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Firms face second-guessing regulator

FSA plans for product regulation – reports by Nicole Blackmore

Advisers have given the FSA’s plans for product regulation a mixed response with some suggesting it could lower industry misselling costs while others say the idea is unworkable.

SimplyBiz chairman Ken Davy believes product regulation could be the “least worst option” in attempting to ensure future misselling scandals are avoided.

He says: “Product regulation carries with it a number of risks, including restricting innovation, however, the IFA sector and consumers are fed up with having to pick up the bill for products which they were misled into believing were sound investments.”

However, Baronworth Investment Services director Colin Jackson believes that regulating products is “totally unworkable”.

He says: “When Lehman failed, it led to counterparty products failing as well but the FSA could not possibly have foreseen that. The regulator relies on outside auditors and it has no control over the work those auditors do.

“Certain products are potentially high risk but investors should be able to choose their own risk level as long as they are told of the risks involved.”

The Adviser Alliance says the FSA does not understand the causes of the economic crisis and therefore its tougher Cobs rules will not improve the retail market.

In a letter to Money Marketing, Adviser Alliance director Steven Farrall says the FSA has “unbelievable arrogance” to assert that it should decide how financial products are designed and how financial businesses are run. He says: “If no one has any risk in any transaction, they know that whatever decision they take, however stupid, will never result in any personal loss. This will add massive additional moral hazard.”

Cicero Consulting has warned that IFAs will face greater uncertainty over conduct of business regulations under the more intensive approach being proposed by the FSA.

Director Mark Twigg says that companies will find it difficult to predict what the FSA will identify as potentially risky behaviour.

He says: “Dan Waters’ day job at the FSA is going to be sitting at a desk, looking into a crystal ball, trying to predict where risks might emerge in the future. It will be very hard for any authorised firms to second-guess what direction the FSA is going in.

“There will be a lot less certainty and that uncertainty will be even greater for IFAs who do not have as close a relationship with the FSA as larger firms.”

Lansons director of regulatory consulting Richard Hobbs says: “Regulating products more closely is fine but all that does is drive more cost into the industry, which is ultimately borne by the consumer.

“There needs to be a corresponding decrease in conduct of business regulation, which would keep the cost to the consumer unchanged.”

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