The powers of the FSA should be limited and regulation relaxed for a number of complex financial products and mortgages, according to a Conservative working group report.
The Competitive Challenge working group, headed by John Redwood, has made a number of recommendations to remove regulation of mortgages and products designed for sophisticated investors. It also proposes preventing the FSA from adding to EU regulations and hiring an independent expert to ensure the FSA is helping firms comply with regulatory changes.
The report states that, while the Government is right to ensure that customers are protected when placing money in unit trusts or where institutions add consumer money to their own balance sheets, it does not think more sophisticated investors should be as tightly regulated.
The report says: “There is not necessarily a good reason why a regulator should have to be involved in product design and marketing for rich and sophisticated investors. We recommend that such investors should be able to sign a piece of paper, which allows them to go ahead and buy unregulated products at their own risk.”
The report concludes that retail customers should accept more responsibility for risky financial products and recommends setting up a regulatory court to deal with retail financial services claims, similar to the small claims court.
However, Danny Cox, head of financial planning at Hargreaves Lansdown, says that waivers are often not helpful and is also worried about deregulation, even for high net worth individuals.
He says: “How do you identify a sophisticated investor? Many investors might claim to be sophisticated when actually they know relatively little about financial products.”
The report also recommends the complete deregulation of mortgage products as it states the lending institutions are taking on risk rather than the consumer.
Ray Boulger, senior technical manager at John Charcol, says: "I don't think de-regulation would have much impact on the majority of brokers who favour the principles based route because it's been shown to work for firms and consumers.
"There are also a number of cavaliers, many of whom have been fined by the FSA, who would see de-regulation as a way of going back to their old practices"
In addition, the report wishes to remove much of the additional detail added to EU regulations when they become British law, known as ‘gold plating’.
Criticising the Government’s current approach to EU regulation, the report says: "Some ministers in the present Government see the transposition of a Brussels measure as a welcome opportunity to flex their own legislative pen, without the same scrutiny that could occur with UK primary legislation."
The report recommends preventing the FSA from maintaining UK regulation that is covered by EU rules without justifying any super-equivalence via a cost-benefit analysis.
The working group also raise doubts about the extent to which the FSA is helping firms deal with regulatory requirements.
"[A Conservative Government should] appoint an independent expert to conduct a review of whether the FSA is using its guidance giving powers to best effect in assisting firms to comply with regulatory change," the report advises.
The report is likely to be welcomed by financial firms, many of which feel that the regulatory burden in the UK is impacting on its competitiveness.
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