Stringent regulation required for retail investment products, says FSA



FSA's Lord Turner - The  Angel Guardian for Retail Investors

FSA’s Lord Turner – The Angel Guardian for Retail Investors

To reign in mis-selling of financial products to unsuspecting customers, the Financial Services Authority (FSA) proposes to set price cap on certain products, warn investors about some other and completely ban certain other categories; in a move that is in sync with a global movement to clean-up the financial services sector.

The FSA published a discussion paper on Tuesday suggesting intervention in different product segments. It suggests of pre-approving some products, compulsorily disclosing product features, raising the bar for financial advisor competence, banning non-advised sales and issuing consumer and industry warnings.

The FSA has identified leveraged Exchange Traded Funds (ETFs), traded life settlement products – which was rocked by the Keydata scandal and some of the complex structured products as ‘generally unsuitable’ for the mainstream retail market.

The FSA Chairman – Lord Adair Turner said “The way we do things now is not good” and added that he wants to break the cycle of product mis-selling in Britain in categories such as pensions. Britain is not the only country to beef up supervisory requirements; US has already set up a consumer watchdog to oversee mortgages and credit card businesses and the Securities and Exchange Commission (SEC) has mandated that brokers act in ‘best interest’ of their customers. French regulators have made written warnings compulsory for products they consider too complex for retail investors.

“We may have to put what is expected into rules to make it easier for us to say what is not (suitable)”, Lord Turner commented.

Dispelling fears that it’s against innovation, the FSA said: “We still want to see innovation, but only where it is in the interests of consumers”.

“It is not our intention to create a ‘zero failure’ regime where consumer detriment is impossible, this is likely to be unattainable in practice and would require a huge increase in our resources, but we aim to reduce the frequency with which large-scale market problems occur and, if possible, to stop them from happening at all” the report said.

The CEO of FSA, Hector Sants had said in December that the proposed new regulator – the Consumer Protection and Markets Authority (CPMA), due to come into existence in 2012, will incorporate key regulations from the FSA and will require more authority to implement disclosures and intervention – such as banning products; if it wants to remain relevant.

FSA will publish a second consultation document in the first quarter of this year while the government has already promised that the CPMA will be a consumer ‘champion’ and will be given much teeth to protect interests of consumers.

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