Blog: How do you spot a problem product?

The general consensus is (read: always has been) that the widespread mis-selling of investment bonds was the main reason behind the RDR.

Yet, even counting its overhaul of advisers' qualifications, remuneration and disclosure requirements, it is clear the regulator does not believe the RDR is enough.

Now product regulation - or 'intervention' as the FSA calls it - is back on the agenda.

A decade on from the introduction of stakeholder pensions and the associated RU64 rule, the FSA has put forward a raft of measures aimed at stopping products reaching the 'wrong' customers.

Advisers, of course, have their own duty of care, not to mention TCF, obligations to ensure they only recommend suitable products to suitable clients.

But can more be done on the product side? More pertinently: How can the FSA take action against a product before it is too late (ie: before a customer has purchased the product and suffered the consequences).

The following are what the FSA calls 'indicators' of potentially problematic products, based on its market failure analysis and observations of past episodes of mass consumer detriment.

They are split into investments, insurance, mortgages and general (we have picked a couple of features from each area).

It all begs the question: If products have always existed which bear these features, why hasn't more been done about this before?

Investments

• Use of product names that imply greater levels of safety or return than are actually possible.
• Charges that do not appear to reflect the level of service provided (such as passive collective investment schemes with high annual charges).
• Use of non-standard assets for investment purposes.

Mortgages

• Product structures that encourage irresponsible lending/borrowing.
• Products designed to be repaid solely through property appreciation.

Insurance

• Complex claims notification procedures that will deter claimants.
• Circumstances in which the provider can withdraw cover risk undermining the utility of the product.

General

• The product cross-subsidises other products
• The product carries an inherent conflict of interest that is potentially damaging to consumers
• Exit charges or other features which act as a material barrier to exiting.
• Products aimed at consumers facing financial hardships.

The FSA says, if it does decide to be more intervenionist on the product side, judgements "will need to be made about whether the indicators are a cause for concern on a case by case basis".

And any product intervention rules will surely have to be accompanied by the following footnote: Even the most 'inherently bad products' (FSA's words) may be suitable for a minority of clients.

What do you think?

Scott Sinclair is deputy editor of Professional Adviser magazine and IFAonline.co.uk