Financial standard products offer consumers little benefit
Consumers are not always better off if banks and insurers are required to offer a standard product, for example, for individual retirement plans or disability insurances. Competition between providers is not likely to increase. As a result, prices and quality will not become better. In addition, choice overload and wrong product choices are not reduced either. In fact, the introduction of standard products may even lead to consumers making fewer right choices. This is the conclusion the Netherlands Authority for Consumers and Markets (ACM) makes in a study, which was carried out in part at the request of the Dutch Ministry of Finance.
Chris Fonteijn, Chairman of ACM, explains: ‘Introducing a standard insurance product or standard retirement plan is a major intervention in the market. Consumers must really benefit from such an intervention, and it has to solve an actual problem in the financial market in question. In both cases, I do not see that happening.’
Providers will not make an effort to sell many standard products
A standard product is, for example, an insurance or individual retirement plan of which all features, except for service and premium, are exactly the same among all providers. Standard products are not likely to promote competition between the different providers. Instead, providers probably want to sell their own products because they are able to generate more profit on them. They will not give the standard product a prominent place in their product collections.
Standard products do not always lead to better consumer choices
Standard products do not lead to better choices among all consumers. That is because the standard product may give the impression that it is the ‘best product’ for every consumer, meeting everybody’s needs. However, that is not necessarily always the case. After all, each consumer has his/her own wishes and needs, which a non-standard product may actually meet better. Having a standard product in the market can thus lead to wrong product choices. At the same time, making the right product choice does not become easier with the introduction of a standard product. After all, many other products next to the standard product continue to exist that are not easier to understand or compare.
Less far-reaching government measures are possible
Introducing standard products in the financial sector is a drastic government measure, of which the benefits to consumers are not certain. According to ACM, consumer choice behavior can improve by making information about financial products simpler, and by standardizing such information. If the Ministry of Finance still wishes to introduce standard products, ACM advises to have more empirical studies be carried out first. Such studies should determine, among other things, what problems currently exist in the various financial markets, and what intervention could be the best solution to them.
AFM examined consumer choice behavior
The Netherlands Authority for the Financial Markets (AFM) carried out a study into the effects of standard products on consumer choice behavior. The Minister of Finance has sent that AFM study together with ACM’s study to the Dutch House of Representatives.