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The FSA's discussion paper on product intervention can be seen as a positive move for consumer rights
As well as being quite an understatement, the recent concession by Lord (Adair) Turner that the FSA’s hands-off approach to product regulation has not worked is good news for consumers.
Which? has been a long-term advocate of appropriate product regulation. Its 1998 policy paper on financial product regulation stated: "Problems of consumer detriment had primarily been dealt with through process regulation, ensuring that certain procedures are followed during the selling process. But as our research has shown, this has not worked.
"While shoddy products remain available, consumers run the risk of being persuaded to buy them. We would like to see a new approach taken, based on the levels of risk involved and using minimum standards to force really poor, high-risk products out of the market."
Unfortunately for everyone, the regulator did not listen. As identified in the Turner Review in 2009, the FSA had previously worked on the assumption that product regulation was "not required because well-managed firms will not develop products which are excessively risky, and because well-informed customers will only choose products which serve their needs".
The publication of the FSA's discussion paper is a welcome change of heart and contains a comprehensive survey of some of the possible tools the regulator should use to improve the quality of financial products.
It has, not surprisingly, been met with warnings from the industry that product regulation will raise costs and reduce consumer choice. This is effectively arguing that we have to accept bad products and bad practices as stamping them out will somehow upset the karmic balance of the banking world - good products do not need to be counterbalanced by bad products.
The argument against product regulation can be met with a three word response – payment protection insurance. In any normal competitive market, a product as poor as PPI would have failed within weeks of its launch.
If a company tried to market and sell a chocolate fireguard then I can guarantee that it would not have much success. Instead, when it came to PPI this poor value and widely condemned product flourished and became a multi-billion pound money spinner for the industry as it sold expensive and inappropriate insurance to millions of consumers.
In the past decade we have seen the widespread mis-selling of PPI, the banning of single-premium PPI, the intervention of the Competition Commission and subsequent challenge by the industry, scandalously poor complaints handling and now a judicial review. This entire debacle could have been avoided if the regulator intervened when PPI was still in its product development stage.
It is also simply wrong to say that past product regulation, such as standards on charges, access and terms and stakeholder pensions, has had no benefits for consumers. Millions of mortgage customers at Lloyds TSB and Nationwide are benefiting by billions of pounds from a contract term introduced as a result of the CAT standard which stated that standard variable rates could not be more than 2 percentage points above the Bank of England base rate.
One commentator has suggested that the principle of let the buyer beware should form part of the regulatory mix. There is a major flaw in this argument, namely that let the buyer beware can only exist when there is a balance of power and information between buyer and seller - a principle, like so many others, sadly lacking in the financial services industry.
Effective competition relies on consumers being able to impose market discipline on financial services providers. It is clearly not enough to say that effective competition exists because consumers have the choice of thousands of products of a particular type. Competition will only be effective at driving improvements and protecting consumers if they are properly able to understand and comprehend the products, and can choose which ones are the best for them. Good value and good quality products and providers need to gain market share and providers who consistently offer poor value and toxic products should go out of business.
Relying on pages of small print to explain complex products is not sustainable. Please could someone explain to me the implications of this term in one bank's structured product where the money I invest will be used to "buy shares in a protected cell of a Guernsey 'protected cell' investment company, Guaranteed Investment Products 1 PCC limited" because I do not understand it or what it means for my investment.
Once the FSA passes the regulatory baton to the Consumer Protection and Markets Agency, the new agency should embrace the role that product regulation can play in addressing conflicts of interest, disciplining markets and aligning the interests of producers with consumers.
Product regulation could be used by the regulator to address three key issues – to ensure minimum standards for new products, to minimise the toxic aspects of some products and to ensure the availability of vanilla products.
There are certain products, such as current accounts and protection products that consumers need access to. It would be the regulator's role to ensure that any such products meet agreed minimum standards. We would draw a parallel with motor insurance where all products on sale must meet minimum legal requirements, and consumers then have the option to add on additional bells and whistles.
A further example would be to set the default standards for some products in the interests of consumers. For example, this could include ensuring that consumers are able to opt-out and opt-in of unauthorised overdrafts for current accounts. The regulator may also take steps to ensure that information disclosure is on standard terms, enabling consumers to easily compare products. It could also take steps to introduce industry-wide standards, such as portable bank account numbers for current accounts.
Product regulation would also minimise the toxic aspects of products. In some cases, it may be necessary to ban a particular type of product or specific product. Once again the example of single premium PPI springs to mind. Regulation can play a valuable role in limiting the harm that certain products can cause. One example, which the FSA references in the discussion paper, is where banks are offering a higher rate on a one-year bank deposit if you put a matching amount into one of its investment products, normally a tax-inefficient investment bond or some sort of poor value structured product. This type of bundled product poses a heightened risk of mis-selling.
Experience has shown that the financial services industry alone will not develop simple, good value for money products which meets consumers’ needs. We believe the regulator should pursue the idea that providers and intermediaries should offer simple, straightforward priced vanilla products alongside their additional product offerings. This could be used alongside rules similar to the current RU64 in pensions, which requires firms to consider whether a simple good value stakeholder pension would be more suitable than more complex, higher charging pension products which they are seeking to recommend.
At a time when the financial services industry is looking for the holy grail of trust and confidence, why not seize this opportunity to demonstrate a commitment to customers’ needs by engaging with the FSA about how financial products can be improved?
Dominic Lindley is principal policy adviser of Which?
