RegulationMay 1 2013

Prevention can be better than cure

Search sponsored by
ByEsrar Moitra

The purpose of this article is to:

• Provide an overview of the temporary product intervention rules.

• The potential triggers that might precipitate the use of the rules.

• Show how firms can potentially identify ‘risky’ products.

• Illustrate measures that can reduce the potential problems when intermediating a product subject to rules.

The regulator has not specified the precise scenarios under which it would use its powers, but it would be concerned about a product that was poorly designed, impeded competitive processes or undermined market integrity. The following are examples of potential triggers:

• Products that are sold widely outside its target market with the prospect of widespread detriment.

• Products with complex features, structures or comprising esoteric assets.

• Product features or charges that result in limited benefit or poor value for money.

• Misaligned incentives arising from excessively high margins or cross-subsidies if sold as a bundled or tertiary product.

• Products designed to take advantage of poor competitive forces.

The legislation provides the FCA with considerate latitude to intervene through the rules. It can:

• Prohibit authorised firms from entering into specific agreements unless certain requirements have been satisfied.

• Prevent authorised firms from performing an activity that results in the holding of a beneficial or economic interest unless certain requirements have been satisfied.

The types of measures it could invoke include:

• Variations to product terms and conditions to include, exclude or amend certain product features.

• Revisions to marketing materials.

• Restrictions on sales or marketing of a product at wholesale or retail level.

• Outright bans on sales to all, or particular segments, of consumers

The actual degree of ‘intrusiveness’ will be directly related to the scope and scale of potential consumer detriment. While consumers who invest in products after the rules were introduced would not automatically be entitled to compensation, they would only need to demonstrate to the Financial Ombudsman Service or a court of law that the arrangement was subject to the rules. For consumers who invested prior to the introduction of the rules, they would have to demonstrate that advice was unsuitable or as a result of some other malpractice.

The FCA board will make the ultimate decision- about the rules after the specific issue had been considered by a working group and board sub-committee. The rules will only last one year and on expiry the FCA can only extend the provisions through permanent rules with consultation. The FCA is not required to review the rules once in place, but may do so to ensure they are functioning as intended and have not resulted in any unintended consequences or market distortions. The review may result in: