FSA publishes first Retail Conduct Risk Outlook

[Amethyst]

FSA publishes first Retail Conduct Risk Outlook
The Retail Conduct Risk Outlook (RCRO) examines how a range of current, emerging and potential risks could impact customers. The RCRO is a key component in the FSA’s consumer protection strategy to identify risks earlier, proactively intervene earlier in the product chain and prevent consumer detriment. The report’s analysis of current and upcoming risks informs how the FSA will set its priorities and deploy its resources.


http://www.fsa.gov.uk/pubs/other/rcro.pdf

CURRENT RISKS

• unfair terms in mortgage contracts (Chapter B 2.2);
• treatment of mortgage customers in arrears (Chapter B 2.3); and
• sale and marketing of structured investments and deposits (Chapters B 2.5 and 2.6).
Other issues are longstanding, such as:
• complaints handling in major banks (Chapter B 2.1); and
• payment protection insurance (Chapter B 2.4).


EMERGING

• Traded Life Policy Investments (Chapter B 3.9.1);
• Exchange Traded Funds and other exchange traded products (Chapter B 3.9.2) – where we discuss the growing complexity of these products;
• Self Invested Personal Pensions (SIPP) – where we highlight concerns over SIPP operator governance and issues for consumers (Chapter B 3.9.3); and
• Unregulated Collective Investment Schemes – where we discuss the findings of our thematic review and the key risks these products pose to consumers (Chapter B 3.10).

• firms’ reward policies and practices (Chapter B 3.6) – where we are examining how firms control the risks that staff incentives may pose.


POTENTIAL

• Generating income through fees in banking (Chapter B 4.1), especially as it relates to:
• developments in private banking and wealth management – which recent evidence suggests may be expanding;
• protection products and possible PPI replacements – where we are monitoring the market to ensure new or substitutable products do not pose risks similar to PPI; and
• packaged accounts – where we are keen to ensure consumers understand the benefits and costs of these products.
• Risks associated with bundling products (Chapter B 4.2) – where we discuss risks that may come to the attention of consumers (for example, in increased complexity).
• Risks associated with cross-selling (Chapter B 4.4) – where we discuss possible risks in mis‑selling and product design.
• New business models that may emerge as a result of the RDR (Chapter B 4.5) – where we discuss how these may give rise to new risks.

[Amethyst]

Re: FSA publishes first Retail Conduct Risk Outlook

The bit on PPI replacements

4.1.2 Protection products and potential PPI replacements
Following regulatory intervention on PPI, the adverse publicity surrounding this product, and the resultant decrease in this important source of revenue, banks are increasingly likely to be considering how to develop other protection solutions to run alongside credit facilities such as mortgages, term assurance contracts, or stand alone policies.
As discussed in Chapter A, banks’ sales of pure protection products – including Critical Illness Cover (CIC) and Income Protection (IP) – increased over the course of 2009 and in early 2010, as did their share in the distribution of these products (Figures 73 and 74).
Retail Conduct Risk Outlook 2011
Chapter B – The risks
77
Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10
Figure 75: Number of added value accounts available
0
10
20
30
40
50
60
Number of accounts available
31 33
39 39 41
49
53
59 59
Source: Defaqto Retail Banking Report, April 2010
Some protection products currently in the market, such as CIC and IP, have the potential to meet
some of the protection needs of consumers previously targeted by PPI providers. Neither CIC
nor IP (in particular long-term income protection) have the product features that contributed
to making PPI sales so widespread. Unlike PPI, they are both individually underwritten
at the point of sale, i.e. the risk underwritten is assessed at that stage and the premium is
calculated accordingly for each customer. This makes the process of selling and concluding a
contract relatively expensive for the firms and lengthy compared with some more typical PPI
sales processes.
However, we have observed specific issues around the sales of CIC and other pure protection
products as currently designed. We have conducted research into the sale of CIC over the
past year, and published our findings of this research in our ICOBS review in June 2010.39
In November 2010 we wrote a Dear Compliance Officer letter to all firms selling pure
protection products, requesting that they implement and maintain adequate policies and
procedures sufficient to ensure compliance with ICOBS.40 We requested that firms review their
sales processes and procedures and confirm these are sufficient to ensure compliance with
all the relevant requirements in ICOBS. The letter also reminded firms of their overarching
obligation to comply with the Principles.41
In addition, there is a risk that the design and distribution of these products could evolve in such a
way as to pose problems in the future, e.g. if their underwriting and sales process was changed to
make them more profitable for firms at the expense of a higher decline rate on claims for consumers.
Entirely new products might also be introduced in the market. For example, debt freeze or
waivers are contractual terms within a loan or credit product under which the lender agrees
to waive its right to seek (either some or all of a) repayment should a specified adverse event
happen to the borrower. In return, the borrower might pay a higher interest rate on the loan.
While these products have some very similar characteristics to credit insurance products from
the customer’s perspective, we consider that they do not usually constitute insurance in a
legal sense and are instead regulated under the rules for the sale of various lending or credit
products. However, they may present similar risks to consumers as with sales of PPI. We are
working with the OFT to ensure that firms’ use of such product features in relation to both
39 Insurance: Conduct of Business Sourcebook (ICOBS) post-implementation review: statement of findings, June 2010, FSA.
http://www.fsa.gov.uk/pubs/other/icobs_review.pdf
40 http://www.fsa.gov.uk/pubs/other/oral_disclosure.pdf
41 PRIN 1.1.9G
Retail Conduct Risk Outlook 2011
Chapter B – The risks
78
consumer credit activities (which fall outside our regulatory perimeter) and mortgages does not lead to poor outcomes for consumers, and to consider how any risks of consumer detriment might be mitigated.
Finally, stand-alone protection policies may also be designed or targeted to consumers in inappropriate ways, e.g. by cross-selling them in an inappropriate way to branch customers (see the section below on cross-selling for further information on when cross-selling may create a risk for consumers).
We expect firms to be able to clearly demonstrate that customers’ needs are at the heart of product design and distribution for any protection solutions they plan to develop or sell.

[EXC]

Re: FSA publishes first Retail Conduct Risk Outlook

Yep the FSA are increasingly concerned that firms will design products that will slip under the Competition Commission's PPI radar.

EDIT: Snap!

[Amethyst]

Re: FSA publishes first Retail Conduct Risk Outlook

lol, it's all pretty good in that report.

Sounds like they are going to investigate bonus and commission structures on bank sales staff too - see if they contribute to misselling lol.

[leclerc]

Re: FSA publishes first Retail Conduct Risk Outlook

are the FSA on twitter?