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FSA can see the wood for the trees

In last week&#39s Money Marketing editorial leader, the FSA was accused of being somewhat presumptuous in publishing its discussion paper on the options for regulating the sale of simplified investment products (DP19).

Paraphrasing Ms Piggy, presumptuous – moi?

This article sets the background to DP19 and answers the questions – Why now? Why the three options we have put forward? And what happens next?

Of course, we have yet to hear from the Government about what the proposed product standards will be for stakeholder products. But although the detail is not known, the framework is there already in what Ron Sandler said in his report and from the discussion of Ron&#39s report at the Treasury seminar in October 2002.

So it is by no means idle for the FSA to be asking for views now on whether industry and consumer interests see the case for some trade-off between regulation of the selling process and product regulation and where the dividing line might be drawn.

This is a fundamental debate, first started in CP121, on whether appropriate consumer protection necessarily means that in all cases a full advice service needs to be provided, particularly where protection is built into products themselves.

This is not to deny that consumers – and particularly those on lower incomes – may also need access to generic advice but that is a need the industry may not find it economic to provide in all cases.

There has been a too ready assumption that the FSA is wedded to decision trees as the way ahead. But I emphasise that DP19 is a discussion paper, that it canvasses three possible options and that the FSA is not averse to other options being put forward.

But I will start with the provocative question – what&#39s wrong with decision trees?

The industry view that they have been a “failure” in the case of stakeholder pensions is simply based on the fact that, on the whole, the industry has chosen not to use them, rather than that the trees fail to do the job for which they were designed, which was never to gauge suitability.

If decision trees were used for the selling of the new suite of products, they would also not pretend to access suitability for a particular individual. Rather, they would aim at screening out those consumers who are either ineligible or were likely to suffer detriment if they purchased.

“Misbuying” would remain a possibility for some consumers but any detriment they might suffer would be reduced by the existence of the product standards. So the issue is to what lengths we need to go to ensure that each and every consumer gets an optimal outcome, with no possibility of misbuying.

Anyway, I will axe the trees for the moment and deal with the other options.

One is modelled on the selling regime envisaged in Ron Sandler&#39s report. It would involve a high degree of consumers taking responsibility for their own decisions. That already happens when consumers decide to buy a product through a direct-offer financial promotion. But the possible risk of misbuying is increased with this option.

At the other extreme is the idea of focused advice on the lines we discussed in CP121. It could be delivered by staff who are not trained to full FPC standard and, in consequence some limits would have to be placed on the products on which they could advise. Nor could this option claim to provide a comprehensive financial check but it should at least allow identification of those consumers who should be referred on for more specialist advice. Importantly, it would help with the conundrum of how to make it more economic to reach lower-income consumers. For IFAs there might be an opportunity here to make better use of para-planners.

In addition to the consultation on DP19, we will be holding a number of seminars during the spring to seek the views of industry and consumer representatives.

Once the Treasury has published its proposed standards, we can work towards the publication later in the year of firm proposals on how we propose to regulate the selling process.

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