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.”