Advisers debate FSA product regulation

Hints this week the FSA may introduce a form of product regulation – including pre-approving individual products – has sparked debate among advisers.

While most argue its introduction would benefit consumers and advisers, others say the FSA will never pre-approve products because it would then be admitting culpability should anything go wrong.

Others cite the costs involved and the added regulatory burden of vetting products before they are introduced to the market as another barrier.

During a speech at the 17th Gleneagles Summit on 19 September, FSA managing director of retail markets Jon Pain said well-documented problems with mortgage endowments, bank charges, pension products and payment protection insurance (PPI), among others, means it will have to "explore alternative approaches" to products and services.

"We will approach product regulation with an open mind in future," Pain said, adding the term ‘product regulation' may encompass pre-approving or banning products, or involve "setting parameters or constraints". "We have seen the limits of what can be achieved with tools such as disclosure of product details and charges," he added.

IFA Sheriar Bradbury, managing director of Bradbury Hamilton, says the introduction of product regulation, should it happen, will be years too late.

"Some sort of approval process for the products would make it much better for consumers and would help avoid a lot of problems," he says.

"We never got involved in precipice bonds, for example, but others did and got stung. My question is: Why didn't the regulator properly look at the products beforehand? Is a drug tested before it's unleashed onto the market?"

But Colin Jackson, director at Baronworth Investment Services, says: "It won't happen. If the FSA puts itself in a position to vet products before they come to market, it will be liable should anything go wrong. The FSA might say it can't find anything wrong with a product, but it won't actually approve it."

Chris Cummings, director general of the Association of IFAs (AIFA), says he supports product regulation adding any FSA intervention "simply must" involve pre-approving products before they hit the shelves.

But he says it could bring an extra financial burden on advisers as well as limit their abilities to do their jobs.

"The truth is there will be far less innovation if the FSA intervenes in product regulation," he says. "Products may be safer for consumers, but there will be fewer of them to choose from.

"Innovation will also become more costly as products will need to be approved. These additional costs will inevitably fall on the whole industry."

The ABI says it supports upfront product scrutiny, but adds another tier of regulation may prove problematic and costly.

"In a complex world, consumers do not come in one size, so markets should be allowed to deliver a wide range of products, suitable for as many people as possible," ABI director general Stephen Haddrill says.

"Regulation also adds cost, and so must be clearly justified. What lessons can we learn about why previous regulation has not achieved enough before we launch another layer of rules?"

Pain said in his speech: "We would need to ensure that intervention does not introduce more problems than it solves", adding it must also ensure it is not seen as a "substitute" for the regulation of financial advice.

PROBLEM PRODUCTS
Where might early FSA intervention have eased consumer loss?

With-profits
The introduction of Market Value Reductions (MVRs) changed the public's perception of with-profit funds, but it was the near-collapse of Equitable Life in 2001, which sold a large number of policies with guarantees it later proved incapable of meeting, that really tarnished their reputation.

Precipice bonds
Promotional literature for precipice bonds often involved large double-figure returns emblazoned on the cover, but they offered no protection against the loss of the capital initially invested. Some £7.4bn was invested in the bonds between 1997 and 2004, much of which was lost. The FSA later admitted it may have encouraged precipice bond mis-selling by offering "implicit comfort" to vendors.

Structured products
The one-year anniversary of the collapse of US investment bank Lehman Brothers, and its subsequent domino effect on global markets, has brought the issue of structured products bound by third party arrangements firmly under the spotlight.

Payment protection insurance (PPI)
A tsunami of complaints sparked a two-year review of PPI by the Competition Commission. It concluded lenders have an "unfair" advantage selling PPI at the same time as another credit product and recommended this be banned from October 2010. It also recommended the prohibition of single-premium PPI.

Mortgage endowments
The underlying premise of endowment policies - that the rate of growth of the investment will exceed the rate of interest charged on the loan - looked fine during the 1980s when anticipated growth rate reached as high as 12% But it later fell as low as 4% and, by 2001, the sale of endowments to repay a mortgage was virtually seen as taboo.