Howard Davies calls on the industry to co-operate with the FSA to improve consumer understanding of financial services

"I think it is a good moment for us to think imaginatively about the way the industry and the regulator can work together, in the interests of consumers. We are moving into a very new environment, in which many of the products available to consumers are new and little understood.

"Levels of consumer understanding are remarkably low. A survey last year found that one in five of those people approaching retirement thought that when they drew their pension it would not be taxable. The same survey found that fewer than 40% of adults were aware of the link between the return on an endowment policy and the performance of the stock market.

"The big over-riding question we face at the FSA, however, is how much of our resources to devote to educating the consumer. I think there is potentially a win-win strategy here for the regulator, the industry and the consumer if we can get it right.

"How should we best work with the industry, using our new powers, to ensure a happy outcome from all these initiatives? I cannot say that I know the answer yet. But I am sure that one part of it will be a rebalancing of our regulatory effort, towards work at the front end, in other words work to improve the buying decision at the outset, rather than mopping up the consequences of mis-selling after the event."

Mr Davies went on to point out how this new approach could be applied to new products such as ISAs and stakeholder pensions, and warned the industry that they should bear the responsibility of ensuring consumers are clear about what they are buying:

"There is evidence that consumers do not always understand the distinction between mini and maxi-ISAs. It is clear that some have mistakenly bought both, though we will only know for certain the extent of mis-buying when Inland Revenue figures are available next summer.

"In the meantime it is up to firms to do everything they can to make sure that consumers know what they are buying. In particular, firms selling mini-ISAs need to make it clear that you cant then open a maxi-ISA in the same tax year. When firms sell maxi-ISAs they also need to make it clear that if you already have an ISA of any kind you cant then buy a maxi-ISA. If firms dont make this clear, they can expect their customers to complain in numbers, and so they will suffer reputational damage as a result. So it is in firms interest to beef up their internal training in this area."

Notes for editors

Inland Revenue figures show that Individual Savings Accounts (ISAs) attracted over 7 billion of funds with 3.5 million accounts opened in the first three months of 1999. Mini ISAs: Stock and Shares 602,000, Cash 1,657,000, Life Insurance 30,000. Maxi ISAs 1,216,000.

A free copy of the FSA guide to buying ISAs is available to consumers by ringing Freephone: 0800 917 3311, or as a PDF document on this website: http://www.fsa.gov.uk/pdf/consumers/sas33.pdf

Research carried out by the FSA suggested that only 28% of financial decision-makers trusted trade bodies either completely, or a great deal, to provide accurate financial information. This was double the figure for financial product providers, and more than double the number of those who trusted the government. This compares with 51% who trusted the FSA, or 55% who trusted advice agencies.