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Davies&#39 doubts echo through Sandler suite

Two weeks ago, Sir Howard Davies decided to use his last AGM as head of the FSA as a platform for voicing his personal doubts over the Treasury&#39s suite of lighter-touch-regulation stakeholder products.

In what has been interpreted by some industry insiders as a parting blast at the Treasury&#39s handling of the Sandler consultation, Davies said: “I have personal doubts about whether product regulation and price controls are the right way to go. I recognise the concerns of consumer groups about Sandler&#39s ideas for cutback regulation.”

It was a point he had made before but, coming just a week after the Treasury published its update on the Sandler suite, Davies&#39 comments show the discomfort that some parts of the FSA must be feeling at being handed the poisoned chalice of creating a framework that protects consumers without giving them advice.

Asked for a view on Davies&#39 comments, a Treasury spokesman says: “The Government is committed to the smooth introduction of the stakeholder suite of products by 2005.”

The FSA&#39s feedback statement on discussion paper 19, Options for Regulation of the Sale of Simplified Investment Products, sets out the possible way forward for regulating the suite.

The first option is self-help, which amounts to a series of consumer warnings, after which caveat emptor would apply. This barest of all regulatory regimes has been dropped as being too risky.

The second option – preferred by the FSA – is guided self-help, where a series of filter questions set by the regulator would be used by the salesperson to screen out consumers who should not be thinking about buying a particular product. Firms which applied this simplified sales method could not be held liable for poor advice although consumers would still have protection against fraud.

The third option is focused advice, where an adviser would make a limited assessment of individual suitability under a stand-ard FSA approach.

Announcing feedback to DP19, FSA director, conduct of business standards, Michael Folger said: “We still have to recognise that, for some consumers, even simplified investment products would be a poor choice. So, before taking any decisions, the next step is consumer-testing of a filtered questions approach to the consumer sales process. That will help us assess how effectively it can help consumers make sensible choices.”

The Consumers&#39 Association believes the FSA has effectively already made its decision. Senior policy adviser Mick McAteer says: “I am concerned at the way the FSA has set out its stall on option two – the guided self-help option – before the consumer-testing of it has been done. It seems they have already made up their mind so because it will take an embarrassing U-turn to do anything else.”

Against the background of Davies&#39 comments at the AGM, one has to ask why the FSA is following the second option and not the third. The FSA&#39s statement on DP19 repeatedly raises the issues of suitability and misbuying that come with a filtered question approach – tree-walking by another name – but it then chooses option two, saying it will conduct consumer research to see if its chosen option can work.

McAteer says: “I do not understand Davies&#39 comments because they run contrary to the policy the FSA is following. If he believes option two is too high risk, then what is the point of going through the motions with this option?”

Sofa chairman Nick Bamford has called on Davies to use his remaining two months as head of the FSA to do all he can to stop the proposals if he thinks they are so dangerous.

Aifa&#39s view throughout the consultation has been that it is better to engage with the Treasury and the FSA than be confrontational although most advisers feel there is room for both approaches.

Dennehy Weller managing director Brian Dennehy says: “Maybe Davies thinks these products have no future and will die a death because they will not get the support of the providers. Davies seems to be saying let Sandler and the Treasury play these games because nothing is going to happen anyway.”

Central Financial Planning director Ian Smith believes Davies is proving a late convert to the IFA cause. Smith says: “It is strange how Davies is suddenly coming out with these pro-IFA ideas. I wish he had been a bit more like that throughout his reign. But with the life companies strapped for cash as they are at the moment, these new products will probably bomb worse than stakeholder pensions.”

The timetable of the review means the Treasury is telling the FSA to devise a regulatory regime before it decides on the level and shape of the price cap. Some industry sources say this gives time for Davies to retire – he is leaving to take up his post as director of the London School of Economics – and allow in a new team at the FSA who will not be so prickly on the possibility of misbuying.

The FSA will not comment on the views of chief executive designate John Tiner and chairman Callum McCarthy on the Treasury proposals and the regulatory regime to accommodate those proposals.

Tiner should be given the benefit of the doubt until he is firmly established at his new desk but how he deals with the Treasury on this issue will set the tone for the rest of his time in charge.

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