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