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Categories:Regulation

Fears growing over FSA's risk police role

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The extent of the FSA’s product intervention powers is causing concern among financial services firms as the regulator begins its crackdown on risky products.

FSA interim managing director of the conduct business unit Margaret Cole told Reuters last week that she expects the regulator to start issuing warnings on products where there is significant risk of consumer detriment.

Cole (pictured) said: “I expect us to start being more clear and direct, both to firms planning products and to consumers about the dangers of products, such as structured products we have concerns about.

“We have been asking for minutes of product approval meetings and there are examples where we have told a firm to go back and add features to a product to bring about greater comfort on our part.”

In January, the regulator published its product intervention discussion paper, which set out a range of measures to strengthen the regulation of financial products including product bans, price caps and the power to limit sales volumes.

In consultation papers in February and June, the Treasury confirmed that powers to ban products for up to a year and restrict some product features are to be written into legislation for the Financial Conduct Authority.

But the industry feels that while the regulator’s tougher stance on risky products is positive, it is not clear that sufficient checks are in place to ensure FSA action on products is proportionate to the risk they present.

Investment Management Association director of wholesale Guy Sears (pictured) says: “If this means the regulator is not going to wait until there has been a disaster but willactually prevent one, that is very welcome. Where we get nervous is that, as drafted in the legislation, the product intervention powers are fantastically wide-ranging. It puts enormous stress on trusting that the regulator will use those powers sensibly and fairly.”

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Sears says although the industry appreciates the FSA’s commitment to adopting a more hard-line approach to risky products, there needs to be more clarity over the internal checks at the regulator to ensure these powers are exercised correctly.

Aifa policy director Andrew Strange says: “If this helps to reduce the opaqueness of certain products, this will be a positive move. However, the FSA has a number of significant questions it must answer to satisfy the IFA profession. How will it provide clarity on products with numerous points of similarity or cross-over? Will a warning strictly adhere to a single product or also to other products with similar product features, counter-party risk or investment methodology?”

The Association of British Insurers says it is supportive of earlier product intervention where there is clear evidence of consumer detriment, such as the misselling of payment protection insurance.

But ABI assistant director of retail market regulation James King says: “Regulators are not well placed to design products, and ill-thought-out interventions could ultimately restrict consumer choice and competition. Product categories, such as structured products, Ucits, and investment bonds are very varied, so broad-brush, unqualified warnings by the FSA would be inappropriate and could deter people from starting to save or invest.”

Yellowtail Financial Planning managing director Dennis Hall says the regulator’s previous focus on how products are sold, rather than what products are sold, has clearly not worked.

But he is unconvinced that the new product intervention powers would have prevented investment failures such as Keydata.

Hall says: “I do not know the FSA necessarily has the expertise to recognise a bad investment. The IFA community should recognise these things and even we have been caught out.”

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Readers' comments (7)

  • The IFA landscape is littered with the flostam and jetsam of products which didn't do what it said on the tin, not that said tins always had something written on them and if they did that said IFAs read what was writ.

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  • What happens when a product that has not been branded as risky falls over?

    Can the IFA still be blamed when the FSA hasn't spotted it?

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  • Cash "n" Tracker from now on then.

    Is this what they mean by "Simplfied Advice" ?

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  • The ABI of course is no friend of the IFA.

    Is it not the case that “before” a product can be offered for sale via intermediaries it has to be approved by the regulator rather like a drug before distribution by a dispensing pharmacist? If otherwise we would have the drug agencies issuing warnings only when people started to fall of their perch. If this is the case whay on earth do we have regulators? As James King says: “Regulators are not well placed to design products”, but they are well placed to approve a product after it has been designed & I’m sick of carrying the can for regulators that close the stable door after the horse has bolted and product providers who use smoke and mirrors and again expect me to see through their illusion.

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  • Would this new interventionist policy have prevented the zeros debacle, the KeyData shambles or the Lehman Brothers catastrophe. Chances are that the answer is a big, fat "NO". The FSA took 10 years to look at the PPI problem despite it being common knowledge to IFAs that the PPI being sold by banks and building societies was unaldulterated crap ! Given this history it doesn't bode well for financial services if this bunch of no-hopers start banning stuff they think might be a little risky.

    Thank God the FSA is not in charge of the DoT - we'd all be driving around in cars made out of rubber and forced to employ an assistant with a red flag to walk in front of our vehicle.

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  • If this action prevents a mis-selling debacle, it could be a first for the Regulator!

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  • I remain of the view that the FSA should not spend yet more (of our) money and resources attempting to act as a product design policeman.

    Would it not be better, cheaper and more constructive simply to invite the technical and research teams of the large national IFA's and IFA networks to submit their knowlege and experience-based verdicts on all new products likely to be considered for recommendation? In such matters, a pooling of expertise is usually the best approach.

    Just who within the FSA will be formulating these verdicts on any changes that it may consider necessary for some products? A team of three? Five? Ten? What are their qualifications and experience in such matters? Will they seek input from the wider world as to the validity and/or appropriateness of their edicts?

    Involving the industry could save money. It could reduce the demand on the FSA's resources, thereby enabling it to tackle other, more pressing issues. It could demonstrate that it [the FSA] is actually interested in engaging constructively and cooperatively with the industry it regulates, rather than just handing down pronouncements from on high. It might also be quicker too.

    But then, as we know, if there's a cost-effective, straightforward and speedy way of addressing something (and nobody's saying that this isn't a problem worthy of attention, indeed, it's well overdue) and the other way, then you can bet your bottom dollar which one the FSA will go for. It's almost as if the FSA is utterly opposed to the very notion of trusting anybody's judgement but its own, despite a litany of examples highlighting the various occasions on which the FSA's judgement has been found very much to be wanting ~ ArchCru springs readily to mind.

    Then again, maybe it is the FSA's intention this time round to seek input from the industry, so perhaps I shouldn't prejudge. We'll just have to wait and see.

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