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Suite and sour

The Government and the Consumers&#39 Association are once more coming to blows over consumer protection in the financial services industry.

The bone of contention is the amount of consumer protection that should be contained in the European Commission&#39s investment services directive, presently in draft form and designed to be the most dominant piece of regulation for the investment sector of financial services across Europe.

The CA claims the Treasury and the FSA are trying to bend the ISD to their advantage.

Its argument is that even though the UK has a much higher level of financial services regulation than the rest of Europe, the level of consumer protection provided for in the Sandler suite is lower than where the European Commission&#39s draft directive would set it. The CA says the FSA and the Treasury is lobbying the commission to water down consumer protection to protect the Sandler products. The CA is telling the commission that this would pose a threat to consumers.

The Government and the CA agree that the directive would prohibit execution-only business and guided self-help sales of the Sandler suite. The Government is focusing efforts on relaxing this section of the directive but the CA believes this would be detrimental to the public.

CA senior policy adviser Mick McAteer says: “It is very rare that we completely back Europe over directives but in this case the commission is clearly intending to provide a high degree of protection for consumers and we are disappointed that the FSA is trying to dilute this.”

He believes there is no point trying to protect the guided self-help range of products. “They would fall foul of the investment services directive for a reason – they do not have adequate consumer protection.”

Policy statements from the Government, while mentioning the possibility of the directive affecting Sandler, have been primarily concerned with its effect on online stock trading.

A Treasury spokesman says: “The Government believes that the proposed requirement for firms to carry out a suitability test before executing client orders would add significant costs to online share dealing services. These additional costs are likely to deter firms from offering such services and customers from demanding them. All things being equal, the proposed directive would therefore be expected to reduce the level of online share trading.”

The Treasury&#39s line is that it is early days yet. The ISD is still only in draft stage and lots of EU states are lobbying for different amendments. The Treasury spokesman says: “Implications for Sandler are not clear at this stage. The conduct of business requirements in the current draft would have implications for execution-only business and possibly Sandler products. The Government is opposed to this and is making every effort to ensure that the draft directive is amended accordingly.”

But the CA believes the rationale behind the lobbying is purely to protect the Sandler products. “If the FSA cannot persuade the commission that guided self-certification is ok, then it will kill Sandler,” says McAteer.

The CA is continuing to lobby the FSA and the Government to change their minds on this issue but it is now more proactive in Brussels.

The FSA says since the Sandler suite is the Government&#39s initiative, it is working within the Government&#39s framework to make sure that consumers are protected.

FSA spokeswoman Louise Buckley says: “Article 18 of the ISD has yet to be finalised but we consider that a properly designed filter question approach could be a way of meeting the ISD requirement for a limited suitability test before the sale of an investment product.”

The FSA says it is working closely with the Government to ensure that UK consumers and suppliers can benefit from a European financial services market that includes full advisory and management services, tailored regimes such as Sandler and execution-only dealing services.

It believes that the ISD proposals will affect all of these areas and so the UK is seeking an outcome that delivers a “proportionate and appropriate level of regulation and consumer protection across this range of business models”.

Buckley says: “This is a balancing act and it is important not to focus on just one aspect, for instance, the Sandler model and the pros and cons of lighter-touch regulation there, without considering the consequences in other areas, such as access to low-cost, no-frills broking services.”

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