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Turner warns there is no easy prescription for product regulation

The FSA is still grappling with the extent to which product regulation should be introduced.

At a Treasury select committee hearing on Tuesday, FSA chairman Lord Turner said the regulator was still exploring the issue of product regulation but outlined some concerns.

Turner told MPs that product regulation risked increasing moral hazard by making consumers feel overly confident about buying regulated products. He also suggested it would be difficult to regulate retail financial products which vary in their design.

He said: “Should we ever be willing to say, we know in advance that split-capital trusts are an undesirable product sold to anybody? Some people say, well, in the pharmaceutical area, we have product regulation but it is not as simple as that. Pharmaceutical products tend to come in entirely discrete products that take years in development. The nature of products in retail financial banking are minor variants to a product that previously existed.”

Turner stressed that any move towards product regulation would require new legislation.

He also hinted that further integration was required between the Office of Fair Trading and the FSA. In December, the FSA and OFT scrapped a joint action plan in favour of a more flexible memorandum of understanding.

Turner said: “It is possible to ask questions about whether there should be an integration between the tools that relate to creation of competition and the other tools available to protect customers. We have a disconnect between the competitive tools in the OFT and the Competition Commission and all the other tools which reside with the FSA.”

Derbyshire Booth Financial Management managing director Greg Heath says: “They should go a certain distance with product regulation, particularly with structured products, but if they regulate it too strictly they will destroy innovation.”

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators Awards Team 3rd March 2010 at 4:51 pm

    Oi Turner, listen to me the guy with 30 years experience in dealing with consumers.

    Not sure if you noticed that FSMA 2000 is totally broken as it hasn’t worked at all. So yes we need new and different regulations. But being a cynic myself by regulating every tom dick and harry ensures more work for F-Pack monkeys. What we need is product regulation set up and run by those in industry e.g. insurers and advisers in consultaion. And we don’t need an army of 4000 plus of unqualified monkeys at Canary Wharf.

  2. Whether we are discussing the regulation of products or advice, or banks for that matter, there is one fly in the ointment, the regulator, or should I say the regulators who populate the premises.

    You can create legislation which is intended to counter all the problems in financial services until the cows come home, successive governments have been doing that since 1985 and with great gusto since 1997 but what have they actually achieved? Is the consumer any better off? Have the regulators learned anything after more than two decades in their lucrative posts?

    Would anyone deny that the answer is emphatically NO?

    Didn’t think so..

  3. It is not that hard:-
    Split the products into simple retail
    and complex “City”.
    The Providers then decide which camp their products fall if “city” then they are caveat emptor and every one knows.
    If simple retail then they are authorised by FSA and have to meet their requirements and are protected as now.
    Then the Banks could sell just the simple retail en-mass with regulated charges etc. And the IFA market could advise on whole of market as now.
    The product providers would be responsible for their products meeting the laid down standards.

  4. Typical FSA. Regulation by passing the buck.

    We won’t make any decision in advance; we’ll merely fine after the event.

  5. Michael Fallas 3rd March 2010 at 5:13 pm

    What I read into this is that Mr Turner does believe “product regulation “would solve a lot of problems but he is not sure how to do it.

    That is no reason for not trying to resolve the issues and I personally believe consumers will feel “better protected” by “product regulation” and it is in my view perfectly possible for most everyday products and will not stifle competition but “should” stifle inappropriate products.

    We certainly cannot carry on with regulation as it stands as it does not work as we end up paying for the regulator every time it fails as well as paying the costs of compensating the cunsumer for failed regulation.

    It is a “no win” situation for everyone as it stands at the moment and we are all paying the price, so change IS NECESSARY and must happen soon.

  6. Steven Hodgson 3rd March 2010 at 5:20 pm

    “Should we ever be willing to say, we know in advance that split-capital trusts are an undesirable product sold to anybody? ”

    No just let advisers recommend the product and then ask them, sorry force them, to foot a compensation bill when things go wrong.

    Split caps are a good example of where failure to regulate the products properly enabled split cap managers to invest in each other trusts to create a ponzi hybrid. That is why they failed so spectacularly. If managed properly, the split cap concept is actually a good one.

