MPs told public warning notices will 'disengage' consumers

Government plans to use transparency and disclosure as a regulatory tool - including publishing warning notices against advice firms - could hurt consumer confidence in the industry and make them disengaged from financial services entirely, the Treasury has been warned.

The comments appear in the government's white paper on financial services reform, A new approach to financial regulation: the blueprint for reform, which includes responses to the government's February consultation.

One of the proposals in the February paper was to allow the FSA's successor the Financial Conduct Authority (FCA) to publish warning notices against firms which may face regulatory action.

But industry respondents told MPs the disclosure could have "unintended consequences" if consumers lost confidence in the industry and hence made irrational or uninformed decisions.

Alternatively, they said it could make consumers "disengaged from financial services entirely".

Other respondents raised the threat of action against the regulator for redress, saying the disclosure proposals posed a risk of costly reputational damage to firms.

Publishing details of potential regulatory action could also damage the interests of consumers if it affected the share price of listed companies, they said.

It was suggested the FCA be given the ability, rather than a duty, to publish notices.

For example, where a firm contests the FCA's direction or is a ‘serial offender', or where an advertisement is misleading beyond reasonable doubt.

However some consumer groups said the proposals should go further, enabling the FCA, for example, to publish firm-specific results of its thematic work, or to require firms to provide relevant price data on their products.

Industry respondents argued disclosure should be "the exception rather than the norm".

"Threat of disclosure could lead to firms being more likely to propose early
settlement rather than enforcement cases being taken to their conclusion.

"Or the FCA could be incentivised to push through enforcement action at all costs so as to not have to publish a notice of discontinuance."

The Treasury is requesting responses to today's paper until 8 September 2011, which can be emailed to financial.reform@hmtreasury.gsi.gov.uk.