Last week, the IMA gave the FSA the benefit of its wisdom in response to a discussion paper on product intervention.
Arguably another example of the fallout from the credit crisis, the FSA decided it needed to beef up its consumer protection role by trying to deal with problems before the point of sale.
It is hard to argue with the principle but it must not create a situation where we have a risk-averse regulator taking action that stifles innovation and competition. On the face of it, product intervention is not a problem for the fund management industry. It is some-thing we are well used to, given that funds need to go through a pre-approval process and have to be auth-orised by the FSA.
A fund would not even get to market if it presented potential issues as it would not be authorised in the first place. Applying this level of scrutiny to other investment products can only be a good thing.
Another factor when considering the impact of product intervention is the extent to which funds are regulated by European legislative requirements, not least the Ucits IV requirement for a document containing information for investors about risks, rewards and costs.
In addition, authorised funds must provide a spread of risk and comply with rules on investment and borrowing. Managers are subject to independent oversight and strict risk-management processes.
All of this suggests there would be limited mileage in developing new rules to follow when designing and managing products. Translate some of this regulation to other products and not only will we have a fairer industry but less need for discussions about intervention.
There will be instances when the FSA needs to have recourse to a range of different options to address market failure, and product intervention is one such tool. But it is important that the regulator’s focus is not detracted from the need to properly supervise distribution, identify and deal appropriately with misselling cases and identify instances of consumer detriment.
As well as focusing on the manufacture and distribution of products, attention needs to be paid to their promotion. More could be done to deal with promotional material that does not fully disclose risks that have gone on to cause consumer detriment.
The issue remains that product inter-vention will not be effective in dealing with products that are manufactured offshore, a prime example being the ongoing Keydata debacle.
Finally, it will often be the case that those involved in the market on a daily basis are best placed to spot potential issues or cases of consumer detriment. If the FSA set up some sort of early warning system this would allow concerns to be raised informally and also give the regulator an indication of the market’s views on particular products.
Let’s see some intervention but let it be appropriate, proportionate and sensible.
Mona Patel is head of communications at the Investment Management Association