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The FSA is to get more involved at an earlier stage of product design and stress testing, rather than just at the point of sale, to try and avoid further mis-selling scandals.
Dan Waters, director, conduct risk, and asset management sector leader at the FSA, says the regulator's work on structured products and other investment vehicles identified a “significant risk of profound mismatches between retail products produced through the investment value chain and the needs of consumers who end up owning them”.
Speaking at the McKinsey Asset Management Conference, he emphasized the FSA’s commitment to getting involved earlier in the design stage of products rather than just at point of sale.
Waters says: “We have learned the hard way that a focus primarily upon regulatory intervention at the point of sale has inescapable limitations.
“To put it bluntly, there have been too many mis-selling scandals in the UK and we want to turn the page on that part of our history.
“We want to develop a regulatory approach that looks more deeply into the value chain – into product governance, design and oversight by provider firms, rather than simply waiting to see what happens after products have reached mass circulation to the retail public.”
He also called for providers to consider gaps in consumer needs rather than focusing on who could be sold the product and how to improve marketing.
Waters says: “Often, product design seems to be driven by benchmarking against competitor products, so there is a sort of built-in circularity and re-enforcement of entrenched practices.”
He highlighted the importance of stress and scenario testing to ensure firms identify the type of customer for whom a product or service is likely to be appropriate.
“This means being clear about what the product does, who it is for and certain key characteristics such as the nature and scale of risks presented.
“On stress testing, we have not seen firms adequately illustrate what they do to test products where it is appropriate to do so.
“Stress testing becomes important, for example where a product is geared or has pay-outs which are indicated or promised in the product’s description but which are not guaranteed. The provider should consider stress testing any product features which could lead to sharp variations in the product’s performance.”
“Stress testing should seek to identify how a product is likely to perform in potentially extreme market conditions, including, where appropriate, counterparty defaults and stressed liquidity scenarios.”
He reiterated the FSA’s interest in exploring the risks arising through providers’ direct contacts with distributors.
“In our view, it is incumbent on providers to explore and understand their distributors’ information needs and ensure, as far as possible, that distributors are getting the right messages about what particular products do and how they might reasonably be used.
“This may well include accentuating the negative, and not just latching on to the positive features of particular strategies.”
However, he says the regulator’s enhanced interest in product governance, design and oversight should not be seen as a step in the direction of increased retail product approval or design by the regulator.
He also highlighted potential concerns in areas such as the booming absolute return secor.
Waters says: “This may be especially challenging for those firms that do not have deep experience of working in the retail market, such as hedge fund managers, some of whom are getting on what is beginning to look like a UCITS III bandwagon.
“We would remind new UCITS managers that compliance with the UCITS framework will take considerable investment in systems and controls, and while asset managers may delegate various functions, they retain ultimate responsibility for compliance with the quite detailed requirements of UCITS III and, even more, under UCITS IV.”
There may be further regulatory risks as the drop in value of most asset classes has forced many investment houses to cut costs “aggressively” and there continues to be a high volume of M&A.
Waters says: “Both of these developments have increased the likelihood of certain risks from a regulatory perspective; particularly those related to the retention of key staff, IT integration, and ongoing management of a large number of outsourced service providers.
“It is important that firms recognise the need to retain a focus on client service and performance, and remember to treat customers fairly during periods of significant transition or integration.”
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FSA Product Development
At long last the penny has dropped. Billions could have been saved by the FSA on regulation if this had been adopted years ago.Spurious products would not have come to market.Clients and advisers would be better protected. I trust they will also challenge Government who create dubious sales opportunities to be exploited by the product providers.
Posted by: P Carter
can i buy that tin or am i told what tin i can buy
I understand that only correct products should be sold to the public, as long as they are aware of the risk factors involved then there should be no issues around what is called 'MISS-SELLING' But for the FSA to want to tell companies what they can and cannot do in general terms is mad, these are private/public companies who pay there own bills and as such have the right to run their companies and their product offering any way they see fit, but of course with the relevant law and regulations current at that time. This all comes back to the fact that if we had rules( clear bounderies) rather that Priciples that really have NO PRINCIPLES in themsleves because they keep changing so how can any company know that what they are doing is correct, each time you speack or check on something you get a different answer/comment, really not good enough, the regulator wants the industry to get it right, the industry wants to get it right; this can only be done with clear rules.
