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Consumers cannot be protected from everything

The industry must have its say on consumer protection.

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The financial sector is less than impressed by the coalition’s decision to abolish unitary supervision under FSA and revert to a twin peaks system. The Consumer Protection and Markets Authority will be one of them. But the remit of the new body remains unclear and the Government has yet to explain what this will mean for regulated firms. Lord Turner made this point to the British Bankers’ Association conference recently and asked what precisely is meant by the words consumer protection.

The name implies the CPMA will position itself as a champion of consumer rights and scourge of the financial sector. Ahead of the election, the Tories discussed at length their views on inadequate consumer protection under the FSA. The logical conclusion might be that the new body will take more drastic measures to protect consumers.

But as Turner says, consumer protection, as far as financial services are concerned, cannot mean that consumers are protected from everything that might go wrong. Investors enter a risk market and can no more be protected against loss than they would want protection against gain.

It is also important there is informed debate about the methods the CPMA will use to protect consumers from misselling and that this takes into account the views of industry stakeholders.

Quite what the new authority’s policy toolkit will consist of remains opaque. But increased regulation seems a likely bet. The FSA has become increasingly interventionist in recent years and has expanded on its initial free-market approach, which held that fair disclosure terms and fair sales processes would ensure consumer protection.

In the retail distribution review and mortgage market review, the FSA continues to consider options for product regulation, as proposed in the Turner report of 2008. In his speech to the BBA, Turner discussed the possibility that a consumer protection body might ban outright certain products perceived as harmful to consumers.

More regulation will no doubt mean more intensive supervision and tougher enforcement. Turner says consumer interest might be best served by tough competition. If this is found to be the case, the CPMA might adopt a more interventionist approach to promoting financial sector competition. So far, policymakers have been unclear about the relationship between the Office of Fair Trading and CPMA.

Turner even suggests the CPMA might consider “examining industry economics” in contradiction to FSA’s stated position that it is not a price regulator. The sector can take some comfort that the most recent consultation on responsible mortgage lending finds insufficient evidence to justify outright bans on high loan to income and loan to value.

Nonetheless, Turner heralds the establishment of the CPMA as a “major opportunity” to debate issues relating to consumer protection. It is vital the financial sector makes itself heard.

Simon Morris is a partner at CMS Cameron McKenna

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  1. I’d thought that the central pillar of the RDR is that by forcing all advisers to attain a new minimum qualifications benchmark along with adopting a raft of other new modus operandi, the risk of consumer detriment will become a thing of the past.

    The financial services industry, as we know it today, will be occasionally recalled with a shudder by all these new perfect beings and referred to in whispered tones as the bad old days, before the regulator finally figured out what needed to be done to set the industry on a sound footing of ethics and competence.

    Or will it all be just another monumentally expensive blind alley? The FSA has shown itself to be dismally incapable of operating the present system effectively and efficiently, so what hope is there for the Brave New World post-RDR?

    A utopian vision such as this is unlikely to be workable in practice and certainly not until the FSA creates a level playing field for all practitioners. What chance of that, we wonder?

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