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Safety features are essential for financial products

Many people disagree with my assertion in my last column that regulation of financial products will be better for the mass market than regulation of advice. So here is some more food for thought and a mantra for politicians and regulators.

I start with a question you must have a good answer to – If you believe that product regulation is good for cars (safety), food (safety) and drugs (safety), why is it bad for financial products?

For historical and cultural reasons, legislators and regulators had a bias against regulating financial products and 20 years ago started down the “regulate sales and advice” route. As several commentators on my last column have pointed out, this leaves the liability for bad outcomes from bad products with the adviser/distributor rather than with the manufacturer.

We would not accept that with cars, drugs or food, we would regard it as fundamentally unjust.

Left to themselves, manufacturers of food, cars and drugs would lie to us about the safety of their products. They still lie to us about other things but we do not mind because we know that regulation means they will not lie to us about what is really important.

Perhaps medicines are the closest to financial products. They are complex and can be life-preserving or life-threatening. Imagine if there were no safety standards and doctors had to do their own research to try and find out how safe a medicine was. How many people would die?

There are many medicines you can buy in any pharmacy. These are mainly basic products that have been in existence for many years, such as aspirin, and have a huge literature of research on their use and dangers. We allow any adult to buy these things off the shelf and assume they will read the product leaflet that tells them what not to do.

But when it comes to medicines for cancer or heart disease, we do not allow that. We require someone to consult a doctor and you have to have a prescription from a doctor to get the medicine. Do we think this is an over-complex, impossible-to-police, nanny-state system? No. Most of us like it and would not want to change it for anything else.

I am advocating a similar approach to financial products. Simple products that pass simple safety tests go on the shelves at banks or supermarkets and websites. You can buy them with or without advice from a salesperson and they are salespeople, not advisers. They may give advice about a product but their job is to sell things.

If you think you need a proper diagnosis of your financial situation and some advice, then you have to consult a professional, an IFA.

IFAs can recommend any financial product they consider suitable, including complex ones you cannot buy at the bank. In their case, it is the advice process that is regulated, just as it is with doctors, lawyers or accountants. If their advice is at fault, you can get compensation.

Like doctors, IFAs may recommend the equivalent of aspirin or off-the-shelf cough medicine. But they may also prescribe financial solutions that, like steroids or statins, could ruin you if you do not use them carefully.

Safety standards for financial products would have eliminated the potential for every one of the misselling scandals of the past 15 years, scandals that regulation of sales and advice failed to prevent.

The mantra for politicians and regulators is – Safety standards save lives. Even canaries can sing that.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Agree fully. The problem is that there are too many vested interests (IFA as well as FSA) in seeing it otherwise.

  2. Julian Stevens 1st March 2011 at 4:57 pm

    The trouble with these aspirations is the effect of Solvency II, which is going to mean that any sort of safety features will have to be backed by substantially higher levels of capital. So the safer products become, the more their performance will be dragged down by the costs of those safety features. Eventually, we’ll get to products that are as safe as houses but which offer returns hardly better than their NS&I counterparts. Take the cost of advice out of the equation, and the differences will be even smaller.

    If people want returns better than NS&I products offer (and many do), then they have to accept a measure of risk and, as everyone has a different ATR, that is why the advice process in terms of determining suitability has to be regulated.

    The nearest we might resonably get to product regulation is for the regulator to decide that, as far as its been able reasonably to determine, a particular product or its provider has no obvious danger features that need to be flagged up. This, I think, would be a good direction in which to move, but with no expectation that just because a product or provider have been declared not to be obviously high risk, that constitutes carte blanche approval for them to be sold to all and sundry.

  3. The problem with product regulation is that people will start ‘buying’ these products without advice and although they may be ‘safe’ they might not be ‘suitable’.

    Who picks up the tab when a ‘safe’ product fails?

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