Speaking at the FSA’s retail distribution review conference in London today Thomas, also corporate director at the FOS, said potential risks from the RDR now lie in the “middle ground between what is clearly independent full advice and what is clearly execution-only”.
He said: “In the middle ground between full independent advice and execution-only, any lack of clarity about the nature and extent of the service which the financial business is providing to the consumer has the potential to increase the number of cases referred to the ombudsman service.
“It is not necessary that consumers should understand the regulatory requirements that surround the sales process. But it is essential that they should understand the extent to which they can rely on the financial business and the extent to which it is a case of ‘let the buyer beware’.”
However, Thomas said “there is quite some way to go in achieving this”. Referring to recent ABI research, he said the findings suggested that consumers do not understand the distinctions between information and advice.
Thomas also issued a warning to banks and insurers who have approached the RDR “as a means to reduce or eliminate their own risks of potential claims from consumers”.
He said: “As indicated in the FSA’s feedback statement, the legal concept of what constitutes advice is broader than the definition of regulated advice. So, a process which avoids regulated advice will not automatically avoid what a court or an ombudsman would consider to be advice.”
Referring to sales processes, Thomas said processes must involve “legitimate encouragement”. However, according to Thomas, banks and insurers appear to not “have found it easy to devise potential sales processes which provide legitimate encouragement for the consumer without involving an implicit recommendation”.
To conclude, Thomas said there is a clear need for the consumer research promised by the FSA. He said: “The consumer research which FSA has promised to undertake to establish descriptions for different types of services, that will be truly meaningful to consumers.”
He also said descriptions of products as low/medium/high risk are pretty meaningless unless they are unbundled. And, unless consumers understand the risk/reward ratio, any new processes are likely to have a bias towards low-risk savings products which may not fulfil the public-policy objective.