Posted by: b
Oh dear me
This may be a case of the Regulator taking more powers on the basis of its claim not to have had the pwoer to intervene when if it had had such powers nothing woiuld have gone wrong. Well things did go wrong-take structured products for example with capital guaranteed irrespective of market performance. The sales literature for these products commonly did not name the underwriter. The Regulator should have been inspecting the sales liretaure for these products under the powers that they had-they don't need new powers. They should have insisted that clear and not misleading information was available to clients and their advisers-where all parties to the contract were not named clearly in the literature it surely did not pass the test which the Regulator was responsible for ensuring applied. The taking of new powers is a smokescreen behind which teh Regilutor is hiding its failure to Regulate. Nothing can be done to stop the Regulator behaving badly and garnering more authority to misuse-nothing short I suppose of some sort of revolt. I see that the chariman and chielf executive of the FSA do not conform to their own Handbook's expenses guidelines and instead dine and overnight at the most expensive hotels they can find. I am all for Regulations but they should apply to all of us. There is no need whatsover for a high and mighty executive in the Regulator--these executives have been found to be asleep through the Northern Rock abortion-allowed wholesalers of financial products to keep sectret the parties to the contracts they had devised. These are seriuos failings-the personel responsible are all still in post and still receiving bonuses. What can be done?
Posted by: snooks
The Three R's...
Risk, Regulation and Rewards (potential at least). OK, so if I am reading this article correctly, it would appear that the FSA's idea of "assisting" in product design to to get the providers to carry out deeper stress testing. So that will be the end of structured products as no provider, having stress tested for every possible eventuality, will launch any product (i.e. if we have a global financial meltdown and the counterparty fails will the product pass TCF outcome 6...erm.. NO!). As far as regulation is concerned, and as a number of the previous comments show, it is not the regulator's position to determine what risk a client can take with their money. For the FSA or anyone else for that matter, to try and calculate the "risk" of any product is at best misadvised and more likely misleading! Risk changes continually, for every asset class, so to try to determine the risk of a particular (say) 5 year product is pointless. And on to Rewards... without a free market, all stock and bond markets will cease to function, much the same as with the UK property market over the last two years. If the market is too heavily regulated (such as lending criteria) the the potential returns become diminished. If we don't have some serious changes to the approach to regulation and those regulators don't understand the necessity for a free market, then is 30 years time we'll be looking back at a regulator which "broke" the financial aspirations of a generation!
Posted by: You must be joking
Not needed any more
Well it had to happen, I'm not needed anymore, there is only one step left for the FSA and that is advise and to sell the product as well. O sorry the Government is already trying to do this with pensions. I agree with regulation, its needed but this is getting out of control. What products have not been suitable? its not the products its the advisers. When are they ever going to wake up and start to really go for those that have and are miss advicing. They can help design it, it will not stop the product being miss sold.
Posted by: Martin Evans
Regulation by Design
In effect this will create FSA approved product designs - though I thought we were moving away from 'products' as such. So if the FSA 'approve' the design and it all goes wrong, what rederess does the customer have and will the product provider be able to defend themselves against the FSA and Ombudsman. The FSA knowledge of products and matters technical is pathetic, when precipice bonds became an issue they had to bring in staff from the industry the FSA had no idea at all. Where are they going to get people who understand these products, hey I know the product providers,trebbles all round?
Posted by: gav1010
FSA Product Design Input
High Time too! For too long the FSA has, very much after the event, told us what we have done wrong without offering to take a lead or, at least, providing any constructive input. Had this organisation been more pro-active at a much earlier stage we might have avoided the debacle of "precipice bonds" and other such (retrospectively) contentious products having been "sold" to Financial Advisors by a plethora of product providers, who, in turn, have kept themselves well out of the firing line when their products later failed the stress tests.
Posted by: Chris Sellers
have they thought this through?
I'm not sure if the FSA have entirely thought this through. It is a good idea to intervene with the development of products which don't do what they are designed for, but surely they already look at this anyway when they authorise funds etc? As for the vast majority of mis-selling that has occured over the past 20yrs, this HAS been at the point of sale! Either poor advisors or providers providing incorrect information. If the FSA want to stop misselling scandals they need to carry on doing what they are doing now... only much, much better than they have been.
Posted by: GXR
That's the answer!
Yeah, that's it. Wrap everything and everyone in cotton wool, and then nothing bad can ever, ever happen or go wrong. But at least if it does, then the FSA will still be in business. Oh and the claims chasers, too! One thing going through my mind is, can products designed by civil servants ever match the general public's risk profile? And...I thought the RDR, with its banning of commission, was going to stop any miss-selling?