FTAdviser.com - Instant karmas going to get you
- Story by: Dominic Lindley
- Magazine: FinancialAdviser
- Published Thursday , February 03, 2011
The FSA's discussion paper on product intervention can be seen as a positive move for consumer rights
As well as being quite an understatement, the recent concession by Lord (Adair) Turner that the FSA’s hands-off approach to product regulation has not worked is good news for consumers.
Which? has been a long-term advocate of appropriate product regulation. Its 1998 policy paper on financial product regulation stated: "Problems of consumer detriment had primarily been dealt with through process regulation, ensuring that certain procedures are followed during the selling process. But as our research has shown, this has not worked.
"While shoddy products remain available, consumers run the risk of being persuaded to buy them. We would like to see a new approach taken, based on the levels of risk involved and using minimum standards to force really poor, high-risk products out of the market."
Unfortunately for everyone, the regulator did not listen. As identified in the Turner Review in 2009, the FSA had previously worked on the assumption that product regulation was "not required because well-managed firms will not develop products which are excessively risky, and because well-informed customers will only choose products which serve their needs".
The publication of the FSA's discussion paper is a welcome change of heart and contains a comprehensive survey of some of the possible tools the regulator should use to improve the quality of financial products.
It has, not surprisingly, been met with warnings from the industry that product regulation will raise costs and reduce consumer choice. This is effectively arguing that we have to accept bad products and bad practices as stamping them out will somehow upset the karmic balance of the banking world - good products do not need to be counterbalanced by bad products.
The argument against product regulation can be met with a three word response – payment protection insurance. In any normal competitive market, a product as poor as PPI would have failed within weeks of its launch.
If a company tried to market and sell a chocolate fireguard then I can guarantee that it would not have much success. Instead, when it came to PPI this poor value and widely condemned product flourished and became a multi-billion pound money spinner for the industry as it sold expensive and inappropriate insurance to millions of consumers.
In the past decade we have seen the widespread mis-selling of PPI, the banning of single-premium PPI, the intervention of the Competition Commission and subsequent challenge by the industry, scandalously poor complaints handling and now a judicial review. This entire debacle could have been avoided if the regulator intervened when PPI was still in its product development stage.
It is also simply wrong to say that past product regulation, such as standards on charges, access and terms and stakeholder pensions, has had no benefits for consumers. Millions of mortgage customers at Lloyds TSB and Nationwide are benefiting by billions of pounds from a contract term introduced as a result of the CAT standard which stated that standard variable rates could not be more than 2 percentage points above the Bank of England base rate.
One commentator has suggested that the principle of let the buyer beware should form part of the regulatory mix. There is a major flaw in this argument, namely that let the buyer beware can only exist when there is a balance of power and information between buyer and seller - a principle, like so many others, sadly lacking in the financial services industry.
Effective competition relies on consumers being able to impose market discipline on financial services providers. It is clearly not enough to say that effective competition exists because consumers have the choice of thousands of products of a particular type. Competition will only be effective at driving improvements and protecting consumers if they are properly able to understand and comprehend the products, and can choose which ones are the best for them. Good value and good quality products and providers need to gain market share and providers who consistently offer poor value and toxic products should go out of business.
Relying on pages of small print to explain complex products is not sustainable. Please could someone explain to me the implications of this term in one bank's structured product where the money I invest will be used to "buy shares in a protected cell of a Guernsey 'protected cell' investment company, Guaranteed Investment Products 1 PCC limited" because I do not understand it or what it means for my investment.
Once the FSA passes the regulatory baton to the Consumer Protection and Markets Agency, the new agency should embrace the role that product regulation can play in addressing conflicts of interest, disciplining markets and aligning the interests of producers with consumers.
Product regulation could be used by the regulator to address three key issues – to ensure minimum standards for new products, to minimise the toxic aspects of some products and to ensure the availability of vanilla products.
There are certain products, such as current accounts and protection products that consumers need access to. It would be the regulator's role to ensure that any such products meet agreed minimum standards. We would draw a parallel with motor insurance where all products on sale must meet minimum legal requirements, and consumers then have the option to add on additional bells and whistles.
A further example would be to set the default standards for some products in the interests of consumers. For example, this could include ensuring that consumers are able to opt-out and opt-in of unauthorised overdrafts for current accounts. The regulator may also take steps to ensure that information disclosure is on standard terms, enabling consumers to easily compare products. It could also take steps to introduce industry-wide standards, such as portable bank account numbers for current accounts.
Product regulation would also minimise the toxic aspects of products. In some cases, it may be necessary to ban a particular type of product or specific product. Once again the example of single premium PPI springs to mind. Regulation can play a valuable role in limiting the harm that certain products can cause. One example, which the FSA references in the discussion paper, is where banks are offering a higher rate on a one-year bank deposit if you put a matching amount into one of its investment products, normally a tax-inefficient investment bond or some sort of poor value structured product. This type of bundled product poses a heightened risk of mis-selling.
Experience has shown that the financial services industry alone will not develop simple, good value for money products which meets consumers’ needs. We believe the regulator should pursue the idea that providers and intermediaries should offer simple, straightforward priced vanilla products alongside their additional product offerings. This could be used alongside rules similar to the current RU64 in pensions, which requires firms to consider whether a simple good value stakeholder pension would be more suitable than more complex, higher charging pension products which they are seeking to recommend.
At a time when the financial services industry is looking for the holy grail of trust and confidence, why not seize this opportunity to demonstrate a commitment to customers’ needs by engaging with the FSA about how financial products can be improved?
Dominic Lindley is principal policy adviser of Which?
FTAdviser.com - Instant karmas going to get you
