MP for Wallasey, called for a traffic light warning system where the riskiest investment was marked in red. She suggested this approach might have prevented people buying precipice bonds offering a headline return of 10 per cent a year but put people at risk of losing their money. David Prosser, chief executive of Legal General, said a rating system would not help people taking advice on which products to buy. He said consumers were capable of making decisions about savings but did not understand the products. ?It is our responsibility to make the products simpler,? he said.

The life company chiefs agreed that complicated with-profits products, such as most mortgage endowments and many pensions and investment bonds, were on the way out. Sales account for about 10 per cent to 15 per cent of new business.

Jonathan Bloomer of Prudential said his firm was working on a redesigned version of with-profits that would ?make it clearer what the risks are?. But Sandy Crombie of Standard Life said at the very least, with-profits products would be much less popular than in the past.

Chief executives also came under pressure during questioning about their ?cosy relationship? with independent financial advisers. MPs were critical of the commission system that rewards IFAs for making sales rather than for providing advice.

John McFall, committee chairman, said firms should ensure the IFAs they do business with were acting in the interests of consumers.