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FSA reveals product regulation plans

The FSA has announced plans to scrutinise financial products at the design stage in an effort to intervene earlier and prevent consumer detriment.

In a speech at the Annual Lubbock Lecture in Management Studies in Oxford this evening, FSA chief executive Hector Sants said the regulator will take a new approach to conduct regulation.

He said: “We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs. We will do this through using our integrated model of risk analysis and research to identify earlier sources of conduct risk, intervening further up the value chain and scrutinising products at the design stage.

“This approach will be combined with a greater willingness to test outcomes through mystery shopping and on-site visits, which should increase the probability of identifying issues before they gain industry-wide momentum.”

Sants admitted the FSA’s focus has been “too late in the product lifecycle” to ensure it identified issues early enough to prevent consumer detriment.

Sants said the FSA’s treating customers fairly initiative has not delivered “substantial, on-the-ground benefits to consumers”, adding that the new approach will make the retail market work better for consumers.

Sants also raised a number of possible actions the FSA may include in its “cocktail of measures” to address the risks posed by large, too-big-to-fail companies, including higher capital and liquidity requirements.

He suggested an industry levy to pay for a future crisis has the advantage of raising funds from firms in a risk-based manner and avoids the problem of those who fail avoiding paying, although it increases moral hazard.

He said a combination of a pre-event levy and post-event tax may be the best way forward although further analysis is needed.

The out-going chief executive stressed that the FSA should not be judged on the rules in place for firms, which he says are made internationally and in conjunction with the Treasury and Bank of England.

He also warned that future policy and rules will be determined in Europe. “The new European regulatory structure will mean that in the future policy and rules will be determined in Europe, and the FSA, or any successor organisation, will be a locally-based supervisor delivering European rules,” he said.

KPMG head of RDR and TCF Fiona Fry says: “The FSA is very clear they intend to examine all stages of the value chain so firms will need to be able to demonstrate they are treating their customers fairly throughout; not only on sales and after sales processes but also on product development, pricing and rigorous stress testing.
“Now is the time for firms to start remediation-proofing their business. They need to be thinking about how they will incentivise compliant product development and invest in the right people so they end up with a much more coordinated and less risky business and, most critically, senior management must make it clear from the top of the organisation that consumer protection is a fundamental priority.”


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. Good intent but 10 years and several trillion pounds too late. If the Regulators had originally had a policy of approving a product before it ever left the factory then this would have stopped most problems occuring, be they investment, mortgage or banking. It would not have stopped fraud, but that would have been a matter of criminal breach anyway.

    Will they do it effectively now? Not in a trillion years!

  2. What the FSA take ownership of regulation? Last time they tried this they guaranteed final salary pensions LOL. Must be because they won’t be around to implement this and then get the blame rather that the poor sods they have regulated since 2000.

  3. Why not just let the FSA design the products it thinks we should sell? They could decide how much we should all earn and what returns a client is entitled to. By the time the FSA are finished with their meddling the only difference between products and providers will be the colour of their brochures!

    Here is a starter for Hector:

    All funds should be trackers
    The maximum TER should be 0.5%
    No commission
    If funds fall in value the client is entitled to their money back plus a goodly amount of interest.
    Free transfers between providers must be available at all times.
    All literature must carry identical wording so as not to confuse the consumer
    Everyone will use the same actuarial/annuity tables
    All pensions will be in red brochures
    All single contributions will be in Blue brochures
    All protection plans will be in green brochures

    Everybody must eat vanilla ice cream
    Everybody must drink tea

    Everybody should retire at the same age
    Everybody should die on their actuarially predicted age

    Everybody should get married

    Everybody should vote labour

  4. Incredible really

    What have they been doing for the last decade then?

    Any one with a bit of common sense would have realised that if you are a regulator checking that products stack up to what they say they are and the associated risks are clearly documented woud be one of the first areas to look at “wouldn’t it ” ?

    Let’s put the FSA down and out of it’s misery and start with some new blood and ideas. A decade is long enough and after some of the biggest financial failures in history it must surely tell us it has not worked.

    As we cannot sue or bring the FSA to account for their failures as they are protected by statute maybe we can issue a vote of “no confidence”.

