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The dangers of trying to police products

There are dangers in trying to police products


Many IFAs seem possessed of the idea that the burden of regulation should shift away from them, but where will it go?

The FSA, in a sudden and very uncharacteristic burst of touchy-feeliness, is asking the IFA profession for input on the future shape of regulation through its discussion paper on product intervention.

As I understand it, the idea is to move from current point-of-sale regulation to a product approval/risk rating approach. But how will that work?
Presumably, before any new investment is launched it has to be stress-tested and the Consumer Protection and Markets Authority will have to approve the provider’s proposed risk rating or even determine the risk rating itself. Either way, this raises a number of fundamental issues.

That means CPMA, or now FCA, staff will be of equal or greater mental acuity and have wider experience and greater risk assessment skills than the designers of the financial products they are examining. Other than run-of-the-mill products, which generally do not fail spectacularly, why should we have any faith in their ability to do that?

Let us assume the FCA sets the risk rating of a new product as low/medium. It is bought by swathes of people relying on that rating. Let us also assume it fails.

Would that be deemed to constitute misselling on a scale requiring a thematic review and regulatory action? If so, against whom?

Who does the disgruntled client pursue for compensation? Surely not the IFA because, applying suitability criteria, if he sold the product to a client with a low/medium attitude to risk he is fireproof.

The Financial Ombudsman Service could not possibly rate the risk differently than the FCA, as that would de-stabilise the whole system.

The client would have no alternative other than to pursue either the provider or the FCA, or both, for redress for getting the risk rating wrong, assuming the test to be applied in the future is the same hindsight risk reassessment test that the FSA and FOS apply now.

I can just hear it now – the CPMA will defend itself by saying that its risk rating was correct on the basis of the data available at the time and that holding it liable for subsequent market performance would simply be reassessing risk rating retrospectively.

But if that argument were to hold good for the regulator, then it would have to be good for the provider too. Both would then be off the compensation hook. So who would be held accountable in regulatory terms and for compensation purposes?

I regret to say I cannot see a wholesale abandonment of the point-of-sale regulatory approach because it would mean there were no easy scapegoats for failures of the system and markets.

But if the FCA is wedded to change to a product-approval approach, the result could be a sea of nothing at all but bland vanilla products with low risk ratings, high charges as there would be little competition and therefore low returns for the investor.

Alasdair Sampson is a solicitor at Financial Services Advocacy


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Only a few weeks ago the FSA announced that it was open to input from the IFA community on what it considers to be potentially toxic products. My initial reaction was that in view of the FSA’s love of pissing away millions of pounds of our money on endless outside consultations, it seems to be just a bit of a cheek to be asking for help from the industry to do its job without offering anything in return.

    The technical and research divisions of the networks and the larger IFA firms, for example, represent a valuable resource of which the FSA might well usefully avail itself. The FSA could invite submissions from a range of such bodies and, on the strength of their collective input, arrive at a balanced verdict on a particular product. Furthermore, such engagement would surely go a long way towards minimising accusations of the FSA being asleep at the wheel if a particular product were subsequently to backfire and blow up.

    But it is unreasonable to expect the networks to provide their expertise for nothing. Why should they? Why not offer some form of regulatory dividend in the form of a levy discount, particularly in view of the fact that the networks do a large slice of the FSA’s job for it but all their members are still charged full whack?

    It does seem strange, though perhaps sadly typical, that this doesn’t seem to have occurred to anyone at Canary Wharf.

  2. Quote “I regret to say I cannot see a wholesale abandonment of the point-of-sale regulatory approach because it would mean there were no easy scapegoats for failures of the system and markets.”

    Perhaps worth emphasising that it is a discussion paper, and it won’t be the last on this subject.

    Equally, even at this stage, there is no suggestion I can find in the DP that the FCA will move away or reduce its interest in the point-of-sale/ distribution aspects.

    The theme of the DP is a recognition by the FSA that this approach on its own has proved insufficient – thus the FCA seek discussions and input on areas such as product design, product distribution techniques and ongoing servicing.

    Included as an example for discussion is a suggestion that some products could be categorised as unsuitable for certain segments of the market – which illustrates that it does cross the bridge to point of sale.

    In reading the DP I also thought of the points made by Julian Stevens – why are the resources and skills of the IFA not being employed?