Posted by: Dermot Brannigan
responsibility
The FSA can take responsibility or it may not, which is the better thought? It is clear regulation is not working at an adviser level and an earlier filter needs to be applied. How many advisers for example complain when a product doesnt work, yet it does what it says on the tin. The problem is most adviser firms are too small to have a research team. They wont be able to ascertain the true risk in a product so they sell the headline then blame afterwards. This is all about responsibility and instead of providers being allowed to pop toxic products into a system, they now will know they are being watched. How many advisers are currenty using structured products? How many are using Investec for example as the counterparty risk. How many are using lloyds as counterparty risk. Consider today Investec is BBB rated - one notch away from junk bond status and doesnt even have a credit default swap rating yet their products are being sold by the buckets. the risk - under the large company rule is that all the customers capital could be lost. Lloyds TSB is being proposed as a counterparty risk by another provider yet it has a CDS of 135!!!?!!! I am stunned. However this provider refers to it as effectivley having the back up of the UK government! Hmmmm. Advisers who sell them will then say ' who would have thought that would have happened?' With no with profits bonds, AVCs and less than five structured plans across our books, research is everything. My research bill would be halved if I didnt have to chew toxic products everyday to see if they tasted ok. I would be a lot happier. Lift away from the coal face. Everyone, everyone everyone (press,FSA,adviser,customer) needs to remember we have the responsibility of our customers financial security at the forefront. If everyone takes the responsible approach and does what we should be doing, all will be well. Blame and paranoia have no relationship with responsibility.
Posted by: Peter McGahan
reply to Peter
Peter, In an ideal world the FSA would be able to filter out these 'toxic' products, I just can't see this happening. During the history of it's existence the regulator has shown no appetite for taking on additional responsibility, regularly spouting phrases such as, "it's the responsibility of firms to comply with our rules" etc etc. For example, I doubt that firms like Investec and Lloyds will have products taken off the shelves - there would be an outcry! Perhaps the best we can hope for is that they are made to explain their financial positions in detail to prospective investors and IFAs looking to use such products.
Posted by: GXR
Just for once I feel sorry for the FSA
As advisers, we feel damned as we do and damned if we don't by the F-pack, but for once, based on the mixed bag of comments above, so are the FSA with this idea. I don't think this is the solution, but it might be PART of the solution. The thing that needs to be ensured with any pre launch approval by the FSA is that it does not stop someone from designing a service or product and then promoting it which does NOT have an FSA acceptable stamp on it. We need choice both as advisers and clients both innovation as well as other simple products with a clear description of who it might be suitable for. The rights and responsibilities of all parties should then be made clear, whether greater protection for advisers and providers against claims when pre approved/tested by the FSA and much less protection for an adviser or firm for "non approved/tested" products. This could then be balanced by actually allowing people to choose a "non approved product", without comeback for the adviser or form if it is made totally clear the client has made the decision themselves contrary to advice and a signed bit of paper by a client saying this is in my opinion worthless and everyone needs to wake up to the fact we are in the 21st centuary and voice and video recordings of a complete client meeting could prove much more transparantly the client knew what they were doing and has to take responsibility for their own actions.
Posted by: Phil Castle
Headless Chicken Expands Empire
If you say something often enough people will believe it is true. The financial advice model is NOT broken. It may have faults, it may be improvable, but it ain't broken. The level of complaints received by the Ombudsman that actually require work done on them is significantly less than 1% of total transaction in one year (and remember that the complaints will refer to a number of prior years), even taking into account the 6 largest financial institutions (which rules our IFAs!) which account for over 50% of complaints. So, without being complacent, the model isn't broken. The level of complaints are NOT outrageous, if anything they are well within anticipatable limits when the size of the market is taken into account and allowing for normal human error rates. If the FSA now want to vet contracts before issue they either have too little real work or are looking to expand their empire once again. The Credit Crisis demonstrates that they have little idea how products impact on the market, so how can they now come up with stress testing techniques that work. And remember that the Credit Crisis came after 25 years of regulation. Methinks that this is just another way for the FSA to pretend that they are doing some work, and deflecting criticism. They have shown no competence in the past at relating products to usage, so why should anything change now. What will vetting do other than slowing innovation and increasing costs. How many times has the market taken a product and used it for purposes that were never initially envisaged - that is the market working creatively for the benefit of clients (and sometimes the adviser) - so how will stress testing cover those unexpected situations. Financial Advice is at least as much about sociology and social psychology as about finance, and I doubt that there is anyone in Canary Wharf with those skills.
Posted by: Glen McKeown
FSA flights of fancy with its new propsals?
Dan Waters - the new boy on the block. Interesting that he appears to be American. We have had to listen to politicians and Regulators say they cannot avoid paying huge bonuses to stop our valuable people leaving. So where is the 'valuable person' who could have done this job? Perhaps we don't have any/many after all, which means we should not have to pay the rubbish talent left so highly. Wonder if he is paid 'UK' rates or 'American'?
Posted by: Orlando Furioso
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FSA Product Design!
Just what we need, incompetent regulator to desogn incompetent products for an incompetent ombudsman to deal with with FSA to sort it out. This is a laugh and a half! It just gets better by the week.
Posted by: Incompetent Regulators Awards Team