    Of course there were advisers that recommended these things without fully understanding them and if inappropriate advice is given, then advisers should pay redress. But in cases where perfectly sound and suitable advice is given, but the product then fails to do what it was originally designed to do (endowments, with profits bonds, split caps, Equitable Life, etc.), it is unfair to lay the blame at the adviser’s door.

    Both product and sales/advice regulation is needed and the FSA need to stand up and be counted. Forget moral hazard, if the FSA can’t endorse a product for fear it might go wrong, how on earth can advisers ever recommend anything without fear of being wrong.

  7. Turner says : “Should we ever be willing to say, we know in advance that split-capital trusts are an undesirable product sold to anybody?

    The FSA is unable to product regulate because it is too complex. On the other hand they seem willing to regulate product sales retrospectively and then expect the IFA to do what they fail to do i.e. predict the suitability of the product in advance!

    Can I ask what purpose the regulator serves? Better to scrap them and redirect their costs into one big PI scheme and let the courts, common law and statute regulate advisers.

  8. If the FSA were to be put in a position where they had to regulate products before they were marketed you do all realise that would require the FSA to do certain things:

    Train the staff to know what they were doing.

    Train the staff to understand impact on the consumer.

    Train the staff to understand what they were looking at.

    Train the staff to make a decision.

    Train the staff to be able to be able to understand the difference between a positive and a negative.

    Train the staff.

    And who would pay for all this training????

    Yes of course they should product regulate. But if a horse has no legs it can’t walk let alone run.

  9. Just as we all knew; the FSA don’t know how to do their job. As the football crowds would say “you’re **** and you know you are”.

    Let’s face it, it’s far easier to chase IFAs around than regulate products.

  10. Who’s deluding who here, neither the FSA or the Treasury have control of product regulation. The whole debate is hot air, yet more wasted tax payers money and actually doing all those who work in the industry and don’t have time to keep up with these matters, a serious disservice.

    The EU controls product regulation and whilst UK authorities may influence they certainly do not have the ability to unilaterally decide which way product regulation should go in the future.

    Product regulation and radical change is already on the cards. If anyone wants to understand the direction regulation of products is really going I’d suggest googling things like “European Commission Packaged Retail Investment Products” “UCITS IV” “Key Investor Documents”, “EU risk disclosure consulation”etc. etc.

    At least then you may be able to plan your businesses with a clearer understanding of what future regulation is going to look like and how it may impact you individually.

  11. Product regulation is extremely difficult, mainly because the final judgement call has to be based on suitability for a particular client. What may be right for one client may be completely wrong for another. A product may be satisfactory in many respects but you have to gauge its suitability. The Porsche 911 may be a great car but it’s hard to imagine any circumstances in which it might be deemed to be an appropriate recommendation for a 70 year old granny.

    So the onus has to be on the seller to understand the product inside out and forewarn the buyer of the potential the risks involved. And that’s where third party research and technical support services come into their own.

    Having said all that, the FSA should be banned from forcing hindsight reviews on the industry. If you’ve sold a client a product without understanding it and without warning the client of the potential risks involved, then you’re vulnerable to any complaint against you being upheld, for which we all have to have PI Insurance and the FOS, however flawed and biased that organisation may be.

    We have a consumer protection structure that works, so why can’t the FSA just let that aspect of the industry work as it should and does without constantly seeking to stir up trouble and complaints that in many cases otherwise wouldn’t arise? The answer, of course, is that the FSA is a bunch of malicious s**t stirrers who seek constantly to foist on others the consequences of their own failings.

  12. Leslie Squires 4th March 2010 at 1:14 pm

    In my opinion we need to go back to basics and ask ourselves what is it that our customers want then provide a simple product to meet those needs. The problem is product providers in their attempt to compete more favourably against each other have designed products that are complex and profferred on the basis of what they have to offer rather than want the customer might need and importantly understand. After all said and done what is a pension if it is not a savings plan but look at its complexity. Regulation to prevent miss selling would undoubtedly be less onerous if it was simple to understand. We seem to be selling complex solutions to generate more income and dare I say it huge bonuses for some. Let have a little more simplicity and sanity.

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