The FSA has for a long time been interested in addressing the risks that arise from product development and the product provider/distributor interface and the Financial Conduct Authority will take this challenge to the next level when it implements the proposed product intervention rules.
At the beginning of December, the FSA published CP12/35, a consultation on the approach the future FCA will take if it needs to exercise powers to make temporary rule changes, before consultation, relating to financial services products.
In January 2011 the FSA published DP11/1 that proposed a range of possible product interventions as part of its new approach to regulating retail financial services. The consultation outlined some instances that may trigger temporary rules being made, including:
Where a product is in serious danger of being sold to the wrong customers. For instance, where complex or niche products are sold to the mass market.
Where a non-essential feature of a product seems to be causing serious problems for consumers.
Where a product is inherently flawed.
It proposed that product intervention rules, temporary or not, may include:
Consumer or industry warnings.
A requirement that certain products are only sold by advisers with additional competence requirements.
Prevention of non-advised sales or marketing of a product to some types of consumer.
A requirement for providers to amend promotional materials.
A requirement for providers to design appropriate charging structures, banning or mandating particular product features.
In rare cases banning sales of the product altogether.
Journey to the FCA, published by the FSA in October, said the FCA will intervene and will have a lower risk tolerance than the FSA. The Financial Services Bill introduces the use of product intervention rules and provides that temporary intervention rules may be published if necessary or expedient and such rules will not last more than 12 months.
Generally speaking, the FCA is likely to find it necessary or expedient to make temporary product intervention rules where urgent product-related issues arise and urgent action is appropriate.
The enforceability of product agreements that are subject to temporary product intervention rules will depend on whether the FCA decides to incorporate unenforceability provisions. If so the unenforceability measures would only apply to agreements entered into after the product intervention rules have been introduced and in contravention of those rules. But this would not stop consumers having resource to the complaints procedure in the normal way and any mis-selling can still be subject to enforcement action.
Product intervention is an attempt by the new regulator to have the option of being able to wave a big regulatory and commercial stick at product providers if it has any concerns that consumer exploitation is a risk. If it works as intended it should have a significant effect on the design and distribution of investment products.
However the flip side to all of this is the role of the adviser and what effect these rules will have on them. It is now more likely that the technical information and promotional materials for more complex products provided to distributors of products will more accurately reflect the risks to consumers. All too often advisers have complained that the technical information in the past has left the advisers exposed to claims when the product did not perform to plan and/or it had not been made abundantly clear as to which type of investor the product was most suitable. In future if the regulator does not consider the product to be appropriate to a particular segment of the market and there is a risk of mis-selling, it can intervene. Whether the regulator will have the capability to do this early enough is another matter.
Philip Ryley is a partner and head of financial services and markets of Michelmores
