You are here: Home - News -

A closer look at…product intervention

by:
  • 06/05/2011
  • 0
A closer look at…product intervention
Imagine a world in which a financial services regulator pre-approves products and forbids their sale without advice.

Now imagine a world in which intermediaries are forced to justify their recommendations by explaining why their preferred product is at least as suitable as a lower-cost, but similar, alternative.

These options and a dozen more were outlined in an FSA discussion paper on product intervention published at the beginning of the year.

The paper offers a glimpse into a regulatory future not spearheaded by the FSA, but by one of its successor organisations: the Consumer Protection and Markets Authority (CPMA).

Currently, the FSA does not question the design or cost of products. Instead, it supervises the market at the point of sale. It admits this approach “has not always achieved the right consumer outcomes”.

The problem for the FSA is this: it believes earlier and more intense intervention on the product side – the paper refers to deposits, insurance policies, investment products and mortgages – will lessen the chances of products reaching the wrong consumers, but it fears this may also stifle competition in the market and limit consumer choice.

Later this quarter, the regulator intends to publish what it calls a Feedback Statement to January’s discussion paper.

IFAonline, Mortgage Solution’s sister title has pulled together all the key talking points from the paper to give you a sneak peak at a possible future under the CPMA, and to answer the key question: Is any of it likely?

 

Why is the FSA doing this (and what is a ‘discussion paper’)?

The FSA says it has been following a more intrusive and interventionist strategy for more than a year, via ‘intense’ supervision of firms, sector-side risk analysis and higher scrutiny of certain products. But it feels wider product intervention (and the RDR) may be the key to ensuring fairer outcomes for consumers.

However, a discussion paper contains not a single hard proposal, and instead invites comment to help shape a possible future consultation paper.

 

What are the key discussion points?

The discussion paper identifies what the FSA considers the current weaknesses in the market, outlines possible new rules for providers and, most importantly, lists a handful of product intervention options. We deal with these in turn:

Current market ‘weaknesses’

1). Consumers lack information or do not use it to make the right purchases
Consumers do not tend to consider charges which may arise later in a contract, such as mortgage exit administration fees or unauthorised overdraft charges.
2). Consumers are obstructed from judging products’ price and quality
Complicated terms and conditions or features such as initial bonus rates which catch the eye but may not reflect the quality of the product.
3). Consumers do not realise there is a problem until it is too late
4). Infrequent purchasers can’t pressure poor firms by taking business elsewhere
5). Distribution incentives are sometimes not aligned with those of consumers

Seven possible new rules for providers:

1) All new products must be ‘stress-tested’
2) Product’s charging structure subject to FSA (CPMA) analysis
3) Assessment of provider’s distribution strategies: should some products only be sold with advice?
4) Must produce more detailed disclosure documents and communications
5) Must ensure products reach ‘right’ customers
6) Must conduct ongoing tests of product’s risk profile
7) Staff responsible for signing-off products must have appropriate qualifications

 

Additional product intervention options

Product pre-approval
Unlikely as the FSA considers there would be too many problems, including what it calls the “moral hazard” of ‘signing off’ on a product. It also says it would stifle competition. But pre-approving specific products remains an option. However, this would require a change in legislation.

Banning products
FSA may do this if a product ticks too many of its ‘negative indicators’ (click HERE, see p30) or where industry proves incapable of selling to the ‘right’ consumer.

But it wonders about the impact this might have on people who have already taken out the product? It says it might also undermine business models of some firms, plus how does it ‘prove’ a product is bad? Will firms become less likely to innovate?

Mandating or banning product features
The FSA believes this might this make products too expensive for some consumers? And might it lead to the complete withdrawal of the product when this was not the original intention?

Price intervention (four options)
The FSA says it has repeatedly found problems with the pricing of retail financial products. For example, following the FSA’s pension switching review, the most common reason it deemed advice was unsuitable was that the recommendation led to unnecessary additional costs.

Option 1: Responsibility for product designers to ensure appropriate charging structures
This would require an explicit requirement that firms test the product charging structure to make sure it is appropriate for the target market. The FSA says complicated combinations of investment charges may be inconsistent with targeting a mass market. It adds some charges are also referred to confusingly: Might a 98% allocation rate be better described as a 2% initial charge?

Option 2: Provider duty to consider overall charge of products
The FSA says, with retail products, there is a risk the total charge undermines the possibility of achieving a reasonable return.

An idea under consideration as part of RDR, but not pursued, was for providers to monitor the effect on their products of the levels of adviser charges they paid out on behalf of the end customer. Should firms provide the FSA with information about product charging levels?

Option 3: Point-of-sale responsibility to benchmark advice against a low-charged substitutable product
Firms not recommending a stakeholder pension must explain in writing why it is at least as suitable as a stakeholder pension, under rule RU64. But some people say this is the same as a price cap, which has had a negative effect on sales.

The rule may be most appropriate to investment products with explicit charging structures. “We are not saying that low charges are always best for all customers,” the paper reads.

But FSA says a low-charging product would be a good starting point. But at present there is no default product in many market areas, so FSA would need to find suitable benchmarks. But how does FSA assess correct benchmark price?

Option 4: Price capping
FSA says this option should remain open, but that it may be only an interim measure in extreme circumstances

Increasing prudential requirements on providers
Would most likely be relevant to smaller, niche providers as larger players already subject to capital rules set by EU directives.

Consumer and industry warnings
FSA could use speeches, media, or its moneymadeclear website to list products which are “generally unsuitable” for the mainstream.

Mandated risk warnings
Like health warnings on cigarette packs, FSA could mandate ‘wealth warnings’ which would be disclosed alongside particular products that are of significant concern to the FSA. This is similar to approach taken by AMF in France. But would consumers read and act upon them?

Preventing non-advised sales
FSA’s work on pension transfers and distributor-influenced funds are examples of cases when it has said it is generally inappropriate to use non-advised channels.

As this would mean investors capable of buying products themselves paying more (by being forced to go through advised channels), the FSA does not see this approach being widely used. But FSA may consider restricting sales to certain categories of client.

Additional competence requirements for advisers
Is there a need for more specialist requirements for advisers working with non-mainstream products? But how will the FSA define ‘non-mainstream’?

There are already additional requirements for advice on long-term care insurance contracts, pension transfers and equity-release mortgages. But which activities might be defined as specialisms beyond these?

 

Key quotes from the discussion paper

“We are prepared to take action to stop a product being sold where the resulting benefits to the majority of consumers from not being mis-sold a product outweigh the costs to the minority who might benefit from not being able to access it.”

“It became increasingly obvious there are problems in retail financial services which were not going to be solved simply by demanding fair disclosure.”

“While high standards at the point of sale are essential to help consumers buy the right products, firms’ actions before this also have a significant influence.”

“The CPMA must have a lower risk tolerance than that of the FSA.”

“If we do not intervene on a particular product, this should not be regarded as our endorsement or approval of that product.”

“The CPMA will not always assume that the consumer is right, or that consumers have no responsibility to look after their own interests when dealing with financial firms.”

Let us know what you think of the paper. Use the comment facility below or you can email Scott Sinclair HERE.

Related Posts

There are 0 Comment(s)

You may also be interested in