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Product lottery

How would the FSA’s early intervention approach work?

The FSA has been widely criticised for not taking a more hands-on approach to regulating the financial industry. We have seen the FSA responding to this criticism over the past few weeks with a number of proposals for more proactive supervision. It comes as little surprise that the FSA now intends to apply this approach to its policing of financial products. But will it restore consumer trust in the market or is it just an attempt to appease critics?

Hector Sants, the FSA’s outgoing chief executive, spoke at the Lubbock Lecture of the FSA’s product regulation plans for “earlier detection and intervention through intensive supervision”. Products would be assessed through official visits to various financial service providers and through mystery shopping. If deemed necessary following assessment, the product in question would be banned. The intention is to avoid further misselling scandals and create a fairer market for the consumer.

But it is unclear from Sants’ speech just how the FSA’s enhanced product supervision will work in practice. Sants insisted that the FSA would not be going as far as to kitemark products, thereby prohibiting the sale of products not yet approved. It therefore appears that the system will develop into somewhat of a supervision lottery, whereby seemingly haphazard selection of products will be the subject of scrutiny, whereas certain firms may escape investigation altogether.

As it stands, the FSA’s proposals lack transparency. The FSA will need to be clear precisely what it is looking for when deciding whether or not to approve a product, otherwise it is likely to face a high level of justified criticism from the industry.

The move will have huge financial implications for the industry and regulator but we have yet to see details of the FSA’s cost-benefit analysis. We do, however, note that the FSA intends to increase its budget by 10 per cent due to changes in supervisory approach and to employ nearly 500 additional staff. Firms, particularly those whose size and impact the FSA considers require the most regulation, for example, banks, will see an increase in their FSA fees.

This is not the first time we have seen the FSA give an apparently reactive response to criticism. For example, it was recently forced to rethink its proposals addressing com-plaints on payment protection insurance as it vastly underestimated the cost implications and was accused of acting outside of its legal powers. It has been suggested by the media that the FSA may have additional motivations in submitting to its critics’ demands – the Tories have made it clear they intend to axe the FSA if successful in the election. Is the FSA trying to convince the country that it is worth saving? In any case, exactly how this system of early-stage supervision of a random selection of products will create a fairer market for consumers is unclear. We look forward to receiving further detail of the FSA’s proposals in this respect.

Suzanne MacDonald is a partner and head of TLT’s financial services regulation team

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