    And perhaps an example of that IFA involvemement (and of product regulation more generally) would be the Standard Life Sterling Fund – where “what it said on the tin” was not “what was to be found in the tin”.

    But there is also a much deeper point for me, related to the point made in this article – who may eventually be found responsible when the system of regulation fails?

    Most of the analysis of the banking crisis reflects the fact that the Bank of England had the responsibilities but it was the FSA who had the tools to discharge those responsibilities – and it all fell down in the cracks in between.

    So now we have Plan C for regulation – in the forms of the FPC, PRA, and FCA – but what is to stop those bodies also having similar problems of function and practice – and cracks in between?

    An example will explain – Equitable Life. On the face of it I can see no reason why the FCA (had it existed at the start of Equitable Life) would have found anything wanting in Eq Life bringing to market endowments and pensions on a With Profits basis the “products”.

    Those “products” did not fail in and of themselves as specific “products” – disaster though it all was and remains for those involved latterly – but Eq Life is in solvent run off and meeting all the guarantees under its “products”.

    What happened – as the Parliamentary Ombudsman made clear, and as has been accepted in a recent speech by Hector Sants, was a regulatory failure specifically on the “prudential” side and not specifically “product” side.

    For me much of the Keydata fiasco can be seen in that very same light.

    So personally I believe it is no bad thing that the concept of “product regulation” is opened up for discussion.

    But for the life of me I, like Julian, cannot understand why the knowledge and skills of IFAs are being left out of the picture.

    Nor do I believe that IFAs should in any way allow themselves to be left responsible (after the event) for the failures of a regulatory structure with potential cracks in its structure.

    History has this bad habit of repeating itself.

  3. The product failed ? so what ? Life isn’t meant to be nothing but success and happiness. perhaps clients and the public in general ought to start taking a bit of responsibility for their own actions and stop complaining every time it rains.

  4. This article lacks a coherent argument. It talks about product providers being off the hook because of systemic failure – they are off the hook in that event as governmental intervention is required, or they have already ceased to exist.

    The only product I can think of which would fit your argument would be a 50% soft protection structured product, where a significant loss could occur if the tracked index finished more than 50% down from it’s start point.

    However actually provided it was ‘low risk’, provided it was appropriate, that is just one of those unfortunate things that happens every now and again – investors do sometimes lose, and an automatic right to compensation should not be available – to use a loose analogy you seem to be implying that if I go to the roulette wheel and lose, I should have options to sue the house for taking my money.

    Sorry complete disagreement with your thesis.

    Don’t get me wrong, I do not underestimate the ability of the CPMA to cock up product regulation as spectacularly as they have advisory or prudential regulation, I just don’t think your argument holds water.

  5. John,

    The problem comes when IFA’s promise “sun” and then take people to the hills of Manchester where it rains an awful lot.

    Soon as the over promising stops, the perception of IFA’s will improve.


  6. John Hutton-Attenborough 21st February 2011 at 9:22 am


    Or even worse the “adviser” tells the client that even if it does rain it won’t matter as he will have a very nice umbrella to keep him dry only to find out that it is made of paper!

  7. I have long argued that pre-approval of product regulation is a good and worthwhile thing.
    Alistair’s argument that the regulator will require skill sets in line with product designers is a little weak. Do the regulator not pay themselves handsomely to attract said qualified and talented staff already? Should be just a case of putting some of their skills to good use.
    This also overlooks the fact that the product designers and regulators will be looking at this from different points of view and opposing motivations in most cases. I think it would be good to see regulators try to value product worthiness and appreciate what IFA’s have been doing for a long time.
    It is also a strange question to ask why we should we have faith in a regulators abilities, I would ask why have faith in a product designers abilities, motivations and integrity?
    This is a discussion to consider the impact and value of having a degree of product pre-approval running in conjunction with existing point of sale regulation. With no long stop for IFAs, this could help clarify an advisors role and encourage the public to take more responsibility and occasional disappointment. If it is proved an advisor promoted a product, deemed suitable in design, and carried out proper diligence with the sale process, better protection should be available to him. Could help rid us of this current culture to blame and where providers use smoke and mirrors and generally act far more clever than time genrally proves them to be.
    It makes a lot of sense to me and I hope such ill thought out and frankly bland headline grabbing comments do not do anything to derail this important discussion.

  8. Regulation as we know it has failed society, that includes the regulation of ‘products’.

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