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 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
Has been cold-calling consumers
New shares admitted to London Stock Exchange
Slow and steady growth
Missed funding target by £240,000
Denies any wrongdoing