  5. Never Too Old To Rock 12th March 2010 at 6:27 pm

    FSA are as Cream song ‘We’re Going Wrong’

  6. Will product providers still be allowed to market high risk products as SECURE Income Bonds?

  7. Charles Bunbury 12th March 2010 at 6:54 pm

    Why has it taken so long? The first thing FSA .GOV .UK should do is get its own house in order by removing its own restriction on the universal placement of CONVERTIBLE TERM by one and all. In light of FSA.GOV UK own mandate of being the CONSUMER WATCHDOG for consumers and its policy of TFC can the FSA or some one please explains to me how this restriction is justified?

    This product was the cornerstone of protection short, medium and long term, it allowed the public or policyholder to convert into savings/investment and estate planning. The fact that one had to go back to the same provider can not justify the limitation of placement claiming that it has an investment link. I my book millions are exposed

    Half a loaf is better than none at all which is the position that million of pure term insurers are now in because of FSA restriction. I often wonder who will be accepting responsibility when the true effects of this rule takes effect when current pure protection policies are near the end selected term, policyholders are older and health has deteriorate. I hope that FSA.GOV.UK put its hands up and accept that its rule restricted the wholesale placement of this product to public at large and compensate all those who will suffer financial loss because of FSA.GOV.UK limitation rule or are we going to see another structured product.

  8. This is finally a step in the right direction! As in a previous letter the ridiculous situation we are in us akin to a no airworthy airplane crashing, the travel agent being blamed and then being asked to pay the compensation. With products being tested, the providers will at long last be responsible for providing sound products and the advisor can concentrate on giving suitable advice.

    This will not however stop the banks from ‘miss selling’ unsuitable products to the public and with the decimation of independant advisors by the FSA, the lack of choice coupled with the loss of genuine desire of advisors to make sure their lifeblood (clients) are well looked after, will surely leave clients with little or no unbiased choice.

    The FSA should actively start to clean up the Bank selling practises and when the have been found to be actively shafting clients – eg PPI, fine them prohibitively ie more than the monies they made from selling the product and encourage independant advice rather than extinguishing it (RDR).

  9. I wonder what would have happened if the FSA had taken this approach at the very beginning rather than at the end of its life? If the product providers had been held accountable for the products they designed and their future perfomance, what a different financial world we would be experiencing today and just think of the billions of pounds that would have been saved. Lets get back to basics and ask the customer what he wants and then supply a product to match his needs. Its that simple!

  10. In fairness regulating products – or at least their description and promotion is a good idea. Afterall, drug production is regulated so that Doctors don’t have to worry about products not being what they say they are…….

  11. one thing that is clear…increase in mystery shopping to all regulated firms which should scare the pants off some of you and there is going to be more stripping down of casual titles that we use currently like “interest only” mortgage which will be called something like no repayment mortgage.

  12. Friday night … went down the pub with my mates as usual. Typical pub, full of noise, outbreaks of raucous laughter etc., you know the type of thing, but I overheard these two guys deep in conversation at the end of the bar.

    Now, I didn’t hear it all because of the hubbub, and shouts for the next round etc., but what I did hear was so interesting I thought should post about it.

    Apparently there is a global discussion amongst car manufacturers about moving into the personal investment markets, based on a single premium structured product. Now the minute I heard that bit, I edged closer and tried to hear more.

    It seems that the single premium will have two elements, one investments of the consumers’ choice via a platform and the other element gets you a new car.

    They sniggered at one point … it seems once each year any depreciation on the car will be deducted from the investment element – but a bit of skilful hedging will disguise what is actually happening.

    All above my skill levels to be brutally honest, but they both agreed they had the exam passes to get it all off the ground.

    Anyway, I digress … it seems that the real attraction for car manufacturers is to do with faults in car design.

    From what I managed to hear they have been monitoring the FSA’s thoughts over product manufacture in the investment markets, and how this looks as though it will relate primarily to mystery shopping and pro-active scrutiny of the sales environment for products, but not perhaps back to the original manufacturing of any product.

    Of particular interest seems to be the fact that the FSA have said there are far too many products for them to make judgements on each individual product, and they laughed out loud when they listed the bits that went into each new car.

    Then the karaoke started …. but as best I heard it, the real clincher seemed to be that if it all went ahead, it would always be the product retailer that would be first in line over responsibility from now on over sticky accelerator problems and the like.

    It may have been the drink they had already consumed, but they became very animated as they imagined this brave new world of “Why did you sell this defective product – and never – why was this unsafe product allowed out on the streets in the first place.”

