FCA chief: We must protect irrational consumers
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Head of the Financial Conduct Authority Martin Wheatley says the new regulator will work to protect consumers who cannot be relied upon to make rational choices by banning the sale of potentially harmful products.
In an interview with the Financial Times, Wheatley (pictured) says the 2008 financial crisis has led to the regulator changing its assumptions about how best to protect investors.
He says: “You have to assume that you do not have rational consumers. Faced with complex decisions or too much information, they default…They hide behind credit rating agencies or behind the promises that are given to them by the salesperson.”
Under the new regulatory structure the FCA, set to launch next year, will ensure suitable products are sold to retail investors. The new regulator will have the power to ban products that could cause consumer detriment, or limit their sale to certain types of consumers.
Wheatley believes use of product ban powers will be rare, but also says the regulator’s more interventionist approach will mean “stepping into the footprints of the investors”.
Wheatley says : “We will work more closely with firms to make sure the products they design go through a real testing process and serve a real purpose. When we start to hear of problems with a product, we will go in much earlier than in the past.”
He says the FCA will be pursuing a more intensive style of supervision than was previously the case under the FSA before the financial crisis, and says the new regulator will be “looking at things from a consumer perspective, rather than an industry perspective.”
Wheatley told the newspaper he is hopeful that costs of the FCA will be in line of those of the FSA, but warned if the FCA is given new responsibilities such as promoting competition and regulating consumer credit more money would be needed.
He adds: “Where it is a step change, we will need more. There is not much more we can stop doing.”
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Readers' comments (33)
Alan Lakey | 25 Jan 2012 8:56 am
Interesting comment re FCA costs.
Is he saying that he anticipates the FCA needing no more than the £400m p.a. that the FSA uses for advisers AND banks?
Anther example of nanny-state encroachment. "We know what's best for you"
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Neil Shillito | 25 Jan 2012 9:00 am
Martin Wheatley the designated head of the new Financial Conduct Authority, has signalled that the new body will take a much more interventionist stance when it comes to consumer protection to ensure that the public are not sold inappropriate products. This is a fine pronouncement but we are going to need evidence of how it will work in practice.
He cites the recent scandal of the mis-selling of payment protection insurance by the banks, referred to, by him, as a fiasco, which indeed it was, the inference being that it was a fiasco engineered by the banks, but neatly dodging the responsibility the FSA had in preventing it which they manifestly failed to do. Mr Wheatley's explanation is that the FSA did not have the necessary powers to prevent it. How interesting.
If the FSA lacks such powers currently, can he please tell me how it came about that in November 2011, Margaret Cole made an ill-thought out, intemperate and wholly inaccurate pronouncement on Traded Life Settlement Funds that has resulted in the suspension of trading of perfectly reputable funds, placing investors' assets at risk and in one particular case depriving investors of an income of circa 8% p.a at a time when interests rates are 0.5%. The FSA have yet to explain how such a move has protected investors' interests, especially against a background of failing utterly to justify or provide any evidence whatsoever that such funds are 'toxic', and 'ponzi schemes'. A ponzi scheme by its nature is fraudulent and if such a serious charge is to be levied, it is usually a good idea to have sound evidence to substantiate it.
Yes, investors can behave irrationally and they do deserve protection against unscrupulous selling of inappropriate products, but the unelected FCA must be very careful with its new sweeping powers or they will be in grave danger of disadvantaging the very people they are supposed to protect.
Yours faithfully
Neil Shillito
Director
SG Wealth Management Ltd
Norwich
NR3 3SA
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Anonymous | 25 Jan 2012 9:03 am
So now we are to assume that the customer is potentially 'not rational' and that it is ultimately the fault of the product provider.
Who will they try to blame next?
If they were made up of people who knew what the business is all about then we wouldnt have so many problems.
Why do these bodies keep employing people at enormous salaries who do not know what they are doing?
sic FSA ,consumer groups etc etc
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Nigel Tinsdale | 25 Jan 2012 9:06 am
Perhaps it is nothing to do with the products, it may well be the greed of the selling body that is the problem. Perhaps if individuals were more accountable for their own actions, no matter what size of organisation they work for then they might think twice about selling a product for their own gain and not that of the consumer. Just a thought.
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Anonymous | 25 Jan 2012 9:07 am
Love it. System working well, send more money.
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Derek Bradley ceo PanaceaIFA.com | 25 Jan 2012 9:12 am
I start to worry when I hear such phrases as “protect consumers who cannot be relied upon to make rational choices”.
Is the public now so incapable of rational choice that another protective layer is needed to make life’s financial journeys safer? Is the FCA to be a financial version of the Health and Safety executive?
In principle though this is quite laudable but it is a mery-go-round that is difficult to know where to either get off or on.
Surely it would produce a better consumer outcome to simply licence products and instruments as fit for a particular purpose rather than ban them after they have demonstrated toxicity?
This could result in very positive consumer outcomes but that would mean the FCA taking responsibility for any decision they make regarding fit for purpose rather than being wise after the event.
Sorry I was in a dream then, that would never do would it?
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Nick | 25 Jan 2012 9:24 am
It will be interesting that if the FCA decides a product is suitable for a certain category of customer as to wether they will take any respobsibility if that product then becomes a disaster.
I guess not.
I remember not so long ago, when we arranged a mortgage & did not sell a PPI with it you had to document why you were NOT selling PPI. Amazing how things change with hindsight
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Anonymous | 25 Jan 2012 9:24 am
Lawyers will be laughing all the way to the Bank!!
As soon as they see an admission that the system is faulty they will get their greedy noses out of the claims trough to add this one to it!
Buyer be aware,or should it be seller be aware?
Either way its more money for those who are making a fortune of the inadequacies of our so called 'protection system'.
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john | 25 Jan 2012 9:26 am
The body of evidence from behavioural finance backs up the irrationality point. So stopping poor products is a very good start. His problem is that the RDR was and is predicated on an intelligent consumer able to make rational decisions about what they should and shouldn't pay for...and here lies the nub. Irrational consumers are highly unlikely to pay someone to persuade them to do something that they know they should do anyway. Or at least by the time the adviser has persuaded them, they don't see the value in the persuasion. And yet we all know that this is where the costs sit.
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Anonymous | 25 Jan 2012 9:29 am
Nigel
Do I get a taste of 'bitterness' that someone is making a living out of selling advice?
Good intentions go out of the window when we become besotted with restrospective actions!
How many people who make their living from selling Financial servcies are you going to include in your statement?
Get out there,sell something and then stand by your principles and dont be afraid of the bogeyman(FSA et al)
its called having the balls to stand by what you believe!
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