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FSA floats idea of product regulation to ban risky products

The FSA has floated the idea of introducing a form of product regulation into the market as a way of banning products that are deemed too risky.

Speaking at a Treasury select committee meeting this afternoon, FSA chairman Lord Turner said the idea will be an “open issue” included in its report into banking regulation, due on March 18.

Lord Turner said: “The issue we might have to address is whether you can ever imagine a regulator saying that a product should not exist because it is too complicated. I think regulators so far have been wary of that degree of ability to step in and simply say I am going to product regulate.”

“But I certainly don’t exclude it and indeed in the open issues of the final chapter of our report on March 18 it will put not for definitive conclusion but as an open issue whether in future there are some categories of financial product where we should simply say we think this is too complicated for anybody to deliver in a risk managed fashion.”

Later in the Committee meeting, Turner also signalled that the FSA will look at regulating mortgage products.

He said one issue that has to be decided is whether it is best to set maximum loan levels against the value of a property or borrowers’ incomes.

Turner said: “What we will be doing in the review that we produce in three weeks time is signalling not a definitive answer to our proposals on this but signalling that we can certainly see a strong argument for us getting more involved in product regulation than we have in the past and we will be committing that by the third quarter of this year we will be producing a review of the mortgage market which by then will have our proposals.

“The issue of whether you should regulate maximum loan to values or loan to income, because actually loan to income is a slightly better predictor of whether people get into trouble than loan to value…I think is clearly something which is on the table.

“I think we can see considerable merit, both in relation to the defence of consumer interests and in relation to the macro prudential issue about guarding against excessive booms and busts, in looking at the issue of mortgage regulation either through loan to value or loan to income route, or some alternative.”


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