    Because of the noise, I am also sure I misheard the bit about the FSA having already agreed that many ex-IFAs would make ideal used car salesman, and giving an assurance that there would soon be a plentiful supply.

    A rather loud version of “Delilah” by one of my mates meant I heard no more.

    Is any of this true?

    Well, maybe I should tell you – I really wasn’t down the pub last night.

    But I was thinking about going on the phone to my MP about this idea of mine about an “endowment scrappage” scheme.

  13. Hector Foolhead 14th March 2010 at 10:52 am

    Why don’t the FSA go a take a flying {sweary phrase sell deleted!} at them selves. The have always said they are not intrested in providers who develop products and when providers give them information on it the people at the regulators dont have the knowledge to understand them. If this has been sorted it would be ok but unless you have managed to hire some decent staff and not just some bullsh*te merchants who have not clue about the industry financial promotion or COBS.

    Only thing worse than an ineffective regulator is an ineffective regulator who then trys to rectify the situation by being more ineffective.

    It would be like allowing Paedos to tell shcools the best way to protect children from paodos

  14. Wow what a revelation it’s only taken 10yrs for the FSA to come up with this new concept (still they’ve got there pension benefits to think of).

    The car trade and other trades have been doing it for years it’s called the ‘Kite Mark.’

    If it’s not in the market place nobody can advise on the product or be fooled by these investment houses who miss use the word ‘Guarantee’.

  15. Terry Mullender. 15th March 2010 at 9:38 am

    “Too little too late” is perhaps a fitting and appropriate comment on the FSA tombstone.

  16. I welcome this approach wholeheartedly. It is too easy for journalists to always blame “commission hungrey salesmen” when in practice a manufacturing fault is the base of the issue. Equitable life..nil commission. Split caps and “failed guarantee” products (ie Lehman backed NDF etc) typically 0-3% commission. Amazingly the IFA was the only party capable of working out that these were flawed and therefore wholly liable when it all went wrong. In all of the above cases a different product could have been retailed for a far higher amount of commission.
    This is a difficult area for the regulator but if a product is retailed it should at least be fit for the purpose and its marketing literature accurate. In the case of split caps they were described as “the 1 year old that lets you sleep at nights” yet some clients made 100% losses and the sole party liable was the IFA!
    Well done Mr Sants very overdue but better late than never.

  17. What about the consumer detriment visited upon us all by the FSA and its masters, the Labour Government, by completely messing up the country’s finances and by encouranging the retail banking cartel to exploit excessively loose money and pathetic – as in excessive and wrong headed – regulation? Sants rant is risible. The whole idea is utterly stupid.

  18. Sorry to ask Hector but why has this NOT been done for the past TEN years?
    I appreciate you will not admit it but the most plausible reason is that it is being done now to reposition the FSA should the Conservatives win the coming election.
    From other reports it appears the FSA understands that it has lost most of it’s credibility on the ‘large scale’ regulation of Markets and Banks and is therefore attempting to salvage a part of its role with something more suitable to its staffs skills sets. On performance to date even that much lesser role of ‘consumer watchdog’ looks beyond it. As we would say ‘past performance is no guarantee of future performance’ but it is the best indicator we have.

    Mr Sants’ further comments that all future ‘Rules and Regulations’ will come from Brussels and that the ‘UK Regulator’ (whoever it is) will be reduced to being the ‘London Branch Office’ makes depressing reading. Is it really all over as far as regulation in London is concerned, all now turned over to the very ‘Politically’ motivated bureaucrats in Brussels who are jealous of London’s pre-eminent position? Sounds as if Hector has run up the white flag already. Why would that be? Gordon Brown made it crystal clear that we were NOT going to join the Euro so why should Hector signal surrender so quickly, on regulations yet to be agreed? Regulations that, we could in any case argue forcefully and legitimately, should be confined to the ‘Euro area’. The UK could then show it’s commitment to Europe by agreeing to implement/abide by some regulations, BUT only those that were in the UK’s BEST interests. This would be more honest than most of the rest of Europe which signs up but then chooses when, by how much or even if they are going to implement the Brussels edicts.

  19. Dear FSA, I may have suggested that it might be a good idea in theory but the practicalities need to be sorted out first. Just like the concept of wealth warnings this might end up being another case of “Foot in Mouth”…

    They remind me of puppies “finding” a bone when if fact somebody placed it right in front of their noses.

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