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&#39Test products in similar way to medicines&#39

Financial services products should be stress-tested in the same way as pharmaceutical products to reduce the risk of providers paying compensation, says FSA managing director of regulatory processes & risk directorate Carol Sergeant.

The low level of financial literacy of most consumers means that providers must stop launching over-complex and faulty products or face renewed misselling actions in the future, Sergeant told senior life office and banking executives at the Ernst & Young Financial Services Summit in Edinburgh last week.

Sergeant outlined a bleak picture of the public&#39s level of understanding of financial services, citing statistics from a range of surveys from providers, consultants and the FSA.

These show that 23 per cent of consumers cannot explain what a percentage is, two-thirds do not know the difference between equities and bonds and a quarter of pension and endowment holders do not know they are invested in shares.

Sergeant said new products should be tested to ensure that consumers understand them. The trade-off between risk and reward should be made explicit and products should be monitored post-sale to ensure that legal and economic changes have not changed their suitability, she said.

She said: “New pharmaceuticals are tested before launch and monitored after sale. The same should apply for financial services products. Blind, uninformed, ignorant trust is dangerous for firms as well as consumers and the costs of getting it wrong for a large portfolio are high.”

But providers argue that the Government is also guilty of launching products that have not been stress-tested.

Scottish Life group head of communications Alasdair Buchanan says: “Stakeholder is a terrific example of how not to introduce a product. That was not stress-tested and providers were forced into it against their will.”

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