The FSA starts to hack away the jargon jungle

Despite their welcoming noises, I can't help feeling that the insurance industry is not exactly bursting with enthusiasm over the Financial Service Authority's plodding but relentless reform of with-profits policies and bonds. These are financial products which pay nothing to investors until they either mature at a set date or are surrendered at a date of the investor's choosing.

There I go, incurring the FSA's wrath by lapsing into impenetrable jargon invented by the insurance industry to brainwash the public. This is the industry, remember, which dreamed up the phrase "life assurance" as a nicer-sounding replacement for "insurance" when describing policies which paid only on death.

In the same way, "mature" sounds more melodious than "end", and "surrender" plants the notion that the customer is placing him or herself at the mercy of the insurer; and there is a lot of truth in that, if you have the temerity to ask for your cash early. Almost your only return on your investment is called a bonus, which in any other context means something you gain on top of what you might expect. When bonuses are slashed across the board, as at Equitable Life, the industry retreats into the near-meaningless phrase "market value adjustment", conveniently shorten to MVA. Customers are routinely misled by a ritual called smoothing, whereby insurers keep bonus money back in good times so they can kid you that the bad times are not so bad.

Last summer, the FSA's consumer director, Christine Farnish,gave me a strong hint on where their collective mind was heading. "I don't think the industry has helped to make it easy for customers to be more in control," she said. "As long as products are described in language difficult to understand, people are going to glaze over and they will find it difficult to take an interest. Phrases such as 'whole of life,', 'term assurance', 'endowment policy': why should consumers know what these mean? That is why the financial sector looks behind the game compared with other retail sectors, who are usually switched on to what their customers want."

This week the FSA turned the screw on the with-profits gang by declaring: "Most people who take out with-profits investments have only a rudimentary understanding of how the products work but still buy without reading the product information provided. 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 MVAs, and variable understanding of how and where funds are invested."

With such strong condemnation, it is a testimony to the persuasiveness of insurance sellers that so many people blithely sign away large chunks of their income for 25 or 30 years without knowing what will happen to their money. Ms Farnish said: "One salesman asked me, 'What is your attitude to risk?' I had never had an attitude to risk. I didn't know what they were talking about. After two hours I just wanted to sign on the dotted line."

This is the City of London at its most patronising. But what do you expect when the Association of British Insurers defines investment as "the act of allowing someone else to have use of your money in return for payment of interest and/or a share in profits that may be made"?

This week's paper from the FSA, Disclosure to Consumers, sets out a blueprint for the range of information considered necessary to give consumers a full explanation of the way with-profits products work, their benefits and their risks.

The FSA says the main areas to be improved are:

* The nature of with-profits products, including smoothing, bonuses and guarantees;

* Benefits and risks;

* How investment returns are calculated;

* Attitudes to smoothing, bonus calculation and MVAs;

* Factors other than investment performance that might affect the returns to policyholders; and

* How the investment is progressing after being bought.

To the glee of the industry the FSA has to concede that if its recommendations are taken to their logical conclusion there is a risk of information overload so formidable no one will read it.

One idea is to give most would-be investors an idiot's guide. That, I predict, would simply accentuate the patronising attitudes already deeply ingrained. People are going to have to pass an exam to show they are capable of understanding with-profits, or financial products are going to have to become simpler.

w.kay@independent.co.uk

William Kay is personal finance editor of 'The Independent'