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Measure for measure

The FSA’s announcement that it is considering product regulation has raised concerns that the measures would stifle innovation and add costs.

At the Gleneagles Savings and Pensions Industry Leaders’ Summit, FSA managing director of retail markets Jon Pain said widespread product regulation could help boost consumer trust in financial services.

He said the term product regulation would be viewed as encompassing a whole spectrum of possible measures and could involve preapproving and banning products or setting parameters and constraints around certain design features.

Investment Management Association chief executive Dick Saunders described the speech as “balanced and thoughtful” and believes product regulation has served fund investors well over the years.

He says: “The IMA reviewed how the operation of funds fared during the crisis and our report in June found that the structures had stood up well in very difficult conditions. We are not opposed to more product regulation per se, although any proposals would have to be examined closely on their merits.”

Martin Currie head of product development Toby Hogbin says mutual funds are already subject to robust regulation via European Ucits rules or UK Nurs regulation. However, he adds that a level regulatory playing field for investment products outside of funds may reassure investors to some degree.

He echoes the comments of Association of British Insurers’ director general Stephen Hadrill that regulation adds costs and must be “clearly justified” as a result.

Hogbin says: “The retail distribution review requires advisers to assess a broad range of potential products prior to delivering a client proposition and an additional tier of product regulation adds cost.

“Mr Pain appears unsure as to whether product regulation is needed and I share his view. The FSA needs to weigh up whether the supposed benefits of a regulatory framework exceed the costs of their implementation.”

The fallout from Lehman Brothers has added fuel to the argument for some that pre-approval, or a vetting process for more complex investment vehicles such as structured products, could prevent toxic products being launched on an unsuspecting public or IFA community.

But Morgan Stanley executive director of structured products Marc Chamberlain asks: “Would that not imply that the regulator is taking a view on the credit rating of a financial institution? I would not have thought the remit of the regulator is, don’t touch this because we think it is going to go belly up.

“Lehmans is a default issue rather than a product complexity issue. The Lehman products were as simple as everyone else’s, it is just that their credit failed.”

The possibility of added intervention in product development has also brought concerns from other groups that innovation could be snuffed out.

Fidelity International head of UK retail sales Peter Hicks says: “You might end up with product development being driven by what the lawyers allow and do not allow you to do.

“I am not convinced that it is part of the regulator’s job and responsibility to pre-approve products. Part of regulation is policing and enforcement and the FSA has to rely on the product providers to produce good products that produce good outcomes and do what they say on the tin.”

Hicks also questions where the liability lies if a “bad product” slips through the net.

He says: “Are you really going to be able to sort out the bad from the good? Who is liable if you let a product through that turns out to be not a good one? Also, if a product has regulatory approval, will people misconstrue that? If a fund just underperforms, for example, will they think it was not supposed to happen?”

Nucleus chief executive David Ferguson agrees that offering any kind of kitemark to products that are market-linked in terms of performance would cause major problems.

He says: “The FSA has got to be careful when it talks about product regulation. Do they mean product at the tax-wrapper level or at the fund level, because there can be quite a difference? I think we have got to define what we mean by product first of all.”

Ferguson acknowledges that product regulation could be a useful tool as part of a broader consumer education programme but he says, in any case, the emergence of platforms has moved the industry away from product-based selling towards a more open environment.

Alan Steel Asset Management consultant Alan Adam believes that direct product regulation could bring about the return of insurer direct salesforces and enlarged bank salesforces, both serving markets increasingly avoided by IFA firms.

He says: “There is a danger that the Government thinks regulation is the answer to everything and, in fact, good business practice is doing most of the things in the RDR and TCF anyway. What the FSA is trying to do here is very laudable and something the industry is striving for but it is just going to be over the top.”

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