As we have previously discussed,2 the UK Financial Services Authority (the “FSA”) signaled a sea change in the way retail financial products will be regulated in the UK in its Discussion Paper3 on product intervention published in January 2011 (the “Discussion Paper”). In the Discussion Paper, the FSA stated that its existing regulatory approach had not prevented a series of product failures leading to significant customer detriment. It therefore proposed a much more interventionist and intrusive approach to regulation in this area involving earlier regulatory intervention and subjecting firms to greater supervisory and enforcement focus. In its recent Feedback Statement4 published in June 2011, the FSA provides a summary of the feedback from the 84 responses it received and its proposed next steps.
The FSA is in the process of being broken up and its functions will be transferred to new bodies. In the context of product regulation, most of the relevant functions of the FSA will be transferred to the new Financial Conduct Authority (the “FCA”), which will have responsibility for regulating how firms conduct their business, with the objectives of securing an appropriate degree of protection for consumers, promoting efficiency and choice in the financial services market and protecting and enhancing the integrity of the UK financial system. In June 2011, HM Treasury published a White Paper and accompanying draft Bill5 setting out the proposed framework for the new regulatory regime. At around the same time, the FSA also published a discussion paper6 setting out its proposals for the approach to regulation by the FCA which therefore ties in with the more interventionist approach to product regulation referred to above.
The FSA states in the Feedback Statement that consumer organizations were broadly supportive of its proposed new approach; in particular, the increased focus on the early stages of product development and marketing. Industry reactions were, however, more diverse. Some of the responses queried the need for increased product intervention, believing that the focus should be at the point of sale and noting that the FSA has already made significant changes to the regulation of retail products in its Retail Distribution Review and Mortgage Market Review aimed at raising standards at the point of sale. Others, however, supported greater intervention.
The FSA makes it clear in the Feedback Statement that, although it agrees that the point of sale is a critical element of regulatory focus and in determining where consumer detriment arises, it also believes that product design and decisions about how products will be developed and to whom they will be marketed play an important role in determining consumer outcomes. It states that the regulatory approach will be to look primarily at the product governance processes employed by firms, whether there is effective competition for the benefit of consumers and whether firms are exploiting consumer behavior. The starting point in relation to product intervention will be not to dictate product structures to the market but to correct problems where competition and the previous regulatory approach have been ineffective in meeting customer needs.