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Kitemarked products better than product policing

A kitemark for products would stop people being ripped off

Among the powers that be, there is a pervasive sense that dodgy consumer finance products harm consumers and breed distrust. In raising the spectre of product intervention, the FSA is considering intervening in what products firms supply and how they price them. The ends are right but the means are wrong.

The FSA calls this “pre-emption”. And just like George W Bush’s doctrine, it means defending the people against future threats. The regulator plans to “anticipate consumer detriment where possible and stop it before it occurs”.

To do so, it needs a varied arsenal. It could demand that products are inspected before they go on the market. It could ban products already out there that it thinks are not in consumer interests. It could man-date that products have certain features to protect consumer interests. It could try to regulate prices so consumers do not get ripped off.

This approach is misguided and heavy-handed for three reasons. First, intervention before the point of sale reduces consumer choice. The FSA is likely to overshoot, banning some products that are useful to some consumers.

Second, if it determines the prices consumers should pay for products, it will effectively ban some of them. Firms need to get sufficient revenue to market products and if they can’t, notoriously inert consumers will not hear about them. If market competition is not working to reduce prices, then the FSA should concentrate on that, not regulating prices.

Third, and most important, while the problems in consumer finance are widespread, financial pre-emption will only ever affect a small number of rich, reasonably financially capable consumers. The FSA is talking about super-vising products such as unlisted shares and hedging products for financial investments.

Instead of intervening in the product market, the FSA should seek to resolve the broader failures in the retail market. Many product markets fail because providers compete heavily on headline prices to entice consumers in and then they make their money later with hidden charges or reduced coverage in the case of insurance.

What should the FSA do? The answer lies in the Treasury’s “simple products” agenda. But rather than focusing on simplicity, the FSA should create a kitemark for “fair products” that don’t rip consumers off when they are not looking. In setting standards – but not price caps – for such products, they would encourage firms to compete on transparent and fair financial products that are fairly priced, even if they do not always appear to be the cheapest.

In doing so, the FSA can make a virtue of the market rather than trying to clip its wings. Competition between financial providers would then have beneficial effects, unlike today.

By developing a set of fair products, the FSA can lead the market, creating fair competition over the products that most people need. Don’t restrict the market, use it.

John Springford is a senior research fellow at the Social Market Foundation

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. The question has to be if we have “product approval” or “kitemark” products, who pays if they fail and who takes responsibility if they fail?

    A “kitemark” has little value to consumers if there is no “protection” to go with it.

    That is what the FSA fear so they will never go near it until they can address that key issue.

    The FSA are more than happy for everyone else to take responsibility for their mistakes and pay compensation for them as well, but the thought of those in the FSA having to do the same would be unbearable to them.
    It might however help reduce their own mistakes (which they don’t pay for) and make them think a lot more before they force yet more regulations on everyone.

  2. We already have kitemarked products, namely those offered by NS&I. Nothing marketed by private sector providers can offer the simplicity and security of products backed by HM Treasury. They may not be very exciting, particularly at the moment, but if zero risk products are what a consumer wants, then they’re already there for the taking.

    Trying to come up with private sector investment products as safe as those available from NS&I is, IMHO, an exercise in futility. Is it really necessary to try to reinvent the wheel?

    And who will grant the kitemark seal of approval? Certainly not the FSA, for the simple reason that Canary Wharf is where the buck would have to stop if the product were to fail. Or would the kitemark be awarded on the basis that if the granting body gets it wrong, the industry will be hit with yet another special FSCS levy? Imagine the uproar if that turns out to be the basis on which the kitemark seal of approval is granted.

    It might be argued that the industry’s closest approach to a kitemarked product is With Profits, at least in the eyes of consumers, and look what’s become of that.

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