Make sure your customers know exactly what product they are buying, says the regulator
Financial service companies still need to do more work to fully explain their products to consumers before and after they are sold to avoid further cases of mis-selling. That is the view of Carol Sergeant, managing director of regulatory processes and risk directorate at the FSA.
Speaking at the Ernst & Young 2003 Financial Services Summit in Edinburgh, Sergeant said companies need to test whether or not consumers understand the products they are being offered and whether or not they actually need them.
At present, she believes consumer capacity to understand a product and how it fits their investment requirements does not feature in the companies' product design and marketing.
Added to this, she said not enough is being done by companies at monitoring product effectiveness after sales have been made, particularly for long-term savings products.
'Do firms actually understand a product's effectiveness if there will be fundamental shifts in economic macro trends, or regulatory changes? We at the FSA do not think so,' she said.
To avoid the legal risks of mis-selling attached to the retail sector, Sergeant suggested firms should be setting risk tolerances for retail consumers.
To do this, the FSA believes firms must ask themselves whether the product they are launching takes into account: the consumer's targets, whether it has been adequately risk tested, how economic and regulatory changes will affect the product and if they provide an effective after sales service.
She said: 'The FSA won't set out rules for each of these situations but we have devised a set of conduct of business principles and firms without adequate checks will be focus to FSA enforcement.
'This is not a narrow regulatory issue that will be fixed by a set of rules. Shareholders want to deal with firms that treat them well and if the challenge is met there will be fewer complaints and as result fewer enforcements will occur.'
Sergeant's comments followed her assertion that UK investors are largely inexperienced in long-term financial planning and do not understand savings and investment risks, especially in a low inflationary environment.
As a result, she believes there are serious potential risks for consumers who do not know what they are getting into when it comes to choosing savings vehicles, many of whom she said are buying for the first time.
She said: 'At the FSA we are working hard to improve the understanding of consumers but we think companies have more work to do to explain their products.'
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