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First step in the definition debate

The FSA&#39s much anticipated publication of a definition of misselling has been greeted with something less than overwhelming enthusiasm by the industry trade bodies which have been lobbying so hard for the term to be defined.

Arguably the most positive thing anyone has to say about it is that it provides a useful first step to kick off a debate about how any definition should read.

That honour falls to the ABI, which offered lukewarm and guarded praise to the FSA&#39s effort of last week. Even it, while greeting the publication as a positive first step, said more clarification was needed before the matter is done and dusted.

ABI spokeswoman Emma Grainge says: “The FSA has restated its current position, which is a welcome first step. We look forward to discussing this matter with the FSA but there is a need to go further and clarify the issue of a suitability definition as recommended by Ron Sandler.”

Other trade bodies were less accommodating to the regulator&#39s latest announcement on the issue, which came in the form of a note to the industry from managing director John Tiner, which represented neither formal guidance nor any type of modification to the existing rules.

Sofa, Aifa and the LIA have all lined up to criticise the move, saying it moves the debate forward very little. They reserved their greatest criticism for the FSA&#39s rejection of the creation of a safe-harbour for advisers, something most of them view as being the most fundamental aspect of any definition of misselling.

In the note, Tiner said: “It would not be practicable or ultimately desirable for the FSA to provide an exhaustive set of specifications by way of a safe harbour. If those specifications were to be exhaustive, they would bound to be very lengthy, detailed and prescriptive.”

But it is precisely this which the industry was waiting to see, according to LIA head of public affairs John Ellis. He says it would provide certainty to IFAs when they are advising a client that they will not arbitrarily be accused in the future of misselling because of the whim of the regulators at the time.

Ellis says: “I don&#39t think this definition takes us forward at all. It says nothing new, instead it just reaffirms what we already all know. It does not add more certainty to the industry which is what was the thinking behind the recommendation from the Sandler team.”

It is not blanket protection IFAs are looking for but simply the self-confidence that the goalposts will not move sometime in the future.

Instead, all they got was a reiteration of existing guidelines brought together in a single place for the first time. The so-called definition included a repetition of the commitment not to embark on retrospective reviews, something already offered by outgoing chairman Howard Davies at Aifa&#39s annual dinner last November.

Furthermore, Tiner reminded the industry that the FSA cannot randomly embark on widespread misselling reviews without the approval of both Houses of Parliament. But this has always been the case under the Financial Services & Markets Act 2000.

The regulator can however launch targeted reviews such as mortgage endowments and split-caps.

Sofa managing director Brian Lawless says: “I might be more confident there will not be an industrywide review but I am no more confident they won&#39t embark on case by case reviews, so how are we any better off?”

Tiner also emphasised the importance the FSA places in consumers taking responsibility for their financial decisions, something which has been welcomed by the industry.

This is an interesting development viewed against the fact, caveat emptor, the legal principle behind this statement was excluded from the FSMA after much debate.

Tiner re-emphasised the importance of suitability and know your customer requirements, both things IFAs are undoubtedly already well aware of.

ProAct Legal partner Gar-eth Fatchett says: “It is a definition without there actually being a definition. It is disappointing because it does not actually provide any guidance, it doesn&#39t tell us anything more we don&#39t already know. It could have been a perfect opportunity to provide some clarity and they did not take it.”

One of the main driving forces behind a definition of misselling was a desire from the professional indemnity insurance market for more stability.

PI insurers consistently say they are unwilling to offer cover to IFAs because they fear future misselling reviews along the lines of those for pensions or mortgage endowments which would inevitably see large numbers of claims against PI policies. The reaction in this regard has been underwhelming.

The FSA has invited trade bodies, consumer groups and industry players to a pow-wow to discuss the issues raised by last week&#39s publication. It can expect a lot of interest in this meeting but also a lot of criticism for a missed opportunity.


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