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Regulator still faces toxic test, says Aifa

Aifa believes the FSA must continue to be on its guard against toxic products although its plans will help to stop spikes of misselling.

The remarks are in response to the FSA’s feedback statement on its prudential requirements for personal investment firms paper, which was published along with the RDR.

Director general Chris Cummings says: “We acknowledge the FSA’s belief that the investment in raising standards via TCF, the RDR and quality of advice programmes will be repaid by the reduced risk of further spikes but we stress in the consultation period this is not the complete picture. We reiterate that the providers must accept their fair share of responsibility, especially when advice was evidently correct when given but the product later turned out to be toxic.”

Aifa says in terms of the FSA having concerns that firms may still need to “leave resources behind”, any moves should be proportionate and based on firms’ risk profiles.

The feedback statement scotches several assertions previously made about advisers, professional indemnity insurance, capital adequacy and the link to misselling.

Aifa welcomes the finding that there are no suitable indicators of consumer loss which could be linked to prudential rules and the FSA research that found no proof that low amounts of capital in a business increased pressure to missell.

The response says: “The FSA’s initial assumptions as to the role of capital and how it affects firms’ behaviour have been firmly rebutted. We disputed the argument that low capital necessarily leads to pressure to chase high up-front commission, leading to consumers being sold inappropriate products. We also disputed the claim that firms were systemically failing because they could not meet liabilities, thus creating a burden on the Financial Services Compensation Scheme.”

On PI reform, Aifa says “the FSA’s research also dismissed its initial assumptions that firms may deliberately or otherwise give poor advice, knowing that they can claim on their PI policies. Our view is that poor advice is due either to incompetence or bad management, both of which can be dealt with by the regulator using existing mechanisms.”

Noting that the FSA is still examining whether to extend the capital requirements for firms according to size, Aifa says it does not believe that the FSA will be able to raise capital requirements for adviser firms above euro25,000.

Aifa has suggested that the FSA might consider an exit audit on firms in response to suggestions from researchers that the FSA may need to establish a run-off pool to achieve the benefits of PI cover but without the vulnerability to market volatility.

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