Blog: Thou shalt treat thy customer fairly

Mark Lisle, compliance manager at Rowanmoor Pensions, on why RDR is not a panacea for consumer protection...

Is financial services the only industry where the principle of caveat emptor doesn’t apply?

I use an example when introducing new recruits to the sixth principle of our regulator – “Thou shalt treat thy customer fairly”, which focuses on how customer satisfaction is not to be relied upon as a guide to fair treatment – which involves a chap being charged less by a garage than quoted. We know it would never happen in real life, but what this illustrates is that caveat emptor can apply outside the realm of financial services.

What we also don’t enjoy in financial services is the protection afforded by a regulatory structure that controls the products first and foremost, not their sale. Drugs have to undergo years of clinical trials before recouping the development costs through sales. Cars have the stringent New Car Assessment Programme (NCAP).

Other products have the Conformité Européenne, or CE, compliance assessment requirement to ensure they meet minimum technical standards.

At times, the FSA has come close to regulating products. When talking about the issues surrounding Payment Protection Insurance (PPI) in September 2008, then managing director of the FSA’s retail markets Jon Pain said: “Firms may wish to consider stopping selling single premium PPI sold alongside unsecured personal loans, given the continuing problems in the sales of this product.” Pain left the regulator in 2010 as head of supervision, ahead of the changes in structure at Canary Wharf, and the implementation of RDR.

The seeds of RDR were sown with the Financial Services Act 1986. The industry failed to police itself, and the regulation imposed focused upon sales, when what was required was a critical look at the products, and a regime for their vetting.

If a tied salesman had one regular savings offering that had no value for seven years, was he wrong to advise this if there was a need? Should an IFA have been able to cherry pick a rate of return for mortgage endowments to make the repayment vehicle affordable?

Fast forward from the days of FIMBRA and LAUTRO, to the PIA era. If products had been regulated, rather than their sale, would we have endured the negative connotations of the failings of SCARPs, and the aforementioned PPI? With the advent of the super regulator came the infamous so-called death bonds of Keydata, and the questionable positioning of Arch Cru, and New Star NURS investments’ fundamental illiquidity.

Notwithstanding the nod in the direction of professional standards, does anyone either within or outside the planned Financial Conduct Authority truly believe RDR is a universal panacea for consumer protection (lest the regulator forget its mandate)? I suggest an approach that focuses on product first will be of most benefit to the consumer; then perhaps the principle of caveat emptor could apply as a medium-term goal. It is worth a try, as the last 25 years appear to have got us nowhere.