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A chorus of disapproval

Paul Thomas reports on a combative reaction of FSA proposals to take regulatory control of products

The Building Societies Association and the Intermediary Mortgage Lenders Association have hit out at the FSA’s proposals to intervene on product design, saying it is beyond the regulator’s remit.

The FSA published a consultation paper last week setting out plans to adopt a more interventionist approach on product design. It looked at whether the FSA and its successor, the Consumer Protection and Markets Authority, should be given more powers to regulate the design of retail financial services products.

In the paper, the FSA mentions mortgages, deposits, investment products and insurance products as areas which could be affected.

FSA chairman Adair Turner says the new approach could see the regulator introduce price caps and even ban some products being sold to certain customers if they have the “potential to cause significant detriment”. The regulator says it will not seek to pre-approve all products before they hit the market but it could require firms to pre-notify it of product launches or changes to existing products.

BSA head of mortgage policy Paul Broadhead says the market should be free to design suitable products without interference.

He says: “Given we have got a lot of regulatory change going on, the approach to consumer protection is subject to review. I think effective conduct of business regulation has got to be a preferable approach to boosting consumer protection. It should be left to the market to design the products.”

Imla executive chairman Peter Williams calls the FSA’s desire to regulate product design “questionable”. He says it is not the role of a regulator to involve itself in product intervention.

Williams says: “The idea that the Government or the regulator can specify what is a safe product is questionable. The job of the FSA is not product regulation but to specify the framework in which firms produce products.”

London & Country head of communications David Hollingworth says product innovation could suffer if the regulator intervenes too much. He says: “As the regulator notes, it is a fine line that it walks in terms of how much intervention would work. Too much and the market becomes stifled and lacking in innovation, which can be detrimental to customers. Too little and there is potential for problems to surface.”

The FSA has also proposed a ban on non-advised sales for complex products or products where there could be a high risk of consumer detriment. However, it has ruled out a blanket ban on all non-advised sales, as it says people who are able to make their own financial decisions would be forced to shoulder the costs of paying for advice.

First Action Finance head of communications Jonathan Cornell says: “I think there are certain products that people should never be able to buy on a non-advised basis. Equity release springs to mind. It is such a complex product it should always be sold as part of an advised process.”

The FSA says it has concerns over bundled products and argues they make it difficult for people to judge the suitability of a product. In the paper, it mentions offset mortgages, which bundle savings and mortgage products, in the paper.

Which? financial services principal policy adviser Dominic Lindley says stronger controls should be in place if lenders continue to offer “headline rates” to customers who take out a number of products.

He says: “An interesting one to flag, and something that we have flagged before, is firms have got to be aware of the risks of bundled products. It is that type of product design which makes misselling more likely. If firms are going to persist with those types of products, there have got to be stronger controls in place.”

John Charcol senior technical manager Ray Boulger says: “There are some bundled products where there is clear consumer detriment, particularly where it is a condition of the mortgage to take out the lender’s buildings insurance. As is pointed out in the paper, the chances are you are going to be paying over the odds and may even be ripped off with some of the other products.”

But he says offset mortgages should not be counted as a bundled product. He says: “I think it would be a big mistake to consider offset mortgages as a bundled product, purely because they consist of a current account and/or savings account. You cannot have an offset mortgage unless you have something to offset it against so I think it would be a big mistake to include them in bundled products.”

The FSA says it is investigating incentives and remuneration for in-house sales staff to see if incentives increase the likelihood of misselling by promoting one product over another.

Cornell applauds the move, saying incentivised in-house sales staff have caused significant detriment to customers.

He says: “There have been a number of issues recently where consumers have been put quite significantly into detriment and I am pleased the FSA is looking into this.”

But Boulger says: “I do not think it is a problem in the broker market today. There is clear evidence this was a problem with some of the banks some time ago and one needs to be on guard to make sure these types of things do not return but my impression is they are not very prominent now.”

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