FSA reveals product regulation plans
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The FSA has announced plans to scrutinise financial products at the design stage in an effort to intervene earlier and prevent consumer detriment.
In a speech at the Annual Lubbock Lecture in Management Studies in Oxford this evening, FSA chief executive Hector Sants said the regulator will take a new approach to conduct regulation.
He said: “We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs. We will do this through using our integrated model of risk analysis and research to identify earlier sources of conduct risk, intervening further up the value chain and scrutinising products at the design stage.
“This approach will be combined with a greater willingness to test outcomes through mystery shopping and on-site visits, which should increase the probability of identifying issues before they gain industry-wide momentum.”
Sants admitted the FSA’s focus has been “too late in the product lifecycle” to ensure it identified issues early enough to prevent consumer detriment.
Sants said the FSA’s treating customers fairly initiative has not delivered “substantial, on-the-ground benefits to consumers”, adding that the new approach will make the retail market work better for consumers.
Sants also raised a number of possible actions the FSA may include in its “cocktail of measures” to address the risks posed by large, too-big-to-fail companies, including higher capital and liquidity requirements.
He suggested an industry levy to pay for a future crisis has the advantage of raising funds from firms in a risk-based manner and avoids the problem of those who fail avoiding paying, although it increases moral hazard.
He said a combination of a pre-event levy and post-event tax may be the best way forward although further analysis is needed.
The out-going chief executive stressed that the FSA should not be judged on the rules in place for firms, which he says are made internationally and in conjunction with the Treasury and Bank of England.
He also warned that future policy and rules will be determined in Europe. “The new European regulatory structure will mean that in the future policy and rules will be determined in Europe, and the FSA, or any successor organisation, will be a locally-based supervisor delivering European rules,” he said.
KPMG head of RDR and TCF Fiona Fry says: “The FSA is very clear they intend to examine all stages of the value chain so firms will need to be able to demonstrate they are treating their customers fairly throughout; not only on sales and after sales processes but also on product development, pricing and rigorous stress testing.
“Now is the time for firms to start remediation-proofing their business. They need to be thinking about how they will incentivise compliant product development and invest in the right people so they end up with a much more coordinated and less risky business and, most critically, senior management must make it clear from the top of the organisation that consumer protection is a fundamental priority.”
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Readers' comments (19)
Anonymous | 12 Mar 2010 5:45 pm
Good intent but 10 years and several trillion pounds too late. If the Regulators had originally had a policy of approving a product before it ever left the factory then this would have stopped most problems occuring, be they investment, mortgage or banking. It would not have stopped fraud, but that would have been a matter of criminal breach anyway.
Will they do it effectively now? Not in a trillion years!
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Simon Mansell | 12 Mar 2010 5:56 pm
What the FSA take ownership of regulation? Last time they tried this they guaranteed final salary pensions LOL. Must be because they won't be around to implement this and then get the blame rather that the poor sods they have regulated since 2000.
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Anonymous | 12 Mar 2010 5:57 pm
Why not just let the FSA design the products it thinks we should sell? They could decide how much we should all earn and what returns a client is entitled to. By the time the FSA are finished with their meddling the only difference between products and providers will be the colour of their brochures!
Here is a starter for Hector:
All funds should be trackers
The maximum TER should be 0.5%
No commission
If funds fall in value the client is entitled to their money back plus a goodly amount of interest.
Free transfers between providers must be available at all times.
All literature must carry identical wording so as not to confuse the consumer
Everyone will use the same actuarial/annuity tables
All pensions will be in red brochures
All single contributions will be in Blue brochures
All protection plans will be in green brochures
Everybody must eat vanilla ice cream
Everybody must drink tea
Everybody should retire at the same age
Everybody should die on their actuarially predicted age
Everybody should get married
Everybody should vote labour
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Michael Fallas | 12 Mar 2010 6:01 pm
Incredible really
What have they been doing for the last decade then?
Any one with a bit of common sense would have realised that if you are a regulator checking that products stack up to what they say they are and the associated risks are clearly documented woud be one of the first areas to look at "wouldn't it " ?
Let's put the FSA down and out of it's misery and start with some new blood and ideas. A decade is long enough and after some of the biggest financial failures in history it must surely tell us it has not worked.
As we cannot sue or bring the FSA to account for their failures as they are protected by statute maybe we can issue a vote of "no confidence".
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Never Too Old To Rock | 12 Mar 2010 6:27 pm
FSA are as Cream song 'We're Going Wrong'
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Anonymous | 12 Mar 2010 6:47 pm
Will product providers still be allowed to market high risk products as SECURE Income Bonds?
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Anonymous | 12 Mar 2010 6:54 pm
Why has it taken so long? The first thing FSA .GOV .UK should do is get its own house in order by removing its own restriction on the universal placement of CONVERTIBLE TERM by one and all. In light of FSA.GOV UK own mandate of being the CONSUMER WATCHDOG for consumers and its policy of TFC can the FSA or some one please explains to me how this restriction is justified?
This product was the cornerstone of protection short, medium and long term, it allowed the public or policyholder to convert into savings/investment and estate planning. The fact that one had to go back to the same provider can not justify the limitation of placement claiming that it has an investment link. I my book millions are exposed
Half a loaf is better than none at all which is the position that million of pure term insurers are now in because of FSA restriction. I often wonder who will be accepting responsibility when the true effects of this rule takes effect when current pure protection policies are near the end selected term, policyholders are older and health has deteriorate. I hope that FSA.GOV.UK put its hands up and accept that its rule restricted the wholesale placement of this product to public at large and compensate all those who will suffer financial loss because of FSA.GOV.UK limitation rule or are we going to see another structured product.
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Anonymous | 12 Mar 2010 7:05 pm
This is finally a step in the right direction! As in a previous letter the ridiculous situation we are in us akin to a no airworthy airplane crashing, the travel agent being blamed and then being asked to pay the compensation. With products being tested, the providers will at long last be responsible for providing sound products and the advisor can concentrate on giving suitable advice.
This will not however stop the banks from 'miss selling' unsuitable products to the public and with the decimation of independant advisors by the FSA, the lack of choice coupled with the loss of genuine desire of advisors to make sure their lifeblood (clients) are well looked after, will surely leave clients with little or no unbiased choice.
The FSA should actively start to clean up the Bank selling practises and when the have been found to be actively shafting clients - eg PPI, fine them prohibitively ie more than the monies they made from selling the product and encourage independant advice rather than extinguishing it (RDR).
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Anonymous | 12 Mar 2010 9:03 pm
I wonder what would have happened if the FSA had taken this approach at the very beginning rather than at the end of its life? If the product providers had been held accountable for the products they designed and their future perfomance, what a different financial world we would be experiencing today and just think of the billions of pounds that would have been saved. Lets get back to basics and ask the customer what he wants and then supply a product to match his needs. Its that simple!
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Anonymous | 13 Mar 2010 7:15 am
In fairness regulating products - or at least their description and promotion is a good idea. Afterall, drug production is regulated so that Doctors don't have to worry about products not being what they say they are.......
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