Fears growing over FSA's risk police role
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.”
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.”